In the case of the 30-year East West contract, significant payments that are understood to have already been made include bank commitment fees covering $3 billion of funding that would have been progressively drawn down as the tollway was constructed, and payments to project development teams involved in the design, construction and operation of the tollway - pre-paid project success fees, in effect. The argument about how much the government (and behind it, Victorian taxpayers) will pay to kill the East West Link project would be fairly simple if the East West contract included an agreement that upfront payments made on the assumption that the project would proceed were repayable if the project was halted. It is understood, however, that the East West contract does not include such an agreement - and that previous PPP projects in Australia have also not included clawback mechanisms. Even allowing for the fact that the events that created the East West debacle were extraordinary, this is a gap that those drafting future PP contracts must close. The East West saga has been a stuff-up from the start. The previous coalition government pressed on with it in the second half of last year knowing that Labor opposed it, and that it faced defeat at the state election in November.

Then, in September, Labor leader Daniel Andrews announced that Labor was no longer committing to honouring contracts for the project if elected. Planning approval had been granted without a business case for the project being sighted and and was therefore invalid, Andrews said, adding that a Labor government would support a local council Supreme Court legal challenge on those grounds. That decision was extraordinary in two ways. First, Labor was effectively committing to kill the project without knowing how much it would cost to do so. Second, the decision raised sovereign risk issues for the private sector, because governments are always expected to honour commitments previous governments have raised. The Abbot government, for example, killed Labor's fibre-to-the-home national broadband network, but did not kill key hardware contracts, and negotiated new contracts with Telstra and Optus on the basis that they would be at least as valuable as the old ones. Andrews' announcement led to an equally amazing decision by the-then Coalition government. In late September, it wrote a side-letter to the East West project consortium, guaranteeing that termination payments would also be payable if the Supreme Court struck the project contract down. Compensation would be due in the event of the project being "declared or decided to be void or otherwise unenforceable," the side-letter stated. The consortium's request for comfort in light of Andrew's unexpected announcement that Labor did not intend to honour a Coalition state government contract was predictable. The then-government's decision to respond with what was in effect a blanket guarantee, in doing so locking in "bribe to subscribe" pre-payments was, however, either commercially naive, or a deliberate, successful attempt to create a poison pill for Labor. The Andrews government is negotiating with the consortium, and the fate of the payments that have already been made under the contract's PPP formula is going to be crucial.

The government will argue that a commercial settlement that both sides can live with has to recognise that the PPP pulled payments forward that were made only in the expectation that the project would proceed, and should now be repaid. It is true that prepayments and compensation payments that reportedly total about $1.2 billion have no relationship to how much has been spent by the Lend Lease consortium. An unsuccessful John Holland consortium was paid $12 million for the work it put in to make a bid, for example. What's a commonsense settlement amount that does not create sovereign risk and damage the government's ability to deal with the private sector or, on the flipside, damage the ability of the consortium members to do government work in future? Multiples of $12 million, I would say, given that the Lend Lease-led consortium won the bid, lined up resources including expensive overseas-based tunnel-boring machinery, and engaged in intensive negotiations to put the project in the starting blocks. Even then, however, surely only a fraction of the reported $1.2 billion maximum. If the talks don't progress, things could get ugly, however. If it doesn't see a commercial settlement or progress towards one this month, for example, the government will probably start talking about imposing one of its own, backed by special legislation.

That escalates concerns about sovereign risk swirling around the fiasco, but the government would argue that it had no alternative.