Has Labor pulled a rabbit on East-West Link?

By Leith van Onselen

Just a week ago, things were looking dire for Victorian taxpayers on the East-West Link toll road project.

The $6.8 billion project, which was signed in haste by the former Napthine Liberal Government, was estimated in its full business case to deliver a benefit to cost ratio of just 0.45 and take an estimated 56 years to pay-off, leaving Victorian taxpayers worse off.

Even worse, a side letter signed by the former Liberal Treasurer, Michael O’Brien, promised that the Victorian Government would pay generous compensation to the consortium partners (East West Connect), even if a court declared the project contract illegal, invalid or unenforceable, thus making it more difficult and costly for the new Labor Government to cancel the project.

The compensation figure due in the event that the road project was cancelled was widely estimated to be in the order of $1.1 billion, thus leaving Victorian taxpayers facing two painful alternatives:

  1. Proceeding with the East-West Link project at great cost and receiving negative returns; or
  2. Abandoning the project but paying massive compensation to the construction consortium.

Today, The Australian has revealed that the Victorian Government may have pulled a ‘rabbit out of the hat’ and found a way to limit the compensation bill to only around $220 million, in what would be a massive win for the state’s taxpayers:

The [$220 million compensation] figure is based on the understanding that financiers have spent $100m on arranging the debt while the consortium has paid about $100m in early work on the project, the bid and design costs.

A further $20m could be added as “sugar” on top of the deal, although the margin could be higher…

The government is now considering enacting legislation that will in effect make the side-letter unenforceable.

The legislation is expected to include provisions for the consortium partners for costs as well as a small margin.

The Liberals should never have rushed to sign the contracts on the East-West Link project to beat the artificial November election deadline, and then agreed to compensate the consortium partners for both their bid costs and “opportunity costs”, even if the contracts are declared illegal, invalid or unenforceable.

If they manage to make the side letter unenforceable, the new Victorian Government will have done taxpayers a great service, and should be congratulated.

That said, their true test will be ensuring that any new infrastructure projects are properly vetted, fully transparent, and produce net benefits to taxpayers, thus breaking the long cycle of infrastructure mismanagement that has dogged Victoria from both Labor and Liberal.

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Comments

  1. I have little time for the State ALParatchiks, but if they can pull that off then good on them.

    Anything they have to shell out for the contract should be subjected to a parliamentary debate, and funded directly from a direct levy taken from all state taxpayers caled the ‘Liberal National Party Captive Contract 6 weeks Prior to an Election Without Public Disclosure of the Cost benefit Analysis Levy’

    Utterly despicable what the Napthine Government did…….

    • Napthine, O’Brien and whoever else was part of this need to be liquidated first & foremost. That should knock off a few mill.

      Edit: @Lab everything you said below.

    • Oh, so the feasibility study showed this project not worth it!
      I suppose the feasibility study showed desalination plant was?
      You only have to drive on the eastern freeway to understand the common sense to do something.
      DON’T believe all the crap they feed you just do yourself a favour and take a drive on it.
      Freeways all over the world connect and Melbourne’s population is increasing at a rapid pace.

  2. The $220m should be taken from the politicians who signed off on the project. If they can’t afford it they should spend 1 year in jail for every $1million they can’t afford.

    It is the very definition of treason, selling out the country in favour of a corporation.

    • I agree, Michael O’Brien should be in the dock for penning that side letter.

      I supported a lot of the policies Vic Libs were trumping (EWL, not so much), but this side note is an utter disgrace.

      Who does he honestly think he is, placing his office above the judiciary.

    • It’s not the definition of treason. Treason requires attempting to overthrow your country’s government, or aiding an enemy in time of war. Words have agreed meanings; sticking to them helps prevent people talking in circles.

      The word you’re looking for here is ‘nepotism’, or perhaps ‘graft’.

      Such behaviour is common-place in banana republics whose economies are based on resource extraction or agriculture. While the only ways to get ahead in Australia remain the ownership of mining leases, land, or having the right mates, expect much, much more of this.

      • #PartyPooper

        @LD

        You print : ‘Words have agreed meanings; sticking to them helps prevent people talking in circles’

        Please, don’t destroy their fun, you ‘partypooper’ … ‘not sticking to agreed word meanings has oiled their talking in circles ‘ = their comfortability and interactive understanding … they been doing this for ages ; like mental patients speaking in tonques that only they understand and respond to. You also expecting too much from the beatniks.

      • HAHAH
        Getting ahead by owning land.

        Country NSW.
        Own land.
        CSG company can come in and fk you up.
        No recourse.

        Private property rights my #rse.

        You’re better off going all in on metro real estate.

      • Actually the word is corruption. This is exactly what it looks like in Western countries and why wouldn’t they? It’s not like the perpetrators are going to be punished in any way

    • ” If they can’t afford it they should spend 1 year in jail for every $1million they can’t afford. It is the very definition of treason, selling out the country in favour of a corporation”

      This is exactly what Andrew Robb has already done in stitching up AUS to the Trans Pacific Partnership, whose fundamental article is just this-elevating corporations above countries.

      No more Australian sovereignty [if you think I’m exaggerating, take a look at the court case in Hong Kong brought by tobacco companies vs Australia re: plain packaging]

      • No more Australian sovereignty . . .

        That’s all part of the “New Elite Consensus”:

        The New Elite Consensus is the program of abolishing the ideals of the Modern Era – the ideals of Egalitarianism, popular Democracy and Self-determination – and reinstating the traditional Rule of Privilege with entrenched wealth, corrupt government, and supra-national relationships which transcend community (and even national) self-determination.

        Stripped of its ephemera, human history – at least until the Modern Era – was a story of psychopaths competing with one another to achieve positions of power, then using that power to dominate and brutalise their fellow human beings.

        If those behaviours seemed to change in the Modern Era, it was due not to any evolution of human psychology, but rather to a temporary change in the environment in which humans were operating.

        The current social norms which so many people take for granted (Egalitarianism, Democracy, and Self-determination) were the result of – and were contingent upon – very specific economic and technological conditions. These were conditions in which an evolutionary advantage (and that includes economic and military advantage) could be obtained by training individuals to very high levels of skill to operate the complex – but not fully automated – machinery of the industrial state.

        Having invested such a vast amount in individuals, Rulers came to “value” them. Conversely, those individuals had (historically unparalleled) bargaining power relative to those who would rule them.

        But those Modern Era ideals are just that – modern!! They arose out of very specific technological and economic conditions.

        For most of human history, such ideals would have been regarded as preposterous. The self-evident difference between Rulers and Ruled was taken for granted. As Charles I remarked on the scaffold: “A subject and a sovereign are clean different things”. Or, as Alexander Hamilton told the Constitutional Convention: “All communities divide themselves into the few and the many. The first are the rich and the well-born; the other the mass of the people … turbulent and changing, they seldom judge or determine right. Give therefore to the first class a distinct, permanent share in the Government … Nothing but a permanent body can check the imprudence of democracy.

        Both of these men in their different ways were reflecting the “normal” view of human social arrangement, as it has existed for millennia – before the Modern Era. And we know from the historical record that homo sapiens Rulers had no hesitation in wasting the lives of their fellow human beings – by the thousands. By the millions if they had the need and the opportunity.

        It was only in response to the very specific – and historically anomalous – conditions of the modern industrial era that the quintessential Modern Era ideals of Egalitarianism, Democracy and Self-Determination arose.

        And there was never any universal law which said that such ideals must continue when the technological and economic environment changed.

        We are now entering a new era – unprecedented in human history – in which automation and robotics is making the vast bulk of the human race redundant. Not just unemployed, but “redundant” – no longer needed by their Rulers. The relative bargaining power has swung back.

        And we are seeing the effects, both economic and political in the “New Elite Consensus”.

        This new consensus aims to eliminate Modern Era ideals and to reinstate the traditional Rule of Privilege with its entrenched wealth, corrupt government, and supra-national relationships transcending community self-determination.

        In the field of egalitarianism and equality of wealth, Thomas Piketty and others have done a good job of documenting the return to concentrated private wealth. While median wages in developed countries have stagnated, the wealthy become ever wealthier. The benefits go to the “1% of the 1%”.

        And where money leads, politics follows.

        In the field of politics, the Elite have learned how to effectively subvert the corrupt system of “elective” government through a combination of:

        a) campaign finance;

        b) the promise of lucrative jobs for obedient politicians on retirement; and

        c) the transfer of strategic monopolies into the hands of private controllers, and the alienation of public revenues into the hands of private “tax farmers” (think private road tolling), making politicians ever more dependent on the goodwill of private financiers. A return to the “ferme generale” of the ancien regime.

        In the field of self-determination, local (and even national) self-determination is being abolished in favour of opaque and unaccountable supranational institutions (the EU, the web of so-called “free-trade” agreements) which can be used to impose Elite interests against any aberrant national government which might attempt to oppose them.

        Any sense of local (or even national) community is being swept away. For the Elite, their “community” transcends local and national boundaries anyway. Like the interlocking royal dynasties of old, they think in supranational terms.

        The root of this problem is the lack of genuinely democratic government.

        Had genuine Democracy – with the right of initiative and referendum – ever taken root, the gains of the Modern Era might have been entrenched. But it did not. With just a handful of exceptions, the most that was ever achieved was the corruptible system of “elective government”, which has now been completly subverted.

        Corrupt government and Elite power go hand-in-hand. When small businessmen face economic difficulties they go bankrupt. When Elite businessmen face economic difficulties, they call their friends in government and have the rules of the game changed.

        Wealth -> Power -> More Wealth -> More Power.

        If you care for your children and your grandchildren, look to the system which is destroying their future: the corrupt system of elective government.

        The only remedy is Democracy – genuine Democracy. That is the battle which needs to be fought.

        If Democracy can be won, all else will follow.

        If Democracy cannot be won, any other victories will be short-lived at best, falling eventually to the relentless power of Elite rent-seeking.

        Fight the battle worth fighting.

        It’s the only hope there is.

  3. But, but – $220m is not enough to guarantee a future directorship! Think of the future for the poor LNP politicians, you can’t expect them to do real jobs.

    I still think is should be ‘You can have $220m. But by taking the money you will never get another Victorian (or Labor state) contract.

  4. $220 million dollars for doing nothing but being mates with the right people…

    … a nice little earner. Good thing the ‘adults’ were in charge, eh? They sure are the fiscally responsible ones!

    … and everyone says Australia has low rates of corruption. Pfffft.

  5. I’ve looked, but I thought there was a clause in the constitution that governments cannot deliberately enter into contracts with the expectation that following governments are bound by them.

    IE: if an incoming government chooses to, the contracts are invalid.

    The main reason this isn’t done in practice is because it would mean that private enterprise would be turned off by the sovereign risk.

    In this case though, it’s a perfect opportunity to remind the private sector to act in good faith and not sign midnight contracts in the face of extremely vocal and likely incoming opposition.

    • “In this case though, it’s a perfect opportunity to remind the private sector to act in good faith and not sign midnight contracts in the face of extremely vocal and likely incoming opposition.”

      +1

    • I didn’t think there was such a clause in the Oz Constitution however there is a clause in the EW contract to protect the lead consortium should the contract be reneged upon. This is usual practice.

      Labor was aware of this prior to winning office.

      Anyway Victorians won’t get the EWL, will pay a massive sum for fair compensation and will no doubt enjoy projects brought to them courtesy the CFMEU.

      Oh, and if this $220m figure is correct, it probably was from the getgo. Nothing like a bit of tense drama with a ‘happy’ ending.

      • Given that the benefit cost ratio was so low, the most financially prudent course still looks like abandoning the project. If the benefit cost study is correct, then continuing with it would have been throwing good money after bad.

        Having said that, the Coalition will never ever again be able to claim superiority in matters financial. Their reputation as financial managers is in tatters for a generation at least. This affair makes Craig Thomson look like a model of probity.

    • Subject to parliamentary sovereignty, the State is bound by its contracts and would need to reimburse contractors for a breach of contract, including payment of the compensation.

      The State’s obligation is subject to the sovereignty of the State Parliament to legislate away such obligations.

      The State Parliaments in general cannot bind their successors on legislative matters, so they could not enact a law requiring compensation with a “this law may never be repealed” clause in it. The “this law may never be repealed” clause could itself be repealed.

      However, Australian State Parliaments can (pursuant to Section 6 of the Australia Act, 1986 which replaced the former Section 5 of the Colonial Laws Validity Act 1859(?)) specify the “manner and form” in which legislation is to be passed or amended or repealed. They can in principle require certain acts to be repealed or amended only by referendum. However, they tend not to do that other for conventionally constitutional matters. It does not apply to compensation cases like this.

      The Australian (federal) Constitution has a constitutionally entrenched “just terms” provisions which in certain circumstances may be held to prevent the acquisition of “property” (whatever that might mean) other than on just terms. At the federal level such a requirement (if the High Court held that it did in fact apply*) could be circumvented only be referendum.

      In practice, however, the Commonwealth Government tends to circumvent “just terms” provisions by getting the States to compulsorily acquire property and then reimbursing them.

      In Pye v Renshaw (1951) (http://www.austlii.edu.au/au/cases/cth/HCA/1951/8.html) the High Court approved a procedure whereby a State (New South Wales in that case) could acquire property without regard to “just terms” and for the Commonwealth to pay for it through Section 96 grants. Provided that the State acquisition didn’t make reference to the grant and vice versa, the “double-shuffle” purchase was held to be constitutional.

      “The Castle” is a work of fiction.

      – – – –

      * I seem to recall that in the Tasmanian Dams case the judges went out of their way to declare that the right of the State to build a dam was not “property”. More recently, however, in cases not involving States (where the Commonwealth appointed judges hate to give anything away) the Court has been more expansive in its definition of “property”.

      • Thanks Stephen. A previous post of yours indicated a potential escape from the contractual mire, does this still stand?

    • The private sector should also remember that the state spends money into existence and writes the laws which afford the market space.

      Which with out they would be in deep shit and just devolve into feudalism as such is their nature.

      • So… there were no markets before the state came into existence?

        Civilization came out of feudal models. Not that i suggest we go back, but the limitations of the state should also be understood, and the fact is that democracy has been considered a bad idea for the majority of the last few thousand years.

      • 1. There are no enforceable contracts without the state. The “state” may be defined as the institutional arrangements which enforce contracts.

        As the great Ronald Coase observed in his Nobel address:

        . . . what are traded on the market are not, as is often supposed by economists, physical entities but the rights to perform certain actions and the rights which individual possess are established by the legal system”,

        a legal system enforced by the state.

        2. Under the feudal system, the overlapping jurisdictions of feudal lords, king and church together constituted the state (depending on the particular rights to be enforced).

        For people born into the modern world, it is common to confuse:

        a) the “state” as an institutional system (often involving overlapping jurisdictions) for enforcing rights; and

        b) the modern “sovereign” or “monopoly” state in which there is only one institution responsible for enforcing all rights.

        3. Finally:

        “. . . the fact is that democracy has been considered a bad idea for the majority of the last few thousand years.”

        Considered by whom?

        With what authority?

        A Charter from Heaven?

        Or just an argumentum ad verecundiam?

        It is demonstrably not considered thus by the majority themselves:

        a) in almost every case where people have been given a choice they have chosen some form of direct democracy as their system of government; and

        b) where people enjoy such democratic rights they never use those rights to repeal or limit them, even though it is a straightforward process to initiate a referendum for that purpose.

  6. $220 million is a bargain to avoid a project whose costs are way bigger than its benefits. Napthine tried everything in the playbook to make it add up, even the last refuge “wider economic benefits”, whatever that means, and still the EWL was going to cost much more than it was ever going to return.

    There’s nothing with building roads as such, but they’ve got to be worth the money. EWL was not.

    • Victoria has to do something about productivity enhancing traffic flows and battling gridlock at some stage. If not EWL, some other.

    • Of course there are wider economic benefits. These benefits are difficult to calculate and even more difficult to tax – but we should be looking to collect revenue from beneficiaries that we can identify to pay some of the costs of the road.

      • If you put a railway line where there isn’t one, the surrounding land value does go up. 1890s Victorian Premier Tommy Bent (bent by name, bent by nature) made a fortune approving rail lines through land that he owned.

        In theory, you can tax the high land values to pay for the rail line.

        The same could be true of a road. But the EWL link was going through land that is already high priced. What added value would there be?

      • “But the EWL link was going through land that is already high priced. What added value would there be?”

        I’m not a supporter of the link but I would think that removing traffic from Alexandra Parade would be a benefit for the inner-city area.

        Most of the benefits would have accumulated to those in the outer suburbs who could have used the link and were also not affected by its construction.

        One of the main reasons the Libs pushed the link so hard (other than to pay-off their construction mates) was that they thought it would be a great wedge against Labor in the outer Eastern suburbs. Too bad it didn’t pay off, eh Denis?

    • Ever flown on corporate jets with a retinue of bankers on board. And then had to entertained them.

      It’s not cheap.

      • Cool.

        So, apply a real costs clause to the settlement.

        5 Mill in time.

        Easy.

        Jesus, and we’re trying to impoverish Aussies with co payments and other nonsense.

        The world is a fked up place

      • Aaaahhh! That’s private sector “efficiency” for you.

        $100 million just for arranging the finance.

        When the government could simply issue bonds at historically low rates.

  7. Plenty of rumours flying around the engineering world of the bidders flying in people from all over the place (incl. international) to get bums on seats to elevate their claims.

  8. I think they should agree to pay it by installments and leave it on the balance sheet for successive governments to never forget about it.