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:

Proceeding with the East-West Link project at great cost and receiving negative returns; or 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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