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Home > Reports & Publications > Reports on the Finances of the State |
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PART 7 LIABILITIES, COMMITMENTS AND CONTINGENCIES AGGREGATE LIABILITIES OF THE STATE 7.1 The Government’s Annual Financial Report details liabilities of the State totalling $47.7 billion at 30 June 2002, a decrease of $3.5 billion compared with the previous year. This decrease was mainly due to reductions in payables of $4.1 billion (mainly due to the maturity of derivatives in the year) and interest-bearing liabilities of $1.8 billion, partially offset by an increase in unfunded superannuation liabilities of $1.5 billion and outstanding insurance claims of $491 million. 7.2 Table 7A illustrates the composition of the State's liabilities at 30 June 2002. TABLE 7A
Source: Annual Financial Report for the State of Victoria, 2001-02. 7.3 In addition to the liabilities outlined in the above table, the State also has quantifiable and non-quantifiable contingent liabilities. These contingent liabilities represent potential commitments, the occurrence of which is dependent on future events or outcomes. Quantifiable contingent liabilities were estimated at around $1.8 billion at 30 June 2002 ($1.7 billion, 30 June 2001). 7.4 The most significant quantifiable contingent liabilities relate to the value of correctional services to be provided by the private sector, beyond the initial 5 year contract period, and lease payments on new rail rolling stock if early termination of public transport rail franchise agreements eventuated. The major non-quantifiable contingent liabilities include those associated with contracts and agreements for the Melbourne 2006 Commonwealth Games, the provision of public transport services by private sector operators and the redevelopment of the Melbourne Cricket Ground. 7.5 The State has also entered into various arrangements giving rise to operating, capital and other commitments. These do not form part of the liabilities included in the Government’s Consolidated Statement of Financial Position as the relevant goods or services had not been received or consumed at balance date. 7.6 The aggregate value of these commitments was estimated at $13.2 billion at 30 June 2002 ($13.3 billion, 30 June 2001) including: • operating lease commitments ($9.4 billion); • capital commitments associated with works not performed under existing contracts ($1.9 billion); and • other commitments arising from commercial arrangements ($1.9 billion). UNFUNDED SUPERANNUATION LIABILITY 7.7 At 30 June 2002, the State’s unfunded superannuation liability was the largest component of the State’s liability portfolio. The liability represents employer superannuation contributions yet to be paid by the Government to superannuation schemes for services previously provided by government employees net of the market value of assets held by the respective superannuation funds. The value of the unfunded liability is based on actuarial assessments undertaken as at 30 June each year. 7.8 The liability has resulted from decisions of previous governments to progressively meet the employer share of superannuation benefits when, or after, employees retire (i.e. on a “pay-as-you-go” basis) rather than as benefit entitlements accrue over the working lives of employees. These “pay-as-you-go” schemes were progressively closed to new members by 1994. Approximately 99 per cent of the State’s unfunded superannuation liability is attributable to the State Superannuation Fund. 7.9 The Government’s Annual Financial Report disclosed an unfunded superannuation liability of $13.4 billion as at 30 June 2002 ($11.9 billion, 30 June 2001). 7.10 Chart 7B shows the movement in the level of the State’s unfunded superannuation liability since 1992. CHART 7B  (a) All figures are presented in nominal values. Source: Annual Financial Report for the State of Victoria, 2001-02. 7.11 During the 2001-02 financial year, the State’s unfunded superannuation liability increased by $1.5 billion. This substantial deterioration was largely attributable to: • Negative investment returns of 5.03 per cent for the State Superannuation Fund (SSF) and 2.98 per cent for the Emergency Services Superannuation Scheme (ESSS) primarily attributable to the downturn in world equity markets. These negative returns were the major factor contributing to a reduction of approximately $1.1 billion in the value of superannuation assets held by the Funds; • Changes to actuarial assumptions, including an increase in the assumed proportion of Revised Scheme members opting to resign between ages 54 and 55; and • Higher than projected member salary increases. 7.12 These negative factors were partially offset by the favourable impact on the unfunded superannuation position of the Beneficiary Choice Program of $170 million in the 2001-02 financial year, and an additional contribution of $250 million made to the State Superannuation Fund by the Government, representing the early payment of an amount that would normally have been paid in the 2002-03 financial year. 7.13 The most recent actuarial projections indicate that the State’s unfunded superannuation liability will peak in nominal terms at $13.9 billion in 2011 and then gradually reduce until the liability is eliminated by 2035. To meet this time frame, the State makes annual payments determined on the basis of actuarial advice. Should the State also continue to make additional contributions, the unfunded liability may be fully extinguished prior to the current projection of 2035. Beneficiary Choice Program 7.14 In late 2000, the Superannuation Acts (Beneficiary Choice) Act 2000 was passed by Parliament, providing the Boards of the Government Superannuation Office and the Emergency Services Superannuation Scheme with the authority to implement a commutation program referred to as the Beneficiary Choice Program (BCP). 7.15 The BCP provided pensioners and deferred beneficiaries of the State Superannuation Fund and the Emergency Services Superannuation Scheme with the opportunity to commute their pension benefits to lump sums. Under the BCP, current active members of the Funds will also, upon retirement or resignation, be able to have their entire benefit paid as a lump sum. Prior to the introduction of this legislation, upon retirement members of certain schemes within the Funds were only entitled to commute a maximum of 50 per cent of their pension to a lump sum benefit. 7.16 Under the BCP, eligible deferred beneficiaries could elect to fully commute their benefits by specified dates, ranging from mid-February 2001 to early November 2001. It is estimated that commutation offers were made to approximately 54 000 pensioners and 32 000 deferred beneficiaries. This option continues to apply to approximately 73 000 existing members. 7.17 At the close of the final election period, 35.4 per cent of pension fund members elected to commute half or their entire pension to a lump sum (25.7 per cent opting for full commutation and 9.7 per cent opting for 50 per cent commutation). Approximately 29 per cent of deferred beneficiaries elected to commute their deferred benefit to a lump sum which was then transferred to a superannuation fund of their choice. 7.18 As a result of the acceptance rate by members for this offer, the BCP has had a beneficial impact on both the unfunded superannuation liability and the Government’s long-term contribution requirements. 7.19 The overall reduction to the State Superannuation Fund’s unfunded liability arising from the BCP over the past 2 years was $538 million, with $368 million in savings occurring in the 2000-01 financial year and a further $170 million in the 2001-02 financial year. The BCP has also led to total savings to the Emergency Services Superannuation Scheme of around $43 million in the 2000-01 and 2001-02 financial years. Funding position of the Emergency Services Superannuation Scheme and other State schemes 7.20 In recent years, we have commented on the funding position of the Emergency Services Superannuation Scheme (ESSS). The Scheme moved from a net surplus position of $275 million as at 1 July 2001 to a net deficit position of $70 million as at 30 June 2002. 7.21 Table 7C discloses the key employing agencies with an excess or shortfall of net assets relative to their portion of the superannuation liability within the Scheme. TABLE 7C
Source: ESSS financial reports. 7.22 As illustrated in the table, the surplus position of all key employer entities reduced significantly during the year. In particular, the Victoria Police funding position deteriorated by $231 million, moving from a surplus position of $47 million at 30 June 2001 to a deficit position of $184 million at 30 June 2002. The actuary of the ESSS attributed the deterioration in the ESSS to negative investment returns earned over the past 12 months and the payment of contributions at recommended rates that were lower than the contribution rates required in the longer-term. In particular, around 17 per cent of the overall deterioration for Victoria Police was attributed to salary increases (including promotions) exceeding the assumed rate of salary growth per annum of 3.5 per cent used in actuarial assessments. 7.23 To reduce the deficit, the Board of the ESSS resolved to increase the employer contribution rate for Victoria Police from 1 July 2003. In addition, the Board is focusing on reducing the volatility of both investment returns and employer contribution rates by setting an investment objective more closely correlated to the actuary’s current liability assumptions. 7.24 In addition, the Parliamentary Contributory Superannuation Fund also moved from a surplus position of $13.1 million in 2000-01 to a deficit of $5.2 million as at 30 June 2002 due mainly to a reduction in investment returns. INTEREST-BEARING LIABILITIES 7.25 Interest-bearing liabilities of the State predominantly comprise public sector debt raised domestically and overseas, loans and advances from the Commonwealth Government and finance leases entered into by various public sector agencies. 7.26 At 30 June 2002, the State’s interest-bearing liabilities, totalled $13.1 billion, a reduction of $1.8 billion compared with $14.9 billion at 30 June 2001. The State’s interest-bearing liabilities represented 7.2 per cent of Victoria’s Gross State Product as at 30 June 2002, compared with 8.7 per cent as at 30 June 2001. 7.27 The decrease in interest bearing liabilities was largely due to the draw-down during the financial year of around $1.2 billion of deposits by the State Superannuation Fund held by the Treasury Corporation of Victoria to meet lump sum payments associated with the Beneficiary Choice Program, and debt retirements. 7.28 Chart 7D illustrates the movement in interest-bearing liabilities for the financial years 2000 to 2002. CHART 7D  (a) Foreign currency borrowings represent borrowings issued in currencies other than Australian dollars. (b) Domestic borrowings include Australian currency denominated borrowings issued in overseas markets. Source: Annual Financial Reports for the State of Victoria. Management of the State’s debt 7.29 The Government’s current objectives for debt management include: • The application of budget surpluses to the acquisition of financial assets, thereby reducing the net debt of the State, rather than being directly applied to the retirement of existing debt; • ensuring that the State maintains ready access to low-cost funding to finance government obligations; • reducing the State’s exposure to interest rate volatility; and • maintain a well functioning market for the State’s debt securities. 7.30 The State manages risks associated with its debt portfolio by borrowing from both domestic and overseas markets, issuing a mix of fixed rate, floating rate and inflation-indexed debt, and managing the maturity profile of its debt portfolio. The State’s central borrowing authority, the Treasury Corporation of Victoria, manages virtually all of the State’s debt portfolio and related risk management activities. 7.31 The State’s exposure to market, liquidity and foreign exchange risks is managed by using both physical and derivative financial instruments. The majority of these derivatives were undertaken to manage currency and interest rate exposures. The State’s foreign currency denominated borrowings are hedged into Australian dollars as protection from financial losses arising from movements in foreign exchange rates. The State does not maintain any material net foreign currency exposures. At 30 June 2002, the book value of payables relating to derivatives held totalled $2.5 billion, while the book value of receivables under derivatives was $2.6 billion. State debt maturity profile 7.32 The State issues various debt instruments with terms to maturity ranging up to 30 years. Chart 7E illustrates the maturity profile of the State’s debt (excluding debt associated with deposits lodged by public sector agencies with the Treasury Corporation of Victoria) as at 30 June 2002. CHART 7E  (a) Face value of debt. (b) Excludes debt associated with deposits lodged by public sector agencies with the Treasury Corporation of Victoria. Source: Treasury Corporation of Victoria. 7.33 The State’s exposure to risk arising from the repayment and/or refinancing of matured debt, is mitigated by maintaining a spread of debt along the maturity spectrum. As illustrated in the above chart, $1.4 billion of core debt will fall due for repayment in the 2002-03 financial year. OUTSTANDING CLAIMS LIABILITIES 7.34 The level of the State’s outstanding claims liabilities increased by $491 million (4.8 per cent) during the year to $10.7 billion at 30 June 2002. The majority of these obligations are managed by the Victorian WorkCover Authority (personal workplace injury), Transport Accident Commission (motor vehicle and public transport personal injury), and the Victorian Managed Insurance Authority (participating public sector agencies insurance cover). 7.35 The liabilities for outstanding claims relating to each of these insurance entities at 30 June 2002 are detailed in Table 7F. TABLE 7F
Source: Financial reports of the respective agencies. 7.36 Over the past 6 years, the State’s outstanding insurance claims liabilities have increased by 60 per cent, as reflected in Table 7G. The factors contributing to the overall increase in these liabilities include the impact of an increasing number of claims, reflecting the maturing nature of the schemes, rising claims costs for medical, legal, rehabilitation and settlement expenditure, and the higher number of motor vehicle and workplace accidents resulting in serious injury that have led to costly claims. TABLE 7G
Source: Financial reports of the respective agencies. 7.37 The overall rate of increase in these liabilities during 2001-02 of 4.8 per cent was substantially less than in any other year over the previous 6 year period, mainly reflecting the positive effect of management initiatives in relation to common law claims at the Victorian WorkCover Authority and the long-term injury claims of the Transport Accident Commission. 7.38 Despite achieving a reduction in the rate of increase in claims liabilities, operating losses were incurred by all 3 State-owned insurance entities reflecting the significant downturn in investment returns. 7.39 The Victorian WorkCover Authority does not presently hold sufficient assets to cover its liabilities, with an excess of liabilities over assets of $781 million as at 30 June 2002, following an operating loss of $98 million for the 2001-02 financial year, and an operating loss of $260 million for the 2000-01 financial year. While the Transport Accident Commission and the Victorian Managed Insurance Authority have positive net asset positions, deterioration in the financial position of these entities did occur during the 2001-02 financial year. Understanding the uncertainty in actuarial assessments 7.40 The methodology used to determine the value of outstanding claims liabilities is essentially the same for the 3 insurance entities and accords with professional requirements including Australian Accounting Standards. External independent actuaries undertake full assessments at June and December each year, which support the preparation of financial statements at those dates. 7.41 The actuarial assessments cover claims reported but not paid and claims incurred but not reported. In assessing the outstanding liabilities, the actuaries take into account projected inflation rates to arrive at expected future payments, based on prior years’ claims experience, which are then discounted to present values using a combination of risk-free and market-adjusted rates. Allowance is then made by the actuaries for the anticipated costs of settling the claims. The economic assumptions for 2001-02 were generally consistent with those of the previous year. 7.42 The extent of the “tail” for the State’s insurance obligations is indicated by the “weighted average expected term to settlement” for claims, which varied at 30 June 2002 from 5.4 years in the case of the Victorian WorkCover Authority to 6.6 years for the Victorian Managed Insurance Authority and 9.7 years for the Transport Accident Commission. These average settlement terms differ from the previous year, reflecting the growth trends associated with seriously injured claimants and the maturing of the stock of claims. 7.43 The Australian Prudential Regulatory Authority has advocated the use of “prudential margins” where there is a significant level of uncertainty in actuarial estimates, as is experienced with “long tail” insurers such as the State’s insurance authorities. 7.44 The decision on whether to incorporate a prudential margin and the quantum of such a margin is made by each insurance entity’s governing board. For the Victorian WorkCover Authority, no prudential margin is included in the actuarial assessment and reliance is placed on the “central” or “best” estimate arrived at by the actuaries to adequately reflect the inherent uncertainty in the estimation process. The prudential margin for the Transport Accident Commission and the Victorian Managed Insurance Authority at 30 June 2002 totalled $629 million, and effectively represented 13.3 per cent of their combined outstanding claims liability of $4.7 billion. 7.45 The Department of Treasury and Finance has indicated that it is considering the adoption of prudential guidelines for the State public sector insurance entities along similar lines to that promoted by the general insurance regulator. PAYABLES AND OTHER LIABILITIES 7.46 At 30 June 2002, payables and other liabilities, totalled $7.8 billion, an overall decrease of $3.9 billion compared with the previous year. This reduction was mainly attributable to a decrease in liabilities associated with derivatives which matured in the year. As there was also a reduction in the State’s receivables associated with derivatives, these reductions had a minimal effect on the State’s net asset position. 7.47 Comments on other major transactions impacting on payables and other liabilities during 2001-02 and future financial years are outlined in subsequent paragraphs. Remaining financial obligations of the SECV 7.48 Our previous reports to Parliament have commented on the disaggregation and assumption of the remaining assets and obligations of State entities involved in the electricity, gas and port industries and the resultant effect on the financial operations and position of the State Electricity Commission of Victoria (SECV). An administrator is responsible for the management and, where appropriate, the disposal of the remaining assets and the resolution of the obligations retained by the SECV following the disaggregation. 7.49 Significant transactions in the financial year relating to the SECV have included: • partial sale of Loy Yang 3-4 Bench site in August 2001 for $490 000; and • transfer of the SECV interest in hedging contracts entered into by Snowy Hydro Trading Pty Ltd to the newly corporatised Snowy Hydro Limited in which the State holds a 29 per cent interest. 7.50 At the date of preparation of this report, the remaining key obligations of the SECV included: • administration of the flexible electricity tariff arrangements relating to the Portland and Point Henry aluminium smelters; • management of the State’s 29 per cent interest in Snowy Hydro Limited; and • involvement in the defence as a cross-respondent in litigation arising from the class action concerning the Longford gas incident in October 1998. Flexible electricity tariff arrangements 7.51 My previous Reports on the Finances of the State of Victoria have outlined the flexible electricity tariff arrangements established by the Government in 1984 in relation to the Portland and Point Henry aluminium smelters, which have imposed significant financial obligations on the State. Under the arrangements, the SECV is responsible for meeting the Government’s obligation to subsidise electricity generators for the lower prices charged to the smelters when aluminium prices fall below a stipulated level. 7.52 To reduce the State’s exposure associated with the smelter contracts, the SECV entered into a hedge arrangement and introduced, in July 1997, a levy payable by wholesale electricity market participants. The levy is collected and applied by the SECV towards the funding of future expected losses under the flexible electricity tariff arrangements. 7.53 Net payments made by the SECV under the smelter contracts during the 2001-02 financial year totalled $101 million (2000-01, $150 million). The SECV’s obligations and rights arising from the smelter contracts and the energy levy are assessed at the end of each financial year using a valuation model. The valuation model takes into account developments in the electricity market and changes to underlying assumptions, in particular future aluminium and electricity prices, foreign exchange rates, discount rates and consumer price index forecasts. 7.54 The estimated value of the energy levy and the smelter contracts as at 30 June 2002 is outlined in Table 7H. The energy levy represents the sum of the cash inflows of levies to be received in the future and the smelter contracts are the sum of future cash outflows for the remaining term of the smelter contracts. TABLE 7H
7.55 As indicated in the above table, it is expected that, the State will incur a loss of $57.4 million for the remaining duration of the smelter contracts. The cumulative net cash outflow position for the remaining 16 years of the smelter contract is illustrated in Chart 7I. Under current projections, the State will have net cash outflows in each year until 2014, but is expected to have net cash inflows thereafter. CHART 7I 
Longford gas incident 7.56 In May 1999, a class action against Esso Australia Pty Ltd and Esso Australia Resources Pty Ltd (together Esso) was initiated on behalf of gas users and stood-down workers who suffered losses during the fire and explosion at the Longford plant in September 1998. The SECV, together with VENCorp, Gascor Pty Ltd and certain other public sector entities have been named as third parties in this class action. 7.57 In August 2001, Esso initiated proceedings against the SECV and various other cross-respondents, for contributions and indemnity. The SECV along with certain other public sector agencies named as third parties in the class action have issued fourth party claims against their insurers for indemnity, and against BHP Petroleum (Bass Strait) Pty Ltd for contributions and indemnity. 7.58 The defence of this matter is being centrally managed through the Department of Treasury and Finance on behalf of State entities named as third parties. The first trial commenced in the Victorian Supreme Court in September 2002 in which certain threshold issues were heard. At the date of preparation of this report, no other significant developments have emerged from the legal proceedings. 7.59 This claim is recognised in the Government’s Annual Financial Report as a non-quantifiable contingent liability. Restructuring of housing home loan scheme 7.60 In June 2002, the Government announced a Home Loan Support Package offering financial support to people who took out various types of government home loans between 1984 to 1996. Over that period, the Government provided several types of loan products to people on low to moderate incomes who were not able to obtain access to private sector home finance. Due to the impact of changes in interest rates, loss of income and other economic factors, many recipients have experienced difficulties in meeting repayment terms for these loan liabilities. Of around 25 000 loans that were provided in the period since 1984, just under 4 689 remained in the portfolio as at 30 June 2002, with an estimated value of $203 million. 7.61 The financial support contained in the Government’s Package includes: • Enhanced hardship support measures, such as not charging interest where an outstanding loan balance may exceed the value of the property; • Improved sharing of home ownership costs between co-owners and the Director of Housing under shared home ownership arrangements. Many co-owners will also receive improved rent subsidies; and • Support for borrowers wishing to exit loans by offering alternative housing options and a write-off of any loan amount in excess of the net sale proceeds from a property. 7.62 The cost of the Package is estimated at $85 million over a 20 year period. This includes direct cash outlays, income forgone and the write-off of loan balances. Car fleet financing arrangements 7.63 Our 1996-97 Report on the Government’s Annual Financial Statement outlined an arrangement under which the Minister for Finance in July 1997 entered into a 7 year Master Lease Agreement (MLA) with the Commonwealth Bank of Australia (CBA), involving the sale and leaseback of the Budget Sector vehicle fleet. At that time, the State sold and leased back approximately 7 200 vehicles, with the sale proceeds of $168 million paid into the Consolidated Fund. 7.64 Under the terms of the MLA, the State is required to fund any shortfall, between the value of motor vehicles sold at the end of a lease term and the previously agreed residual value of the motor vehicles via increased rentals on new leases. Alternatively, if there is a profit associated with these transactions, the State is to obtain the benefit at the expiry of the lease facility. These transactions are recorded in a “Profit and Loss Adjustment Account” (PLAA) maintained by the Department of Treasury and Finance. 7.65 As commented in our November 2001 Report on the Finances of the State of Victoria, there has been a gradual accumulation of a deficit in the PLAA. The Department attributes the significant growth of the deficit in the PLAA to the downward movement in used car prices as a result of the introduction of the Goods and Services Tax. At 30 June 2002, the Department estimated the aggregate loss associated with vehicle disposals under the leasing arrangement to be $63.6 million, which will be progressively realised over the remaining term of the lease arrangement. 7.66 In September 2001, the Department engaged consultants to conduct a high level review of the current vehicle fleet management and financing arrangements. The review, completed in October 2001, found that under the current fleet management arrangements the Government appears to pay more and receive less service when compared with best practice fleet management services. 7.67 At the time of preparation of this report, the Government was in the process of finalising proposed action in relation to the findings of the review. St Vincent’s Hospital redevelopment 7.68 Our previous Reports on the Finances of the State of Victoria have commented on the financial arrangements entered into by the Victorian Government in 1991 to finance the redevelopment of St Vincent's Hospital, which is owned by the Sisters of Charity religious order. The redevelopment commenced in January 1993 and was completed in October 1995 at a cost of $144.3 million. 7.69 The redevelopment was initially funded from a combination of borrowings raised by St Vincent’s Hospital (Melbourne) Ltd and equity finance provided by 2 major Australian private banks. Ownership and use of the redevelopment is governed by a series of leasing arrangements. 7.70 Under the complex financing arrangements established for the redevelopment, the Hospital had ongoing obligations in relation to repayment of the borrowings and payment of lease rentals. In particular, arrangements provided for: • Borrowings - The Hospital to raise an amount of $80 million through the issue of annuity indexed bonds, which was on-lent to the Trustees of the Sisters of Charity of Australia. The Trustees, in turn, on-lent $62.9 million to certain banks from the proceeds of the bond issue, to be used for financing the redevelopment. The arrangements in regard to the servicing of the obligations to the bondholders provided for: • funding from the Department of Human Services to the Hospital under a 25 year Health Services Agreement to include an annual grant of $7 million, indexed annually, to be used by the Hospital to make the principal and interest payments to the bondholders; and • any excess of grant moneys, following payments to bondholders, to be held by the Hospital in a reserve account to meet certain additional costs associated with the arrangements, with any unspent amount reverting to the Treasurer of Victoria at the expiry of the leasing arrangements; and • Lease obligations - Ownership of the redevelopment to initially reside with the banks. Under a finance lease arrangement the Trustees leased the redevelopment from the banks and, in turn, sub-leased the redevelopment to the Hospital. 7.71 The Treasurer of Victoria, under the provisions of the Health Services Act 1988, guaranteed all repayments to bondholders and indemnified the Hospital against default by the Department in making payments for public hospital services under the 25 year Health Services Agreement. The indemnity was assigned to the benefit of the banks, therefore, ensuring that sufficient funds were available to the Hospital to meet the financial obligations to the banks. 7.72 The original arrangements governing the ownership and use of the redevelopment involved leasing agreements which provided for: • ownership of the redevelopment to rest with the banks for the first 15 years of the arrangement and then to pass to the Trustees following the payment of a compensation amount sufficient to discharge the outstanding bank obligations; • the Trustees to apply $6.7 million of the proceeds from the issue of bonds to purchase a zero coupon bond with a face value of $28 million maturing in December 2007, and to use the proceeds from the bond to partially fund the abovementioned compensation amount; • the Trustees to lease the hospital redevelopment from the banks, with the leasing arrangements due to expire in December 2007; and • the Trustees to sub-lease the redevelopment to the Hospital, with the rental paid by the Hospital matching the Trustees’ lease payment obligations to the banks. 7.73 However, in the period since the leasing arrangement was established, the decline in prevailing interest rates has reduced the cost-effectiveness of the finance lease facility. Accordingly, in 1999 the Hospital commenced negotiations with the Department of Human Services to vary the financial arrangements as they pertained to the participation of the banks in order to structure a more cost-effective and straightforward debt facility. The Hospital had estimated that the replacement of the leasing arrangements with fixed interests loan financing would result in savings to the Hospital of $5.7 million over 10 years. Termination of the leasing arrangements 7.74 The Hospital received approval from the Department of Treasury and Finance in May 2001 for the termination of the leasing arrangement. Consent to vary the financial arrangements was provided by the bondholders in September 2001. 7.75 In late December 2001 a net amount of $73.6 million representing the remaining liability associated with the finance leasing arrangement was paid to the banks in order to terminate the leasing arrangements, calculated as a compensation amount of $153.7 million to extinguish the Hospital’s financial obligations to the banks, less an amount of $80 million representing the repayment by the banks of the money on-lent from the Trustees. The payment was sourced from: • a new 10 year loan from the Treasury Corporation of Victoria (TCV) of $46.1 million; • proceeds of $19.5 million from the early redemption of the Trustees’ zero coupon bond; and • payment from the Hospital’s reserve account of $8 million. 7.76 The loan from the TCV is secured by a guarantee from the Treasurer of Victoria under the Health Services Act 1988. 7.77 Overall, the refinancing has resulted in a reduction of $5 million in the State’s liabilities, including the impact on bondholder repayments, lease repayments and loan repayments over the period. 7.78 Following the application of $8 million from the Hospital’s reserve account towards termination of the leasing arrangements, a further $6.2 million remained in the Hospital’s reserve account. 7.79 In accordance with the provisions of the financial arrangements the amount of $6.2 million was available to be paid to the Treasurer of Victoria at the end of the leasing arrangements. However, in April 2002 the Hospital paid the balance into an escrow account under the management of the Department of Treasury and Finance. These funds will be held in escrow pending the outcome of negotiations with the Department of Human Services regarding restructuring of elements of the Health Services Agreement and the application of the balance of the reserve account. Spencer Street Station redevelopment 7.80 The Spencer Street Station precinct covers an area of around 21 hectares, stretching from Dudley Street, along Adderley and Spencer Street down to Flinders Street. The Station is the gateway to interstate rail, coach services and metropolitan trains, and was constructed in 1859, followed by a number of refurbishments and a major redevelopment in the 1960s.  Existing Spencer Street Station site. 7.81 In June 2001, following the substantial progress with the Docklands precinct development, the Government released a master plan for the Station comprising a major refurbishment of the rail terminal, the provision of significant new transport infrastructure and the integration of the precinct with the west end of the Melbourne central business district and the Docklands precinct. The Government’s plans included a multi-modal interchange for passengers on country and metropolitan rail services, tram and regional buses and the commercial development of the Station. 7.82 The redevelopment of the Spencer Street Station formed part of the Government’s Linking Victoria initiative, launched in February 2000, which provided a blueprint for transport infrastructure works to be undertaken in the State. Under this initiative, the Minister for Transport announced that the redevelopment of the Spencer Street Station site (the project) was likely to proceed with private sector involvement under the Government’s Partnership Victoria framework. 7.83 The key objectives of Government for the project are to: • obtain a world class transport interchange facility providing high quality services for passengers and transport operators; • significantly enhance the public amenity and aesthetic quality of the Station; • minimise the long-term costs to the taxpayer for provision of the new facility; • transfer risk to the private sector where it is appropriate to do so; and • make cost-effective allowances for future patronage growth and for new transport services and infrastructure at the Station over time. 7.84 To facilitate the proposed redevelopment, in December 1999, the Rail Corporations and Transport (Amendment) Act 1999 was enacted, establishing the Spencer Street Station Authority. The functions of the Authority are to manage the precinct and its development for transport and related purposes, and to monitor current and future requirements for transport facilities at the precinct. 7.85 The Department of Infrastructure (DOI) and the Department of Treasury and Finance (DTF) jointly established the Rail Projects Group, consisting of senior staff from both departments and external advisers, to manage this and other rail infrastructure projects. 7.86 During the construction period, the Authority will be responsible for the operations of the Station, while the Rail Projects Group will manage the delivery of the project on behalf of the Authority. On completion of the project, the Authority will assume responsibility for managing ongoing service agreements with the private sector. Use of the Partnership Victoria framework 7.87 One of the key requirements of the Partnership Victoria framework is to compare the costs of private sector procurement with conventional government procurement by using the Public Sector Comparator (PSC). 7.88 The PSC is essentially the cost to the public sector of undertaking the design, construction, financing, maintenance and operation of a project, compared with a competing private sector bid. The PSC is expressed in net present value terms (NPV) and is based on the cost of providing the defined outputs within the public sector, and identifying and quantifying risks which would be encountered under the public sector method of procurement. The exercise involves identifying and quantifying risks, assessing the probability of risks eventuating and determining who should manage those risks. 7.89 External financial advisers appointed by the Rail Projects Group conducted a business case analysis using the PSC, taking into account the design, construction and operation of a transport interchange facility over a 30 year period, and the commercial development of the surrounding site. The analysis identified a NPV cost of $294.4 million if the project was delivered via the traditional public sector works program, compared with a cost of $234.4 million (NPV) if the project was delivered by the private sector. 7.90 The forecast cash flows were discounted to present day values based on inflation and discount rates determined by DTF. The consultants estimated that the NPV cost of private sector delivery could typically be expected to generate savings of between 15 per cent to 25 per cent on construction capital costs and a further saving of 5 per cent to 10 per cent on operating costs over the life of the project, by comparison with government delivery. 7.91 The consultants anticipated that the private sector savings would be achieved through: • efficiencies resulting from better resource and time management; • designing and operating the project under a long-term approach; • greater ability to diversify risk; • increased scope for financial and tax structuring; • use of patented equipment and systems; and • the more diverse experience of the private sector in delivering similar works and services. 7.92 Under the Partnership Victoria framework, risk allocation aims to minimise the chances of project risks materialising and the consequences if they do, by allocating risks to the party best able to manage them at the least cost. Effective risk identification and allocation is critical in ensuring that the Government achieves value for money from the delivery of a project. 7.93 In the project brief for the Spencer Street Station development issued to the market in July 2001 the Government proposed the allocation of the following identified risks to the developer: • the majority of the design, construction, finance and operational risks associated with the transport interchange; • all of the key design, construction, finance and operational risks associated with the commercial development; and • the risks associated with the construction of the rail and signalling infrastructure. 7.94 It was intended that risks which neither the Government nor the private sector could fully control, and the private sector is unable to insure, would either be shared or retained by the Government where it was identified that the cost of passing such risks to the private sector would not deliver value for money. Tender evaluation and selection process 7.95 In July 2001, the Rail Projects Group sought expressions of interest for the design, construction, finance, lease, maintenance and redevelopment of the existing Spencer Street Station site. The project brief invited proponents to submit proposals for the development of a transport interchange facility and associated rail modifications within the framework of the Partnership Victoria policy, on the basis of a payment stream over a 25 year to 30 year period. Respondents were also encouraged to include in their submissions proposals for commercial developments beyond the requirements of the transport interchange area on a lease arrangement of up to 99 years. The option to include an upgrade of the signalling system was also made available. 7.96 Of the 7 registrations of interest received, 3 bidders were short-listed and were provided with a Request for Proposal in November 2001. The 3 short-listed bidders were requested to provide a base bid comprising a proposal for the following 4 stages of the project: • Facility - The requirement for the developer to design, construct, finance, lease, maintain and operate the transport interchange facility to a specified standard. The design life expectancy for the permanent structure was to be 100 years. Final commissioning was to occur on or before 30 June 2005, at which time the developer will become fully responsible for operating the transport interchange facility for a period of up to 30 years. At the end of the 30 year operating phase, the facility is to be returned to the State; • Rail modifications - Construction of 2 additional station platforms and the possible relocation of an existing platform; • Signalling upgrade - Upgrade of the existing signalling system located at the Station which is used on the regional train services network; and • Commercial development – Potential developers were required to bid an upfront, non-refundable cash payment to the State in return for the property rights acquired for a lease term ending on 31 December 2100. 7.97 In February 2002, the Rail Projects Group eliminated one bidder due to major departures from the risk allocation matrix outlined in the request for proposal and the bid being significantly higher than the PSC. The remaining 2 bidders were invited to submit revised bids by May 2002. 7.98 The PSC benchmark was subsequently adjusted from $294.4 million to $301 million, reflecting more clearly the defined insurance risks associated with the redevelopment. 7.99 Following assessment of the revised bids, the Rail Projects Group recommended that Civic Nexus Pty Ltd be accepted as the preferred tenderer for the construction and operation of the new transport interchange facility, the signalling works and the associated commercial development in the Spencer Street Station precinct. The net present value of the price tendered by Civic Nexus was $15 million below the adjusted PSC benchmark. Civic Nexus Pty Ltd is a consortium established specifically for this project, consisting of ABN AMRO Australia Pty Ltd, Leighton Contractors Pty Ltd and a number of other sub-contractors.
Proposed redevelopment of Spencer Street Station. 7.100 The independent probity auditor appointed by the Rail Projects Group concluded that the tender evaluation process was conducted fairly and impartially, and all bidders were evaluated in accordance with agreed selection criteria. The recommended bid was subsequently endorsed by the Government on 1 July 2002. 7.101 In August 2002, certain requirements of the arrangement with Civic Nexus were fulfilled, including the receipt by the Authority of fully executed documents and copies of specified insurance policies. In addition, the Authority received a $66 million payment under the Commercial Development Agreement referred to later in this report, and a $15.2 million construction bond. The construction bond was arranged to secure the performance of the developer with respect to design, construction and commissioning of the facility. 7.102 Comments follow on the key obligations of each party, including the allocation of responsibility for managing and mitigating identified risks under the terms of the contractual arrangements. Commercial development 7.103 In August 2002, the developer paid $66 million (exclusive of GST) to the Authority for: • the right to receive income from the retail businesses, advertising and any other permitted commercial operations located within the transport interchange Facility over a 30 year lease period; and • a non-exclusive licence over each commercial development site to enable construction of the commercial elements of the project. Upon completion of each development, the developer is to be granted a lease until 2100. 7.104 The commercial developments to be undertaken comprise an office complex, retail precinct and a residential tower. While construction is scheduled to commence within periods specified by the Authority, the developer has the ability to exercise an option to defer construction of each of the developments by providing an additional payment to the Authority. 7.105 The developer assumes virtually all risks relating to the commercial development. However, the State retains specific defined risks including 50 per cent of the remediation costs associated with non-identified pre-existing contamination and any adverse financial impact resulting from changes to the interpretation or application of the Land Tax Act 1958. 7.106 In the event of a defined termination event, such as a failure to cure a default notice or to start or complete construction by predetermined deadlines, the Authority must pay the developer a termination payment. This payment is calculated as the lesser of either the market value of the commercial development at the date of termination and the associated costs incurred by the Authority, or the payment made by the developer to the Authority ($46 million) less the associated costs incurred by the Authority. 7.107 Following completion of the construction of the commercial development, a commercial lease will be issued. In respect of each development, the lessee is required to pay the Authority a nominal rental of $10 per annum and all charges for utility services, including rates and taxes, in respect of the land. In addition, the developer is to maintain specified insurance policies and coverage. 7.108 Overall, the developer assumes the key risks and costs associated with the commercial development, including the risk of cost overruns, construction delays or design construction flaws, and the risks associated with occupancy utilisation of the commercial facilities. In 2100, the land and the associated commercial development works on the land, revert back to the Authority for nominal consideration. Design and construction of the interchange facility 7.109 The developer is to design, construct and commission the transport interchange facility, including rail modifications and a signalling upgrade. Under the approved works program, the developer is required to meet design and construction milestones, including a final construction completion date. The final draft design documentation prepared by the developer is to be consistent with the final contractual documents and comply with the project brief and provide a construction cost estimate. The final design documentation cannot be changed without the approval of the Authority. 7.110 The Authority may at any time prior to final construction completion request a modification, with any resultant costs borne by the Authority. The developer may also claim any costs associated with a delay or disruption arising from a defined government extension event and any costs associated with the acceleration of progress of the works. 7.111 Where a construction milestone is not achieved, the developer will be liable for liquidated damages of $10 000 per day and, if final completion does not occur by the scheduled completion date, the developer will be liable for liquidated damages of $25 000 per day until the final completion date. 7.112 Throughout the construction period, the developer must keep rail network franchisees fully informed of progress and endeavour to minimise any disruption to the franchisees’ use of the area in order to minimise any costs incurred and any revenue forgone by the franchisees. Under the agreements, construction is to be undertaken in a manner that will not disrupt the daily operations of the Station. 7.113 Under the contractual arrangements, the developer is required to compensate the franchisees for agreed occupation costs. In the event of unplanned delays or late hand back, the developer is liable for specified liquidated damages that are to be paid to the Authority. The affected franchisees can make a claim against the State for the financial impact of unplanned delays or late hand-back under the terms of the Franchise Agreements. The State, therefore, will meet any additional costs claimed by the affected franchisees where the specified liquidated damages paid by the developer to the State are insufficient. 7.114 The Authority and the developer have agreed to appoint an independent reviewer to monitor progress against the terms of the agreement, and resolve any disputes between the parties. In the event that a default event takes place between the developer and the construction contractor, the Authority has the option to step-in, in place of the developer, to complete the project Occupancy and operational phase 7.115 Upon final construction completion certified by an independent reviewer, the developer will be granted a 30 year lease in return for a nominal rental of $10 per annum from the operations commencement date. During the operating phase, the developer is to provide all associated services at a level detailed in the agreement. 7.116 The developer is to prepare quarterly performance reports and the Authority may monitor, review and audit the developer’s performance against the provisions of the service agreement and the developer’s performance management systems. The Authority has the power to enter and inspect any part of the facility. Key performance measures to be reported and monitored include availability, repairs and maintenance, security and emergency services, cleaning, passenger information and signage, baggage handling and traveller assistance, telecommunications, food and beverage, car parking, energy management, waste management, pest control and bus bays. 7.117 In exchange for providing the service, each quarter after the receipt of the developer’s quarterly performance report, the Authority is to make specified payments to the developer which are adjusted for movements in the consumer price index which cover capital, operating and insurance costs totalling $341 million in net present values (using a discount rate of 8.65 per cent) over the life of the arrangement. In addition, the Authority agreed to accept the risk for any changes in insurance cost premiums for public/product and industrial special risk insurance until the start of the operations commencement date. Thereafter, the developer assumes the risk of insurance premium increases except in the event of increases in excess of 30 per cent on the previous insurance period, where upon the Authority will compensate the developer for the difference (provided that any increase is due to market movement and not the performance of the developer). The above payments will be adjusted for penalties incurred for failing to achieve the relevant key performance indicators to specified levels assessed by the Authority. 7.118 Any costs associated with remedying damage, defects or matters requiring repair are to be borne by the developer. To meet maintenance costs over the life of the development, the Authority is to pay from the commencement of operations a specified portion of the quarterly payments into an escrow account, upon receipt of appropriate documentation from the developer. Payments to be made to the escrow account total $11.8 million in net present value terms over the life of the lease term. 7.119 The developer assumes the risk of complying with any change in law, with the exception of a change in law of the State which directly affects the facility works or the facility. In addition, in the event that the interpretation or application of the Land Tax Act 1958 is changed, the Authority is required to compensate the developer for the costs incurred, as a result of the imposition of that component of amount of land tax. 7.120 The developer bears the risk of loss, damage or destruction of the facility works, the facility or the site. In the event of destruction of the entire facility or a substantial portion of the facility, the developer is required to reinstate the facility within a reasonable time, unless the Authority issues a notice to the developer not to carry out its reinstatement and directs the developer to pay the insurance proceeds to the Authority. However, the Authority has accepted the risks of destruction if caused by an uninsurable event. If the uninsured damage is less than $338.2 million (indexed), the Authority is required to meet the cost to reinstate the facility. If the uninsured damage is estimated in excess of $338.2 million (indexed), the agreement is to be terminated. 7.121 If a default event occurs including a breach of an obligation under the agreement, the developer is required to submit a plan to correct the default within a reasonable period. In the event that a major default is not remedied, the Authority is able to exercise its step-in rights to cure the default or terminate the agreement. 7.122 In the event of defined termination events, the Authority has the option to terminate the agreement activating various termination payment principles. In certain defined termination events, the Authority is able to exercise its step-in rights. Upon termination of the agreement, the developer is not entitled to make any claim in respect of any indirect or consequential loss incurred including loss of business opportunity and payment of liquidated sums, penalties and damages under other agreements. 7.123 Other key restrictions imposed on the developer include change in ownership interest, amendments to the trust deed, constitution and membership. In addition, the developer is not to create or allow to exist, any security interest over or assign, transfer, or dispose of any rights or obligations of the facility and lease without the Authority’s approval. Accounting treatment for the arrangement 7.124 Australian Accounting Standards provide indicative criteria for determining the accounting treatment for lease arrangements. These include an indicative benchmark which provides that the present value of the discounted lease payments under a lease are not to exceed 90 per cent of the fair market value of an asset for it to be considered an operating lease for accounting purposes. 7.125 An initial assessment of the Spencer Street Station redevelopment, in line with this criteria, indicates that the arrangements associated with the transport interchange facility will need to be classified as a finance lease, given that the present value of the capital component of lease payments under the arrangement, is well above this benchmark. The Department of Treasury and Finance advised that its preliminary assessments of the arrangement have also indicated that the arrangement should be classified as a finance lease. Accordingly, the lease arrangements associated with the transport interchange facility will need to be reported in future statements of financial position as a liability of the State, with the corresponding asset also reported. CONTINGENT LIABILITIES OF THE STATE 7.126 Contingent liabilities of the State represent potential commitments, the occurrence of which are dependent upon future events or outcomes. Such potential commitments may arise from the provision of guarantees, indemnities, sureties, letters of comfort, litigation actions and other forms of financial support. 7.127 Guarantees oblige the State to meet commitments to third parties in the event that organisations in receipt of guarantees are unable to meet their commitments in the first instance. Indemnities, on the other hand, generally impose a primary obligation to the Government to protect entities in receipt of indemnities against certain financial losses. 7.128 The Government’s Annual Financial Report discloses that the estimated quantifiable contingent liabilities of the State at 30 June 2002 were around $1.8 billion, an overall increase of $120 million or 7 per cent over the previous year. This increase was mainly attributable to $127 million in contingent liabilities for lease payments relating to new rolling stock delivered during 2001-02 and $134 million in contract variation claims relating to the Geelong Road Project. This increase has been offset by decreases associated with guarantees and indemnities provided to the Melbourne Cricket Club and Melbourne Cricket Ground Trust relating to the construction of the Great Southern Stand and the imminent expiry of the initial 5 year period for the private prisons contracts. 7.129 In addition to the quantifiable contingent liabilities, the Government’s Annual Financial Report details a number of non-quantifiable contingencies, including contingencies relating to the Melbourne 2006 Commonwealth Games, the Seal Rocks Centre (disclosed as a post-balance date event in the Annual Financial Report), the Longford gas incident, public transport franchise agreements, exposures relating to the collapse of the HIH Insurance Group and the potential for payments of refunds of duty on general insurance premiums. 7.130 Comments follow on some of the more significant developments during 2001-02 which impact on contingent liabilities. Impact of High Court ruling on responsibility for road accident liabilities 7.131 Public sector authorities, like any private sector corporation or institution, can be sued for acts of negligence in failing to carry out a duty, or to carry it out properly, when it is required or reasonable to do so. However, relevant Australian public authorities with responsibility for maintenance of roads and associated infrastructure have, until recently, been able to rely on common law immunity from damages for injuries to persons or property resulting from accidents caused through a failure to repair the normal wear and tear of the road or infrastructure asset. 7.132 This immunity is referred to as the “highway rule” and arose from decisions by the High Court prior to World War 2. However, the immunity does not extend to injuries to persons or property arising from negligent maintenance undertaken on road infrastructure. Failure to repair is termed “nonfeasance” by the High Court, while negligent repair is termed “misfeasance”. 7.133 Recent appeals to the High Court tested the well-established immunity of road authorities for nonfeasance. In May 2001, the High Court handed down decisions on 2 cases. In both instances, the litigants suffered injury to person or property as a consequence of the condition of a road or pedestrian infrastructure, and sought damages against a local government council. 7.134 In each case, the High Court was asked to reconsider the “highway rule” and overrule what was previously thought to be established law. In one case, the High Court found that the appellant had failed to establish that the council was negligent and the appeal was dismissed. In the second case, the High Court found that the distinctions between “nonfeasance” and “misfeasance” were artificial, were not based on sound law and led to perverse outcomes in that it appeared less risky for authorities to neglect roads rather than repair them. This decision, in effect, resulted in the abolition of the common law immunity that had been the basis of the “highway rule”. 7.135 State and local government authorities can no longer assume that they are immune from being sued for damages in respect of accidents caused by failure to maintain roads and infrastructure to an appropriate standard. 7.136 In response, the Government in mid-2002 prepared a discussion paper outlining the major issues and proposing a set of principles that underly any future legislation, and provided options for legislative amendments.  The High Court ruling raised significant 7.137 In October 2002, the Government introduced a Transport (Highway Rule) Bill into Parliament which proposes to establish a legislative immunity from civil action for VicRoads and local government councils that mimics, as closely as possible, the former “highway rule” abolished by the High Court. The immunity provisions include a sunset clause of 1 July 2004, which is intended to allow sufficient time for road authorities to adjust their activities in accordance with their extended responsibilities for inspection, maintenance and repair of roads and related infrastructure. Transmission Interconnect 7.138 In January 2002, VENCorp (a State public sector agency) and private sector participants, SPI PowerNet and ABB Australia entered into an arrangement to build, own and operate a $44 million project – a 400MW upgrade of the power link between Victoria and New South Wales. The upgrade aims to provide a 5 per cent boost to Victoria’s electricity reserves and ensure that Victoria has increased access to interstate electricity at times when the State’s electricity demand is high. 7.139 Under the contract, VENCorp will pay SPI PowerNet and ABB Australia a monthly charge for periods up to 30 years for provision of the ongoing services required for the project. VENCorp will recover these costs through regulated transmission use of system charges which require approval by the Australian Competition and Consumer Commission (ACCC) and levied on transmission customers (i.e. distribution businesses and major electricity users). 7.140 The project received approval under the National Electricity Code as a regulated project. The Code sets out the rules and objectives of the electricity market, and the rights and responsibilities of market participants. VENCorp views its financial exposure as minimal given that the Code has been authorised by the ACCC as an access code in the National Electricity Market under the Trade Practices Act 1974. 7.141 Overall, the State’s financial exposure is limited to the possibility that the ACCC does not approve VENCorp's transmissions charges, resulting in VENCorp being unable to recover its costs associated with the project. Finalisation of Melbourne City Link Authority 7.142 In previous reports to Parliament we have provided detailed analysis of the arrangements established between the State and Transurban for the financing, construction and operation of the Melbourne City Link. The key arrangements for the City Link project are set out in the Concession Deed (contract) established between the State and Transurban in October 1995. 7.143 We have previously reported that, while certain project responsibilities and risks were assumed by the State, substantial risks and exposures were also transferred to Transurban and users of the City Link. In particular, the State has accepted certain obligations, mainly relating to the maintenance of the overall operating environment for the City Link, including certain traffic management measures to enable the most efficient use of the overall road network and provide benefits to local communities. 7.144 Under the arrangements, Transurban has designed, financed, constructed, and is maintaining and operating the City Link. 7.145 The Melbourne City Link Authority (MCLA) was formed in December 1994 under the auspices of the Melbourne City Link Authority Act 1994 and was allocated primary responsibility for overseeing the State’s involvement in the development and delivery of the $2.2 billion City Link. 7.146 Following the completion of the construction phase of the City Link project in December 2000, the Government reviewed the arrangements for ongoing management of the City Link contract. Subsequently, in December 2001, Parliament passed the Melbourne City Link (Further Amendment) Act 2001 that established the position of Director, Melbourne City Link and imposed a number of statutory responsibilities on that position which is located within the Department of Infrastructure and came into effect on 1 January 2002. 7.147 In order to accommodate the completion of minor financial and administrative arrangements, the legal entity of the MCLA was retained for a brief period. Following proclamation of relevant sections of the Melbourne City Link (Miscellaneous Amendments) Act 2000, the MCLA was abolished on 28 February 2002, with its rights, obligations and net assets transferred to the Department of Infrastructure. Material adverse effects claim 7.148 As part of the contractual arrangements with Transurban, the State agreed to compensate Transurban if certain events had a material adverse effect on Transurban. In particular, the State is subject to certain compensation claims in the event that it can be shown that Transurban’s revenue has been adversely affected by State actions. 7.149 Our Report on the Finances of the State of Victoria, 2000-01 detailed a claim submitted by Transurban in February 2001, alleging that the construction of Wurundjeri Way (within the Docklands precinct), Network Roads (the Latrobe Street and Bourke Street extensions and alterations to Footscray Road and Flinders Street Extension) and the widening of the West Gate Freeway, would reduce traffic volumes on the City Link. It was claimed that this would result in lost revenue with a net present value of around $36 million over the concession period. While the State accepted the validity of the notice in respect of the material adverse effects claim received from Transurban, it did not accept that a specified claimable event had occurred. 7.150 Under the dispute resolution mechanism provided for in the contract, agreement was reached in March 2001 to appoint an independent expert to determine the matter. In July 2002, the independent expert determined that Transurban had suffered no detriment as a result of the road network changes and, therefore, a specified claimable event had not occurred. Transurban has appealed the determination of the independent expert. Under the processes provided for in the contract, the matter will now progress to arbitration. The Department of Infrastructure is managing the claim on behalf of the State. Imposition of stamp duty in respect of the GST element of insurance contracts 7.151 The Duties Act 2000 (and previously the Stamps Act 1958) imposes duty on the premium paid for general insurance policies at the rate of 10 per cent. As defined in the Duties Act 2000, the premium represents the total consideration given to an insurer to affect the insurance. Following the introduction of the GST on 1 July 2000, the State Revenue Office adopted the practice of levying stamp duty on total insurance premiums inclusive of GST. 7.152 In August 2002, following litigation brought by Royal & Sun Alliance Insurance Australia Limited against the Commissioner of State Revenue, the Supreme Court held that the GST component of the amount payable by the insured was not part of the insurer’s gross premiums and, therefore, was not dutiable. 7.153 As a consequence of the Supreme Court’s ruling, the Government has included in its Annual Financial Report an unquantifiable contingent liability for the payment of refunds of stamp duty on general insurance, pending the outcome of an appeal to the Court of Appeal by the State Revenue Office. In the meantime, the Government has announced that it proposes to draft legislation to confirm and clarify existing arrangements to ensure that the entire premium remains subject to duty. Seal Rocks Life Centre 7.154 In March 1997, the State entered into a series of agreements with Seal Rocks Victoria Australia Pty Ltd (SRVA) for the development of the Seal Rocks Life Centre, located on Crown land at Point Grant on Phillip Island, some 130 kilometres east of Melbourne. Stage One of the development, the onshore facilities, was commissioned in March 1998 to serve as an interpretative centre on sharks, seals and the surrounding environment. The capital cost of the completed onshore facilities was around $13 million. Stage Two of the development related to the proposed development of offshore facilities, including an undersea tunnel and observation tower, at an estimated capital cost of $50 million. 7.155 Under the project arrangements, SRVA agreed to construct and operate the Centre and transfer it, together with amenities, to the State at the completion of the 25 year term of the arrangements. The financial and operating arrangements were set out in a series of agreements between the State, SRVA and the project’s financier. A project monitor was appointed by the State to ensure compliance with the agreements and produce monthly reports against benchmark measures set out in the agreements. 7.156 The Centre opened in April 1998 and subsequently SRVA has been involved in disputes with the Government over various aspects of the contractual arrangements. This situation led to the appointment of an independent arbitrator in July 2000, after SRVA lodged a compensation claim against the Government for breach of contract. 7.157 An interim award was handed down by the independent arbitrator on 9 August 2002. The Government has since made application to appeal against the independent arbitrator’s interim award. The application is scheduled for hearing in the Supreme Court. 7.158 As a consequence of the Government’s action to appeal the interim decision, SRVA lodged an application in the Supreme Court on 6 September 2002 for leave to appeal against the interim award, and seeking compensation for loss of future earnings of up to $400 million. 7.159 The Government’s Annual Financial Report for 2001-02 discloses this matter as an unquantifiable event occurring after balance date. 7.160 A detailed review by my Office of the Seal Rocks arrangement was suspended in July 2000 due to the commencement of the arbitration process. Due to the prolonged period of arbitration and the recent litigation initiated by both the Government and SRVA, it has not been possible to recommence and report to Parliament on this issue. Our review will proceed once the current legal proceedings are completed. Geelong Road project 7.161 VicRoads is the statutory authority responsible for the construction and maintenance of all major roads in Victoria, including the redevelopment of the Geelong Road (Princes Freeway) which commenced in January 2000. 7.162 The Geelong Road project involves the widening and reconstruction of the Princes Freeway for nearly 50 kilometres between Laverton North and Corio. When fully completed, 4 lanes will be available in each direction beyond the Western Ring Road at Laverton North through to the start of the Maltby Bypass and 3 lanes each way from Werribee to Corio, on Geelong’s northern outskirts. In addition, a 24 kilometre off-road recreational path to be known as the Federation Trail is being constructed from Brooklyn to the Werribee River. 7.163 The project is estimated to cost $270 million and is being jointly funded by the Victorian and the Commonwealth Governments as a Road of National Importance. The Commonwealth Government is providing $120 million with a further $150 million to be provided in State funding from the Better Roads Victoria Program. Completion of the project is expected by late November 2002. 7.164 The Government’s Annual Financial Report includes quantifiable contingent liabilities to the value of $134.4 million relating to claims by contractors for contract variations on the 4 major road construction contracts associated with the Geelong Road project. 7.165 At the date of preparation of this report, the majority of claims were still being assessed by VicRoads. In addition, VicRoads advised that the majority of the claims will be settled by the end of the 2002-03 financial year. RESPONSE provided by Minister for Finance Geelong Road project Para. 7.164 In accordance with standard VicRoads conditions of contract, contractors on road projects can lodge claims with the contract superintendent in relation to any variations associated with the project. As at 30 June 2002, some 50 per cent of these claims have been reviewed and have subsequently resulted in accepted variations of $650 000. |
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