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Estimates: Rural and Regional Affairs and Transport Legislation Committee (WestConnex)

Estimates & Committees
Lee Rhiannon 19 Oct 2015

WestConnex: the Federal Government is providing $1.2 billion in funding, and yet there's so much we don't know. Has the business case been reviewed? Given other motorway failures overseen by Infrastructure Australia, has risk been appropriately addressed? Lee questions key departmental and organisational officials to attempt to answer the murky details around the WestConnex Project, including the recent reform of the WestConnex Delivery Authority to a the private Sydney Motorway Company, now out of reach of Freedom of Information requests. 

Officials questioned include Mr Jaggers and Mr Danks from Infrastructure Investment Division, Mr Mrdak from The Department of Infrastructure and Regional Development, and Mr Davies from Infrastructure Australia. 

Senator RHIANNON: Has the federal government received a copy of the full business case for the WestConnex project?

Mr Jaggers: We have seen copies of the previous version of the business case. The business case is still being worked on by the New South Wales government and we have seen various aspects of that. The business case is being revised again, and the final version of that business case will be settled shortly, we expect.

Senator RHIANNON: So you do not have a final copy. You said it will be finished shortly. What is 'shortly'?

Mr Jaggers: I would expect in the next few months

Senator RHIANNON: Before the end of the year?

Mr Jaggers: That is my expectation.

Senator RHIANNON: So you have a draft copy or you have sections of it?

Mr Jaggers: There was a business case produced a couple of years ago which we have obviously seen the full versions of. Since that time New South Wales continues to develop the project, and as that project developed New South Wales took a decision to revise the business case in full. We have seen the various elements of that business case as they have been developing it—we have had access to the data that supports that business case. Once it is finalised we expect to see the final version of that shortly after it is settled.

Senator RHIANNON: So you have seen that information yourself?

Mr Jaggers: I have seen a lot of the information in that business case, yes.

Senator RHIANNON: Has the investment division been informed of the current state of recruitment of private bank financiers, and what banks have agreed to invest?

Mr Danks: Stage 2 of the project has been a bank exercise. That process is coming to an end in the next couple of weeks. There were 13 banks that put in expressions of interest and they have shortlisted that down to four. For commercial-in-confidence reasons I would rather not name those four banks, as that process is still ongoing and it is right in the middle of competitive tensions.

Senator RHIANNON: When will the short list be announced?

Mr Danks: I would imagine in the next two to three weeks.

Senator RHIANNON: And then when will the decision be made on which bank it is?

Mr Danks: I believe there will be multiple banks involved.

Senator RHIANNON: So it is not actually a short list—it is a final list, and in the next two or three weeks—

Mr Danks: There is a short list, which could be the four banks that end up being in the project, but we expect that in two to three weeks they will be final.

Senator RHIANNON: Over what period would repayment be required?

Mr Danks: Repayment for what?

Senator RHIANNON: Repayment of these loans.

Mr Danks: To clarify, the project concession would probably run until 2060. However, the way project finance would work is that is that there would be shorter term loans, so I would imagine between seven and 10 years and that gets refinanced across the life of the concession.

Senator RHIANNON: When will those terms be released? Will that occur within the two to three weeks when the announcement about the banks is made?

Mr Danks: It would be a matter for the New South Wales government and the Sydney Motorway Corporation whether they release the terms of those deals. Historically, that sort of information is not released.

Senator RHIANNON: What are the final arrangements for the repayment, including the interest rates of the $2 billion concessional loan?

Mr Danks: The interest rate for the concessional loan will be analogous to the Commonwealth long-term bond rate. That will be fixed at financial close.

Senator RHIANNON: Can you remind me what that means, please?

Mr Danks: Financial close means when the financing of stage 2 is complete. That is expected within the next month.

Senator RHIANNON: This is fairly unusual. This is quite a unique loan, isn't it?

Mr Danks: It is the first time the federal government has offered a concessional loan for a transport project such as this. I would not describe it as unusual. I suppose it is just a groundbreaking first.

Senator RHIANNON: It is a groundbreaking first. Could you spell out a bit more how it is going to work? I am interested in the timing for the repayment of the concessional loan compared to the repayment of private bank investors.

Mr Danks: The concessional loan is scheduled to run to 2034. There will be no refinancing of our concessional loan. That provides a bit of extra confidence for private financiers that the $2 billion that the Commonwealth is putting in is staying there for that period of time. As I said earlier, private banks will refinance every seven to eight years throughout the loan.

Senator RHIANNON: When you say 'extra confidence', what do you mean by that?

Mr Danks: Providing a concessional loan does take some of the risk out for the private banks. We have done a very robust due diligence process to ensure that the risk the Commonwealth is taking is not unreasonable, but it does provide a level of extra confidence for the banks that their investments are more secure, which will flow through to cheaper rates for the loan.

Senator GALLACHER: In an earlier question we asked about PricewaterhouseCoopers WestConnex financing advice—that contract. So you bought that? Do you have that? Can that be tabled or disclosed?

Mr Mrdak: I will take that on notice to check the details, if you do not mind. Provided it does not—

Senator GALLACHER: That advice underpins all of your decisions in respect of this financing process.

Mr Mrdak: It includes advice on some of the due diligence issues which Mr Danks has talked about. I will take that on notice, if I can.

Senator RHIANNON: Thank you, Senator Gallacher, that was useful. I just want to go back to this issue of extra confidence. We have the situation with the Cross City Tunnel going into receivership twice and financial problems with Brisbane motorways. You did say that it is an unusual loan that we have here. It is quite unique. You used the word 'robust', which rings alarm bells for some of us, I have to say. Could you expand on how this is going to work? I am still trying to understand it.

Mr Danks: The loan mechanics or the due diligence process we went through?

Senator RHIANNON: The loan mechanics first off, please.

Mr Danks: The Commonwealth loans $2 billion. It is known as a subordinated or mezzanine piece of debt, which sits below senior debt in the structure but above equity. We are in for a period up to either 2029 or 2034. That provides a level of support to the project, where senior banks can become more comfortable with the risk profile they are taking. As you would be aware—you picked on one of the projects that have failed—there have not been many greenfields toll risk projects around for the last couple of years. This will hopefully be the first one that gets done. Again, I want to reassure you that the amount of due diligence that we have undertaken has been robust. We have had commercial advisers, legal advisers, risk advisers, technical advisers making sure that we are protected in the documents that are being put forward.

Senator RHIANNON: Do you look at those failed projects to determine what went wrong and what you can learn from it?

Mr Danks: Yes, we have.

Senator RHIANNON: Is the WestConnex project due to receive more funds from the federal government?

Mr Danks: Not that I am aware of.

Senator RHIANNON: Mr Mrdak, are there talks about extra funds?

Mr Mrdak: No. The government's commitment is, as they have announced, the concessional loan and also the grant funding that has been provided.

Senator RHIANNON: So there is nothing in the form of grants which have been committed but not yet actually transferred, or parts of the concessional loan for the M5 upgrade?

Mr Mrdak: The concessional loan, as Mr Danks as outlined, is still being settled. The grant funding has been provided. I will ask Mr Foulds to comment.

Mr Foulds: The grant funding is, as per your understanding, $1.5 billion.

Senator RHIANNON: That is what was outlined in the portfolio budget statement for 2015-16.

Mr Foulds: Yes.

Senator RHIANNON: So that has not changed?

Mr Foulds: There is no additional grant funding waiting in the wings.

Senator RHIANNON: Given that the investment division has an interest in making sure that these funds are spent appropriately, can you say under what conditions those payments would be halted? You have said how thorough and robust it is. Things can go wrong. Under what circumstances or what conditions would the payments be halted? Safety breaches? Management?

Mr Foulds: Are we talking about grant funding?

Senator RHIANNON: Yes.

Mr Jaggers: We will be making progress payments across the WestConnex project. Those payments are linked to achievement of milestones by the New South Wales government. That is our fundamental protection. We are putting in money at the same time as the state government is putting in its funding. With the loan, we are also drawing down the loan concurrently with senior debt draw-downs, as well. So the Commonwealth will not be exposed as the provider of funds by putting in money first. It will be putting in money alongside the New South Wales government. In the financing space, the body receiving the loan will be drawing down the loan from the Commonwealth concurrently with draw-downs from the private sector. In terms of risk mitigation that is one of the key elements—we will not be putting our money solely, first. 

Senator RHIANNON: Mr Mrdak, can I take you back to the essence of the question. Under what conditions would those payments be halted? Such as safety breaches, management corruption, anything else?

Mr Mrdak: As Mr Jagger has indicated, the Commonwealth's payments are premised on achievement of milestones of the project. Issues such as the ones you have raised are primarily a matter for the state government. They have operational responsibility for the delivery of the project through the motorway corporation.

Senator RHIANNON: But you are also dealing in public money. Surely there are conditions. When you use the word 'robust', people expect that there are conditions and that you are looking after the public money. You must look out for these things. Do you really rely on the New South Wales government?

Mr Mrdak: Certainly, if there were events of the nature you have outlined, clearly they would be matters which the Commonwealth would have to look closely at. They are not matters which are currently incorporated into the milestone schedules for the payments that we make. They are based on delivery of the project.

Mr Jaggers: I might add that payments are also made in accordance with the legislation. We set up milestones, as the secretary has indicated. The state government has to achieve those milestones. If something happens in the project that does not enable the state to move the project forward, then the Commonwealth does not make those payments. In addition, there is an MOU that we have with the New South Wales government which also deals with the payments for the project and the commitment from the Australian government.

Senator RHIANNON: Considering that there has been a track record in New South Wales of corruption that has been exposed by ICAC, if there are accusations around corruption, and the project is going ahead but there are accusations, do you have a point of interaction, or are you just waiting on the New South Wales government to advise you?

Mr Jaggers: I am not aware of any such accusations.

Senator RHIANNON: I was speaking generally. I am sure you are aware of the many cases of corruption that ICAC has dealt with. I am saying that there has been a track record with corruption issues in various aspects to do with past New South Wales governments. Firstly, I am surprised that you do not have these issues spelt out in your conditions. You have explained that you do not. I was just trying to understand how this is playing out. We are talking about public money. You have talked about how robust your approach is, but there are conditions. I am trying to understand: if problems arise that have been reported and talked about, do you just rely on the New South Wales government giving you advice, or would you gather information yourselves or make some intervention? How would you handle this? This is very serious. We are talking about public money.

Mr Mrdak: You are talking about a theoretical situation. If there were allegations of impropriety in any way or issues of risk or safety in relation to a project, under the terms of the memorandum of understanding that we have with the New South Wales government, there is a requirement to meet and share, and we are involved and can seek information. Clearly, it would be a matter at that time for the agency and the government as to what information is sought and what inquiries are made. We would obviously treat any such matter very seriously. We want to ensure that they are properly being dealt with. What Mr Jaggers has outlined to you is the formal process for payment. We do not have those sorts of events as trigger events, but they would obviously require examination if there were allegations made.

Senator RHIANNON: Mr Mrdak, as a result of the disillusion of the WestConnex Delivery Authority, which has devolved into the private Sydney Motorway Corporation, has that changed your relationship and, if so, how?

Mr Mrdak: I do not believe it has changed our relationship. Mr Foulds will give you the details. We remain involved in the WestConnex steering committee, which I and Mr Foulds now attend. We also have an established relationship at various working levels with the Motorway Corporation.

Mr Foulds: There is a regular meeting of the project control group with WestConnex which is attended by the department. That has not changed. Now it is run by SMC, it is the same people, the same level of engagement and the same level of sharing as when it was run by WDA. The New South Wales steering committee, which the secretary and I go to, has commenced and we still attend that. The SMC is also represented in that place and all questions around the project can be aired and answers given. So, in effect, there is no change.

CHAIR: Senator Rhiannon, your 15 minutes has come and gone. Your next question may be your last until we do a bit of a loop around.

Senator RHIANNON: Thank you. I will finish off on a related question and come back if I have time. So what you are saying is that your ability to ensure federal funds are spent appropriately and that the stated goals of the WestConnex project are met are all the same?

Mr Foulds: That is what I am saying. There is no difference.

Senator RHIANNON: Thank you. I will come back, Chair, if there is time.


Senator RHIANNON: Yes, I have been waiting. Was Infrastructure Australia's advice sought on the corporate arrangements for the Sydney Motorway Corporation?

Mr Davies: Not that I am aware of. Our role was to make an assessment of the business case for WestConnex, which we did.

Senator RHIANNON: You said you were not aware of that. Is it the case that you would be the person who would be aware of it if it happened, if your advice was sought?

Mr Davies: Yes, I would be aware of it.

Senator RHIANNON: Therefore, we assume that the advice or interaction was not sought?

Mr Davies: That is a matter for the New South Wales government.

Senator RHIANNON: How did you hear that WestConnex Delivery Authority was becoming the Sydney Motorway Corporation?

Mr Davies: I believe that information was available in the media.

Senator RHIANNON: So, you read about it in the media?

Mr Davies: Yes.

Senator RHIANNON: Then subsequently were you asked for an opinion or was it just, 'We're now working with the SMC rather than the WDA'?

Mr Davies: No. We have not been in any discussions since then.

Senator RHIANNON: So, you have not had any subsequent meetings?

Mr Davies: No.

Senator RHIANNON: What are the legal or financial advantages of using a private company as a vehicle for the delivery of WestConnex?

Mr Davies: That is really a question for the New South Wales government.

Senator RHIANNON: But as the federal government is giving money to this project are these questions you would have to ask yourself how that project managed changes so substantially?

Mr Davies: Infrastructure Australia's role was to review the business case for WestConnex, which we did, and then when the projects move into the delivery phase that is a matter for the New South Wales government. The Department of Infrastructure has some role in that where the federal government is providing funding.

Senator RHIANNON: What are the legal or financial advantages of using a private company as a vehicle for the delivery of WestConnex?

Mr Mrdak: I would have to seek advice from the state government. I have not been closely involved in their rationale for the alternative structure. They were certainly bringing together two delivery bodies into a single body. The choice of the governance mechanism is one by New South Wales. I am happy to seek their advice on that.

Senator RHIANNON: Considering the federal government has a major stake in this, would you be seeking independent advice or at least your department giving its own assessment rather than relying on the New South Wales government?

Mr Mrdak: We certainly have been involved, as we discussed this morning, in relation to the steering committee. We are aware of the governance shift and we certainly do not have any issues with it. You asked me expressly about the advantages of a particular governance entity. That is something that I would have to seek from New South Wales. We do not see a problem with the shift. We think there are some operational advantages in moving from having two separate bodies, a funding body and a delivery body, and merging those into one entity. To us that made good governance sense.

Senator RHIANNON: So, when you say you do not have any issues with it, that suggests that you have made an assessment. Is that correct?

Mr Mrdak: As I outlined, we see the benefit of merging the funding and the delivery body into a single body. We think that makes good sense.

Senator RHIANNON: So, what are the operational advantages?

Mr Mrdak: As I said previously, in the way it was structured there was a body through the New South Wales Treasury, essentially, which was developing the business case and the funding model. Separately there was a body which was developing the design, construction and the implementation. Those stages have now reached a certain point. They have now brought those two bodies together into the Sydney Motorways Corporation, which is a body they can then operate through their future disposal strategy. That to us reduces overlap and makes a single point of contact for the project. We think that has an inherent delivery advantage.

Senator RHIANNON: Have you been advised whether the SMC will be required to release its contracts and consultancies for public scrutiny?

Mr Mrdak: I am not aware that we have been advised in relation to that.

Senator RHIANNON: Is that something that you think is necessary?

Mr Mrdak: Certainly as the New South Wales government and the Australian government made clear in its position in relation to the documentation at this stage, documents have been released that are able to be released at this time.

Senator RHIANNON: But you would be aware that the formation of the SMC puts it beyond the reach of FOI laws. Is that something that you have addressed?

Mr Mrdak: I am not familiar with New South Wales FOI laws, so I would have to take that on notice if I could.

Senator RHIANNON: Surely you would understand that part of the nature of being a private company is that the FOI laws do not apply.

Mr Mrdak: Obviously I have an understanding of the Commonwealth FOI. I do not have a working knowledge of the New South Wales laws.

Senator RHIANNON: The company AECOM, as well as being contracted to supply environmental impact statements for both the M4 and M5, is engaged in other aspects of the project such as traffic modelling. Is Infrastructure Australia aware of this?

Mr Mrdak: Again, Infrastructure Australia's role has been to assess the business case. These matters in relation to the implementation probably rest between the governments more so than Infrastructure Australia. I do not think Infrastructure Australia has been involved in those types of areas.

Mr Davies: No

Senator RHIANNON: Therefore, I should be asking the question to you, Mr Mrdak, to try to understand this a bit more?

Mr Mrdak: That is right. I am sorry, I do not have the officers with me who handle this matter.

Senator RHIANNON: Have you tried to evaluate any of AECOM's work?

Mr Mrdak: What do you mean by 'evaluate'? They are developing an environmental impact statement. That will go through the normal public consultation and state approval processes.

Senator RHIANNON: I was referring here to some of the aspects of their previous work that has been quite challenging at times. I understand AECOM was contracted by WDA to do traffic modelling for WestConnex and has paid $280 million in damages to banks who sued in relation to grossly inaccurate traffic modelling for the Brisbane River City Clem7 Tunnel, which carried less than 25 per cent of forecast traffic volumes since it opened in 2010. Some 650 investors joined in a class action and are continuing to sue AECOM. Are you aware of that?

Mr Mrdak: I am aware of public reporting of such matters. I am not very familiar with the case itself.

Senator RHIANNON: Considering we are talking about AECOM being involved in a Sydney motorway and AECOM was involved in a financially controversial Brisbane motorway, would that be something that you would have to look at in detail?

Mr Mrdak: As Mr Danks mentioned this morning, we have engaged a series of advisers. We discussed one of those, PWC, which has had a very close look at the traffic data and the projections. The Commonwealth loan is very much driven around the serviceability of that loan and its repayability. We have done a great deal of due diligence. We have done our own independent traffic assessments. We are comfortable with the traffic assessments that have been done for the project and, therefore, the revenue stream that will be available.

Senator RHIANNON: When you say you are comfortable with the traffic assessments done for the project, does that mean that your work, the department's work, has backed up the traffic predictions that AECOM has put forward?

Mr Mrdak: We have questioned at great length the traffic projections for the project, and after work have been satisfied with the work that has been done to satisfy our due diligence for the concessional loan.

Senator RHIANNON: When you say you questioned them, do you mean that some of them were wrong and they had to be done again?

Mr Mrdak: There were areas where we questioned some of the methodology and the approach and we also asked to see some of the data sets, which were made available. I can provide you with further details of the assessment that was undertaken by the Commonwealth in relation to that.

Senator RHIANNON: If you could provide that.

Mr Mrdak: Certainly.

Senator RHIANNON: You can take that on notice. AECOM has publicly stated that it will no longer do traffic modelling for tollways. On what basis are you confident that the modelling and subsequent toll predictions for WestConnex are accurate? Is it purely based on the fact that you did your own modelling?

Mr Mrdak: We did our due diligence of the modelling that was undertaken. We sought professional advice from some of the world experts in this area, particularly around patronage risk, and we have been satisfied with the end result of that work.

Senator RHIANNON: If AECOM had not been involved in this controversy with the Clem7 Tunnel, would you have gone to the extent that it appears that you have with your due diligence?

Mr Mrdak: Yes, we would have, because of the nature of it. It is a very significant loan being provided and the Commonwealth has to be satisfied that the loan is serviceable, as do the banks who will be providing private sector finance.

Senator RHIANNON: Do you think you have it right this time? Cross-City Tunnel wrong once, Cross-City Tunnel wrong twice, Lane Cove Tunnel and Clem7 Tunnel.

Mr Mrdak: I think there has been a lot of experience-

Senator RHIANNON: There have been bad examples there.

Mr Mrdak: There has been a lot of experience learnt from those examples. As you heard this morning, we have picked that experience up in our due diligence work.

Senator RHIANNON: I just wanted to understand a bit more about the $2 billion concessional loan in terms of the private sector risk. Would it be correct to say that the government has borne more of the risk of the project in order to reduce the risk for the private sector?

Mr Mrdak: We have been very careful in how we manage the risk. My officers have just returned so they may be able to add some more. We have certainly, as an objective of the concessional loan, had to derisk elements of stage 2, which was allowed to occur much earlier than it would have otherwise occurred. I think it is fair to say that part of the way we have done that is to provide some assurity through the length of the Commonwealth loan and the stability of that loan has provided a great deal of assurance to the private investors, as Mr Danks indicated this morning.

Senator RHIANNON: Mr Mrdak, you just said that you have been very careful to manage the risk. My question was: has the government borne more of the risk of the project in order to reduce the risk for the private sector? That is a part of the question that you did not answer. That is the growing worry with how these projects have played out in the past, so could you address that point please?

Mr Mrdak: I think it is fair to say that in our due diligence we accept there is a level of risk around the patronage, but the way in which the loan has been structured for repayment we are comfortable that the Australian government is bearing a reasonable risk for the project benefit that will accrue. That certainly has provided some stability for other investors in the project.

Mr Danks: I think those other projects that you were touching on that had failures-it was more that it appeared to have been wrong in the first place and that was because the proponents had an incentive to bid up what those patronage numbers were in order to win the deal. The private sector has really been insulated from the risk by a government concessional loan. That incentive is not there and I think, as the secretary has said, we have spent quite a lot of money on traffic due diligence by Dr Bain from RBconsult to ensure that the traffic we are seeing is realistic and gettable. We think we have hit that right balance.

Senator RHIANNON: You just said 'quite a lot of money'. Could you take on notice and supply data on how much money has been spent on that, please?

Mr Danks: I can provide that information now. We have an engagement with RBconsult, which has a maximum cap of $225,000. Their engagement was to review the traffic forecasts that have been provided by WDA and our SMC.

Senator RHIANNON: I will have a look at that. Has the relationship between Infrastructure Australia, the New South Wales Roads and Maritime Service and the project changed as a result of the dissolution of the WestConnex Delivery Authority into the private Sydney Motorway Corporation?

Mr Mrdak: No. Infrastructure Australia does not have a relationship. It is between my department and the New South Wales agencies and the corporation now. No, there has been no real change in our relationship.

CHAIR: We will now take a short break, after which we will go to ARTC.

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