It's not too late, Premier, to save us from the desal disaster

SEVERAL Victorian Liberal Party branches have expressed concern that unless the Wonthaggi desalination plant contract is renegotiated there will not be enough money for other public infrastructure without further tax increases and service cuts.

They are worried that the Baillieu government has not already dismissed a recent statement by the desalination consortium AquaSure that it should be compensated for the 18-month delay in meeting the target completion date, due to rain and industrial problems.

Under the public-private partnership contract, these risks are supposed to be transferred to the operator.

A motion calling on the government to review the contract and to examine whether it makes more "financial and environmental sense to break the contract and pay present- value compensation than to allow the plant to operate indefinitely" has been put up for consideration by the Liberal state conference in April.

In response to questions, the Department of Sustainability and Environment told me on December 15: "As per its rights under the contract, AquaSure has passed some of [construction company] Thiess Degremont's claims to the state. No claims have been agreed. The claims are currently being assessed under the strict requirements and limited provisions of the state's contract with AquaSure."

The stakes are huge. Unless the government is prepared to break the contract with AquaSure, drinking water will become more expensive and there will not be enough money to pay teachers or nurses salaries that are competitive with other states.

On the other hand, if the government does break the contract it will offend a powerful group of financial interests and those interests could be expected to fight back.

The consortium behind the Wonthaggi plant the French multinational water company Suez, the builder Leighton Holdings, the lead banker Macquarie Capital, plus 19 major bank and superannuation fund creditors would face the prospect of massive financial losses if the contract were broken. Unless AquaSure can replace the lease payments from the government of $580 million in 2012 with government compensation for delays due to rain and industrial unrest, the consortium will not be able to pay the banks the interest owing on its debt.

The financial edifice supporting the public-private partnership is promissory notes for equity of $760 million, $350 million from local banks for the underground power line, plus $4.5 billion in bank loans that must be turned over in 2016.

AquaSure needs at least $500 million for the first interest payment in 2012. The realistic options are the banks will capitalise the interest payments, which means the liability is increased or the government will pay the interest expense in exchange for equity.

But why should the government purchase the plant? It doesn't need the water and even if it did, it could get additional water at a fraction of the operating cost of the plant from recycling, aquifers and conservation.

The real question is: who is responsible for the capital expenditure of building the plant?

The contract specifies on page 124, under section 20.4 headed "Delays", that the "project company bears all risk of cost of delay and disruption". This suggests the government holds the whip hand.

Originally there was a government guarantee for the loan so AquaSure could attract lenders for the project. This was publicly withdrawn after the contract was let. When questioned, the Brumby government said it was withdrawn because it had been replaced by the "take or pay" contract for the water.

But the take or pay contract offers no comfort to the bankers during the construction phase of the project. If there is no functioning plant as per the contract, there is no water and no obligation for the government to pay.

It beggars belief that the financiers would be so silly as to risk $5.7 billion during the construction phase without a side guarantee with the previous government and AquaSure that the financiers would have a claim on the assets of Melbourne Water in the event of AquaSure being unable to pay back the loans. Ministers say that senior bureaucrats involved in water policy have assured the government no secret side agreement exists. If this is the case, the government is in a strong position to renegotiate the contract on its terms.

However, a side agreement that puts up the assets of Melbourne Water as a guarantee for the banks during the construction phase is the only rational explanation for the Baillieu government's reluctance to use its apparently strong position to renegotiate the contract.

Either way, an urgent and high-level inquiry into water policy, as demanded by rank-and-file Liberal Party members, is needed. It should be done by the new anti-corruption commission to clear the air and create the conditions for a sound water policy in Victoria backed by informed public opinion.

Email: kennethdavidson@dissent.com.au