The Sydney Morning Herald reports that engineering consultancy and traffic modeller, AECOM, is facing a large class action lawsuit over its forecasts for the Clem 7 toll tunnel in Brisbane. This tunnel will be familiar to regular readers of this blog as I have written twice on it before.
Previously, the Brisbane Courier Mail reported AECOM claimed it had indemnity against the inaccuracy of its forecasts to be a liability of no more than A$500,000 (US$553,000), and it was paid A$1.5 million for the work (US$1.66 million). Clearly investors think that this does not apply.
The suit involves a claim of A$700 million (US$774 million). The claim comes from a wide range of investors who lost heavily when demand on the road was around a third of forecasts. One concern is that AECOM did work on the traffic demand study for both the Product Disclosure Statement (the document intended to outline the project as an investment) and the Environmental Impact Statement (the document intended to obtain planning approval).
AECOM is denying the claim is valid and is responding by asserting that conditions have changed since the work was done in 2006, that the projects and traffic modelling for the two statements are different.
The Sydney Morning Herald continues:
In the PDS, AECOM estimated the average daily number of vehicles using the Clem7 tunnel would be more than 100,000 by 2011…
In a study done 18 months earlier for Brisbane City Council's environmental impact study, AECOM estimated traffic volumes would hit 57,000 a day by 2011, assuming a $3.30 toll.
The key concern being that if there had been transparency about those latter figures, investors would have been far more cautious and reluctant to invest.
IMF believes investors may have rights to recover their losses in RiverCity under the Corporations Act 2001, because it alleges that AECOM's statements in the PDS were misleading and omitted to provide investors with critical information relevant to their decision.
I am sure AECOM will defend this vigorously, as it means that the work of traffic modellers is, in fact, far more valuable than may typically be thought if the reliance on the work is made into a liability for the companies involved in this activity (companies that tend to concentrate on civil engineering consultancy, not investment bank level analysis). If AECOM succeeds, it will likely raise the issue as to whether investors will want a serious audit and due diligence done of such forecasts for future toll road. If the investors succeed, the premium on traffic forecasting will rise accordingly, as firms decide how the likely increase in corporate liability insurance required for such work affects their pricing.