Killing off Melbourne's East West Link will cost Victorian taxpayers $1.1 billion

Part of the design for the proposed East West Link.

The Victorian auditor-general has rebuked both sides of Victorian politics and the public service over Melbourne’s controversial $23 billion East West Link (EWL) project in an audit report released today.

Dr Peter Frost, the acting auditor-general, says that “from its inception to its termination the EWL project was not managed effectively”, believing it will be a case study in poor public administration for the state.

The audit, he says “points out important and sobering lessons for government, the public officials who advise and serve it, and for taxpayers”, concluding that contrary to the $15-17 cost billion cited, “the entire EWL project would have cost in excess of $22.8 billion in nominal terms”.

Stage 1 of the toll road, from “Hoddle Street to CityLink, formed the initial contract for $6.8 billion, which has cost $1.1 billion to end.

But his report has fallen on deaf ears, with both the premier’s department and treasury rejecting the findings and Frost goes so far as to say the Victorian government has misrepresented his conclusions, saying:

Disappointingly, they have failed to acknowledge critical deficiencies identified by the audit, and have rejected its recommendations. In their response to this audit, they have also made a number of assertions and drawn inferences which fundamentally misrepresent the content of my report.

The East West Link was supposed to be an 18km 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. It was one of the largest, most complex and costly transport infrastructure projects ever proposed in Australia.

The Labor government, honouring an election promise, killed off the project when it came to power in December 2014. New premier Daniel Andrews said taxpayers would be liable for around $339 million for cancelling the contract, but the Victorian auditor-general’s office (VAGO) has found that the total cost of the termination was more than $1.1 billion “with little tangible benefit for taxpayers”.

The cost will be partially offset by the sale of properties acquired for the project, worth an estimated $320 million.

But VAGO believes the public service failed in its “fundamental obligation to provide frank and fearless advice” to government, saying that while the advice offered was “generally comprehensive, in some critical instances it fell short of the required standard of frankness”.

Here’s what the report says about Labor cancelling the deal:

The new government was also not provided with updated, comprehensive information on the impacts of completing the project versus the option of cancelling it. This meant it was deprived of comprehensive advice to assure it that termination was the best use of public funds.

The federal government had offered $3 billion towards the project.

While the auditor-general says the Andrews government successfully negotiated a termination cost was less than the contract specified, it’s impossible to check whether taxpayers had a win because there was limited verification of expenses for the contractor, East West Connect Consortium (EWC), which included Capella Capital, Lend Lease, Acciona and Bouygues.

Here’s what the report says:

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.

The VAGO is critical of the one-term Liberal government which commissioned the EWL, saying the “likely net benefits of the project were not sufficiently demonstrated and the failure to properly resolve project risks before entering contracts exposed the state to additional financial risk”.

The auditor-general concluded the Napthine government’s decisions were made based largely on the election cycle and they knew it would cause problems down the track:

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.

The public servants involved also came in for criticism:

It was clear the advice provided to the then government was disproportionately aimed at achieving contract execution prior to the 2014 state election rather than being in the best interests of the project or use of taxpayers’ money.

Frost’s report says the integrity of the public service is at risk:

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.

The road was scheduled for completion by 2020, and was expected to cost the government $340 million annually in payments, with tolls expected to deliver around $137 million a year in income and taxpayers stumping up the rest.

The VAGO report pointed out that there was a significant risk that toll revenues might be lower than expected, adding to the financial burden for taxpayers.

You can read the full Victorian auditor-general’s report here.

The VAGO has also released this video explaining its key findings:

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.