East West Link Project

Tabled: 9 December 2015

Appendix A. Key features of the project contract

This Appendix is drawn from the East West Link (EWL) project summary prepared on behalf of the Linking Melbourne Authority (LMA) in October 2014. In a departure from usual practice for public private partnership (PPP) arrangements in Victoria, the project summary for EWL was not publicly released. The government released a partly redacted copy of the project contract documents in April 2015.

Parties to the project agreement and other project documents

On 29 September 2014, the state executed the project agreement with East West Connect (EWC) to design, construct and finance the project and to operate and maintain it over approximately 30 years—including approximately a five-year design and construction (D&C) phase and 25-year operations and maintenance (O&M) phase. Financial close was subsequently achieved on 3 October 2014, whereby remaining contractual and financing arrangements were finalised between the state, EWC, its key contractors and debt and equity providers.

The key entities involved in the project included:

  • The state—as a signatory to the project agreement and other ancillary project documents. The Minister for Roads executed the project documents on behalf of the state.
  • LMA—the state government authority with responsibility for managing the project on behalf of the state.
  • EWC—theEWC consortium was selected to deliver the project, and was the counterparty to the project agreement. EWC, in turn, contracted with its consortium partners to perform elements of the project. Notwithstanding this, EWC was tobe the entity ultimately responsible to the state for the project.
  • Equity providers—equity for EWC was to be provided by five entities.
  • Debt financiers—equity for EWC was to be provided by seven entities.
  • D&C contractor—EWC contracted an unincorporated joint venture comprising three related parties to design and construct the project.
  • O&M contractor—EWC contracted a related party to operate and maintain the road for the 25-year term.
  • Independent reviewer—thestate and EWC jointly engaged an independent for the project.

Contractual relationships

The relationship between the state, EWC and other related parties was detailed in the project agreement and associated contracts. Figure A1 outlines the structure and principal agreements.

Figure A1

Contract arrangements and relationships

Figure A1 shows contract arrangements and relationships

Source: Victorian Auditor-General's Office.

Contractual terms and risk transfer

The contractual terms and risk allocation in the project agreement were generally consistent with the Partnerships Victoria framework. Through the Partnerships Victoria framework, the state seeks to achieve best value for money by allocating risks to the party best able to manage them. This process results in various risks being retained by the state, transferred to the private sector or shared between the parties.

The project agreement and associated project documents established the obligations of each party in managing the project risks.

Figure A2 outlines at a high level the risk allocation for the project. Where a risk is allocated to both parties, the parties may not necessarily share that risk equally. The project agreement and associated project documents explicitly set out express contract terms for the risks. It should be noted that EWC bore the majority of project risks associated with the PPP project.

Figure A2

Risk summary

Risk category

Description

State

EWC

Approval risk

Obtaining and maintaining key planning approvals

Risk of delays and/or costs of obtaining and maintaining the key approvals for the project under the Major Transport Projects Facilitation Act 2009 (Vic)

 

Obtaining additional/ amendments to approvals

Risk of delay and/or costs caused by amendments to the key planning approvals or the need for additional approvals, attributable to any changes to EWC's design solution post contract close

 

Compliance with approvals

Compliance with all approvals, including those obtained under the Major Transport Projects Facilitation Act 2009 (Vic)—subject to limited exceptions where the state has the responsibility for compliance

 

Site risk

Contamination caused, contributed to, disturbed or interfered with during the project term

Risk of delay and cost associated with contamination that is caused, contributed to, disturbed or interfered with during the project term

Land acquisition

Risk of cost and delay associated with acquiring land identified as required at contract close

 

D&C risk

Completion of the works

The risk that construction activities cannot be completed on time and/or to budget

 

Defects risk

The cost of rectifying defects identified during, or following completion of construction

 

Fit for purpose risk

The risk that the road is not constructed to be fit for purpose or does not comply with contractual obligations under the project agreement

 

Construction delays caused by inclement weather

The risk of cost and delay caused by inclement weather

 

Construction delays caused by force majeure events

The risk of cost and delay caused by force majeure events (natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations)

Construction costs and delays caused by certain defined extension events

Risk of cost and delay if caused by defined extension events including breaches by the state of the project agreement (not caused or contributed to by EWC)

 

State-initiated modifications to the D&C activities or an occurrence of a specific event requiring modification

Risk of cost and delay associated with the implementation of a state-initiated modification to the D&C of the project or an occurrence of a specific event requiring a modification

 

Modifications to the D&C activities initiated by EWC

Risk of cost and delay associated with the implementation of a modification initiated by EWC

 

Interface risk

The risk associated with the interface between project activities and impacted third parties

Operation and maintenance risk

Carrying out O&M activities

The risk that O&M activities cannot be completed in a timely manner, to the required standards and/or to budget

 

Handover risk

The risk that the asset will not be in the required condition at the end of the O&M phase

 

Force majeure risk

The risk that force majeure events affect the operations of the project or its availability

O&M costs caused by defined intervening events

The risk of noncompliance with performance requirements or cost, if caused by defined intervening events (not caused or contributed by EWC)

 

Traffic demand risk

The risk that traffic flow, vehicle mix and volume is greater, less or otherwise different than that anticipated at contract close

 

Industrial relations risk

Delays caused by any industrial action except where it is a direct result of an act or omission of the state

The risk of cost and delay caused by such industrial action

 

Industrial action which is a direct result of an act or omission of the state

The risk of industrial action affecting the construction or the operation of the project which is a direct result of an act or omission of the state which occurs only at the project site or only in respect of the project

 

Finance risk

Financing risk

The risk of providing finance to meet D&C costs—other than the payment of the state's contribution during and following construction—including future refinancing risk

 

Base interest rate risk after financial close to the first scheduled refinancing

The risk of movement in base interest rates after financial close to the first scheduled refinancing—seven years post financial close

 

Base interest rate risk after the first scheduled refinancing

The risk of movements in base interest rates from the first scheduled refinancing—seven years post financial close—to the end of the 25‑year O&M phase

 

Source: Project Summary prepared on behalf of LMA in October 2014.

General obligations of EWC

The state contracted EWC to finance, design and build the project and then operate and maintain it over the 25 year O&M phase—starting from the date for construction completion. The project agreement and associated project documents contained the full range of EWC's obligations.

Figure A3 summarises the key obligations of EWC.

Figure A3

Summary of key EWC obligations

Project element

Description

All risks

Responsible for all risks relating to the project unless expressly specified otherwise.

Time

Responsible to complete all D&C activities and achieve completion of the road by the contracted date for construction completion.

Design, construction, financing and commissioning

Responsible for all aspects of design, construction, finance and commissioning of the project, including:

  • coordination and management of the design development process
  • liaising with all relevant government agencies and utilities providers and installation and maintenance works to ensure the provision of utility and external infrastructure to the site as required for the project
  • compliance with Victorian Industry Participation Policyrequirements, the Victorian Code of Practice for the Building and Construction Industry and the Victorian Government's Implementation Guidelines to the Victorian Code of Practice for the Building and Construction Industry
  • implementing an appropriate communications strategy, in conjunction with LMA, to engage with the community and various stakeholder groups.

O&M

Provision of the following services for the project throughout the 25‑year O&M phase, in accordance with the performance standards specified in the project scope and requirements and the project agreement more generally:

  • O&M of EWL to a pre-agreed standard, including liaison and interface with other road network operators and performance levels relating to road and traffic management and traffic incident management
  • provision of traffic management services, including proactive measures to manage traffic flows and performance, and the provision and use of intelligent traffic information systems to maximise road network efficiency, safety and user information
  • safety and environmental management, including adherence to applicable approvals, laws, guidelines and standards.

Insurances

EWC is required to take out a range of insurances during both the D&C phase and O&M phase of the project.

Finance

Procurement of necessary debt and equity to finance delivery of the project.

Handover

Undertake all necessary tasks to ensure that the project assets and site are handed back to the state on expiry of the O&M phase in the required conditions and in accordance with the end-of-term requirements set out in the Project Agreement.

Source: Project Summary prepared on behalf of LMA in October 2014.

General obligations of the state

The state retained certain obligations under the project agreement. The following summarises some of its key obligations:

  • acquire the necessary land to enable EWC to deliver the project
  • obtain the relevant key planning approvals under the Major Transport Projects Facilitation Act 2009(Vic)
  • establish and facilitate a community advisory group to seek to ensure stakeholder and community involvement in the project
  • consider material submitted by EWC in accordance with the project agreement
  • undertake defined activities in relation to the project's interfaces with other parts of the transport network
  • make state financing contributions:
    • during the D&C phase to assist with payment of construction costs
    • during the O&M phase to facilitate a reduction in private sector debt consistent with an efficient capital structure for this phase of the project
  • make an early completion incentive payment if completion of the project and completion of the tolling system are achieved at least one week before the contracted date for construction completion
  • make quarterly service payments to EWC during the O&M phase of the project—subject to any abatement that may apply if services are not delivered to the required standard.

Payment mechanism and abatement regime

The state was not required to pay any quarterly service payments to EWC until the project had been certified as having been fully constructed in accordance with the requirements of the project documents.

It is noted that the state intended to separately contract a tolling services contractor to provide relevant works and services, including the commissioning of road-side tolling equipment. In the event that the tolling services contractor did not complete its works until after EWC had met its construction completion requirements, quarterly service payments to EWC may have been paid prior to the road being open.

During the O&M phase, the state was to pay quarterly service payments to EWC according to the payment mechanism in the project agreement. The payment mechanism included an abatement regime to provide an incentive to EWC to operate and maintain the road in accordance with the standards in the project agreement. In other words, the quarterly service payments would be reduced if the road was unavailable or EWC did not meet the necessary performance standards, including:

  • availability abatements—which are sized by reference to the number of vehicles affected by the unavailability having regard to historical traffic figures for time periods that correspond to the period of unavailability
  • failure to meet required key performance indicators—which cover a range of operation and maintenance activities including those relating to:
    • emergency contact points
    • incident response
    • compliance with certain operational plans
    • maintenance inspections and works
    • reporting and environmental management.

EWC had to monitor its performance against the requirements of the payment mechanism, with a duty to record all performance failures. This obligation was supported by audit rights for the state.

State financial contributions

Traditionally a PPP project is financed by the private sector. Given the size and risk profile of the EWL project and in accordance with the updated Partnerships Victoria guidance with respect to alternative financing options, the state considered a number of financing options to deliver value for money. Reflecting this assessment, the state elected to provide financial contributions to EWC during both the D&C phase and the O&M phase (state contributions) to reduce the amount of private financing that EWC would otherwise have to raise for the project.

The key features of the state contributions were:

  • During the D&C phase, a state contribution of $2 billion (nominal) was to be made available to EWC once a total amount equivalent to 80per cent of the debt and 100 per cent of equity for the D&C of the project was drawn down by EWC. The state contributions were payable in instalments at the same time as, and in proportion to, remaining drawdowns of debt.
  • A final state contribution of $1 billion (nominal) was to be paid to EWC approximately seven years after financial close, provided certain conditions were satisfied. This contribution was to be used to repay part of EWC's debt obligations, achieving an efficient capital structure for the post construction phase of the project.

The independent reviewer had the ability to undertake 'look forward' tests at any time during the construction phase of the project to determine whether EWC would achieve construction completion on time. If the independent reviewer formed an opinion that construction completion would be late, EWC was required to develop and implement a cure plan to rectify the situation and achieve completion as soon as practicable.

Federal funding for the project

The Commonwealth Government committed a total of $3 billion to the EWL.

The Commonwealth Government funding was received as grant revenue by the state government under a memorandum of understanding between the Commonwealth and the state. However, the state had sole contractual liability for capital funding contributions to EWC as and when they fell due under the project agreement. The state received $1.5 billion of this grant for both the EWL – Eastern Section and EWL – Western Section in the 2013–14 financial year.

Finance arrangements

Initial financing

EWC's financing comprised senior debt and equity as follows:

  • senior debt comprised a construction facility which converted to a term loan on the scheduled commencement of the O&M phase, with a combined loan term of seven years from financial close when it was expected to be refinanced
  • equity was provided by five entities.

The state and EWC's financiers held a range of security over the project's assets in order to secure their interests. The financiers' Direct Deed detailed the rights and priorities between these security interests.

Future refinancings

EWC's debt was to be refinanced at various intervals during the project term. The project agreement entitled the state to a specified share of future refinancing gains. EWC fully bore future refinancing losses.

CityLink interface

The project had a significant physical interface with CityLink, therefore, the project documents incorporated a regime for managing this interface between the state, EWC and, the CityLink manager during the D&C phase and O&M phase.

Tolling interface obligations

The project documents anticipated that the state would separately engage:

  • a tolling services contractor to provide works and services including the commissioning of road-side equipment
  • a tolling collection contractor to provide toll collection, maintenance and related services or works.

The project agreement set out the obligations of EWC to provide access to these contractors during the term of the project.

Proximate state work

Under the project agreement, the state could, at any time during the project term, construct, operate, maintain or repair any road or other means of vehicle, public transport, pedestrian or bicycle access, or utility infrastructure under, on, above or adjacent to the project land. Where the state exercised these rights, it had to compensate EWC for its increased costs arising from the proximate state works in accordance with the requirements of the project agreement.

Modifications

The state could propose a modification to the project activities at any time during the project term. This included an ability to remove works or O&M services from the project scope. Certain events may have also triggered a requirement for the state to issue a modification, including certain changes in law or policy. Under the modifications regime, EWC was required to provide an estimate of the cost impact of any modification proposed by the state, in a manner which complied with the requirements of the project agreement.

The state was to pay for the modification(s) either by a lump sum payment, milestone payments, or an adjustment to the quarterly service payment—if the modification is financed by EWC. To provide greater transparency and certainty regarding the cost of modifications, the project agreement specified a range of pre-agreed margins.

In addition to the ability to request modifications, a number of pre-agreed modifications had been costed by EWC and included in the project agreement, which the state could nominate to include into the project scope at any time before a specified deadline.

The state had already elected to include two pre-agreed modifications at financial close. These were:

  • an additional northbound lane on CityLink between Racecourse Road and Moreland Road—this modification was nominated in connection with the CityLink Tulla Widening project—in relation to which the parties reached agreement on 6 October 2014
  • a new shared user overpass on the Eastern Freeway—this was included as a pre-agreed modifications after a number of procurement options were considered for this element before determining what the best value-for-money outcome was.

Default, step-in and termination regime

Default

For a major default, EWC was generally required to provide a cure plan and diligently pursue a remedy within the time frames specified in the project agreement. If EWC failed to diligently pursue a remedy, or failed to remedy the event of default within the required time frame, it would generally—subject to financier cure rights—give rise to a state right to terminate the project agreement.

Certain defaults were so severe or not capable of remedy that EWC was not provided with the opportunity to cure the default. These would have given rise to a state termination right immediately—subject to the financiers' cure regime. These events were called default termination events.

Step-in

In addition to triggering termination rights, in the event of (i) a default termination event, (ii) an incident which represents a serious risk to safety, (iii) the project being suspended as a result of a force majeure event or (iv) in certain circumstances in the event of a major default, the state could assume temporary total or partial control of the project and take any steps that were necessary in the reasonable opinion of the state to perform the project activities.

Where the state exercised its right to step in and the event giving rise to that step-in was attributable to a breach by EWC:

  • during the D&C phase, EWC had to compensate the state for any costs it incurred during the step-in
  • during the O&M phase, the state had its costs reimbursed via the abatement of the quarterly service payment.
Termination

Where the project agreement was terminated before the expiry of the 25-year O&M phase, EWC may have been entitled to a termination payment. Figure A4 summarises the four types of termination payments in the project agreement.

Figure A4

Termination payments

Event

Trigger (summary)

Termination payment (summary)

Termination for convenience

The state may terminate the project agreement at any time by giving 90 days' notice to EWC.

EWC's outstanding debt as at the termination date plus the fair value of the equity, together with any other reasonable costs incurred by EWC as a result of the termination (including amounts payable to subcontractors for loss of profit).

Termination for convenience following a specific key approval event

The state may terminate the project agreement for convenience following a specific key approval event, or the state is required to terminate the project agreement following an extended period of a material impact on the project as a result of a specific key approval event.

EWC's outstanding debt as at the termination date plus an equity component which has been sized to reflect the early termination of the project, together with any other reasonable costs incurred by EWC as a result of the termination (including amounts payable to subcontractors for loss of profit).

Termination for force majeure

The occurrence of a force majeure event which prevents the state and/or EWC from carrying out all or a material part of the project.

EWC's outstanding debt as at the termination date less any insurance proceeds.

Termination for default termination event

The occurrence of a default termination event.

The project's fair market value determined by tendering or an independent valuer. An independent valuer must be used in certain circumstances including where there is no liquid market.

Source: Victorian Auditor-General's Office based on the project summary prepared on behalf of LMA in October 2014.

Specific key approval events

As noted above the state was responsible for obtaining and maintaining key planning approvals, which were the subject of an application for judicial review. Specific provisions were set out in the project agreement to address the circumstances that the key planning approval for the project was found to be invalid or set aside anytime during the first two years after financial close (specific key approval event). In these circumstances, EWC was entitled to an extension of time and costs relating to the delay. The costs claimable by EWC relating to the delay were subject to a daily cap.

The state was required to terminate the project agreement if the specific key approval event subsisted for a specific period of time and had a material impact on EWC's ability to carry out the project activities. In these circumstances, or if the state terminated the project agreement for convenience following the occurrence of a specific key approval event, EWC was entitled to a termination for convenience payment with an equity component sized to reflect the early termination of the project.

To the extent that any new, revised or varied key planning approval procured by the state to address the specific key approval event differed from the original key planning approval, the difference was to be deemed to constitute a modification.

State rights at expiry of contract

Starting from three years prior to the expiry of the O&M phase, EWC and the state were to carry out periodic joint inspections of the road to determine the maintenance and repair work required to achieve the asset condition required under the project agreement at handover.

The estimated costs of carrying out those works were to be progressively set aside in a handover account—or subject to a handover bond of that amount—and reimbursed by the state to EWC as the work was incurred.

At the end of the O&M phase, the road was to revert to the state at no cost. Any money remaining in the handover account was to be paid by the state to EWC.

Reimbursement of bid costs for unsuccessful tenderers

The project was identified as a trial project under new Partnerships Victoria guidelines for reimbursing proposal costs. As such, the state was to contribute to proposal costs of the unsuccessful short-listed respondents equal to 50 per cent of the respondent's verifiable external proposal costs—subject to a maximum payment to any unsuccessful short-listed respondent of $12 million.

The payment to each short-listed respondent was subject to the unsuccessful short‑listed respondents licensing the intellectual property rights in its proposal to the state and otherwise complying with the new Partnerships Victoria requirements and various terms and conditions set out during the tender process.

Audit and inspection rights of the state

The project agreement had contractual rights for the state to be given access to information and data, including to:

  • inspect, observe or test any part of the works, infrastructure or project activities
  • examine and make copies of the accounts and other records, reports and all documents reasonably requested of EWC or any of its key contractors in connection with the project.

The state had the ability to disclose information in connection with the project to satisfy the disclosure requirements of the Victorian Auditor-General or to satisfy the requirements of Parliamentary accountability.

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