The Secretary of the Department of Infrastructure and Regional Development, Mr Mrdak, and the Acting Executive Director of the Infrastructure Investment Division, Mr Foulds, respond to queries regarding the WestConnex strategic business case and the extent of the federal government's oversight of the project.
CHAIR: Senator Conroy, you have had 17½ minutes. We will come back to you. Senator Rhiannon.
Senator RHIANNON: Have you seen an unredacted version of the WestConnex updated strategic business case?
Mr Mrdak: The WestConnex business case has been provided to the department, yes.
Senator RHIANNON: Is it the unredacted version?
Mr Mrdak: I will check that with my officers, but I believe it is, yes.
Mr Foulds: Yes, we have.
Senator RHIANNON: Have you seen the redacted copy and the clean copy so that you are aware of what has not been released?
Mr Foulds: Yes.
Senator RHIANNON: So you are aware that all of the figures pertaining to the capital costs for the construction of stages 1, 2 and 3, excluding property and urban renewal amounts, have all been redacted, as have those indicating the annual recurrent costs including life cycle operation and maintenance? Is that accurate of what has been redacted?
Mr Foulds: I would have to take those precise words on notice. But I think, more or less, you are correct.
Senator RHIANNON: What I am trying to understand is about the redacting. Without that information it is obviously very hard to have independent scrutiny of the detail here. Maybe the best starting point is, with the redacted material, can you explain how that decision was made and at what stage will that information be released?
Mr Foulds: What decision?
Senator RHIANNON: To redacted this information. We have a report with reduced information in it, which makes it much harder to understand the detail here.
Mr Foulds: The New South Wales government has taken the decision to redact certain commercial elements in the updated strategic business case.
Senator RHIANNON: Yes. They have taken that decision, so are you saying that you have no role at all in ensuring that there is independent scrutiny? You are given a clean copy but nobody else is given a clean copy and you don't do anything about that? Or are you saying you cannot do anything about it? I am really just asking about the process now. It is obviously very hard to understand this when the report is so severely redacted.
Mr Foulds: We have received the unredacted version and we are analysing that version. But we do not make the decision as to the redaction or otherwise. That is a New South Wales government decision.
Senator RHIANNON: Do you give any feedback on that, considering there will be Federal public money going into this? Do you give any feedback to the New South Wales government in terms of ensuring that this project is run with thorough scrutiny, which obviously depends on the information made available?
Mr Foulds: We do check that the project is being run with robust scrutiny but we do not make recommendations to the New South Wales government as to whether they should release elements of that business case or not.
Senator RHIANNON: When you say you check the robustness of the project, could you explain what you mean by that and how can that be achieved when the information is not available?
Mr Foulds: We have been intimately involved with the business case for the WestConnex project and the New South Wales government in relation to the development of that business case and the whole WestConnex project from its inception. As you know, when it came to stage 2 in particular, the work was done on the independent assessment of traffic modelling and impacts. We have received project proposal reports for the WestConnex project. So we do engage at every level, from project director level right the way through. We sit on an inter-departmental steering committee run by New South Wales, which also has as a representative from the Sydney Motorways Corporation. Through that and through the analysis work that we undertake, we are across the detail of the WestConnex project.
Senator RHIANNON: What we take from that really is that it is some people in the New South Wales government and some people in your department. That is as far as the scrutiny goes. I understand the updated business case states that the first two stages of WestConnex will be financed by a combination of public money and loans to be repaid from the tolls but the third stage cannot rely on that. I want to ask you about this passage:
The financing strategy for the M4 - M5 Link cannot rely solely on revenue generated by Stage 3, and may need to be supplemented by other funds, services or the sale proceeds from stages 1 and 2.
First off, could you just explain to what degree the department has been involved in stage 3?
Mr Foulds: In the same manner that I just described. In our relationship with-
Senator RHIANNON: The New South Wales government?
Mr Foulds: the New South Wales government-that is the way we have been involved with the development of stage 3 as well.
Senator RHIANNON: Has the department had any involvement in proposals to sell off stages 1 and 2?
Mr Foulds: At this stage, no.
Senator RHIANNON: Does ‘no' mean no discussion or are you in the discussions but you are not the deciders? What does ‘no' mean?
Mr Foulds: No means that we have not had any discussions with the New South Wales government on the sell down of equity in stages 1 or 2.
Senator RHIANNON: Do you expect to, as federal public money is going into this project?
Mr Foulds: As the New South Wales government has said-and if you are going back to first principles-the original schematic for WestConnex was to build stage 1, sell stage 1, build stage 2, sell stage 2 and then build stage 3. The mechanism of the concessional loan allows stages 1 and 2 to be built at the same time. New South Wales is exploring how it might finance it. There is enough funding around-
Senator RHIANNON: Are you involved in those discussions with the New South Wales government when they are exploring that?
Mr Foulds: At this stage only at a very general level, not specifically.
Senator RHIANNON: What does 'general level' mean?
Mr Mrdak: We are involved in the steering committee at senior level where we are updated by New South Wales on the thinking. But, as Mr Foulds has indicated, we are not party to the work that New South Wales is undertaking in relation to the mechanisms for the funding and financing of stage 3 at this stage.
Senator RHIANNON: Do to we take from that answer that the department is not advising. You are just sitting on the steering committee and collecting information. Or are you giving advice about how this should proceed?
Mr Mrdak: These are matters that are primarily being driven by the New South Wales state treasury and their agencies. They are matters for them. If there are areas of Commonwealth engagement, we will provide advice.
Senator RHIANNON: You said 'primarily', so that appears to leave the door open that there is a level of involvement of your federal department in the sell-off of stages 1 and 2.
Mr Mrdak: Not in the sell-off of stages 1 and 2. Those matters have been settled. But in relation to stage 3, were there a request from New South Wales to consider further Commonwealth involvement then obviously we would provide input into those discussions.
Senator RHIANNON: Given the cancellation of the East West Link, has the department considered its options with possible cancellation of WestConnex?
Mr Mrdak: No.
Senator RHIANNON: So there has been no discussions of any plan B or contingency plan? No discussions at all?
Mr Mrdak: No. WestConnex stage 1 and 2 are proceeding. Contracts have been entered into and we are all working on the presumption that those projects will continue as planned and as indicated by the New South Wales state government.
Senator RHIANNON: So there is no issue about the security of any federal funds? There are no question marks over that?
Mr Mrdak: The Commonwealth has made a mix of grant funding as well as a concessional loan. As we discussed in previous hearings, in determining that concessional loan certain sureties and mechanisms were put in place to ensure the repayment of that loan to the Commonwealth. We have confidence in the repayment of that loan by virtue of the contractual relationship put in place with the New South Wales government.
Senator RHIANNON: I just want to refer to the funding. I am aware that you have said in answers to other questions that IA does not make decisions on funding. But, as we know, there was the original cost of $10 billion and it is now up to $16.8 billion. Does the department have concerns about the federal financial allocations to WestConnex given this cost blowout?
Mr Mrdak: I will get Mr Foulds to explain the nature of the additional. It is not a cost blowout, per se. There has been a re-scoping of the project which has involved the changes, particularly to the planning of stage 3 and the gateway elements. But, certainly in our view, stage 1 and 2 is proceeding and the Commonwealth investment is effectively locked in at that point. Mr Foulds may want to give you an indication of the rationale sitting behind the revised figures and the business case, which largely relates to changes of scope providing for future flexibility of development of new options.
Mr Foulds: Senator, you would be aware of the Sydney gateway connection proposal, which is an enhanced high capacity connection from St Peter's through to the airport and the port. Infrastructure New South Wales undertook a project to determine an optimum solution for that. That increase in scope, which the New South Wales government has committed to, is an increase of $400 million, taking it to an $800 million project. With the realignment of stage 3, if you recall the New South Wales government sought to introduce northern and southern connectors and have an assessment as to their suitability and viability. The decision was taken that the northern connector would be incorporated into stage three around Rozelle and the old goods yards there and that stage 3 would enhance connections to Victoria Road, Anzac Bridge and a future western harbour tunnel. The cost of that is an additional $1.2 billion. That is additional scope to the reference scheme from 2013 business case. Lastly, acceleration costs. Now, that $322 million is because stages 1 and 2 have been decoupled and are not proceeding sequentially, you have two very significant projects being designed, developed, assessed and going to market at the same time. Therefore, more resources are required to achieve that. That is where that cost estimation comes from. That takes the total to $16.8 billion.
Senator RHIANNON: Could you just run through it? I think you have given some of them. We now have an additional $6.8 billion and you have detailed some of those. Could you just run through the line items that make up that $6.8 billion? I understand that there is the $1.2 billion that you have just outlined.
Mr Foulds: Do you mean what got up to 14.8?
Senator RHIANNON: In 2012 we were at $10 billion. We are now at $16.8 billion. So there is the extra $6.8 billion. Could you just break that down for us, please?
Mr Foulds: My recollection is that the $11.5 billion number went to $14.8 billion as a result of escalation. In October 2012 we had $10 billion, which was the target capital cost. In July 2013, it went to $11.5 billion and it was the estimated capital cost in the 2013 business case. That had stage 1 being $3.4 billion to $3.6 billion, stage 2 $3.6 billion to $3.8 billion and stage 3 at $4.1 billion. In November 2014, it was nominally out turned, which means escalation was added to take account of cost increases over a year because you had actually determined when the project was going to proceed. That was announced in the New South Wales state infrastructure strategy update. So the expression of costs to nominal terms rather than scope changes. That took it to $14.9 billion. In June 2015 there was an increase in scope and land acquisition costs. The southern connector stubs and the St Peter's surface works were included, and that was about $500 million. The change was the decision to include stubs in the southern connector. In November 2015, we have the updated strategic business case with $16.8 billion nominal, which had those changes that I just described here earlier.
Senator RHIANNON: So that last one is the $1.2 billion that comes in at that stage?
Mr Foulds: Correct.
Senator RHIANNON: I want to finish off by checking with you some answers from a couple of years ago. In terms of the questions being put, you answer questions often in a detailed way but then I looked over it again just to be clear on what the answer was. I am referring to question 145 and it was May 2014. There is such complexity around WestConnex, so we have been going over the history of it and what has been publicly set out. The question was:
Since Infrastructure Australia was established, how many infrastructure projects have been financially supported by the federal government without the federal government having access to a detailed cost-benefit analysis?
You answer was:
A key component of the Department's management of projects is the requirement for all project proponents to complete a Project Proposal Report. This report includes... a cost benefit analysis.
Again, you are not providing the answer there on how many infrastructure projects have been financially supported by the federal government. It is just half an answer. There were a few questions like that. Was it because you did not have the detail? Why was it responded to in that way?
Mr Mrdak: Drawing on my memory, I think we were trying to answer two parts. The question was how many the Australian government has committed to with out IA and with IA.
Senator RHIANNON: No, since IA was established, how many infrastructure projects have been financially supported? That was a clear question and I do not get the answer. The answer you give is that you just literally describe the process.
Mr Mrdak: There are two separate processes. There is the Infrastructure Australia assessment process. Secondly, once governments have committed to a project, before they are funded they go through a project proposal report process under the legislation. What we were saying was that each of those PPRs contains a benefit cost ratio which enables PPRs to be considered by government. I am sorry if we have confused you.
Senator RHIANNON: No, it is not so much that I was confused. I just did not have the information. It was a clear question: how many infrastructure projects have been financially supported? No answer but a bit of information about the process. And again when I ask about funding issues, still with question number 145 on May 2014, No.3 in that section, which is again about funding issues. The question was,
Has the federal government funded any other roads projects that have been submitted to Infrastructure Australia where the Department has not been able to verify something as critical as traffic modelling?
The answer was:
The Department engaged an international traffic risk expert to assist in the review of the WestConnex traffic modelling in April 2014.
Again, the detail is not provided, which is a concern when we are asking those specifics. There is a pattern here, Mr Mrdak. Firstly, is this international traffic risk expert still employed?
Mr Danks: The international expert we are referring to is Dr Robert Bain and his engagement has now ceased at the conclusion of the concessional loan.
Senator RHIANNON: So he is not engaged any more?
Mr Danks: No.
Senator RHIANNON: Where are you taking your advice from?
Mr Danks: For what project?
Senator RHIANNON: Are you saying that you do not need any more traffic advice?
Mr Danks: For the WestConnex, no.
CHAIR: Senator Rhiannon, I know that you are having fun, but time flies.
Senator RHIANNON: I am not actually having fun.