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Fresh legal dispute over Royal Adelaide contract as losses mount

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The State Government is locked in a legal dispute with the facility manager of the new Royal Adelaide Hospital, which today revealed it is facing losses of more than $90 million over the life of its current contract.

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Spotless, which is majority-owned by Downer EDI following a takeover last year, is seeking to renegotiate its subcontract with Celsus – which has a 30-year public/private partnership deal with the Government to oversee the hospital. In a statement to the ASX, Spotless revealed it had commenced a “formal process” in June “to enable the parties to address the various commercial and operational issues affecting the delivery of services at the nRAH”.

Spotless said if it was “not successful in either reaching agreement as part of the Standstill Discussions or via arbitration proceedings, then Spotless is likely to incur operating losses up until September 2022”, the five year anniversary of the subcontract term.

“In this scenario, the estimated present value of the losses would be $93.8 million (after tax) as at June 2018,” it said.

At that point, it said, it “has the ability to trigger a re-pricing process”.

The ongoing issues will also hit taxpayers, with further blowouts expected to be detailed in next month’s State Budget.

Treasurer Rob Lucas told InDaily there were “significant cost issues for us, which will be made more apparent when the budget’s clear”.

The Liberal Government has already revealed a $250 million health budget deficit that it blamed on cost overruns at the nRAH.

Lucas today released a statement in response to Spotless’s market update, confirming the Government “is working cooperatively with Celsus and Celsus’ subcontractor Spotless as part of a formal process to explore the feasibility of resetting the operating model at the Royal Adelaide Hospital as a consequence of the well-known challenges associated with the hospital’s operating environment”.

“The parties are working together to progress resolution of the various operational matters in order to best utilise the capacity of the hospital,” he said.

“Some progress has been made to date.”

The Treasurer told InDaily he used the phrase ‘some progress’ “advisedly”.

However, he didn’t dismiss the matter ending up in court, saying “we’re keen to avoid [that] where we can… but I could never rule it out”.

“I don’t want to raise the wick any more than it needs to be [but] it’s a significant issue.”

Spotless has previously claimed it was hampered by technical and design problems with the new hospital.

Asked if the hospital had design flaws, Lucas said “that’s essentially a view that I think they would be expressing [but] it’s not a view we would express”.

“I don’t think there’s any doubt things could have been done differently, from a taxpayers’ viewpoint and from an operational viewpoint, [but] this is another part of the financial mess that we’ve inherited,” he said.

He said there had been a “series of meetings and discussions to try and resolve” a dispute over “significant contractual issues”.

“They relate to the operation of the contract, and they also impact significantly on what the Minister for Health and SA Health can do in relation to the hospital… particularly in relation to mental health beds,” he said.

He said the parties had contrasting legal views “that have arisen as a result of the drafting and operation and interpretation of the contract” and there are “lawyers on either side trying to work our way through the contract”.

The standoff has also hit Downer EDI’s bottom line, with the company today posting an annual net profit of $71.4 million, down 61 per cent from the previous year.

Downer EDI chief executive Grant Fenn told the Australian Financial Review today the company hoped to restructure the nRAH contract by next month.

Spotless’ market statement said the subcontract was “a cash negative underperforming contract and Spotless is working to resolve various commercial and operational issues, which include significant preliminary claims and counter claims”.

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