CONTINGENT LIABILITIES OF THE STATE

8.111 Contingent liabilities of the State do not represent actual liabilities but rather potential commitments, the occurrence of which is dependent upon future events or outcomes. Such commitments arise from the provision of guarantees, indemnities, sureties, letters of comfort and other forms of financial support. These instruments are issued for various purposes, but generally to provide assistance to entities in raising funds by reducing the level of risk to private sector institutions.

8.112 Guarantees obligate 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. The provision of indemnities, on the other hand, generally impose a primary obligation on the Government to protect entities in receipt of indemnities against certain financial losses.

8.113 While instruments giving rise to contingent liabilities place no immediate demand on public finances, they are nevertheless significant as the Government may be required to honour its undertakings many years after such undertakings are given.

8.114 The Government’s Annual Financial Statement discloses that the estimated quantifiable contingent liabilities of the State at 30 June 1998 arising from government guarantees and indemnities were around $1.4 billion. In addition, various other contingent liabilities existed at 30 June 1998 which could not be reliably quantified. These contingent liabilities are summarised in the Government’s Annual Financial Statement.

8.115 My previous Reports to the Parliament identified certain issues relating to the recording, reporting and management of the State's contingent liabilities, which required attention. In particular, in my October 1997 Report, it was highlighted that a policy and procedures manual for the control and monitoring of contingent liabilities still had not been issued to Departments. In addition, the Department of Education had not established its own contingent liability register to assist in the effective management of its exposures.

8.116 An audit follow-up of the above issues during the audit of the Government’s Annual Financial Statement revealed that, in June 1998, all departments were issued with a policy and procedures manual relating to the control and monitoring of contingent liabilities. Furthermore, the Department of Education has established appropriate procedures to record and monitor its contingent liabilities.

8.117 In order to form an opinion as to whether the contingent liabilities of the State are fairly presented in the Government’s Annual Financial Statement in accordance with the Financial Management Act 1994, audit performed the following key verification procedures:

• as part of the financial audits of all major public sector entities, a review was undertaken of procedures in place for the identification, recording and reporting of contingent liabilities;

• examination, on a test basis, of documentation supporting the major contingent liabilities; and

• review of the procedures adopted by the Department of Treasury and Finance for the recording and monitoring of contingent liabilities.

8.118 Based on the results of these procedures, I am satisfied that the contingent liabilities of the State have been presented fairly in the Government’s Annual Financial Statement. Comments follow on the more significant contingent liabilities of the State. Melbourne City Link

8.119 My previous Reports to Parliament have provided a detailed analysis of the highly complex arrangements established between the Government and Transurban, a private sector consortium, for the financing, construction and operation of the Melbourne City Link.

8.120 The Melbourne City Link project represents one of the largest infrastructure projects ever undertaken in Australia and has an estimated total cost of $2 billion. The project covers approximately 22 kilometres of road, tunnel and bridge works and involves the linking of 3 of Melbourne's most important freeways, namely, the South Eastern, West Gate and Tullamarine Freeways, together with the upgrading of parts of the South Eastern and the Tullamarine Freeways. The key elements of the development include:

• Southern Link - an 8 kilometre freeway connecting the West Gate Freeway east of

Kings Way to the South Eastern Freeway, and involving two tunnels under the Kings Domain and the Yarra River; and

• Western Link - 13 kilometres of new and upgraded freeway-standard roadway,

connecting the Tullamarine Freeway to the West Gate Freeway, via a new elevated roadway and a bridge over the Yarra River.

8.121 The expected opening dates for the Western and Southern Links are April 1999 and December 1999, respectively. The Melbourne City Link Authority has advised that the construction of the project is currently on target.

Construction works for new Yarra Bridge.

8.122 As indicated in my previous Reports, the primary contractual document establishing the basis upon which the project is to proceed is the Concession Deed entered into between the Government and Transurban in October 1995. In addition, the

Melbourne City Link Act 1995, which was passed by the Parliament in December 1995

and incorporates the Concession Deed, provided the Melbourne City Link Authority with certain powers in relation to land and roads affected by the project and empowered the charging and collection of tolls on the City Link. Once completed, Transurban will operate the roadway as a public tollway for an estimated period of 34 years, with toll revenues collected from motorists to be mainly applied towards the cost of its construction, operation and maintenance, with a return on investment available for the investors in the project. At the end of the specified period, ownership of the City Link will revert to the State at no cost and in a fully maintained condition.

8.123 A detailed analysis of the allocation of key project risks and obligations between the relevant parties reveals that, while certain project responsibilities and risks have been assumed by the State, substantial risks and exposures have been transferred to Transurban and users of the City Link. In particular, the State has accepted certain obligations, mainly relating to the maintenance of the current overall operating environment for the project. In addition, the State has undertaken to implement certain traffic management measures involving specific changes to the existing road network in the vicinity of the Link (known as Agreed Traffic Management Measures) to enable the most efficient use of the overall road network and provide benefits to the local communities. Furthermore, the Government may implement future traffic enhancement measures over the life of the project which could assist Transurban in enhancing the revenues of the project. However, any revenue generated by these additional traffic management measures will be shared between the State and Transurban.

8.124 Under the established arrangements, while the users of the City Link via toll payments will in substance be the financiers of the project, Transurban has ultimately accepted substantial obligations in relation to the delivery and operation of the project.

Exhibition Street extension project

8.125 My October 1997 Report to the Parliament outlined the major considerations and deliberations leading to a Government’s in-principle decision in 1996 to proceed with the Exhibition Street Extension project which will involve the development of a direct connection between Exhibition Street and the City Link.

8.126 Consequently, in June 1997, the Melbourne City Link (Further Amendment) Act 1997 was enacted to facilitate the construction and operation of the project and, at that time, the Melbourne City Link Authority issued a formal notice to Transurban under the terms of the Concession Deed, advising the consortium of the changes required to facilitate the efficient integration of the Exhibition Street Extension with the City Link. In addition, the Minister for Planning and Local Government formally announced that the State Government would proceed with the extension of Exhibition Street south east of the central business district in 2 distinct parts, including:

• Section 1, comprising the works on the current project area from Burnley to

Batman Avenue, east of Swan Street (known as the ‘Punt Road end’). This section is to be developed by Transurban for inclusion in the existing City Link project; and

• Section 2, comprising new works outside the current project area from Section 1,

along Batman Avenue, the Swan Street/Batman Avenue intersection and along a new alignment and structure over the railyards to Flinders Street (known as the ‘City end’). This section would be operated by Transurban, or another private sector operator, on the same basis as that put in place relating to the existing City Link project. However, the State would be responsible for the design and construction of this section, with the operator required to make a financial contribution to the State for the cost of its construction.

8.127 The expected completion dates for Section 1 and Section 2 of the Exhibition Street Extension project are December 1999 and September 1999, respectively.

Exhibition Street extension bridge supports.

8.128 It is my intention to include an analysis in my May 1999 Ministerial Portfolios

Report to the Parliament of the arrangements entered into between the State and the

contractor in relation to the development and financing of both sections of the Extension project, including comment on any disputes between the parties in relation to the City Link project.

State’s commitments

8.129 Expenditure incurred by the Melbourne City Link Authority in relation to the total City Link project during the period ended 30 June 1995 to 30 June 1998 amounted to $249 million, of which $34 million related to the Exhibition Street Extension Project. The expenditure incurred to 30 June 1998 comprised $84 million expended towards the acquisition of land, $96 million expended towards specified State works and $34 million for other costs, including salaries and administrative expenditure.

8.130 The State’s capital commitments in relation to the City Link project amounted to $120 million as at 30 June 1998 and have been included as part of the State’s capital commitments in the notes to the Government’s Annual Financial Statement. These capital commitments mainly relate to specified State works associated with the City Link project, including the Exhibition Street extension.