Victoria’s Labor government will not be paying compensation to the consortium of developers contracted to build the East West Link toll road, despite scrapping the $10bn development after contracts were signed.

However, $339m already spent on the project could not be recouped, the government said.

The prime minister, Tony Abbott, denounced the “unprecedented” decision, saying it set “a dangerous precedent”.

The former Liberal-National government of Denis Napthine signed the contracts just weeks before the November election in the face of the now premier Daniel Andrews’ vow to scrap it if elected.



There had been concerns the new government would be liable for millions of dollars in compensation after it confirmed the project would not go ahead, and Andrews would not rule out legislating to avoid paying.



But on Wednesday he announced the government had reached an agreement with the consortium, which includes the developing giant Lend Lease, and no compensation would be paid for lost profits or revenues.



“This agreement has been reached in good faith,” Andrews told reporters. “No legislation at all will be required, no compensation will be paid.”

The government would pay just $1 to acquire the companies in the consortium’s East West Connect Partnership Project credit facility, Andrews said.



The state intended to negotiate with the banks to take over that facility and reallocate $3bn of borrowed money to the government’s Melbourne Metro transport project, its alternative to the East West Link. More than $100m in money not yet spent by the consortium handed to it by the former government would be returned, he said.

“Unfortunately the other $339m paid out before the change in government has all been spent … there is no opportunity for the government to claw that money back,” Andrews said, adding: “This has been a challenging negotiation. We didn’t sign those documents. We warned against signing those documents.”

As the negotiations between the government and the consortium were taking place, there was talk that the consortium would be open to reaching an amicable outcome with government so as not to jeopardise opportunities to work on future projects.

No preference for future projects would be given to the developers comprising the consortium, Andrews said.

“Bids for future projects will be assessed appropriately and fairly under well known principles and with a level of transparency that we just haven’t seen with this project,” he said.

Abbott said the decision destroyed jobs and threatened investment in Australia.

“They have damaged investor confidence in major infrastructure projects,” he said in a joint statement with the assistant minister for infrastructure, Jamie Briggs.

“Australia can’t afford to discourage private investment in infrastructure because government alone cannot afford to build the infrastructure our country needs.

“The East West Link is the only major shovel-ready project in Victora. It is the only answer to easing Victoria’s traffic congestion. The Victorian premier has today destroyed 7,000 jobs,” Abbott’s statement said.

The social services minister, Scott Morrison, said it was an “obscenity” that the Victorian government was spending $420m (including $81m to set up the credit facility) “to pay to a company not to build a road”.

But the Australian Industry Group disagreed with the prime minister, saying the agreement averted any crisis of confidence.



“The sanctity of these contracts is vital to business and the uncertainty around this deal had sent a terrible message to industry, both locally and around the world,” its Victorian director, Tim Piper, said.

“Australian Industry Group had not supported the contract being rescinded but it is important that both the government and industry are now able to move forward with certainty.

“The way is now clear, to enable the government to pursue its projects and regenerate confidence.”

Andrews would not directly answer questions about whether the western part of the toll road, for which no contracts had been signed, would be something the government would consider building in future.

“What I’m really keen to look at closely is infrastructure projects that actually stack up,” Andrews said. “We’ll have further things to say at a whole range of infrastructure projects in coming weeks. I’m not ruling things out today.”

There was “a compelling case to take action” to prevent deals such as the East West Link development being struck so close to an election, Andrews said. But it was something the premier said he was not willing to discuss further on Wednesday.

The treasurer, Tim Pallas, said the agreement was not an occasion for celebration. “We worked hard to get Victoria out of this mess, cleanly and fairly,” he said.

“$339 million is the equivalent to one year of payments to this dud project. This would have been repeated every year if [former treasurer] Michael O’Brien had his way.”

A Lend Lease spokeswoman said it would not be commenting on why the consortium came to the agreement.

But in a statement to the ASX, the developer said once finalised, the agreement would result in a reduction in Lend Lease’s construction backlog revenue of about $1.4 billion.



“No material impact to FY15 earnings is expected to arise from the agreement,” the statement said.

