Airport Link not exactly flying

Leighton Holdings will face penalties for running late yet again while disappointing shareholders.

Leighton Holdings will face penalties for running late yet again while disappointing shareholders.

LEIGHTON Holdings, the company that has made a habit out of disappointing its shareholders with profit downgrades and project write-backs, did it again yesterday when it confirmed what many in the market already knew: its Airport Link project in Brisbane would not meet its June 30 timetable.

Construction companies live and die by their ability to accurately estimate costs and meet deadlines. Leighton has failed several times in the past 18 months, resulting in a share price that is one of the worst-performing on the ASX.

In a statement to the ASX yesterday, Leighton boss Hamish Tyrwhitt said the delay - which could be up to 51 days - would have no effect on its full-year profit result, which was downgraded by a third in March.

What he didn't say was that each day the $4 billion-plus Airport Link project is delayed it will cost Leighton $1.2 million in liquidated damages. If it takes until August 20, that would add up to $61 million. That the delay won't affect its full-year results, suggests that it made some provisioning in its shock profit downgrade in March. The next project to watch is the Victorian desalination plant, which is due later this year. Any delay will also result in liquidated damages.

But worse than the cost of the liquidated damages is the cost to the company's already damaged credibility. Forecast losses from the Brisbane toll road and the desalination plant total more than $1.2 billion after a series of write-downs in the past 18 months.

It is a company that desperately needs fresh blood at board level after so many problems, including the departure of experienced senior managers that the company could ill afford to lose.

It has also been the subject of an investigation by the corporate watchdog ASIC over alleged continuous disclosure breaches last year. It settled up on March 17 with Leighton agreeing to pay $300,000 in penalties and agreeing to implement a formal review of its continuous disclosure policies and procedures. It refused to admit liability.

Yesterday's announcement wiped 3.6 per cent off the share price to $19.25, which was sharply lower than the overall market fall of 2.2 per cent.

WORSENING conditions in the US and renewed chaos in Europe, coupled with a business survey and construction index showing a weakening in Australian business conditions, will put added scrutiny on Treasurer Wayne Swan's budget tonight as he throws every accounting trick in the book to meet a targeted surplus.

Sources in the infrastructure sector are concerned that the few infrastructure projects that get up will be based on accounting treatments rather than rational selection. The speculation is that the $4 billion Pacific Highway upgrade will be selected and classified as a contingent expense to avoid hitting the federal budget's bottom line. The $1.6 billion freight terminal in south-west Sydney that is expected to take thousands of trucks a day off the city's roads is rumoured to have used accounting to avoid being treated as a liability, again to avoid blowing out the budget's bottom line.

If Swan resorts to such accounting tricks, he will do himself and the budget no favours as the government tries to meet a political promise to bring the budget back to surplus after a huge spending spree during the global financial crisis.

One of the biggest issues facing the budget is the size of tax collections, which have grown less than anticipated due to a number of factors including reduced capital gains tax revenue due to the poor performance of the stockmarket and falling property values. Yesterday's stockmarket battering was a timely reminder of how volatile global markets will remain as the US and Europe battle tough economic conditions.

To put it into perspective, capital gains tax as a share of GDP tripled in the five years to 2008 to 1.5 per cent. When the GFC hit, causing tax losses, CGT slumped to 0.5 per cent of GDP. According to Deloitte Access Economics this translated into a fall of $11 billion compared to the peak in 2007-08.

In addition, company and superannuation taxes, as well as the new mining tax are also forecast to fall short of the official expectations, caused mainly by the poor earnings from non-mining fields, including the retail sector, tourism-related sectors and manufacturing. But even the miners are unlikely to contribute as much revenue, as most mining companies have allocated substantial capital investment to green and brownfield projects and offset a large part of their tax bill with depreciation. The release of NAB's business survey for April wouldn't have helped sentiment as it recorded business conditions fell three index points to zero. NAB said the weakening business conditions reflected a weakening in profitability and trading conditions. ''That may well mean that employment growth will weaken further in the face of poorer activity outcomes,'' the bank said in a statement.

Nobody is arguing that a return to a budget surplus is a good objective, the argument is more about timing and the big rush to get there when so many things are up in the air. The latest developments in Europe and the horror US job figures out last Friday are a timely reminder that if there is a GFC mark 2 then a budget tightening would be a big mistake.

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