Victorian premier Daniel Andrews says a $420 million deal struck this week between the Government and the East West Connect consortium will relieve the Government of any future liability for the cancelled road project.
“This settles the matter,” Andrews said at a press conference this morning. “It’s a good faith agreement [which] terminates the project, and terminates the relationship between the government and the East West consortium.”
Under the Heads of Agreement signed on Wednesday, the consortium will be paid $339 million to cover costs of the bidding process, as well as design and pre-construction costs.
Andrews said the $339 million payment was not compensation, as it was for costs which had already been incurred by the consortium, and therefore could not be retrieved.
A further $81 million of fees were incurred to establish the Project Co credit facility, worth $3 billion, for the East West project. The Government plans to negotiate with banks to take over that facility, and contribute to funding for the Melbourne Metro Rail Project.
“The Labor Government and the consortium are on the same page and have come to a good faith agreement,” Andrews said on Wednesday.
“Today’s agreement is the best possible result we could have achieved and it puts the interests of Victorians first,” he added.
“No ten billion dollar tunnel, no compensation and far more funding available for the Melbourne Metro Rail Project.”
While the settlement could be seen by some as a successful resolution to the situation, Victorian treasurer Tim Pallas said he would rather not spend $339 million to cancel a road project.
“This isn’t a day for celebration,” Pallas said. “The previous Liberal Government deliberately left Victoria with only a handful of options – none of them good.
“We worked hard to get Victoria out of this mess, cleanly and fairly. $339 million is equivalent to one year of payments for this dud project.
“This would have been repeated every year for 25 years if [former treasurer] Michael O’Brien had his way.”
The agreement has been met with anger from the Federal Government, with prime minister Tony Abbott saying he was dismayed by the decision to not build the multi-billion-dollar tollroad.
“The unprecedented announcement that the Victorian Government would rather pay hundreds of millions of dollars to a consortium than build the East West Link is a massive set back to Victoria,” Abbott said on Wednesday.
“The Victorian Government’s decision to abrogate contractual responsibilities sets a dangerous precedent for future projects and threatens further investment in much-needed infrastructure in our country.”
Abbott said Andrews’ decision had cost 7000 jobs in Victoria, and said there was no alternative to the East West Link, “the only shovel-ready project in Victoria,” according to the PM.
“It is the only answer to easing Victoria’s traffic congestion,” Abbott said.
“The Victorian Government’s actions today mean that Melbourne’s daily traffic gridlock simply gets worse. Victorians should feel let down by Daniel Andrews who promised before the election that no compensation would be paid.”
Federal minister for social services Scott Morrison labelled the payment as “an obscenity,” according to one report in The Australian.
“For the Victorian Government to spend $420 million to pay to a company not to build a road is an obscenity, and Bill Shorten is linked up with that obscenity in his support for Daniel Andrews’ decision on this,” Morrison was quoted to have said.
I know politicians can be like the worst of biased commentators and put a slant on facts that suits their purpose politically, rather than acting fully in the interests of their taxpayers/electors, but what really worries me about this whole East West Link episode is that so few of the political opponents of Andrews’ actions show (or are prepared to show that they possess) adequate understanding of the important aspects of economic cost-benefit analysis as it is applied around the world of wealthier nations, i.e. to establish a discipline as to which projects should proceed and which shouldn’t, and give each potential project a sensible priority ranking.
A BCR of 0.45 says that 55% of the project cost is effectively wasted.
It was the responsibility of Government employees to get that analysis right basically.
And we know that Infrastructure Australia never got to give its final, fully considered position on that.
55% of $6.8 billion is $3.74 billion or about 9 times what the project termination cost has turned out to be. Simplistically pay $1 to avoid a waste of $9 – seems sound.
One might argue whether the 0.45 was suitably assessed but the ratio here is so serious that I find it hard to doubt the efficacy of the Andrews’ decisions. Maybe North East Link (highlighted as a possible project in the most recent Transurban investor presentation) could assuage the critics – but again that should go through due process and proper analysis.
I hope Infrastructure Victoria can put an effective roadblock in front of projects with such low BCRs. One has to question why a government wanted to undertake a politically unpopular project with such a low BCR.