Downer EDI knew of $117m Waratah blowout a year before telling market, court hears

The company behind Sydney's disastrous Waratah train project, engineering firm Downer EDI, was aware of major delays and cost overruns of up to $117 million a year before it informed the market, a court has heard.

Between August 2009 and November 2009 the engineering firm received letters of concern from NSW government's RailCorp and its joint venture partner Hitachi, and had stopped paying its supplier BlueScope Steel, but had still not told the market the project was in trouble, a court has heard.

The NRMA and other groups warn that commuters travelling long distances will be worst affected by the changes proposed ...
The NRMA and other groups warn that commuters travelling long distances will be worst affected by the changes proposed by the pricing regulator. Photo: Simon Alekna

Downer has been accused in a class action brought in the Supreme Court of Victoria of keeping its costs over-runs and delays to the Waratah project secret from its shareholders for at least six months and up to one year.

Downer shocked the market in June 2010 with a $190 million write-down of its investment in the Waratah project because of cost over-runs, delays and its need to inject more equity in the project. The announcement wiped $585 million from the value of Downer's shares.

Yet only only six months earlier it assured investors the project was on track.

Downer settled a separate class action brought in 2011 by Slater & Gordon for $38 million but decided to defend this claim in a trial that began on Monday and will continue for two weeks.


The court heard on Monday that by November 2009, internal documents showed Downer was expecting zero profit on the project once expected to deliver $350 million per year in revenue.

Lawyer for the shareholders, Norman O'Bryan, SC, told the court the market had a keen interest in whether Downer would need to put more equity into the project to offset the costs it was incurring and complete the project on time.

"That became an increasingly greater and greater concern ... particularly in 2010 when the skies became very dark for Downer in regards to this project."

The internal Downer documents presented to the court showed the engineering services firm was aware its costs had blown out by $117 million in June 2009, according to lawyers for the shareholders bringing the class action.

By October 2009, the project's costs were $180 million over estimates, according to internal documents presented to the court.

Supplier not paid

To stave off its growing costs, Downer stopped paying its suppliers to keep a lid on costs. "The supplier BlueScope Steel has put Downer on a stop-supply list for non-payment," an internal document presented to the court revealed.

There was financial pressure on Downer which was never told to the market.

Norman O'Bryan, SC

"This, we submit, shows there was financial pressure on Downer which was never told to the market," Mr O'Bryan said.

Mr O'Bryan said the strategy turned on Downer, with a company executive noting "a number of suppliers have stopped supply and this is slowing down the project" in an internal document.

Other internal documents showed Downer was seeking to "re-establish confidence in the CEO of RailCorp that Downer can perform its contract" and "RailCorp relationship fragile".

Mr O'Bryan said the issues with RailCorp, BlueScope Steel and Hitachi demonstrated "a parlous state of under-reporting of the affairs of the company".

Mr O'Bryan said despite being aware of the troubles in the project, Downer EDI made no mention of the cost over-runs or the delays in its statements to shareholders, including the "Gantt chart" showing project completion schedules when it was presented at its full-year and half-year results between August 2006 and February 2010.

This was despite internal documents showing the $117 million cost over-run in June 2009.

"At the same time as Downer's accountants are producing these documents internally, the market is being told the timeline is unchanged ... despite the delays that have been identified in the accounting documents," Mr O'Bryan said.

"Downer had consistently published the same Gantt chart. They had never suggested to the market or to the world that delays of up to 12 months had already been incurred by August 2009," Mr O'Bryan added.

Mr O'Bryan said the engineering group's top brass, including then chief executive Geoff Knox, were well across the issues with the Waratah train project by at least August 2009. The board appears to have been let in on the issues by November, Mr O'Bryan told the court.

Emails between Downer EDI's executives presented to court refer to a request by Mr Knox to see a copy of the document detailing the project an its constraints and assumptions about the project, including its actual costs against projected costs. The document refereed to changing the timeline to include "a credible completion date", Mr O'Bryan said.

"At this stage it was plain it was running off the proverbial rails, your honour," Mr O'Bryan said.

"It seems that internally, Downer thought the likely date was December 2010 at that point in time," Mr O'Bryan said.

Yet Downer had assured the market on several occasions between the announcement of the contract win in 2006 and early 2010 the project was "on track", Mr O'Bryan said.

"There was no suggestion that there was any time delays," he added.