Monday, 27 February 2017
CHAIR: Thank you. For the information of senators Ludlum and Rhiannon, what we do is give the call to your Greens and to our voting member. In this case, Senator Rice will yield the floor to you both for whatever time you need.
Senator STERLE: As long as there is no factional blue going on.
Senator RHIANNON: WestConnex and the recent report from the Auditor-General. I want to read out a section of it and then ask for your response to it. This is in the report on WestConnex from the Auditor-General. Chapter 2, point 16 says:
DIRD's approach to linking payments to the achievement of milestones was not effective as a control.
It says that some of those milestones were,
• agreed to after the respective event had already occurred; and
• amended shortly before the payment was due to be made where NSW had not met the milestone.
17. The purpose of these amendments was to ensure that payments would not be delayed.
Could you explain the process by which the milestones were changed?
Mr Mrdak: We are dealing with Infrastructure Australia here. Would you like to do this in the infrastructure investment section where this is more appropriate?
Senator RHIANNON: Is that where we can get the best answer? I am happy to take your advice on that.
Mr Mrdak: I think it is best if we can wait for the infrastructure investment area, which is due after Infrastructure Australia. We would be happy to take you through it. As is clear from our response to the ANAO, we disagree with ANAO’s findings. We believe the milestones were set in accordance with our normal practice.
Senator RHIANNON: It would be good to go through that.
Mr Mrdak: We can go through that in the next section.
Senator LUDLAM: Could you maybe confirm for us the most current figure of your understanding of the total funding for the Perth Freight Link project?
Senator RHIANNON: I want to move to the WestConnex issue and the report that came out recently from the Australian National Audit office.
Mr Mrdak: Certainly.
Senator RHIANNON: The report said that the federal government had in numerous ways failed to protect its financial interests. I would like to start there. Reading the report, you find that successive coalition governments have handed over money to New South Wales up to a year before it was needed for construction. I understand that that cost the federal government budget $20 million in lost interest over the past two years. When we started this discussion earlier, Mr Mrdak, you said you disputed some of the findings specifically on that lost interest. What is your response?
Mr Mrdak: Well, certainly we are not in a position to judge that. That is a calculation that is done in the national interest. The ANAO found that the department certainly protected the Commonwealth's interests in areas such as ensuring repayment of the loan. As to the ANAO's finding in relation to funds being paid in advance of need, the government has been very clear that it made an election commitment to make payments on the project. Those payments were made. In the government's view, they were necessary to enable the project to be started, certainly the initial payments. Certainly in our view, the Commonwealth Federal Financial Relations Act, which provides the capacity for the Commonwealth to reclaim funds in the event of a project not proceeding, does provide protections for the Commonwealth. But there is no doubt that the funds were paid, and that was part of the government's commitment to make that funding available as a means of getting the project started. We do notagree with the ANAO that the project would not have proceeded in the same timeframe had the funds not been available. That is not the view that has been communicated to us by New South Wales.
Senator RHIANNON: So you are now emphasising that the early payment was to allow the project to start. But is it not accurate to say that the early payment was to bring forward the completion date of the project by two years and that in fact that made little difference? Now you are giving a different slant on it post this report.
Mr Mrdak: There were two elements to the Commonwealth's involvement. There was an initial $1.5 billion grant funding, which was provided. Firstly, there was an initial $500 million payment and then certain payments, which were, as I said, government election commitments. Secondly, there was a separate process underway for the development of the WestConnex concessional loan, which was done to accelerate stage 2 of the project. The initial payments, the grant funding, were made, and those commitments were made by the government on coming to office to bring the project into creation much earlier than would have otherwise been the case. Those Commonwealth grant funds went in early to enable the work that is now underway on the M4, for instance, to happen earlier than would have otherwise taken place. The ANAO looked solely at the concessional loan issue. I do not think they fully reflected the full nature of the two packages.
Senator RHIANNON: But irrespective of whether you look at one or both, surely you would agree that bringing the money forward for the project to start early did not result in it being completed earlier. It made very little difference in terms of that completion date.
Mr Mrdak: Certainly during the process of developing the loan, the timeframe for WestConnex has taken longer to come to market and start construction than was originally envisaged. But I do not think that was the problem of the concessional loan. That simply reflected the design and procurement work which needed to be undertaken. Certainly it is clear—and this is an area in which we disagree with the ANAO—that in the absence of both the grant and the concessional loan, New South Wales would not be in a position to have brought the project to market as it now has because it would have taken much longer to be able to have the base funding, which would have enabled it. As you know, the initial strategy had involved building a stage and then selling it, enabling later stages to be built and sold. This enabled the work to start on both the M4 and M5 sections—WestConnex 1 and 2—concurrently.
Senator RHIANNON: But surely you need to take responsibility for that $20 million lost in interest?
Mr Mrdak: Well, that is a judgement that the government has made in making the funding available.
Senator RHIANNON: You mean a judgement that it was worth losing that money?
Mr Mrdak: You have to also understand that in the 2014 budget, and when the government came to office in 2013, the government had been very focussed on trying to get large projects into the market to enable the jobs and economic development that those projects have brought. I think from the government's perspective—and they have been very clear in that—the projects were brought forward in the 2014 budget to enable that economic stimulus to take effect.
Senator RHIANNON: I want to go to one specific point from the report. Points 16 and 17 of chapter 2 reads that the department's approach:
… to linking funding to the achievement of milestones was not effective as a control...some of those milestones were:
- agreed to after the respective event had occurred; and
- amended shortly before the payment was due to be made where NSW had not met the milestone.
The purpose of the amendments was to ensure that payments would not be delayed.
Can you explain the process by which the milestones were changed and who instigated or requested these changes?
Mr Mrdak: I will ask my colleagues to talk about the individual sections. Certainly payments were not made unless sufficient work had been undertaken on the project to warrant the payments. I will ask Ms Leeming to give—
Senator RHIANNON: But does that come about because you changed the milestones?
Mr Mrdak: I am coming to an earlier conversation we had with the committee. In some situations, as you work through with the state and territory governments, you find that timelines have shifted and stages of work have been redesigned. So you find you sometimes have to go back and change the milestones because they no longer reflect the nature of the work that has been undertaken.
Senator RHIANNON: So is that not an acknowledgement that you have made a major mistake in how you have assessed these projects? We have the word 'milestones' because they are largely set in stone.
Mr Mrdak: But what each milestone involves is negotiated between the parties. If they come up with an alternative design or an alternative approach which we believe satisfies the requirement for progressing work on the project to its completion, we are quite happy to alter the milestone. I will just see if my colleagues can add anything further to that.
Ms Leeming: I have responsibility for the grant side of WestConnex. My colleague Mr Danks at the other end can help you with the concessional loan questions. I think it might help if I step through a typical process for negotiating milestones with the states because it is not just for this project. There may be other examples where milestones have changed. Usually we provide our funding on the basis of what we call a PPR, a project proposal report. That project proposal report will have some indicative milestones in it and will be presented very early to the government for funding approval. So that gives our funding envelope. Those milestones are pretty broad at the time that a project is put to government. So it may later change, and they have in this case. The ANAO is focussed on a brief that was sent to Minister Briggs in June 2015. Since that time, you may be aware that the WestConnex has changed in scope in a number of times. Some sections have been brought forward. Some changes have been made. We have negotiated milestones that we think are appropriate for the level of progress in the project.
Senator RHIANNON: I am conscious my colleagues also need to come in with their questions. From what you have just said, it sounds as though you are even accepting of amendments shortly before the payment. That happens at any stage they come forward with these milestones, and it is incredibly flexible, so anything goes?
Ms Leeming: At times it can be flexible, particularly with projects that are subject to scope changes. I think it is incorrect to say that we agree that the milestone changes just before we make payments. That may be what a system might show you. But that process is one of negotiation and discussion over many months. So I think there is a difference between what might be reflected in a system and what might be reflected in ongoing conversations.
Senator RHIANNON: So you are not disagreeing with the report so much as saying that a milestone is not how I think it appears in the dictionary but is something that is very flexible depending on the circumstances?
Ms Leeming: I guess I am just trying to explain the ANAO's table, which I think is where some of your questioning is coming from and where their conclusions are coming from. I am just explaining the difference between a milestone that was set very early when the project funding was first approved and the milestones that were approved by our department. I am explaining that that can happen and does happen with projects, particularly when projects are at a very early stage.
Senator RHIANNON: Mr Mrdak, I would like to go to the interest rate concession. At chapter 3 point 26, the report states that the department:
… should have provided more comprehensive advice to Ministers on the size and cost of the interest rate concession...and obtained specific Ministerial agreement to the loan interest rate including no margin to cover Australian Government loan costs and risk.
Can you explain how this failing came about?
Mr Mrdak: This is an area where I do disagree with the Auditor-General. I do not believe it was a failure. The government made it clear in its decision-making process that this would be a concessional loan. The terms of that loan sheet were then negotiated. But by its nature it is a concessional loan effectively reflecting the Commonwealth's cost to borrowings. I will ask my colleague Mr Danks to explain how the rate was set.
Mr Danks: There is a variety of different ways. Because it is at the concessional loan rate, we decided to choose, as Mr Mrdak said, the Commonwealth cost of borrowing. So we chose the Australian government security bond yield that closely matched the expiry of that loan, which was the 2033 bond series. That was the rate that was applied to the loan.
Senator RHIANNON: I will go back to you, Mr Mrdak. Does that mean that, considering you are disagreeing with the report, you are also saying there is no need to put safeguards in place to prevent a repeat of how this played out with the federal government losing money?
Mr Mrdak: As I said, I would not characterise it as losing money. The government made a decision to provide a concessional loan at the borrowing rate. Had we set a different rate, then the question would have been would New South Wales have taken the concessional loan or would they have been better off to get the money from their own funding sources, including private banks. I do not characterise it as a failure. There are certainly some lessons to be learned. Certainly through the process we have done a number of debriefs and sessions around how this process worked, because clearly the Commonwealth has utilised concessional loans in other areas. We are trying to get this process much better defined as the government increasingly looks to use its balance sheet to fund infrastructure much more. Concessional loans are one of those avenues we are looking to use more of in theappropriate circumstances. Certainly we are working our way through the ANAO report. I would not characterise it the way the Auditor-General has and the way you have reported it, but we are certainly looking for whether there are better ways to do this. If you look at some more recent loans we have negotiated, such as the Sunshine Coast airport loan, we have reflected some of the learnings from this process in how we have managed that process.
Senator RHIANNON: So it could have been learnings from the states. But I suppose that is just different ways of interpreting. I will move on.
Mr Mrdak: I think that is a kind way to put it.
CHAIR: Again, without disturbing your rhythm, Senator Urquhart has, I understand, not a lot of questions and needs to be somewhere. You may need to be somewhere too. If you do, just continue.
Senator RHIANNON: I am happy to go to another senator.
CHAIR: If it is an appropriate juncture, can we?
Senator RHIANNON: Yes. I had a question and then Senator Ludlam has.
Senator RHIANNON: I want to ask questions about the Moorebank intermodal. What impact will the Moorebank intermodal have on future traffic systems and movements around Liverpool and the surrounding area?
Mr Mrdak: I will just get our officers to the table. Essentially, the traffic impacts were assessed as part of the environmental assessment and the planning assessment commission process. I do not have those details with us. We can certainly find for you the assessment details of traffic.
Senator RHIANNON: Could you supply that please, because I was interested in relooking at it considering some of the recent developments. Stage 1 incorporates an initial capacity of 250,000 TEUs. That is enormous. Then there are people who live there as well. How are you going to manage all that? Could you take that on notice?
Mr Mrdak: Certainly. We will provide you with the relevant sections of the environmental assessment.
Senator RHIANNON: Thank you. It is a huge management job with regard to local roads and possibly new bridges around King Georges Road, I think it is. How does that work in terms of the cost? Where you have to do those road upgrades, is that something that the government wears or is that something where you identify what is needed and the company pays?
Mr Mrdak: If it is in relation to public roads, it would be a matter for the state government. The consortia and the Commonwealth are providing common use infrastructure on to the site—for instance, the Commonwealth contribution of the cost of the rail line extension into the site, which connects the site to the southern Sydney rail line and which is critical for the movement of containers from the port to the site. The New South Wales government is responsible for the local roads. We continue to work with New South Wales on options for the upgrade of the local road network, but the private sector developer is largely responsible for costs on site.
Senator RHIANNON: So the proponent is responsible for the on site costs?
Mr Mrdak: Yes.
Senator RHIANNON: The government wears solely the surrounding infrastructure changes. That could become very costly, could it not, because the traffic issue seems to be becoming more contentious?
Mr Mrdak: Well, the environmental assessment and planning assessment commission processes have identified areas where, in particular, the state government will make future investments into the road network and to enable the intermodal facility. As I said, the Commonwealth is providing a substantial investment into the rail upgrade.
Senator RHIANNON: So is it usual that there would be no or very limited costs going to the proponent, considering it will be very beneficial to the owners of the site?
Mr Mrdak: I will get the details for you of what contribution to the infrastructure the key consortia along with the Moorebank company are making off terminal roads. I will get those details for you and then come back to you on that question.
Senator RHIANNON: That would be good. This is specific because I am staying with this transport issue. I notice that there is controversy. I understand that the new chair of MICL, Dr Schott, has said there was an error. I am referring to the statement that this project would take 3,000 heavy vehicles per day off the surrounding roads and possibly a section of the M5. I understand that she has now said that there is an error. Are you aware of those developments?
Mr Mrdak: I am not personally, I am sorry.
Senator RHIANNON: Is there anybody who works on the project who could comment on that and give us an update, really, about the analysis with regard to traffic?
Mr Collett: Senator, I would need to come back to you on notice with regard to the specifics on that. I do know that there was analysis which showed increases in the traffic around the site of the terminal and an overall significant decrease in the number of heavy vehicle kilometres travelled in Sydney more broadly. It is one of the things that goes. Mr Mrdak is talking about the state government's responsibilities in terms of the roads. A lot of the benefits that accrue in terms of taking heavy vehicles off the roads accrue across Sydney. The New South Wales state government would be the beneficiary, so to speak, in terms of the reduction on other roads. I do know that some of the analysis has suggested that during peak periods the traffic associated with the project would be around three per cent of the traffic on the M5.
Senator RHIANNON: Sorry, but could you say that again about the M5?
Mr Collett: In peak periods, an early analysis showed that the project was expected to contribute around three per cent of the overall traffic on the M5 in peak periods once it was fully operational. But in terms of specific comments from the Moorebank Intermodal Company chair, I would need to go and look at those and come back to you on notice with some more detailed advice.
Senator RHIANNON: I was looking at it in light of the EIS from the company. This is on page 5. It states that there were up to 3,000 fewer truck journeys to and from Port Botany each day, which has been used as a big seller of the project. But now that is under a cloud. Meanwhile, many locals are concerned about their own situation. I thought it would be useful to clarify that.
Mr Collett: Certainly, Senator, it would be useful to clarify it. I do not have the specifics of what the chair's comments related to, so we would need to come back to you on notice with the detail.
Senator RHIANNON: Thank you.