We need cool heads in East West Link dispute - 23rd March 2015

We need cool heads in East West Link compo dispute

·       THEO THEOPHANOUS

·       HERALD SUN

·       MARCH 23, 2015 12:00AM

       

One of the protest marches over the East West Link. Picture: Andrew Batsch

MANY in the community have sympathy with the Andrews Government’s argument that it was unconscionable for the previous government to sign contracts on the eve of an election to build the East West Link project.

It was even more objectionable for them to sign a letter guaranteeing exorbitant compensation, irrespective of the outcome of legal or other action that might stop the project.

But they did, so what should the Andrews Government do now?

The first thing to understand is that by not proceeding with the project, the Government would not in strict legal terms be breaking the contract — if it negotiates an agreed compensation payment as allowed for under the contract.

But the compensation payable under the contract, according to the consortium, is a minimum payment of $550 million.

The Government is in a bind. It’s understandable that it may consider legislation to overcome the question of compensation. But is such action warranted or desirable? Legislation could lead to costly and protracted legal challenges. More importantly, it could affect Victoria’s AAA credit rating if the ratings agencies discount credit worthiness for perceived sovereign risk.

If legislation did lead to a reduction to say AA+, Victoria would face the prospect of paying an additional 30 basis points on new and maturing borrowings.

Given Victoria has $22 billion in debts and wants to borrow to build new infrastructure, any possible gains from legislation would be more than wiped out over time. Prime Minister Tony Abbott added to that possibility when he said any such legislation would damage Australia’s international financial reputation. The credit ratings agencies would have heard him loud and clear.

Is there a way through? It’s been suggested the consortium be offered an alternative construction project. As a former major projects minister, that sounds good in theory but is fraught in practice.

There are serious probity principles about open tenders that would have to be overcome, even if an alternative project can be found. It may be possible to deal with these by way of a value for money evaluation process, but as Abbott found in the submarine issue, there is a big difference between an open tender and an evaluation process. Satisfying the community that value for money has been obtained with the latter process is not so easy.

And while it appears the members of the consortium tasked with building the project, Lend Lease, Bouygues and Acciona, are willing to negotiate on another project, the financiers are not as amenable. They are not persuaded by concerns they may miss out on future government contracts. They believe they have legal rights to compensation and they want to be paid. There are many projects in Australia and the world they can invest in once they are paid.

The consortium builders who want a future in Victoria need to rein in the financiers and have a sensible conversation with the Government, rather than gamble that it will cave in to their demands.

Part of the discussion should be to identify another project and have a comprehensive evaluation process, perhaps overseen by the Auditor General, to ensure value. Many worthwhile projects could be considered.

The Premier has opened the door to the construction of the western part of the East West Link.

There is the completion of the ring road from Greensborough to EastLink, the Western Distributor and the 50 level crossing removals, as well as the Metro rail upgrade. Any one could be considered as substitutes in negotiations to avoid the payment of compensation.

The Federal Government can help by allowing the redirection of the $3 billion of funding to any of these projects, including metro rail.

The Victorian Government negotiators have put a strong case for only the legitimate costs of the consortium to be paid. Let’s hope the consortium will negotiate reasonable compensation or that a carefully considered alternative project is agreed upon.

Legislation should not be considered unless the Government is confident Victoria’s credit rating and future investment here will not be affected. In today’s world of shifting global investment options, that’s a big call indeed.

THEO THEOPHANOUS IS A POLITICAL COMMENTATOR AND FORMER LABOR MINISTER