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Estimates: Rural and Regional Affairs and Transport Legislation Committee: Infrastructure and Regional Development Portfolio: Department of Infrastructure and Regional Development

Estimates & Committees
Lee Rhiannon 24 May 2017

Monday 22 May

Senator RHIANNON: I want to return to the Australian National Audit Office's report on WestConnex. Where are you at with it? Is it something there have been discussions on, some lessons learnt and reflections on, or is it that it is gathering dust on the bookshelf and you are thinking, 'Well, we escaped that bullet'? Where does it sit for you?

Mr Mrdak: I think we accepted the recommendation that was made. I will ask Ms Leeming and Mr Pittar to come to the table and give you an update on where we are at. But we certainly accepted the recommendation and are factoring in some of the issues that they raised.

Mr Thomann: We have taken the findings of the audit report very seriously. We appeared before the JCPAA and at that hearing I outlined how we have taken on board the feedback from the ANAO in consideration of the Sunshine Coast Airport extension loan, including the structure of the term sheet, in terms of the way we have got legal and other advice early. But I will ask Mr Pittar to take you through—

Senator RHIANNON: I am aware that you have adopted the recommendation, considering that it was quite extraordinary what played out and what the ANAO found, like the fact that Allens-Linklaters is brought in to give advice, and then you have AECOM brought in to give financial advice, both groupings that are heavily involved with WestConnex already—for many years. I think what is still needed is for the public to understand how it ever got that point. So it is not sort of just after the fact. That is what I would like to ask questions on. When the government needed advice on the terms of the $2 billion loan to the New South Wales government for WestConnex, why in the first instance was it outsourced to the private sector? Why was the decision taken?

Mr Thomann: As a matter of course, the department seeks expert legal, commercial and technical advice from advisory firms that are on our panel. We regularly go to the market to seek specialist advice—

Senator RHIANNON: You have a lot of experience in doing that, and that is why I was wondering that, considering Allens-Linklaters, the company selected to provide advice on the terms of the $2 billion loan, promoted the deal as 'a new model for public-private partnerships in Australia' and as one that would 'support private sector debt co-funding and provide a platform for future private sector equity investment'. It sounds like the $2 billion of public funds were being used to entice private lenders into funding the construction of a WestConnex, as it had been difficult for the government to raise finance the project. To start, do we all agree that the government knew they were going to have trouble raising finance for the project? Then we can go back to why Allens-Linklaters, considering they were so involved with this project and then you get them in to apparently give independent advice.

Mr Thomann: I would not want to conflate the two issues.

Senator RHIANNON: Fair enough—over to you, however you want to answer it.

Mr Thomann: I think the first issue is that of the concessional loan. Certainly, in the discussions and negotiations with the New South Wales government, the New South Wales government made it clear that the project would not be able to proceed without financial support from the Commonwealth government.

Mr Mrdak: I think the critical thing is, in terms of not being proceeding, it is bringing it forward. That is the crucial issue. The concessional loan, as we have discussed previously, was not about the overall project viability; it was about the timing. The New South Wales government's original proposal was for stage 1 to be undertaken and then stage 2 to follow, following consideration of other funding and financing options. What the concessional loan was to do was to enable it to be brought forward by two years to enable stages 1 and 2 to operate in parallel, effectively, or as much as possible. I just want to be clear on that, while Mr Thomann is taking you through it.

Senator RHIANNON: Can I clarify: do you mean by that that it is accurate that the public loan was necessary because investors and lenders were initially not forthcoming in their support for WestConnex, and therefore it was packaged up in this way?

Mr Mrdak: Certainly in terms of bringing it forward to the timetable, to have stage 2 under construction now, that would not have been possible without the concessional loan. That was the advice from New South Wales, because, at that stage, without the further work being done on revenue streams that would have enabled the financing by the commercial banks—and also the New South Wales government at that time was looking at a staged build-and-sell strategy to enable the private sector to see the revenue streams without government support. So, essentially, the concessional loan happening as it did was designed to obviate some of those lender risks, not a comment on the overall financeability of the project.

Senator RHIANNON: I am particularly keen to understand why that company was chosen, considering it was just so involved with the project. That is what has always seemed extraordinary about this.

Mr Thomann: I might defer to Mr Pittar to go through the details, if we have them with us. Otherwise we will need to take it on notice.

Mr Pittar: Thank you, Mr Thomann. As I think Mr Thomann said earlier, we have a panel of providers, and we draw on the panel of providers depending on the expertise that we need from the private sector. That can go to issues around financing, issues around legal aspects and issues around engineering and technical aspects. I do not have the details as to specifically why that firm was chosen compared to other panel providers that we may have had on our panel of providers at the time, so we may need to take that on notice.

Senator RHIANNON: Let us move on to AECOM. They were brought in to assess the financial risk for the proposed loan, I understand. That is correct?

Mr Pittar: I would need to check. I would have thought AECOM—

Senator RHIANNON: I thought they were your choice. I thought you were the ones who chose AECOM.

Mr Pittar: Again, it is a couple of years ago now. I would need to check on those details. But there is absolutely nothing unusual with us selecting providers based on their technical expertise. Companies are also able to structure arrangements around any potential conflicts of interest that they may be perceived to have, if they are advising on other parts of the equation. But that would certainly be something that we would be very keen to avoid in engaging a company where there may be perceived conflicts of interest.

Senator RHIANNON: But it looks as though they had expertise in other areas, which I am surprised has not been mentioned. There is publicly available evidence that they had provided false and misleading traffic projections for other tollways—and that is not me saying it. The allegations led to the company paying out nearly half a billion dollars to settle negligence class actions for their works on the Brisbane motorway. This is where it just seems so surprising. They are so involved in WestConnex, and they have a shady history. And there is also the other one about the allegations including a New York supreme court judgement that AECOM had been party to an undisclosed system scheme of success fees. This should be front of mind, surely, when you come to estimates.

Mr Pittar: I am not going to comment on the issues around that particular company, but I can add that we also brought in other consultants. In relation to traffic modelling, we brought in consultants internationally to assist with modelling—Robert Bain from the United Kingdom, who is an internationally renowned traffic modeller—to assist us with the work around WestConnex. So we went to a number of sources in order to spread our risks, in order to spread the nature of advice that we got on that project, on WestConnex.

Mr Mrdak: I will not comment on the specific instances that you have outlined; I am not familiar with them. But certainly our experience with AECOM has been, on the whole, very positive in terms of the work they have done for us and for state governments in Australia.

Senator RHIANNON: Seriously, Mr Mrdak, are you saying—you are the secretary of the department—that you were not aware of AECOM's history? Forget about New York—fair enough, maybe you do not know about that, although I am surprised at that—but the tollway in Brisbane? That was just in the papers so often. It was reported. Surely you must look at this background?

Mr Mrdak: We do, and we look closely at it. As I think Mr Pittar has indicated, we use a range of consultants to provide advice. What I was saying to you is that the company has done a series of work over many years for the Commonwealth, and we have found that work to be satisfactory.

Senator RHIANNON: And you seriously were not aware that they had given incorrect figures—and they paid the fine—for the Brisbane motorway project? They were then—nearly half a billion dollars to settle negligence class actions.

Mr Mrdak: I am aware of the issues with the Brisbane project. You reference that and ask why we would have chosen that firm. We choose that firm for a range of tasks. Advice on traffic forecasts, we sought other firms to assist us with as well. It is not simply a case of the Brisbane experience ruling them out for other work. On the whole, we found them a company that we are very happy to work with.

Mr Thomann: We could come back, on notice, on the exact nature of the advice that we sought from each firm and the process we went through to engage each firm.

Senator RHIANNON: I would appreciate if you could take it on notice. Staying with the report, but moving on—in the ANAO report, their analysts found a note from your department, from the department's legal advisers, that it was apparent that: … it was the WestConnex Delivery Agency's intent that the loan was to be a concessional loan affording minimal rights to the Australian Government. What was meant by that?

Mr Pittar: The loan was a concessional loan. The other feature of the loan was that it was subordinate to senior debt. The key point of interest for the Commonwealth was to ensure that the subordinate debt was repaid to the Commonwealth. The key features that the Commonwealth were interested in were around the loan being repaid. Those measures were ensured, and those arrangements are currently in place.

Mr Thomann: In fact, the ANAO report concluded that, in respect of the concessional loan arrangements, the Commonwealth's interests had been adequately protected. Especially in relation to the risk of the loan not being repaid, it found that we had taken all relevant steps to ensure that it would be repaid.

Senator RHIANNON: The term 'affording minimal rights' is describing a regime that delivers the best way to get the returns on the debt—is that what you are saying? 'Minimal rights' sends alarm bells for many people. Are you satisfied with that language?

Mr Pittar: We are comfortable with what the ANAO is saying there because our interpretation of it in the broad is that it means that the Commonwealth debt, the Commonwealth loan, is subordinate to senior debt, the private sector debt, in the loan structure to the project. The Commonwealth deliberately structured things in that way so that it was subordinate to debt but superior to equity returns in the structure of the project.

Senator RHIANNON: Was it structured in that way to help ensure that you are getting the funding flows from the private sector?

Mr Pittar: It was structured in that way to leverage private sector debt into the vehicle.

Senator RHIANNON: Even though that is a financial disadvantage for the Commonwealth?

Mr Pittar: It is not so much a disadvantage. It was an arrangement that was structured deliberately in order to leverage private sector debt into the special purpose vehicle, WestConnex—SMC, I should say.

Senator RHIANNON: Mr Mrdak, I have only got a couple of minutes. Coming back to some of the issues about the companies that are involved, are you aware that Leighton, a major contractor with WestConnex, is still under investigation at a domestic and international level for bribery, and that these investigations have been ongoing for four years since 2013?

Mr Mrdak: I am aware of the allegations—yes.

Senator RHIANNON: How do you handle that when you have a major project? You are making a decision to take on a company to basically run and deliver that project, and there is this major investigation that could prove very serious. How do you balance that out? How do you work out your decision making?

Mr Mrdak: When we engage consultants, we do look at—Leighton is obviously a multinational Australian company—the probity issues involved. As you say, they are allegations. We are aware of them. The company makes us aware of those issues. At the end of the day, when we select contractors, we select on a whole range of criteria. If they are allegations, we treat the process as ongoing.

Senator RHIANNON: When you say that Leighton made you aware of it, do they just say, 'We're being investigated,' or do they actually tell you the details of what it is and put their case, and you make a judgement on that?

Mr Mrdak: I would have to seek some advice on what occurred in this particular circumstance, as to what was made available to us or what was made known to us by other parties. I will take on notice the extent of the knowledge at the time we appointed them.

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