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East West Link: The case against this road gets ever stronger

Date

Kenneth Davidson

Paying penalties for dumping the East West Link would be the best roads investment the government could make.

It is just over three months since Dr Nick Seddon, an adjunct professor at the ANU College of Law and the author of a standard text on government contracts, delivered a widely publicised paper pointing out that "sovereign risk" does not apply where governments choose to break contracts and remain subject to legal remedy in the form of compensatory damages.

The paper was given against the background of claims by both the Victorian Coalition government and the Labor opposition that the contracts for the Wonthaggi desalination plant and the intended contract for the East West Link, once signed, could not be broken due to sovereign risk.

The East West road project was examined and found wanting by Infrastructure Australia. The previous federal Labor government accepted that advice, refused federal money for the project and instead approved $1.5 billion assistance for the Metro Rail tunnel which would have capacity to shift the passenger equivalent of 24 lanes of freeway. The Abbott government, by contrast, rejected the advice of Infrastructure Australia and has promised $3 billion for the East West Link, consistent with the Coalition's federal election commitment to fund roads, not public transport.

Infrastructure Australia staff have circulated a report, Spend more, waste more, Australia’s Roads in 2014, to transport industry experts for comment. The report argued that the existing level of road expenditure was unsustainable and unjustified.

No East West Link business case has been published, because it depends in part on increasing car dependence at the expense of public transport. This, in combination with Planning Minister Matthew Guy's Plan Melbourne, will create gridlock. Guy's plan envisages an extra 1.3 million people by 2020, housed mainly in inner Melbourne (200,000 dwellings) and middle Melbourne (600,000 dwellings), and each household requiring one or two cars, given the absence of concomitant investment in public transport.

If the East West Link goes ahead there will be no money for public transport for at least a generation, irrespective of political promises. 

The Seddon paper said that "sovereign risk" was a political perception, but the legal issue was straightforward - the government can break the contract. In response, shadow state treasurer Tim Pallas backed down slightly. Answering a question from The Age, he said: "While tearing up the contract would break no law, it would risk damaging Victoria's strong credit rating and add to the cost of borrowing".

What if it did, and Victoria's rating was reduced from AAA to AA? Victoria's total financial liabilities are $35 billion. The downgrade would increase the interest rate burden by 25 basis points, or $90 million a year. If the contract went ahead as a public-private partnership (PPP), the "availability charge" necessary to finance the eastern half of the link would be about $900 million a year (to yield the private partners a return of 10 per cent over 25 years) or, if it was financed by public borrowings, about $500 million a year based on a 4 per cent cost of public borrowings.

According to the only published benefit-cost analysis for the East West Link, by the Eddington report in 2008, the benefit-cost ratio was 0.45, indicating a return to the public of 45 cents for every dollar spent.

This would mean that each year, the project would be imposing a net burden on the Victorian taxpayer of about $400 million if financed as a PPP, or $220 million if it was financed by public borrowings - plus incalculable damage to Melbourne's liveability.

There is no need for Labor to wait for the contract to be signed. If Pallas announced that an incoming Labor government would "tear up the contract" after the election, the compensatory damages would be minimal.

The finalists left in the bidding process would almost certainly sue the government for the costs of preparing their proposals. Based on compensation of up to $12 million for the unsuccessful consortium that didn't make the final cut, the Victorian taxpayer would have to pay out tens of millions of dollars. But in terms of the billions of dollars saved, and the alternative transport uses to which that money could be put, there would probably never have been taxpayer money better spent.

The financial, economic and environmental arguments in favour of the East West Link are fallacious. There is little community support for it, and Labor is likely to lose three inner-suburban seats to the Greens if it continues its de-facto support for the project.

The risk is that the banks and the financial institutions that stand to earn multi-billion-dollar rents over the next couple of decades if the link goes ahead as planned will fight a ferocious rearguard action to protect their interests. 

In contrast to the desalination plant - a large but benign white elephant, hidden from sight and unused near Wonthaggi - the East West Link, if built, will be a ferocious woolly mammoth that will make life hell for future governments as well as Melburnians.

Kenneth Davidson is a senior columnist for The Age. Email: kdavidson@dissent.com.au

49 comments so far

  • PLEASE, we don't need this road. Don't vote for the buffoons that want to build it.

    Commenter
    Byrneseygirl
    Location
    Elsternwick
    Date and time
    July 28, 2014, 1:58AM
    • Sure, but the problem is that they are hell-bent on pushing it through before the election because they know it's dodgy. It should be taken to an election. Dennis and your staffers (morning!), if you are wondering your polling is so bad, it's this issue. People hate the arrogance of ramming this project through without making a public business case for it.

      Commenter
      Rob
      Location
      Melbourne
      Date and time
      July 28, 2014, 8:08AM
    • Overwhelmingly Victorians want better public transport infrastructure instead of more toll roads and freeways but the government is doing the opposite. Why is this ?

      The government are being secretive, dishonest and underhanded and Napthine and his cronies should face a judicial inquiry.

      This project will turn out to be the biggest financial scam in Victoria's political history.

      Superannuation fund managers are being urged to gamble billions of dollars of members' funds on buying and funding new toll roads such as the E-W toll road.
      Members should write to their super funds and warn the managers not to gamble their savings on this white elephant otherwise members will invest their funds elsewhere.

      The $18 billion East-West toll road at a cost of about $1 billion per kilometre, has already failed a cost-benefit analysis commissioned by the previous government.

      The only way this expensive project could be justified is to exaggerate or falsify the benefits.

      The government's political donors and the road lobby groups are good at promoting these exaggerations because they are desperate to benefit financially during the construction stage.

      Of course the toll road operators want it because they can slug motorists over a million dollars a day in toll fees.

      An international study has already found that for investors to get a return on the E-W toll road, motorists would have to be slugged a minimum of $10.50 per trip.

      The government is also keeping secret a proposal to toll the Eastern Freeway.

      Scrap this expensive E-W white elephant and invest the money in expanding our railway infrastructure, including the Metro Railway Tunnel, Airport rail, Doncaster rail, and Rowville rail, which will provide maximum benefit for taxpayers and reduce road congestion !

      WHERE'S THE TRANSPARENCY ?

      Commenter
      Rail Now
      Date and time
      July 28, 2014, 9:02AM
    • Obviously Byrneseygirl, the traffic in the inner north doesn't affect you much in Elsternwick. Where you live you have a plethora of rail transport options. Us plebs who live in the outer suburbs have next to nothing. What do you want, the Metro Tunnel? More inner city rail transport? How selfish can you get? More train stations next to tram stops. I for one, live in the East and work in the West, and welcome this road. Please, if you have time, try to get by car from North Melbourne to the Eastern Freeway at 5pm on a weekday. It will take you at least an hour. And I hope you dont mind paying more for your supermarket goods, thank to the additional transport costs incurred in paying truck drivers to sit in traffic jams.

      Commenter
      Kingstondude
      Location
      Malaysia atm
      Date and time
      July 28, 2014, 9:47AM
    • KD
      with better public transport you could ride it east to west.
      Also, why dont we just give the trucking companies a direct subsidy?
      After all that is what this ,
      no CBA, shrouded in secrecy, displacing residents, devouring parkland,destroying urban livability,budget blowing, turkey of a project which is beyond the realms of white elephants,that has not been put to the people,
      gravy train project really is.

      Commenter
      nkelly
      Date and time
      July 28, 2014, 10:19AM
    • @ Nkelly, which Govt has a plan to build more public transport in the outer suburbs? I think neither. The Metro Tunnel won't help. I can't afford 4 hours a day for bus, bus, train, train, bus, to get to work. Better to get a rail solution to get more trains through the city, as cheaply as possible. You and I might fing some common ground for concensus if the matter was about more rail transport for the outer suburbs.

      Commenter
      Kingstondude
      Location
      Malaysia atm
      Date and time
      July 28, 2014, 11:17AM
    • I am old enough to remember similar arguments about the widening of Hoddle Street (and other streets). Can you just imagine what a mess we would have if this road were just half the width it is now.
      Also people seem to totally overlook the positive impact on Alexander Parade. It could be reduced to one lane each way - al local street in effect - the park in the middle widened and amenities provided. Life for the residents would be way more pleasant than having a concentrated toxic mix of exhaust fumes twice a day and at a lower level other times. Seems like objection is all based on mantra and not reality.

      Commenter
      Old Dog
      Date and time
      July 28, 2014, 12:47PM
    • Kingstondude, why don't public transport to work?

      Or live closer to work?

      Or work closer to home?

      The fact that some people have to cross the city to get to work isn't really a reason for such a large outlay of public funds.

      The focus should be on better public transport to get people into the city and out the other side.

      I used to spend 2 hours each way to work on the trains over a decade ago - North Fitzroy to Berwick. In the end I found work closer to home because I wanted to live where I already was.

      Commenter
      Ross | Preston
      Date and time
      July 28, 2014, 1:17PM
    • Ross of Preston,
      I've worked as a contractor in engineering for the better part of 30 years. My resume must have 20 different employers from the far flung regions of Melbourne and o/s. The day a train pulls up in front of my home and takes me to some tumble weed swept industrial estate in the south eastern suburbs at 6.30 in the morning is the day I use public transport. The sooner inner city dwellers realise this the better.

      Commenter
      Mckenzie
      Date and time
      July 29, 2014, 8:05AM
    • @Rail Now

      I am an ardent supporter of PT, but I do not believe in either the Rowville or Doncaster Rail Projects. Melbourne's PT Infrastructure is terrible and to my mind modernising the existing infrastructure, Signalling, Tracks, Rolling Stock should take preference.

      Any new Public Transport Initiatives have to be provided cheaply, and that means for Rowville simply providing more Buses with a Direct link to the CBD, instead of Terminating at Caulfield. As for the Airport Line, take over the under utilised Broad Gauge freight, convert it to light rail, build a light rail extension to the airport at grade and all those W Class and Z Class Trams rebuild, refurbish and convert them to articulated trams that can be coupled together, like the Docklands Light Rail

      Commenter
      Michael
      Date and time
      July 29, 2014, 7:58PM

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