East West Link Project

Tabled: 9 December 2015

Audit Summary

The East West Link (EWL) was to be an 18 kilometre cross city road connecting the Eastern Freeway at Hoddle Street to CityLink, the Port of Melbourne precinct and on to the Western Ring Road at Sunshine West, with a range of associated works. It would have been one of the largest transport infrastructure projects ever undertaken in Australia, and significant in terms of its impact, complexity and cost.

The genesis for the EWL was the 2008 report Investing in Transport: East West Link Needs Assessment by Sir Rodney Eddington, which recommended a new 18 kilometre cross city road corridor to provide an alternative to the West Gate Bridge. During 2009, the then government developed a project proposal for what was known as the WestLink project.

Following the November 2010 state election, the WestLink project was effectively superseded by the development of a business case for the EWL.

The government considered a business case for EWL in April 2013 and decided to go ahead with the project, with the eastern section being commenced as Stage 1 of the project. The government decided to deliver the eastern section as a public private partnership (PPP), and following a competitive tender process finalised a project contract with East West Connect (EWC) to finance, design, construct, operate and maintain the road.

The contract was signed before the caretaker period leading into the November 2014 state election, just after the then Opposition indicated it would not proceed with the project. There was also an unresolved legal challenge to the planning approval for the project at the time. The Opposition had also indicated that if it formed government after the November 2014 election it would not defend the legal challenge to the planning decision.

Following the November 2014 election, the incoming government suspended work on the project and by June 2015 had reached agreement with EWC to terminate the project.

This audit assessed whether the state effectively managed the EWL project and related costs by assessing the:

  • total costs of the project, including ongoing financial implications and risks associated with terminating the EWL project
  • appropriateness of advice supporting key project decisions that influenced the project's outcomes and total costs
  • lessons for future major projects.

Conclusions

If it had proceeded to completion, the entire EWL project would have cost in excess of $22.8 billion in nominal terms. Limitations in the business case meant there was little assurance that the prioritisation of significant state resources to this project was soundly based.

Key decisions during the project planning, development and procurement phases were driven by an overriding sense of urgency to sign the contract before the November 2014 state election. The significant risks arising from this situation were further compounded by legal challenges to the project and by the absence of comprehensive advice on the potential benefits of deferring the signing of the contract.

Signing the contract in these circumstances was imprudent and exposed the state to significant cost and risk. The risks associated with this decision were increased when the state agreed to amend the contract to provide additional compensation to EWC if the legal challenge to the project planning approval succeeded. The available evidence suggests that the state knew at the time that there was a significant risk that this would happen.

These circumstances demanded comprehensive advice to government on its options and the best course of action for the state. However, advice to government in the lead-up to signing the contract fell short because it did not sufficiently assess the benefits of delaying finalisation of the procurement and contract to mitigate the risks posed by the unresolved judicial review. Instead, achieving the government's desired time line for contract signing was given disproportionate emphasis despite the risks and implications for the state.

The amount payable by the state under the termination settlement negotiated by the new government with EWC was substantially lower than the cost of terminating under the project contract. However, the decision to terminate was made without full consideration of the merits of continuing with the project. Failure to properly assess the benefits of termination against revised costs and benefits of continuing the project means the government was deprived of comprehensive advice to assure it that termination was the best use of public funds.

Further, the validity of project costs reimbursed by the state could not be fully verified because the state accepted EWC's refusal to allow access to the financial records of its related party contractors. This created a risk that EWC's related parties had a windfall gain.

Terminating the EWL project involved the expenditure of hundreds of millions of dollars for little tangible benefit. Following final settlement of outstanding costs, the state will have incurred costs in excess of $1.1 billion. This includes costs for the acquisition of properties which the Department of Treasury & Finance estimates can be resold for around $320 million. Pre-construction activities including design and geotechnical work and elements of the complementary projects may provide some value in the future.

Over the life of this costly and complex project, advice to government did not always meet the expected standard of being frank and fearless. This highlights a risk to the integrity of public administration that needs to be addressed. Action and leadership is required from government to reinforce these standards and the related expectations for public servants.

Findings

Project business case

The EWL business case did not provide a sound basis for the government's decision to commit to the investment because it did not:

  • clearly establish the need for the investment through robust analysis of the costs, benefits and risks of reasonable options
  • provide a sound basis for prioritising the eastern section over other sections of the road
  • include sufficient information and evidence to demonstrate the accuracy and plausibility of the assumed wider economic benefits of the project, or the validity of underlying traffic modelling
  • adequately address significant issues raised about the traffic modelling by peer reviewers.

The project delivery approach proposed in the business case was sound notwithstanding that undue weight was given to the government's desire to begin work on the project prior to the 2014 state election in the assessment of available options.

Establishing the project contract

The Linking Melbourne Authority (LMA) managed the procurement process well in challenging circumstances, completing it within the tight time lines stipulated by government at the outset of the project. The analysis and advice on the assessment of bids, and selection of the preferred bidder, was generally robust and conducted in accordance with the government's procurement requirements.

The uncertainty created by the unique circumstances in the lead-up to the decision on signing the contract warranted comprehensive advice to government on its options and the best course of action for the state. However, the advice to government did not:

  • comprehensively examine the merits of alternative options, including delaying finalisation of the procurement and contract
  • directly support or oppose the proposed timing of the transaction and neither identified nor recommended a course of action in the best interests of the state.

Notwithstanding this, the significant implications for the state arising from the unresolved legal challenge to the project planning decision prompted the then Department of Transport, Planning and Local Infrastructure and LMA to provide advice to government in August 2014 emphasising the importance of resolving the judicial review before the contract was signed. This advice indicated that an expedited court timetable was achievable, would deliver early certainty and would provide the best mitigation to the substantial cost and risk exposures to the state that existed at that time. Despite this advice the government decided not to seek an expedited hearing and LMA was instructed to proceed to contract close for the project before the state election in November 2014.

Despite the significance and complexity of the project and the risks and implications for the state, the focus on achieving this time line was given disproportionate emphasis. As a result, subsequent advice to government focused on options to mitigate identified risks if the government determined to proceed to contract close rather than considering and emphasising the merits of delaying signing.

If contract signing had been deferred until after resolution of the judicial review, the state's exposure under the non-standard contract provisions, which were accepted to secure EWC's execution of the contract, could have been avoided.

The contract signed by the state with EWC was standard in most respects and generally consistent with the standard commercial principles established by the National PPP Policy and Guidelines and the Partnerships Victoria requirements, as well as with recent precedent transactions. However, in departures from standard practice for PPP transactions in Victoria, the state agreed to the inclusion of clause 58—Specific Key Approval Event in the contract, and signed a side letter confirming the state's commitment to honour the contract. These variations from standard contractual terms were requested by EWC.

Clause 58 increased the state's exposure in circumstances where the planning approval decision was found to be invalid, as compared to the standard provisions of the contract. The risk and exposure for the state created by clause 58 was linked to the outcome of the judicial review of the planning decision for the project.

Given that the state was aware of the significant risk that the planning approval decision would be quashed, the decision to proceed to contract signing was, in effect, a 'gamble' that the judicial review proceedings would not impact the project significantly.

The only scenario under which the side letter can be argued to have created additional exposures for the state is one in which the state did not have the power to sign the contract. Legal advice obtained by government both before and after the election indicated that this was very unlikely.

Terminating the project

The total cost of the final termination settlement will be around $642 million. This excludes state expenditure on the planning, development and procurement of the project, and is substantially less than an estimated amount—in excess of $900 million—that would have been payable under the contract's termination for convenience provisions.

However, to achieve this outcome the state accepted limited verification of the funds spent by EWC and the risk that an EWC-related party contractor had a windfall gain. The government was not able to confirm the reasonableness of the expenditure it reimbursed or the assets it received because EWC refused to allow the state or its advisers access to information at a sufficiently detailed level.

The state's due diligence adviser reported in June 2015 that they were only provided with confirmation that payments had been made from EWC to its design and construction (D&C) and operations and maintenance contractors and that they did not have access to the contractors' supporting documentation. The adviser indicated that this meant it could not verify:

  • what these contractors used the money for
  • whether or not further undisclosed assets existed, and noted that the list of 'hard assets' was very short and the value immaterial
  • whether any expenditure had been refunded
  • whether EWC and the contractors took reasonable steps to mitigate expenditure following the issuing of the state's project suspension notice in December 2014.

The due diligence adviser indicated that this created a risk that a related party to EWC, particularly the D&C contractor, was holding either surplus cash, hard assets that were yet to be identified or prepaid assets capable of conversion into cash at a later date. Ultimately, this limited verification was accepted as part of the 'price paid' by the state to secure agreement by EWC to the terms of the settlement.

In an attempt to mitigate the risks identified by the due diligence adviser, the state sought warranties from EWC and its contractors that they had identified all hard assets and intellectual property acquired, and had complied with obligations under the contracts to mitigate project expenditure. However, the warranties provided were subject to limitations that meant they did not fully mitigate or address the risks identified by the state's due diligence adviser, and in particular did not directly address the risk that the D&C contractor was holding surplus cash.

The Auditor-General requested information from EWC and its contractors in July and August 2015 to address the gaps in the due diligence process undertaken by the state. These requests were refused. The Auditor-General does not have explicit power under the Audit Act 1994 to require provision of such information by private parties.

The final termination agreements involved a different settlement outcome to that initially announced by the government in April 2015. The revised approach to the settlement was based on sound advice to government and delivered a better outcome for the state. The advice comprehensively examined the available approaches, settlement terms and related costs and risks. The strategy adopted was a practical solution to a highly complex situation.

However, only limited analysis was undertaken of the option to complete the project. Although the new government's intention to terminate the EWL project was clearly articulated at the November 2014 election when it was in Opposition, it did not at that time have access to complete and up-to-date information on the project's benefits and cost.

The new government was not provided with updated, comprehensive information on the impacts of completing the project versus the option of cancelling it, to provide a more complete assessment of the merits of terminating the contract. This meant it was deprived of comprehensive advice to assure it that termination was the best use of public funds.

Lessons

The Public Administration Act 2004 (the Act) imposes an obligation on public officials to provide frank, impartial and timely advice to government. Meeting this obligation means there is sometimes a need to provide advice that a government may not necessarily want to receive.

While the advice to government examined in this audit was generally comprehensive, in some critical instances it fell short of the required standard of frankness. These instances involved advice that did not provide recommendations or that gave too much emphasis to the benefits of approaches that were in line with the government's preferred outcome and little emphasis to alternative options that could be argued were more aligned with the state's best interests.

Presenting options to government without a recommendation in circumstances where public officials know that the option favoured by government will expose the state to significant potential risks and costs is clearly not in the best interests of the state. It is not sufficient for officials in such circumstances to stop at disclosing the potential risks and consequences of the available options, they need to provide a recommended course of action.

The departments of Premier & Cabinet and Treasury & Finance disputed this and advise that the Code of Conduct for Victorian Public Sector Employees (the Code) requires the public service to implement government policy decisions once the government of the day has made a clear policy decision. This is a quite narrow reading of the Public Administration Act 2004 (the Act) and the Code because neither the Act nor the Code explicitly state or imply that the requirement to 'implement government policy' sits at the apex of public sector values.

This suggestion is also inconsistent with the objects set out in section 3 of the Act. The Act does not oblige public servants to implement government policy at any cost. Rather, it seeks a public service which responds to government policy priorities in a manner that is consistent with public sector values. Those values include:

  • providing frank, impartial and timely advice to the government
  • making decisions and providing advice on merit
  • objectively considering all relevant facts and fair criteria
  • seeking to achieve best use of resources
  • using their views to improve outcomes on an ongoing basis.

The Act and Code empower and oblige public servants to act with integrity and, most importantly, with impartiality.

Some public officials involved in this audit indicated that providing frank and fearless advice when they believe a government does not want to receive it will negatively impact their influence or career opportunities. This belief is regrettable and if it becomes common in the public sector it poses a significant risk to the integrity of government decision-making and public administration, with consequential implications for the effective management of public resources and services.

Recommendations

That the Department of Treasury & Finance:

  1. provides guidance to support whole-of-project cost tracking and reporting against budget for major projects that involve multiple stages managed by different agencies
  2. improves its business case development guidance material, the adherence to this guidance by agencies, and its quality assurance over key inputs by:
  • critically reviewing the analysis of options in business cases against the requirements of existing guidance material and providing feedback to agencies
  • developing further guidance on methods for transparently determining and quantifying wider economic benefits
  • strengthening its processes for reviewing and advising government on the adequacy of actions taken to address findings and recommendations arising from peer or other external reviews of key business case inputs such as economic and financial analyses, demand modelling, cost estimates and procurement options analyses
  1. develops minimum standards and enhanced guidance for managing the risks associated with concurrent planning, scoping and procurement processes on major projects
  2. mandates the appointment of separate parties to undertake the probity advice and probity compliance review functions on High Value High Risk projects
  3. establishes clear guidance for the terms of future negotiations involving the state reimbursing expenditure by private entities, to require full disclosure and transparency of the underlying information and evidence.

That the Department of Premier & Cabinet:

  1. consults with the Victorian Public Sector Commission to support further guidance to clarify the requirements for frank, impartial and timely advice in the public sector by:
  • establishing clear minimum standards for agencies on how to satisfactorily discharge this obligation when providing advice to government
  • advising government on strategies and options for addressing any cultural issues underpinning the serious deficiencies in the advice provided to government highlighted by this report.

Submissions and comments received

Throughout the course of the audit we have professionally engaged with:

  • the Department of Premier & Cabinet
  • the Department of Treasury & Finance
  • the Department of Economic Development, Jobs, Transport & Resources
  • the Department of Environment, Land, Water & Planning
  • the Department of Justice & Regulation and the Victorian Government Solicitor's Office
  • the Linking Melbourne Authority
  • VicRoads
  • the Environment Protection Authority
  • Planning Panels Victoria
  • the Treasury Corporation of Victoria.

In accordance with section 16(3) of the Audit Act 1994 we provided a copy of this report to those agencies and requested their submissions or comments.

We have considered those views in reaching our audit conclusions and have represented them to the extent relevant and warranted. Their full section 16(3) submissions and comments are included in Appendix C.

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