Auditor questions real cost of Victorian rail deal

The Victorian Government has defended its buyback of the State's rail infrastructure following criticism by the Victorian Auditor General's Office.
Both Premier John Brumby and Rail Minister Lynne Kosky pointed to the gains to the system of a quick purchase and $900 million in upgrades pledged by State and Federal governments.
Victoria's auditor-general, Des Pearson, had questioned the Government's rail dealings only a week after the Tasmanian Government was similarly criticised by its financial watchdog.
Whereas Tasmania had been taken to task on risk-management issues, the spotlight in Victoria was on a likely $70 million or more overspend from the publicly stated $133.8 million along with the lack of a business case and an inadequate valuation.
Pearson's report also identified "a failure to advise Government on the limitations of some external advice".
The report, Buy-back of the Regional Intrastate Rail Network, tabled in the Victorian parliament this week, confirmed what most in the industry had long accepted: that the network was run-down when it was leased and the maintenance backlog had worsened because the lessees were not required to maintain it effectively.
The report did recognise broader logistics gains from the buyback.
"There is little doubt that the buy-back unwound a lease which was ineffective in maintaining the asset," it found.
"It also mitigated financial and other impediments to the State’s capacity to carry out major investments in upgrading the network.
"In negotiating the buy-back the State also made other strategic gains of broader significance to Victoria’s freight and logistics network.
"These primarily related to freeing up rail access to the Port of Melbourne."
However, the lack of thoroughness in due diligence meant the final sum was likely to be one-third more than the State Government had stated.
"Notwithstanding this, deficiencies in the advice given to Government on the buy-back were identified and no assurance can be given that the State paid the lowest reasonable purchase price obtainable in the circumstances," the report said.
"In addition, it is clear that the cost of the buy-back exceeded the publicly announced cost and that the full cost is likely to exceed $200 million.
"In April 2007, the Government announced it had agreed to buy back the regional intrastate rail network lease for $133.8 million.
"The purchase price for the buy-back was within the remit approved by Government, but this was not the full cost of the buy-back.
"The State estimated the full cost to be $174.1 million, including expected transaction and transition costs.
"The full cost of the buy-back is likely to exceed $200 million, based on more realistic assumptions about the cost of reduced network access fees for the vendor agreed as part of the transaction."
Pearson recommended that a 2006 decision to establish a separate State body to operate the network be revisited and "actioned or set aside".
He also recommended that the actual cost savings achieved compared with the business case be published, along with a full accounting of the transaction.

Source: Lloyd’s List Daily Commercial News – www.lloydslistdcn.com.au