The inducement was equal to a 16 per cent return on the total capital cost of the project. The return on the money actually spent on the project by the consortium – no more than $20 million in my estimate – would be an astronomical 550 per cent if the $1.1 billion was paid. According to apparently well-informed speculation (in The Australian last week), the consortium partners are hanging out for "as little as $220 million ... The figure is based on the understanding that the financiers have spent $100 million on arranging the debt while the consortium has paid about $100 million in early work on the project, the bid and design costs. A further $20 million could be added as 'sugar' on top of the deal, although the margin could be higher." But one of the consortium partners, Capella Capital, which is headed by the former head of infrastructure of failed investment bank Babcock & Brown, John Bowyer, is reportedly hanging out for even higher compensation. Perhaps this is driven by Babcock's experience as a private equity partner with the Royal Children's Hospital PPP Babcock clinched the deal with an offer of an upfront payment to the government of $35 million. It reneged on the deal and, according to the Auditor-General, the promised payment was never enforceable. A few months after getting the PPP contract, Babcock onsold its equity to a related party in in the tax haven of Guernsey for $91 million, earning a quick capital gain of $30 million. The East West Link side agreement was developed in response to the advice the then Labor opposition received from former federal court judge Ray Finkelstein, QC, Richard Niall, QC, and Siobhan Keating, which said: "In our opinion the executive arm of the government has no inherent power to contract for the project."

The side deal, released by ex-treasurer O'Brien in an effort to shift the political management of the poison pill to the current government, said: "EWC has advised me it will be unable to sign the Project Agreement in circumstances where the ability of the state to sign the Project agreement has been questioned by others, and in the event that the Project Agreement is declared or decided to be void, EWC will be exposed to significant pecuniary loss or damage ... "Accordingly I declare on behalf of the state if the Supreme Court of Victoria or other court of competent jurisdiction makes a declaration or decision that the state does not have the requisite executive power to exercise the Project agreement such that the project is void or otherwise unenforceable, then the state will pay to EWC one or more amounts by way of compensation on the date that is three months after the date on which the Project Agreement was declared or decided to be void or otherwise unenforceable." In plain language, the promise to pay compensation for a contract found to be invalid was designed to protect the consortium against the election of a Labor government. It was an attempt to usurp the will of the electorate. On this reading, there should be no negotiation with the consortium. Instead, the Andrews government should bring in legislation repudiating the side agreement or any other contract that provides for payments in excess of expenses lawfully incurred. On my judgment, the state would be financially and environmentally better off if it paid $220 million or even $1.1 billion to avoid building the East West Link under the unconscionable PPP contract, but this is not the prime point at issue here.

Recognition that compensation in the case of contract cancellation – even if the contract was shown to be void under standard contract law – would be open to negotiation based on profit forgone, rather than legitimate expenses incurred, would establish a terrifying precedent: that the state was open for blackmail as well as business. Kenneth Davidson is a senior columnist at The Age. Email: kdavidson@dissent.com.au