Leighton's disastrous loss legacies

Now we know why Leighton Holdings decided to suspend trading in its shares earlier this week. The shockwaves from what chief executive Hamish Tyrwhitt describes as two of the "tsunamis" he inherited are continuing to inundate the group with red ink.

The scale of the latest round of losses on Leighton's two big public-private partnerships – Brisbane's Airport Link project and the Victorian desalination plan – is, given how close both projects are to completion, staggering.

Leighton announced today that its latest quarterly review of its operating companies had identified a deterioration in the financial performance of both projects. For Airport Link the ‘deterioration' is going to cost Leighton another $148 million and for the desalination plan another $106 million – $254 million in total.

Where Leighton was previously forecasting an underlying profit of $600 million to $650 million after tax this calendar year, it has now reduced its guidance to between $400 million and $450 million. No wonder the market was shocked and savaged the Leighton share price on resumption of trading.

It isn't just the scale of the new losses – which probably take the total losses on the two projects to around $1 billion – but that the latest deluge of red ink has occurred so close to their completion. Both are supposed to be completed by the end of this year, with Airport Link scheduled to be open to traffic by the middle of the year.

In last month's KGB Interview Tyrwhitt said, quite reasonably, that once a project was 93 per cent to 95 per cent complete "even if there's a five per cent or ten per cent blow-out it's not a material impact". Both projects are beyond those mileposts but the impacts are clearly very material.

The issues that have plagued the projects from the start continue to plague them. Weather, productivity issues (read industrial issues) and the sheer complexity of both projects have been consistent issues with both of them.

Tyrwhitt, in the KGB interview, identified the root cause of the problems. Leighton made some fundamental errors when it tendered for the projects. Their complexity, the industrial issues and the severity of the weather conditions didn't become apparent until Leighton was into their construction.

He also identified some of the responses, which revolve around better risk assessments and mitigation and an upgrading of the engineering and technical skills the group brings to bear on major projects.

The kinds of changes Tyrwhitt, who was appointed CEO last August (displacing David Stewart who had held the post for only eight months) wants to make to the way Leighton operates aren't things that can be implemented instantly and in any event will occur too late to have any impact on the two 'tsunami' projects.

While the disastrous Airport Link and desalination projects are legacy issues, clearly, however, he can't afford any more major mishaps on his watch. Those projects have undermined confidence in Leighton's core competencies and he has to restore it.

The only mildly positive note in today's announcement was that, despite the new losses, Leighton doesn't see any need to raise new capital. Had it announced an emergency capital raising the group would have been absolutely smashed by the market today and its board and management further destabilised.