Failure is all too familiar at Leighton

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

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

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

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

What he did not say was that for every day the $4 billion-plus Airport Link project was delayed, it would cost Leighton $1.2 million in liquidated damages. If it takes until August 20, that would add up to $61 million. For Tyrwhitt to say the delay will not impact the full-year results suggests the company made some provisioning in its shock profit downgrade in March.

The next project to watch is the delivery of the Victorian desalination plant, due later this year. Any delay in this 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. Losses forecast from the Brisbane toll road and the Victorian desalination plant total more than $1.2 billion, following a series of write-downs in the past 18 months.

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

Leighton has also been the subject of an investigation by the corporate regulator, over alleged breaches of continuous disclosure last year. This was settled on March 17, with the company agreeing to pay $300,000 in penalties and 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, which closed at $19.25. The fall was sharply lower than the overall market decline 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 Wayne Swan's budget today as he throws every accounting trick in the book to meet a targeted surplus.

Sources in the infrastructure sector are concerned that the few projects that get up will be based on accounting treatment 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 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 expected because of several factors, including reduced capital gains tax revenue owing to the poor performance of the sharemarket and falling property values. Yesterday's market battering was a timely reminder of how volatile global markets will remain as the US and Europe battle tough economic conditions.

To put it in perspective, capital gains tax as a share of gross domestic product tripled to 1.5 per cent in the five years to 2008. When the financial crisis hit, causing tax losses, the share fell to 0.5 per cent of GDP. Deloitte Access Economics says this translates into a fall of $11 billion compared with 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 official expectations, caused mainly by the poor earnings from non-mining sectors including retail, tourism and its related sectors, and manufacturing. Even the miners are unlikely to contribute as much revenue as expected, as most of them have allocated substantial capital investment to new projects, and have offset a large part of their tax bill with depreciation. NAB's survey for last month would not have helped sentiment as it recorded that business conditions fell three index points to zero. The bank said the weakening business conditions reflected a decline in profitability and trading conditions. "That may well mean that employment growth will weaken further in the face of poorer activity outcomes," it said.

Nobody denies 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 horrible US job figures out last Friday are a timely reminder that if there is another financial crisis, , the tightening would be a big mistake.

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