Only the
weak threaten to sue…

You wouldn’t
normally see Wal King, the hard as nails head of major contractors,
Leighton Holdings, admitting that his company was in a weak decision. And knowing
the man, he’d deny this observation vehemently.

But in
corporate circles companies don’t threaten governments or other companies with
legal action when they are in a strong position, when their cases is all but
unassailable.

Leighton’s
threats against the Victorian Government this week over the Spencer Street
station project – as The Age reports here – were the moves of a company in a weak negotiating
position, trying to bluff their way to parity with a client who holds most of
the aces.

Wal King
knows he has to kick and squeal in public to get the attention of the Bracks
Government, and the partners in the Civic Nexus consortium which is doing
the Spencer Street project.

If the chat
round the contracting industry is any guide, Wal is also a bit dirty on the
ABN-Amro banking group which is involved in the project. Talk has it that Wal
thinks ABN Amro’s fees from the project are a bit too rich.

This is a
project that Leighton got wrong, as it did with the Hilton Hotel redevelopment
in Sydney.The company owned up the debacle in May and has since been trying to
revamp both projects in talks with clients.The head of the Leighton contractors
division at the time is no longer and other changes have happened.

The
Government and Leighton has been talking about improved access and other deals
to try and improve the situation, but the plain fact is that Leighton made a
big mistake and will pay for it through lower profits for the year just ended,
and this year.

Cost
overruns are around $50 million on Spencer Street and around $30 million on the
Hilton Hotel.

So far
Leighton hasn’t threatened publicly to take Hilton Hotels parent to court. That
will be negotiated but again Leighton will be operating from a position of
weakness commercially as it will be trying to change the terms of a signed
contract with the client.

Hilton
wants the hotel finished, sooner rather than later and some deal will be
struck that will be commercially sensitive that sees Leighton wearing a lot of
pain, and Hilton, a smaller amount. The option for Hilton is much larger costs
and financial pain if the hotel project is significantly delayed.

With the
Victorian Government in a mood of not knowing how to make decisions it’s clear that Wal King
believes his only means of defence and to halt the bleeding on the contract, is
to attack the client. Companies
are normally loath to do that, especially where governments are major
clients, such as in infrastructure.

But Wal
King also knows that he’s got governments by the short and curlies. If Leighton
Contractors is excluded (as it has been in the NSW Health Department tendering
system for a time), the company’s Thiess or John Holland divisions can bid and
win a good share of the business, as they have done.

Leighton
Contractors and Thiess are on the short list in differing consortia to win the
very fat and lucrative Mitcham to Frankston freeway deal in Melbourne.

The
Victorian Government can huff and puff as much as it likes but it knows
Leighton Holdings will win that contract, regardless. But at
Spencer Street it’s a different situation.

The
structure of these public private partnerships is meant to protect the public
purse from being raided by contractors to recover cost overruns.

Leighton
Holdings has ‘form’ for trying to recover money through constant use of
‘variations clauses’ in contracts. The company is notorious for it.

The Spencer
Street and Hilton Hotel contracts are the two worst mistakes to have been made
under Wal King’s reign in the contracting area (ignoring the NexGen optical
fibre fiasco and losses) for several years.

While it’s
natural the company is trying to recovery its losses, doing so by suing the
Victorian government will involve spending more money on legal action that
will end up in an out of court settlement anyway.

Leighton
and Wal King should swallow the sh– sandwich and take the losses on the
balance sheet and forgo their fat bonuses and get on trying to make the project
work.

Leighton
and Wal can walk away, if the going gets too tough.

Peter Fray

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