Australian Competition and Consumer Commission v NSW Ports Operations Hold Co Pty Ltd
[2023] FCAFC 16
•23 February 2023
FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v NSW Ports Operations Hold Co Pty Ltd [2023] FCAFC 16
Appeal from: Australian Competition and Consumer Commission v NSW Ports Operations Hold Co Pty Ltd [2021] FCA 720
Australian Competition and Consumer Commissioner v NSW Ports Operations Hold Co Pty Ltd(No 2) [2021] FCA 1040
File number: NSD 751 of 2021 Judgment of: ALLSOP CJ, YATES AND BEACH JJ Date of judgment: 23 February 2023 Catchwords: COMPETITION – where provisions of port commitment deeds required the State to compensate port operators if certain container volumes divert to a possible container terminal at the Port of Newcastle – whether s 45 of the Competition and Consumer Act 2010 (Cth) contravened – purpose of allegedly anticompetitive conduct – whether purpose of ensuring bidders for port assets did not discount their bids because of the risk of a future change of Government policy was an impugned purpose in all the circumstances – construction of the compensation provisions – whether compensation provisions are indicative of anticipated less than full competitive conduct
COMPETITION – likely effect of impugned provisions of port commitment deeds – whether there was a real risk of a container terminal being developed at Newcastle while Botany had capacity – nature of the risk
STATUTORY INTERPRETATION – Crown immunity– whether s 45 applies to the State of New South Wales’ conduct in privatising port assets – whether the State was “carrying on business” with respect to ports and, if so, nature of the business carried on
STATUTORY INTERPRETATION – derivative Crown immunity – principles applicable to derivative Crown immunity including nature and extent of derivative Crown immunity – whether the application of s 45 of the Act to NSW Ports would be in legal effect an application of the provision to the Crown – whether the application of s 45 of the Act to NSW Ports would divest a proprietary, legal, equitable or other right of the State – where the Ports Assets (Authorised Transactions) Act 2012 (NSW) conferred a bundle of legal and statutory rights, interests, powers, authorities and immunities in the undertaking of the transfer of large and valuable assets – where s 45 in its operation would result in the impairment of the existing legal situation of the Executive or Crown – whether s 51 of the Act supports a contrary intention
Legislation: Constitution s 109
Competition and Consumer Act 2010 (Cth) ss 2, 2B, 2C, 4(1), 4F(1)(a)(i), 4L, 45, 51, 75B
Allocation of the Administration of Acts [2001-338] (NSW)
Interpretation Act 1987 (NSW) s 15(2)
Ports and Maritime Administration Act 1995 (NSW) ss 6–10, 10A, 16, 17, 20, 21
Ports Assets (Authorised Transactions) Act 2012 (NSW) ss 4–7, 9, 11, 19, 20(1), 21, 25–28, 33–36
Restart NSW Fund Act 2011 (NSW) s 6
State Owned Corporations Act1989 (NSW) ss 20F, 20H–20L, 20N–20S, 20X, 20Y, Sch 5, Sch 6, Sch 8, Sch 9
Cases cited: Attorney General v Hancock [1940] 1 KB 427
Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2007] HCA 38; 232 CLR 1
Australian Competition and Consumer Commission v Cascade Coal Pty Ltd [2019] FCAFC 154; 374 ALR 90
Australian Competition and Consumer Commission v Liquorland (Australia) Pty Ltd [2006] FCA 826
Australian Competition and Consumer Commission v Pacific National Pty Ltd (No 2) [2019] FCA 669
Australian Wool Innovation v Newkirk [2005] FCA 290; ATPR 42-053
Bass v Permanent Trustee [1999] HCA 9; 198 CLR 334
Bradken Consolidated Ltd v The Broken Hill Proprietary Company Ltd (1979) 145 CLR 107
Bropho v Western Australia [1990] HCA 24; 171 CLR 1
Copyright Agency Ltd v New South Wales [2008] HCA 35; 233 CLR 279
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; 251 CLR 640
Federal Commissioner of Taxation v Tomaras [2018] HCA 62; 265 CLR 434
Hospital Products v United States Surgical Corps [1984] HCA 64; 156 CLR 41
In re Telephone Apparatus Manufacturers’ Application [1963] 1 WLR 463
JS McMillan v Commonwealth [1997] FCA 169; 77 FCR 337
Livingston v Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411
News Limited v South Sydney District Rugby League Football Club [2003] HCA 45; 215 CLR 563
NT Power Generation Pty Ltd v Power and Water Authority [2004] HCA 48; 219 CLR 90
NT Power Generation v PAWA [2002] FCAFC 302; 122 FCR 399
Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal [2012] HCA 36; 246 CLR 379
Rural Press Ltd v ACCC [2002] FCAFC 213; 118 FCR 236
Seven Network Ltd v News Ltd [2009] FCAFC 166; 182 FCR 160
Smith v Leurs (1945) 70 CLR 256
SST Consulting Services Pty Ltd v Rieson [2006] HCA 31; 225 CLR 516
Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 1381; (2000) ATPR 41-783
Transfield v Arlo International [1980] HCA 15; 144 CLR 83
Universal Music Australia Pty Ltd v Australian Competition and Consumer Commission (2003) 131 FCR 529
Victorian RailwaysCommissioners v Herbert (1949) VLR 211
Wirral Estates Ltd v Shaw [1932] 2 KB 247
Wynyard Investments Pty Ltd v Commissioner for Railways (NSW) [1955] HCA 72; 93 CLR 376
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Economic Regulator, Competition and Access Number of paragraphs: 721 Date of hearing: 17–18, 21–22 February 2022 Counsel for the Appellant / First Cross-Respondent Mr M Borsky KC, Mr R Yezerski, Mr A Barraclough and Ms J Watson (written submissions also by Mr J Sheahan KC) Solicitor for the Appellant / First Cross-Respondent Australian Government Solicitor Counsel for the First, Second and Third Respondents / Cross-Appellants Mr N Hutley SC, Dr R Higgins SC, Mr B Lim and Mr T Rogan Solicitor for the First, Second and Third Respondents / Cross-Appellants Gilbert + Tobin Counsel for the Fourth Respondent / Fifth Cross-Respondent Mr S Free SC and Mr I Ahmed Solicitor for the Fourth Respondent / Fifth Cross-Respondent MinterEllison Counsel for the Fifth to Seventh Respondents / Second to Fourth Cross-Respondents Mr G Rich SC and Mr B Hancock Solicitor for the Fifth to Seventh Respondents / Second to Fourth Cross-Respondents Allens ORDERS
NSD 751 of 2021 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
Appellant
AND: NSW PORTS OPERATIONS HOLD CO PTY LTD 163 262 351
First Respondent
PORT BOTANY OPERATIONS PTY LTD ACN 161 204 342
Second Respondent
PORT KEMBLA OPERATIONS PTY LTD ACN 161 246 582 (and others named in the Schedule)
Third Respondent
AND BETWEEN: NSW PORTS OPERATIONS HOLD CO PTY LTD ACN 163 262 351(and others named in the Schedule)
First Cross-Appellant
AND: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION (and others named in the Schedule)
First Cross-Respondent
ORDER MADE BY:
ALLSOP CJ, YATES AND BEACH JJ
DATE OF ORDER:
23 FEBRUARY 2023
THE COURT ORDERS THAT:
1.The appeal and cross-appeal be dismissed.
2.Within 14 days, the parties provide the Full Court with proposed short minutes of order concerning costs.
3.Until further order, the Full Court’s reasons for judgment in this matter not be disclosed to or published by any person save to the parties, their legal representatives, and Court staff.
4.Within 7 days, the parties provide the Full Court with a list identifying any paragraphs or parts thereof of the Full Court’s reasons for judgment which are said to contain confidential information and that ought not be published in an unredacted form, including the reasons why a confidentiality claim is made and whether any proposed redactions are agreed or not agreed; noting that for the convenience of the parties only and without indicating any view as to confidentiality, the Full Court has highlighted in yellow parts of the judgment which were redacted by the primary judge for reasons of asserted confidentiality.
5.The matter be stood over to a date to be fixed for any argument as to confidentiality orders or costs and the making of orders in respect of the same.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
ALLSOP CJ:
Introduction
In 2013, the State of New South Wales privatised Port Botany and Port Kembla. It did so by entering into various agreements with companies being NSW Ports Operations Hold Co Pty Ltd (Hold Co), Port Botany Operations Pty Ltd (Botany Operator) and Port Kembla Operations Pty Ltd (Kembla Operator), which represented the interests of a consortium of infrastructure investors being Global Infrastructure Partners (GIP) and Industry Funds Management (IFM), which had formed the NSW Ports Consortium.
In three relevant contracts known as Port Commitment Deeds (or PCDs) there was a provision (clause 3) under which the State agreed to compensate the Botany Operator or Kembla Operator if container traffic at the Port of Newcastle exceeded a specified cap and reduced container traffic at Port Botany or Port Kembla.
In 2018, the Australian Competition and Consumer Commission (ACCC) commenced proceedings against Hold Co, Botany Operator and Kembla Operator as first, second and third respondents (but not the State of New South Wales) claiming the compensation provisions in the PCDs had the purpose and had or were likely to have the effect of substantially lessening competition in the market for the supply of port services for container cargo in New South Wales in contravention of s 45(2)(a)(ii) of the Competition and Consumer Act 2010 (Cth) (the Act), in the form that the legislation then took. The relief sought was a declaration to the above effect, an injunction restraining the enforcing of, or giving effect to, the provisions and an order for penalties.
The three respondents to the ACCC’s application (Hold Co, Botany Operator and Kembla Operator, to which I will refer collectively as NSW Ports) brought a cross-claim against the companies by then operating, and interested in the operation of, the now privatised Port of Newcastle: Port of Newcastle Operations Pty Ltd (the first cross-respondent), Port of Newcastle Investments (Property) Pty Ltd (the second cross-respondent) and Port of Newcastle Investments Pty Ltd (the third cross-respondent). I will refer to these companies, as did the primary judge, as PON. PON is owned as to 50% by, first, Gardior Pty Ltd as trustee for The Infrastructure Fund (TIF), which is managed by Macquarie Infrastructure and Real Assets (MIRA); and, secondly, China Merchant Port Holdings Co Ltd (CM Ports).
The State was made the fourth cross-respondent to the cross-claim of NSW Ports.
In order to make sense of the application and cross-claim and the issues thrown up by them, a familiarity with the background facts is necessary.
After a 27 day hearing in October and December 2020 and the delivery of submissions in March and April 2021, on 29 June 2021 the primary judge dismissed the application and, consequentially, the cross-claim, delivering a judgment of 1,634 paragraphs over 480 pages: [2021] FCA 720 (J).
The appeal brought by the ACCC does not challenge the findings of fact made by the primary judge. Rather, the proper inferences from them and the proper characterisation of them, and of their significance, are challenged.
NSW Ports relies on a cross-appeal and PON on a Notice of Contention. They are complex and contingently interlocking and only become relevant if the appeal were to be allowed. Given my view that for the reasons that follow the appeal should be dismissed, the matters in them do not arise.
If I may say at the outset, the comprehensive, ordered and thorough judgment delivered with remarkable despatch and clarity by the learned primary judge has made the task of the parties and of the bench on appeal lighter than the subject matter might otherwise have demanded. Nevertheless, it is helpful to set out the relevant essential facts with the inestimable advantage of her Honour’s reasons to which reference can be made by the reader of these reasons without the need for detailed repetition.
Index:
Introduction
[1]
The reasons
[11]
The reasons: The factual background
[11]
The industry and participants, container terminals and ports
[11]
Transactions and events
[20]
PON’s business case
[83]
The reasons: Consideration of the factual background
[90]
The reasons: The evidence of NSW Ports’ witnesses
[110]
The reasons: The purpose of the compensation provisions
[114]
The reasons: The effect or likely effect of the impugned provisions
[137]
The question of the Port Kembla PCD
[140]
Key conclusions
[145]
The structure of these reasons
[150]
The appeal on purpose
[153]
The ACCC’s submissions on purpose
[155]
Grounds 4 and 5: compensation provisions
[155]
Grounds 6 and 7: reimbursement provisions and codification of State policy
[164]
PON’s submissions on purpose
[167]
Ground 5: compensation provisions
[167]
Grounds 4, 6 and 7: reimbursement provisions and codification of State policy
[171]
NSW Ports’ submissions on purpose
[174]
Grounds 4 and 5: compensation provisions
[174]
Grounds 6 and 7: reimbursement provisions and codification of State policy
[178]
The State’s submissions on purpose
[183]
Grounds 4 and 5: compensation provisions
[183]
Grounds 6 and 7: reimbursement provisions and codification of State policy
[184]
Purpose: consideration and disposition
[186]
The appeal on effects
[211]
The ACCC’s and PON’s submissions on likely effect
[215]
NSW Ports’ and the State’s submissions on likely effect
[223]
Likely effect: consideration and disposition
[228]
The claim as pleaded in the Amended Statement of Claim (ASC)
[236]
The reasons of the primary judge on likely effect
[257]
The resolution of grounds of appeal 8, 9, 10 and 11
[285]
Ground 8
[285]
Ground 9
[289]
Ground 10
[296]
Ground 11
[298]
The appeal on “direct” Crown immunity of the State
[303]
The reasons of the primary judge
[303]
The grounds of appeal on Crown immunity
[314]
The submissions of the ACCC on Crown immunity
[315]
The submissions of PON on Crown immunity
[322]
The first asserted error
[323]
The second asserted error
[327]
Consideration and disposition of the Crown immunity question: Grounds 1 and 3.1
[334]
The appeal on “derivative” Crown immunity for the benefit of NSW Ports: grounds 2 and 3.2
[344]
The reasons of the primary judge
[344]
Question 1 posed in J[380]: was there a divestiture of a legal right?
[356]
Question 2 posed in J[380]: does the Act evince a contrary intention to apply its provisions to conduct of NSW Ports even if there were a divesting of a legal right?
[364]
The ACCC’s submissions on derivative Crown immunity
[370]
PON’s submissions on derivative Crown immunity
[376]
NSW Ports’ submissions on derivative Crown immunity
[379]
The State’s submissions on derivative Crown immunity
[383]
Consideration and disposition of derivative Crown immunity
[386]
The submissions on behalf of the intervenor
[416]
Derivative Crown immunity
[417]
The question of purpose
[420]
The Cross-Appeal by NSW Ports and the Notice of Contention by PON
[422]
Orders
[425]
The reasons
The reasons: The factual background
The industry and participants, container terminals and ports
The place of shipping container ports in the global and Australian commercial supply chain and relevant aspects of world shipping were described by her Honour at J[14]–[29].
Ports handling the import and export (in particular in Australia, import) of cargo by container carriage are a vital part of the economy. The transport, storage and logistic infrastructure for the operation of such a port require vast capital investment by government and private parties, including commercial owners or operators of such facilities: roads, railway lines, intermodal transport and storage facilities, and port infrastructure.
The importance of ports, including container terminals, and the efficient movement of goods to the economic well-being of the State was recognised by Transport for NSW in the 2012–2017 Transport for NSW Corporate Plan as quoted by the primary judge at J[76]:
The efficient movement of goods is an essential driver of economic prosperity and quality of life in our metropolitan and regional communities. The NSW freight and logistics industry contributes more than $50 billion to our Gross State Product. NSW roads, rail network, intermodal terminals and ports are some of the most important pieces of infrastructure to enable domestic and international freight movements and support economic development.
No port could possibly operate without vast public and private capital infrastructure investment; nor could a port be developed or operate without approvals from both the relevant State and the Commonwealth departments and agencies: see J[30].
Supply chain costs are divided between blue water costs of shipping port to port, quayside costs (wharfage, and handling and stevedoring charges) of movement of cargo from ship to land transport, and landside costs of delivery from port to a distribution centre. The largest component is landside costs. The wharfage charges payable to the port are charged on a per container basis: J[27]–[28].
There are, and were at all relevant times, three major ports in New South Wales that handle and handled cargo whether bulk, general or container: Port Botany, Port Kembla and the Port of Newcastle. They were described at J[36]–[48]. No other ports in New South Wales are suitable for a container terminal: J[49].
Other Australian container ports are Brisbane, Melbourne, Adelaide and Fremantle: J[50]. Shipping services along the east coast typically call at Brisbane, Botany and Melbourne. They are not substitutes for each other due to high landside costs: J[51].
If a container terminal were developed at Newcastle a ship would not call at both Botany and Newcastle. It would call in at only one port in New South Wales in the course of an east coast trip that included Brisbane and Melbourne: J[52].
By far the most important container port in New South Wales is, and has always been, Port Botany. After the phasing out of the handling of general cargo at Port Jackson with the development of containerisation of cargo in the 1970s and 1980s, Port Botany became the State’s primary container port.
Transactions and events
In 2001, the Broken Hill Proprietary Company Limited (BHP) the owner of the site of the former steelworks at Mayfield at the Port of Newcastle, obtained development consent to build a container terminal at the Mayfield site capable of handling 350,000 containers of a standard twenty foot length (referred to as TEUs or Twenty-foot Equivalent Units) per annum. This development involved associated road, rail and wharf infrastructure and dredging: J[53].
In October 2003, the New South Wales Labor government announced a NSW Ports Growth Plan. The plan envisaged that Port Botany be developed to its full capacity. After Port Botany reached its full capacity it was proposed that the State would acquire BHP’s site at Mayfield for development as a container terminal. The Growth Plan was envisaged as providing for strategic direction to allow both private and public planning for the growth of container trade through ports in New South Wales. At this time the sequence of such growth of container trade was to be Port Botany and then Port of Newcastle: J[54].
In 2007, the State acquired the Mayfield site and transferred it to a State owned corporation, the Newcastle Ports Corporation (NPC), which operated the existing Port of Newcastle under the Ports and Maritime Administration Act 1995 (NSW) (PAMA Act). By this time, the New South Wales Government had decided that the next major container port in New South Wales after the exhaustion of capacity at Port Botany would be Newcastle, which was envisioned then to be within 10 years: J[57]–[60].
By 2009, NPC had begun work for the development of a container terminal, seeking expressions of interest for developing the port including a container terminal. In 2010, NPC selected its preferred developer, Newcastle Stevedores Consortium (NSC), described at J[63]. Also in 2010, NPC published a container terminal analysis envisaging the development of the Newcastle container terminal after Botany’s exhaustion at 3.2 million TEUs per annum: J[61]–[64]).
It is important to appreciate two things at this point. First, there had never been any suggestion that it was intended that any container terminal at Newcastle would be developed before Port Botany exhausted its capacity. As her Honour found, and as will be discussed, the public and private infrastructure costs of a container port were such as to require the staged or sequenced development of container port capacity.
Secondly, Botany’s limit of 3.2 million TEUs per annum imposed in 2005, even with the development of a third terminal, was influenced by community concerns about traffic pressures resulting from the port development and was a development limitation condition. The natural capacity of Port Botany and its infrastructure was much greater.
In 2010, the political decisions that had been made by the then Labor Government were that the Port of Newcastle was the next container port in sequence after the exhaustion of capacity at Port Botany.
The need to develop such critical and valuable infrastructure as ports to drive supply chain efficiency was not limited to the New South Wales Government. In 2011, the Commonwealth Government published its National Ports Strategy: J[65].
March 2011 saw a change of Government in New South Wales with a Liberal/National Coalition replacing Labor.
Shortly thereafter, there was a change of emphasis and momentum in the strategic direction of the new Government concerning port development. Whilst in June 2011, the Treasury approved NPC beginning commercial negotiations with NSC for the development of the Mayfield site, including a container terminal, in September 2011 the Government announced that it would privatise Port Botany by way of a 99 year lease: J[67]–[68].
By November 2011, NPC and NSC had agreed upon terms for the development of the Mayfield site. On 18 November 2011, however, the Treasurer informed NPC that permission to contract with NSC would have to await the outcome of a “scoping study” into the intended long term lease of Port Botany and “the State’s longer term port infrastructure need and the roles of Newcastle and Port Kembla”: J[71], emphasis added. The State also informed NSC of its intention to pause NSC’s development proposal for Newcastle until the scoping and strategy study for Botany was completed: J[74] and [77].
In December 2011, Morgan Stanley was engaged as a consultant to prepare the scoping and strategy study: J[72]. At about the same time, two State agencies, Transport for NSW and Infrastructure NSW commenced a review of ports policy for New South Wales. The Treasury also established a Port Botany project advisory group, which included Infrastructure NSW and the Department of Planning and Infrastructure.
By March 2012, Transport for NSW expressed doubts about the economics of transporting containers to Sydney from Newcastle given most were destined for delivery within 40 kilometres of Sydney. The view was developing that the logistic economics favoured Port Kembla over Newcastle: J[78].
After the announcement of the proposal to privatise Port Botany, the NSW Ports Consortium was formed to bid for the lease of Port Botany. From early in its considerations, the NSW Ports Consortium received advice that a key consideration for the negotiations of any long term lease of Port Botany was “competing terminals”. This advice, to which the primary judge first referred at J[73] and [79], was based on possible competition between Port Botany and the Port of Newcastle or Port Kembla. The preliminary advice saw the risk as mitigated by (see J[73]):
[o]btaining a guarantee from the NSW Government that it will not allow the development of a second container terminal (… considered to be highly unlikely) or [o]btaining a first right of refusal in relation to the acquisition of any container terminal operations at Newcastle Port or Port Kembla.
By March 2012 the concern of at least one bidder with the question of another container terminal at Newcastle had been communicated to Morgan Stanley who was preparing the scoping study: J[80]. This concern was, of course, critical to any valuation of Port Botany. This was especially if, as was the case at the time, the other port (whether Newcastle or Kembla) was owned and run by the State (the announced privatisation at this point being only that of Port Botany).
In early April 2012, Morgan Stanley gave Treasury an indicative valuation. Five important points were made. First, the existing 3.2 million TEU cap on operations at Botany should be removed. Secondly, the concern as to the possible development of a container terminal at Newcastle was a possible loss of value to the State in achievable price of a very large sum of money in lowered, more conservative bids, being estimated at a significant, material amount of money the sum of which is confidential and need not be specified for the purposes of this judgment. Thirdly, because of this, it was recommended that the State not support the container terminal element of the Newcastle port proposal which was the result of the negotiations between NPC and NSC. Fourthly, Morgan Stanley advised that Port Kembla should be the next container port in sequence after Port Botany for three reasons: it served the same hinterland as Botany; both ports would service the Moorebank intermodal terminal; and Port Kembla was the next logical container terminal after Botany. Fifthly, Morgan Stanley advised the State to seek combined bids for Botany and Kembla, and that the Port of Newcastle transaction be staged after the transaction for the other two ports: see J[81]–[85].
These views were accepted by the Treasury transaction team (which included Infrastructure NSW, the Department of Planning and Infrastructure and Morgan Stanley) and were passed on to the Treasurer on 12 April 2012: J[86]–[87].
The terms of the advice of Treasury to the Treasurer were set out relevantly in full by the primary judge at J[86]–[89]. That advice highlighted a number of important contextual considerations against which the commercial and competition considerations in the matter are to be judged. First, an early development of a container terminal at Newcastle would undermine both the rationale to remove the cap at Botany and the combining of Botany and Kembla as a package to enable the container port sequence of Botany and Kembla. Secondly, an early development of Newcastle would have no relationship with the development of the intermodal terminal at Moorebank which would service Botany and Kembla. Thirdly, and consequentially, early development of a container terminal at Newcastle would require additional transport infrastructure from Sydney to Newcastle. Fourthly, shipping lines favoured Kembla over Newcastle when Botany exhausted it capacity. Fifthly, 20-year strategic plans of Infrastructure NSW and Transport for NSW did not support a container port at Newcastle.
Central to the advice of Treasury was the removal of the cap at Botany in order to fulfil the potential of the highly valuable assets there. For instance, the development of the third container terminal was estimated to have required $1 billion of State investment by the time of its coming into operation in 2013. It was essential to allow these assets and this capital investment to achieve their full capacity and produce their full value for the State. Without the removal of the cap it was feared that bids would be discounted by a significant, material percentage, which is confidential and need not be specified for the purposes of this judgment.
The advice based on the economics, logistics and investment criteria expressed in terms of the long term interests of the State was that Botany should be allowed to reach and exhaust its full capacity potential without any cap, with Port Kembla as the next container port in sequence as part of a combined transaction, with a Newcastle privatisation transaction immediately after the Botany and Kembla transaction. Plainly that advice concerning the Newcastle transaction occurring immediately after a packaged Botany and Kembla transaction was premised on the privatisation of the Port of Newcastle not including any approval for a container terminal.
By early May 2012, the Treasurer also received advice in a letter from the NSW Ports Consortium. The letter (see J[90]) was plain: the obtaining of the greatest possible proceeds for Port Botany would be achieved by bundling Botany and Kembla. This would allow the acquirer to manage and co-ordinate the future port and trade demands for New South Wales. If this packaging of Botany and Kembla was not possible it was stated that bidders would want as much certainty as possible about potentially competing ports. The letter stated:
The container market serviced by Port Botany is the same as that which could be serviced by container terminals in either Newcastle or Kembla.
The creation of additional container terminal capacity at either Newcastle or Kembla, prior to Port Botany reaching its maximum potential capacity, will have the negative consequences of bringing forward the investment required by the Government in both road and rail infrastructure which is required to cater for the same level of container imports and exports into and out of Sydney.
We therefore suggest that until such time as Port Botany is approaching its maximum physical container capacity, it will be more efficient for the NSW economy and the Government’s budget for container exports and imports to be serviced at the existing facilities at Port Botany.
The risk of substitution from a second container terminal in NSW before it is economically warranted is also very material for potential bidders. We believe potential Transaction proceeds for Port Botany will be optimised, and the risk of substitution best addressed, by including Port Kembla with Port Botany under the Transaction. This will ensure that the acquirer will be better able to manage and co-ordinate an integrated solution and response to NSW’s future trade demands.
Should the inclusion of Port Kembla in the Transaction not be feasible, we would expect bidders will require as much certainty as possible around the prerequisites and timing for development of potential competing container ports. We would expect that this would include a requirement for a clear undertaking from the NSW Government not to approve, or subsidise, the development of container terminal capacity in Newcastle or Port Kembla until such time as Botany is unable to service the demand.
(Original emphasis.)
In May 2012, Morgan Stanley submitted its scoping study, which was summarised by the primary judge at J[92]–[95]. The first recommendation (of the highest materiality) was the removal of the cap of 3.2 million TEUs per annum to allow Botany to reach its potential of 6–8 million TEUs per annum. The costs of construction of a new container port with associated infrastructure with latent unused capacity at Botany of up to 5 million TEUs per annum could not be justified. This would likely extend Botany’s capacity from about 2018 to 2030.
The second recommendation (of medium-high materiality) related to the possible development of a competing container terminal at Newcastle. The recommendation was to deny approval to a container terminal in the Newcastle proposal (see J[92(3)]):
[w]ere the NPC container development to proceed in the short term, it would have a material financial impact on the Port Botany Transaction, reinforce the inefficiencies in capping Port Botany below its full utilisation, and impose higher landside transport costs onto the economy. It would also be on the same timeframe as the Commonwealth’s recently announced intermodal development at Moorebank, but would not have any real relationship to that facility (unlike Port Botany or Port Kembla).
…
a container terminal at Newcastle is likely to confuse bidders as to the long-term State policy for container facilities in NSW, and likely lead to a lower Transaction Value to the State as bidders discount future growth at Port Botany, and factor in the risk of competing with the State-owned Newcastle Port Corporation.
Recommendation: Consistent with our preliminary recommendation to the Treasurer in the Interim Report, the Project Team recommends that the State denies the concept approval for dedicated container facilities at the Port of Newcastle (i.e., only that part of the Mayfield proposal that relates to containers) as such an action would deliver the overall best policy and financial outcome for the State.
The report noted that bidder perceptions regarding competing with a State-sponsored container terminal would lead to conservative assumptions in the bids.
The report recommended that if there were to be a second container terminal outside Botany, it should be Kembla.
During 2012, Transport for NSW with the assistance of consultants, considered the future needs of the State for container ports. Current road, rail and quayside network capacity were seen as insufficient for forecast volumes in 2031. Port Kembla was seen as the most cost effective location for expansion of container handling facilities, though further research was necessary for that decision to be made. The report entitled “Options for Container Ports in NSW” including the supporting consultant’s report was expressed to be a “guiding principles” document which set out some fundamental considerations about the choice of the next container port as between Kembla and Newcastle, which was recommended to be Kembla. The primary judge recorded those at J[99]. They included the significantly higher project investment costs for Newcastle to develop as the next container terminal to Kembla: $12.1 billion compared to $4.1 billion under one cost allocation method or $6.1 billion compared to $4.1 billion under another; and the higher cost of moving each container from Newcastle to the Moorebank intermodal terminal by road or rail than from Port Kembla.
On 27 July 2012, the Treasurer and the Minister for Roads and Ports announced that Botany and Kembla would be privatised together and that Kembla would be developed after Botany for the State’s long term container capacity: J[100].
Shortly thereafter, the Treasurer wrote to NPC indicating its support for the development of a multi-use cargo facility at Mayfield, but excluding the proposed container terminal. The reasons given reflected the advice that had been received by the Treasurer: J[102].
The view of the Government was made known to NSC: J[104]–[105].
NPC was authorised to continue negotiations with NSC only on the basis of the port handling existing container traffic plus “organic growth” without the proposed container terminal: J[106]. In October 2012, the State wrote to NPC making clear that there was no opposition to a container terminal at Newcastle, after full utilisation of Botany and Kembla: J[111].
In October 2012, Infrastructure NSW published its “State Infrastructure Strategy 2012–2032”, which included detailed reasons for preferring the development of Kembla before Newcastle as the next container terminal: see J[107]. The document indicated that Botany would nearly quadruple its container throughput by 2031, reaching over 7 million TEUs per annum.
Also in October 2012, the New South Wales Parliament passed the Ports Assets (Authorised Transactions) Act 2012 (NSW) (PAAT Act), relevant aspects of which are set out at J[108] and J[110], including: the authorisation to lease (but not sell) land, up to 99 years; the requirement to place proceeds into a statutory fund; the authorisation to the Treasurer to exercise all necessary or convenient functions for the authorised transaction; the provision that an authorised transaction is to be effected as directed by the Treasurer in any manner considered appropriate by the Treasurer; and the removal of Botany’s 3.2 million TEU cap.
In November 2012 a Draft NSW Freight and Ports Strategy was developed and provided to bidders: J[112]–[113]. It identified Kembla as the next container terminal after Botany.
In December 2012, the NSW Long Term Transport Master Plan was published by the Government.
By that time, there were four final bidders for the Port Botany and Port Kembla leases, including NSW Ports Consortium: J[116].
In December 2012, Morgan Stanley, on behalf of the Treasurer informed all four bidders of the State’s attitude to variations to the Bid Version Transaction Documents (making clear that the State preferred no changes), as follows (see J[117]):
Any mark-ups you make to the Bid Version Transaction Documents should reflect the minimum changes that you require to undertake the Transactions based on the cash consideration outlined by you in Section 4.3 above.
The mark-ups you make to each of the Bid Version Transaction Documents will form part of the State’s Preferred Bidder evaluation considerations. NSW Treasury reiterates that the Bid Version Transaction Documents together with the Day 1 Transaction Documents represent the State’s preferred position with regard to the risk allocation regime, terms and other elements of the Transactions.
The selection of the Preferred Bidder will be based to a significant degree on any proposed changes to the Bid Version Transaction Documents. In particular, any changes to the liability and risk allocation regime set out in the Bid Version Transaction Documents will be viewed unfavourably.
In February and March 2013 one bidder raised the question of risk of change of Government policy as to the second container terminal, from Kembla to Newcastle, including the risk of the State competing by operating a container terminal in Newcastle. This was discussed within Treasury as were the ongoing talks with NPC. Foremost in the discussion was the potential impact on the bids of a significant, material amount of money the sum of which is confidential and need not be specified for the purposes of this judgment: J[120]–[123]. In early-mid March 2013, Morgan Stanley advised Treasury on the transaction: J[124]–[130]. The essence of Morgan Stanley’s advice was that whilst Government policy was clear, it had changed in the past and that the issue should be dealt with if the likely significant affectation of value of a significant, material amount of money the sum of which is confidential and need not be specified for the purposes of this judgment was to be avoided. Morgan Stanley described the issue as a “new strawman”. The options put forward (see J[125] and [129]–[130]) included some compensation of Botany and Kembla lessees if Newcastle container volumes “exceeded 200,000 TEUs … within the first 50 years” (J[127]) or exceeded a reasonable projection of “organic growth” (J[129]).
As the primary judge made clear at J[120] and J[955] the issue of the need for the compensation provisions arose when a bidder raised the question of the possible change of Government policy about the second port, after Port Botany. The bidder did not suggest any prospect of the State changing its policy of exhausting Botany’s capacity before the second container terminal was established.
By early March 2013, it was recognised by Morgan Stanley that the issue of compensation by the State would be dealt with in any privatisation of Newcastle: that is by some form of reimbursement provision: J[128].
In mid-March 2013, the Treasurer was briefed by the Steering Committee and he accepted their recommendations: J[131]–[134]. These were: to disclose the status of negotiations regarding Newcastle, but reiterate Government policy regarding Kembla after Botany in preference to Newcastle; to provide a regime to mitigate any impacts of State-sanctioned development in Newcastle “inconsistent with the current policy which Bidders are ‘buying’ today” and to draft contractual provisions for compensation for impacts of any change in policy. Given the debate on the appeal about this document, it is appropriate to set out the recommendations in full from J[132]. It was said in argument by the ACCC that there was no better example, than this document, of the impugned purpose of substantially lessening competition. The recommendations were in the following terms:
•Must disclose current status of Newcastle and reiterate Government policy (draft Transaction Memo attached). This will make it clear that the State has the ability to call for container developments at Newcastle under the proposed lease
•Provide regime to Bidders to mitigate impacts of State-sanctioned Newcastle developments that are inconsistent with current policy which Bidders are “buying” today
•Refer over for preliminary drafting of a “Port Development Sequencing Agreement” which essentially provides contractual support for current Government policy as understood by the Transaction Team, and compensation for impacts of a change in policy
•The risk for the State in this approach is that (i) it subsequently changes its policies and supports container developments at Newcastle, after having transacted leases at Botany and Kembla on a different basis and (ii) it then has to compensate Botany/Kembla Lessees for this change. (We note that Government could require a Newcastle developer to make a financial contribution to mitigate the costs to Government of such compensation).
The briefing document set out “key concepts” in the “Port Development Sequencing Agreement”. Under “Outline/Recitals/Acknowledgments” there appeared three points, as follows:
- The current policies of the State are to develop Botany to the fullest extent for containers, then Kembla, and only then develop dedicated container capacity at Newcastle
- Private sector investors are investing in Botany and Kembla under this policy framework
- Private sector investors in ports are seeking certainty as regards the application of State port development policies, and the prospect of competing with state-owned port developments in relation to container developments
Though in one sense it is plain from these facts, one matter deserves mention at this point. The aim of these “mitigation” or “compensation” provisions was to ensure the maximum bid price on the current policy framework. If a price were bid on such a hypothesis, any change of Government policy that changed that hypothesis would transform the bid price into a commercial over-payment, after-the-fact. Such overpayment was to be offset by compensation provisions providing for the financial effects of the change of policy. Looked at that way, the provision can be seen as providing for financial risk consequent upon hypothesised future change of Government policy: as a form of insurance or price adjustment for the successful bidder.
Whilst one (and those in the position of the bidders) could never be certain about future political and economic policy, two things were and are clear: first, at the least from the then current Government position the advice and economics of the sequencing of a container terminal at Kembla after Botany and Newcastle after Kembla were clear and demonstrable; and, secondly, and despite this first point, the magnitude of the investment recognised by the bid required a very conservative approach by the bidders if there were no financial compensation in the arrangements should Government policy change, even if, as was the case with IFM, the bidders saw the strength of the economic considerations underpinning the sequencing in current Government policy: J[135]–[136].
Importantly, in mid-March 2013, Morgan Stanley modelled possible compensation payable based on NSC’s Newcastle proposal and estimated a present value of $44.5 million to be payable by the State to the operatives of Botany and Kembla: J[137]. This, of course, was to be compared to the anticipated (or feared) loss of up to a significant, material amount of money the sum of which is confidential and need not be specified for the purposes of this judgment in the bid values. The asymmetrical nature of these values was emphasised by NSW Ports in its submissions as revealing the true character of the compensation provisions. In its submissions, in particular on likely effects, the ACCC sought to ascribe a different meaning to the use of the word “asymmetry” by the primary judge.
The draft PCDs were made available to bidders on 15 March 2013. A covering memorandum expressed Government policy of full development of Botany and Kembla and stated (J[139]):
Government recognises that the potential NPC development intersects with the Transactions. Accordingly and in support of the policy position the Government is providing Bidders with a codified regime (including a compensation formula) if container volumes at the Port of Newcastle exceed an organic growth path prior to Port Botany/Port Kembla being fully developed for containers. Bidders should have regard to the draft Port Commitment Deed which is being placed in the data room on 15 March 2013.
In mid-April 2013, the NSW Ports Consortium was announced as the successful bidder for Port Botany and Port Kembla. On 31 May 2013, the Port Botany and Port Kembla PCDs were executed. The relevant extracts of the compensation provisions in the Port Botany PCD and Port Kembla PCD are in schedule 1 to the primary judgment. The primary judge summarised them at J[146]. Neither of the State Owned Corporations (Sydney Ports Corporation (SPC), Port Kembla Port Corporation (PKPC)) that had been involved in the operation of Port Botany and Port Kembla was a party to the PCDs or had any role in their preparation.
On 18 June 2013, the Government announced the intended privatisation of the Port of Newcastle, subject to completion of a scoping study: J[148]. Morgan Stanley was retained to prepare the study. The negotiations between NPC and NSC were ongoing.
In July 2013, Morgan Stanley advised the Treasurer as to Newcastle: J[150]–[155]. Morgan Stanley advised that negotiations only be permitted to proceed without a container terminal (at berths 5 & 6). This was “Stage 1”, which, however, had within it possible effects on Botany and Kembla and exposure under the compensation provisions since NSC’s forecasts for Stage 1 were up to 200,000 TEUs per annum (the compensation provisions contained a threshold of 30,000 TEUs per annum plus material growth). It was recommended that there be a “satisfactory mechanism to ensure any compensation liability under the [PCD] is passed back to NSC”.
On 26 July 2013, the Treasurer, having accepted this advice, informed NSC by letter that the Government would not support NSC’s proposal, but would agree to a revised proposal of Stage 1 only: J[157].
On 6 August 2013 at a meeting between Treasury, NPC and NSC, NSC was told of the proposed reimbursement of State liability to the operator of Port Botany and Port Kembla: J[159].
By mid-September 2013, negotiations between NPC and NSC were complete. NSC became known as the Mayfield Development Corporation (NSC/MDC).
In October 2013, NSC/MDC objected to acceptance of any liability of the State under the PCDs and proposed an alternative which was unacceptable to the Treasurer and he issued a direction under the PAAT Act for negotiations with NSC/MDC to cease: J[164]–[166].
In November 2013, the final NSW Freight and Ports Strategy was published and reiterated what had appeared in the draft (see [52] above), especially about sequencing of certain ports: see J[167]–[173].
Also in November 2013, having received Morgan Stanley’s final scoping study for the privatisation of the Port of Newcastle, the State announced the proposal to privatise the port by long term lease. Expressions of interest were invited: J[175]. It needs to be appreciated that the throughput of cargo (as to 95%) and revenue (as to 70%) of the port was and was derived from the export of coal. It was forecast that coal exports would increase up to 2043. Newcastle is the largest coal exporting port in the world. In contrast it handled only 15,000 TEUs per annum. It did not have a dedicated container terminal: J[175]. Containers were handled by geared vessels: J[190].
The information memorandum to potential bidders for the Port of Newcastle privatisation made clear the sequencing of container ports with Port Kembla after Port Botany, and identified the development of a container terminal at Newcastle in 30 to 40 years, after 2040. Though it stressed the development opportunity thereafter with the available land. The information memorandum disclosed the compensation provisions in the PCDs. It dealt with their required reimbursement as follows J[179]:
The financial obligations of the State under this arrangement will be passed to the Newcastle Port Lessee under the Port Commitment Deed (“PCD”). The Acquirer is not prevented from developing container facilities at the Port; however, the Acquirer will be required to compensate the State for any costs under the Botany/Kembla Port Commitment Deed that result from container developments at the Port of Newcastle. Based on current forecasts, container volumes are not expected to trigger any liability under the PCD for the Port Lessee/Acquirer, and the State sees the risk of costs arising under the PCD as being within the control of the Acquirer.
Notwithstanding the PCD, the Acquirer may choose to further develop container trade at the Port and seek to attract container volumes above the PCD Threshold. The Acquirer will need to determine commercially whether the incremental value of revenues derived from land rental and port charges from all container movements sufficiently offsets any PCD payments prior to the end of the arrangements.
Thus, the proposal was not to prevent any development, but to cast the burden of the compensation provisions upon the acquirer.
To interpose: The ACCC made no case that the reimbursement provision envisaged by the information memorandum or the privatisation of the Port of Newcastle was, of itself, contrary to the Act as having the purpose or the effect of substantially lessening competition.
In April 2014, the State agreed to lease the Port of Newcastle to a consortium which became PON for $1.75 billion. On 30 May 2014, the Newcastle PCD was executed. Clause 3 was a reimbursement provision summarised by the primary judge at J[188] and set out in the schedule to the primary judgment.
Later in 2014, PON’s development plan said there were no plans for a container terminal: J[190].
It is appropriate to interpose here by way of emphasis that PON acquired its rights to the Port of Newcastle and paid the relevant consideration on the clear understanding, and in the context, of the explicit explanation of the Government’s policy as to sequencing container ports in New South Wales and of the existence of the compensation and reimbursement provisions.
In March and May 2016, PON received two unsolicited proposals to develop a container terminal on the Mayfield site: from Anglo Ports and DP World Australia (the latter the operator of one terminal at Port Botany). They were considered by PON’s board which entered a memorandum of understanding with DP World Australia to undertake a due diligence and feasibility analysis to develop a container terminal. The memorandum expired. The primary judge recorded the following at J[193]:
DP World Australia maintained that the PCDs made the project unviable for it and was unwilling to take on any obligation under the Newcastle PCD. DP World Australia’s CEO said subsequently that a container terminal at Newcastle would be attractive but for the PCDs, and that it was hard to see “it working with that handbrake”.
By 2018 the State policy for the sequencing of container ports was renewed. The NSW Freight and Ports Plan 2018–2023 was relevantly summarised by the primary judge at J[194], and highlighted the importance of efficiently developing freight capacity in the State and the large cost of necessary infrastructure. In relation to an asserted issue as to the need for containerised freight at the Port of Newcastle, the Plan stated:
The Plan recognises the interest of the Port of Newcastle in diversifying and expanding the port’s trade base. An initiative has been included in the Plan to support the Port of Newcastle as the commercial operator of the port, to explore other trade opportunities as they deliver their masterplan, such as examining landside capacity constraints that may need to be addressed beyond the timeframe of this Plan.
The NSW Government policy position is that Port Kembla has been identified as the location for the development of a future container terminal to augment capacity of Port Botany when required. Current arrangements do not prohibit the development of a container terminal at the Port of Newcastle but rather allow for the growth of container volumes through Newcastle that service the region.
By 2018, the ACCC had begun to investigate the privatisation of Port Botany and Kembla and in particular the compensation provisions.
At J[200] the primary judge described the substantial Commonwealth and State infrastructure investment to facilitate the efficient use of Port Botany and Port Kembla. The financial, social and economic scale of such investment and activity necessitates setting out these matters:
(1)the development of the Port Botany Rail Line Duplication project, supported by $400 million from the Commonwealth government. This project involves a dedicated freight only rail track from Port Botany to near Marrickville. This project was added to the Infrastructure Australia priority list and was made on the assumption that containers moving through Port Botany were expected to increase by 4.5 million TEUs over the coming decades. The project was designed to provide the capacity to meet forecast rail demand generated by the Moorebank Intermodal Terminal, Enfield Intermodal Terminal, St Marys Intermodal Terminal and future terminals;
(2)the Sydney Gateway Project, which had a project value of $2.4 billion. This project involved various road connections and upgrades to provide a high capacity connection from Sydney Airport and Port Botany to the WestConnex. The purpose of the project included to reduce congestion on existing roads to Port Botany and to support the efficient distribution of freight between Port Botany and logistic centres in western Sydney;
(3)the reservation of land for the western Sydney Freight Line. This is a future transport link that will provide a dedicated freight link between Port Botany and the Western Parkland City;
(4)the rezoning of land for the Mamre Road precinct in western Sydney to protect it for use as a future intermodal terminal. This precinct will have an area of 999 hectares. This terminal will have dedicated access to Port Botany via the western Sydney Freight Line and is anticipated to have a cost of $2.6 billion;
(5)the Moorebank Intermodal terminal, which is a 241 hectare precinct on Commonwealth land, and which is designed to deal with up to 1.05 million TEU of international containerised freight per year. The terminal is designed to deal directly with freight from Port Botany. It is the largest intermodal logistics precinct in Australia. There has also been private sector investment in the precinct, including the development of distribution centres by Woolworths across 26 hectares at a cost of $700-$780 million to Woolworths and $420-$460 million to Qube;
(6)the St Marys Intermodal Freight Hub, which it is anticipated will deal with up to five 600m trains per day from Port Botany and with an annual throughput of 301,000 TEU;
(7)the M1 Princess Motorway Improvements for Picton Road to Bulli Tops. The objectives of these improvements include to “increase the reliability of access into and out of Port Kembla, including for general freight, larger restricted access vehicles and high performance freight vehicles”; and
(8)the M1 Princess Motorway Mount Ousley Interchange. This involves road upgrades on the M1 motorway. The objectives of the proposal include to “provide for the growing freight task including supporting the expanding port at Port Kembla”. This proposal was expressly developed in the context of the State’s policy that Port Kembla would become the State’s second container port.
PON’s business case
As a separate part of the basic or background facts at J[205]–[255] the primary judge dealt with PON’s business case for a container terminal at Newcastle. The subject was of some significance to the primary judge in her views on the lack of realistic foundation of the effects case. That discussion began with the fact that since October 2016 PON was in contact with the ACCC about the compensation and reimbursement provisions (upon the basis of the knowledge of the existence of which it had successfully bid for the Port of Newcastle). The ACCC encouraged PON to develop that business case: see J[205]. It is unnecessary to consider the propriety of the circumstances there discussed by the primary judge.
Against this background of the interest of the ACCC, CM Ports, one of the two equal investors in PON, was keen in 2018 to develop a container terminal. Consultants were engaged and a preliminary business case was presented to the PON board in February 2019. The primary judge described the steps taken at J[214]–[231].
After considering the preliminary business case, the board of PON approved the preparation of a “Detailed Business Case” at a cost of about $3.4 million: J[232]. PON continued the project for a container terminal, which work involved assisting the ACCC to present its case against NSW Ports: see J[233]–[238].
In November 2019, PON board approved a budget for further work on the project estimated by the primary judge to be about $7.74 million: J[239]. Part of the project was working (with the ACCC) to resolve favourably the compensation and reimbursement issues.
In February 2020, the PON board considered a so-called “PCD Resolution Strategy” which identified political involvement to facilitate the elimination of the reimbursement provision to accelerate a project for a “multi-purpose deep-water terminal project”: J[240]. In April 2020, the PON board received a recommendation to approve a budget of $3.8 million to develop a business case for a multi-purpose deep-water terminal to support the ACCC’s case against NSW Ports: J[242]. In April 2020 PON wrote to the Prime Minister seeking Commonwealth funding assistance and legislative assistance to over-ride the reimbursement provision: J[244].
Thereafter McKinsey & Co was engaged to develop an “investment grade” business case, including financial analysis: J[245]. At least six other consultants’ reports were commissioned: J[246]. At J[247]–[255] the primary judge set out aspects of these reports. No “investment grade” business case was ever produced in discovery or tendered. A market analysis by shipping consultants was to the effect that whilstsoever Port Botany had capacity Newcastle would need a subsidy: J[247]. The McKinsey report of August 2020 showed Newcastle to be uncompetitive on landside road costs to Western Sydney, but possibly competitive in rail, which depended on the development of rail and intermodal networks for Newcastle (which necessarily requires considerable investment, whether public or private or both): J[249].
Thus, after four years of analysis, after the incentive of a case to be begun (and later begun) by the ACCC, after the use of political pressure and the expenditure of millions of dollars on consultants’ reports, no “investment grade” business case was or apparently could be developed or propounded for a container terminal at Newcastle while Port Botany had capacity.
The reasons: Consideration of the factual background
In section 2.7 of the reasons (J[256]–[286]) the primary judge dealt with the ACCC’s ten key contentions from these background facts. Evidence of witnesses was relevant to one of these contentions. It is helpful to examine these ten key contentions, before completing a discussion of the background facts, because her Honour’s clear exposition and conclusions assist later analysis.
The first contention was that:
[T]he State’s policy, from around 2003 to 2012 was that the Port of Newcastle would be the next location at which a container terminal would be developed after Port Botany.
In response, the primary judge put the short contention into its proper context, finding at J[258]–[261]:
[258] The State policy from 2003 to 2012 was that after Port Botany reached its full capacity as a container terminal, the next container terminal to be developed would be at Port of Newcastle.
[259] This policy, insofar as it identified Port of Newcastle as the next container terminal to be developed after Port Botany reached full capacity, was under question from late 2011 when the State announced it would privatise Port Botany and Transport for NSW and Infrastructure NSW commenced a review of ports policy for NSW. From March 2012 it was apparent that there were serious issues of concern within the State and its advisers about the Port of Newcastle being the next container terminal to be developed after Port Botany reached full capacity. On 27 July 2012 the Treasurer and Minister for Roads and Ports announced that the State would seek to develop Port Kembla as the logical next long term tranche of container capacity after Port Botany. This policy decision was reflected in the State Infrastructure Strategy 2012-2032 published by Infrastructure NSW in October 2012. It was also reflected in the State’s draft NSW Freight and Ports Strategy published in November 2012. This draft also identified that the expectation was that Port Botany might approach its natural capacity between 2030 and 2040, after which new port infrastructure at Port Botany or Port Kembla might be needed.
[260] This policy was also reflected in the NSW Long Term Transport Master Plan was [sic] published in December 2012. The policy remained unchanged in the final NSW Freight and Ports Strategy published in November 2013. It remains unchanged to date. The State has implemented a number of significant infrastructure decisions subsequently reflecting this policy.
[261] Accordingly, at the time the compensation provisions were made on 31 May 2013 the policy of the State was that: (a) Port Botany would be developed to full capacity first, (b) it was anticipated that Port Botany may approach its natural capacity between 2030 and 2040, after which new port infrastructure at Port Botany and Port Kembla may be required, (c) after Port Botany and Port Kembla had reached their full capacity, the next container terminal in NSW would be developed at the Port of Newcastle.
The second contention was that:
[I]n at least the period from 2010 to 2013, a private sector consortium was interested in developing a container terminal at the Port of Newcastle.
The response of the primary judge to this is found at J[263]–[264] and demonstrates the oversimplified nature of the contention:
[263] NSC/MDC was selected by NPC as the preferred developer of a container terminal at the Port of Newcastle by May 2010. NPC was permitted to negotiate with NSC/MDC in June 2011 on the basis that it could not bind the State and that State approval to any commercial deal would be required. By October 2011 NPC and NSC/MDC agreed a term sheet and draft contracts for the proposed development. When NSC/MDC sought approval to enter into the agreements the State informed it that development of a container terminal at the Port of Newcastle would be considered in the context of an overarching strategy for port infrastructure in NSW. As a result, the State would not agree to the development of a container terminal at Port of Newcastle. It would agree only to the development of a multi-use cargo facility. NPC was permitted to negotiate with NSC/MDC on this basis only. By that time, in July 2013, the State was also contemplating the privatisation of the Port of Newcastle. Negotiations between NPC and NSC/MDC continued on the limited basis approved by the State. By November 2013 the Treasurer had directed NPC to cease negotiations altogether.
[264] The NSC/MDC proposal for a container terminal at the Port of Newcastle never moved beyond a concept phase. Even in concept, the proposed container terminal was phase 2 of the proposed development with no timing commitment. It may be inferred that NSC/MDC did not have funding in place for the development. The advisers to the State also considered that there was no commercial justification for the inclusion of phase 2 in the development proposal. NSC/MDC said that it was ready to develop a container terminal “at a time decided by the government in the future” which it acknowledged may not be for 20 years. In other words, NSC/MDC did not propose to develop a container terminal contrary to the State policy that Port Botany’s capacity should be used first.
The third contention was that:
[T]here was a link between the change in the State’s policy with respect to Newcastle being the location for NSW’s next container terminal, and the work done for the State by Treasury and Morgan Stanley, regarding the Port Botany privatisation, in late 2011 and 2012.
The contention was over-simplified and as such lacked clarity. The primary judge, discerning, however, its intended meaning, disagreed, finding at J[266]–[267]:
[266] If by this, the ACCC means that the State changed its policy because it proposed to privatise Port Botany, I disagree. The State decided to privatise Port Botany first, it may be inferred, because such a privatisation was the policy of the NSW Liberal/National Coalition government elected in March 2011 and, secondly, because Port Botany is NSW’s only dedicated container terminal and the State policy was always that Port Botany would be developed to its full capacity before any other container terminal would be developed. At the same time as the privatisation of Port Botany, the State was reviewing its port development strategy through the work of Transport for NSW and Infrastructure NSW. The interim outcomes of that review informed with the conclusions reached by the Treasury and Morgan Stanley, that Port Botany should be developed to capacity as a container terminal, then Port Kembla, and only then the Port of Newcastle. The conclusions reached by the Treasury and Morgan Stanley did not drive the conclusions reached by Transport for NSW and Infrastructure NSW. Rather, the Treasury and Morgan Stanley considered the interim conclusions and recommendations of Transport for NSW and Infrastructure NSW which informed their own conclusions.
[267] Accordingly, the privatisation of Port Botany did not cause the State’s change of policy. It coincided with the State’s change of policy but the change of policy was not driven by the fact of the privatisation of Port Botany. The change in the State policy was an outcome only of the consideration of efficient and cost-effective infrastructure development for NSW.
The fourth contention was that:
[T]he State was told in 2012 and early 2013 that the Port of Newcastle could compete with Botany and that bidders for Botany and Kembla would consider that risk of competition to be material.
This misrepresented what in fact occurred. The primary judge made the following findings at J[269]:
It is correct that the State was told that if a container terminal was developed at the Port of Newcastle it would compete with Port Botany. It is apparent from the course of the communications as a whole that by “compete” what was meant was that if a container terminal was developed at the Port of Newcastle it would divert some container trade away from Port Botany and that, despite the State policy to the contrary, this perceived risk had a not immaterial value to the Port Botany privatisation because bidders would make conservative assumptions about the perceived risk.
As will be discussed, and as was found, there was a huge difference between the likelihood or feasibility (or lack thereof) of a container port operating at Newcastle whilst there was capacity at Port Botany, and the perception of risk of change in Government policy as to sequencing of ports in New South Wales.
The fifth contention was that:
[B]efore the privatisation of Port Botany in 2013, the State was told that bidders for Port Botany and Port Kembla would want protection from that risk of potential competition from Newcastle.
This contention was over simplistic and included two propositions similar in apparent expression, but importantly different in meaning. The bidders were paying for a monopoly, one that was the product of circumstance, geography and the huge necessary infrastructure for a container port and the overwhelming public interest in the rational deployment of public (and private) funds for investment for such infrastructure. The protection that was wanted was not against competition but assuming competition (because of a change of Government policy) against the financial effects of competition: of a competitive, as opposed to a sequenced monopolistic, market. The bidder, having paid for a monopoly, and if changed Government policy was to impair or affect the monopoly, was to have the benefit of a provision that provided for financial mitigation – whether characterised as compensation or price adjustment or insurance – to ensure that there was no basis not to bid at the highest level to win the asset and thereby provide the State with the most funds to deploy otherwise for the benefit of the State.
The primary judge found (correctly and reflecting the essence of the above) at J[271]:
Subject to the observation above in relation to the fourth point, it is correct that the State’s focus was to protect bidders from the financial effects of the perceived risk that the State policy might change in the future, as a result of which a container terminal may be developed while Port Botany has capacity or while a container terminal at Port Kembla has capacity.
The sixth contention was that:
[T]he Compensation Provisions were directed to providing that protection, and the Treasurer himself signed off on the Compensation Provisions on that basis in March 2013.
Subject to the proper understanding of the fifth contention, her Honour accepted this: J[273].
The seventh contention was that:
[T]he State contemplated the effects of the Compensation Provisions, including the State withholding approval for a container development at the Port of Newcastle and/or requiring investors in a privatised the Port of Newcastle to reimburse or indemnify the State for its liability under the Compensation Provisions.
This too was not accurate, the primary judge finding at J[275]–[278]:
[275] The State did not contemplate that withholding approval for a container development at the Port of Newcastle would be an effect of the compensation provisions. Rather, it contemplated that it had four options which included doing nothing, allowing the development of a container terminal at the Port of Newcastle and providing comfort to bidders, blocking the development of a container terminal at the Port of Newcastle, and blocking the development of a container terminal at the Port of Newcastle and providing comfort to bidders anyway.
[276] In this regard, it is also necessary to recall that the development of a container terminal at the Port of Newcastle meant the NSC/MDC development proposal as described above, which NPC had been pursuing (with the State’s approval until 2012) from a time when that pursuit was consistent with the policy of the State, at least to the extent of the next container terminal, after Port Botany had reached capacity, being at the Port of Newcastle.
[277] It is also necessary to recall that the State’s policy at the time was that Port Botany be developed to full capacity first, then Port Kembla, and only then Port of Newcastle. For this reason the advisers to the State considered the risk of development of a container terminal at Port of Newcastle contrary to the State policy to be a “straw man” that, nevertheless, had to be dealt with given its potential impact on the value bidders would attribute to Port Botany and Port Kembla.
[278] The State did contemplate that if the compensation provisions were included as part of the privatisation of Port Botany and Port Kembla, the State could offset any potential liability under those provisions in the transactions effecting the privatisation of the Port of Newcastle.
The eighth and ninth contentions which were accepted by the primary judge were that:
[T]he Treasurer himself contemplated a reimbursement obligation as a consequence of the Compensation Provisions before he executed the Port Botany and Port Kembla PCDs containing the Compensation Provisions on behalf of the State.
…
[T]he Reimbursement Provision was in fact imposed as a consequence of the Compensation Provisions.
The tenth contention was that:
[S]ince becoming the owner of Port Botany and Port Kembla, the NSW Ports Respondents have held the view that a Newcastle Terminal would compete with Port Botany if the Botany and Kembla PCDs were not in place, and have been concerned about that prospect.
This was not accepted by the primary judge, who found the following at J[284]–[286]:
[284] As discussed below, this submission needs to be unpicked. On the evidence, NSW Ports considers that the compensation provisions provide it with financial protection if the State policy changes and a container terminal is developed at the Port of Newcastle and diverts containers away from Port Botany before Port Botany reaches capacity.
[285] On the evidence, the reimbursement provisions are irrelevant to NSW Ports other than to the extent that they argue that, if anything has an anti-competitive effect, it is the reimbursement provisions alone and not the compensation provisions.
[286] NSW Ports also does not accept that there is a credible threat of entry by a container terminal at the Port of Newcastle in the reasonably foreseeable future and has not done so since the State policy changed, the cap on Port Botany was removed, and Port Kembla was privatised with Port Botany.
The reasons: The evidence of NSW Ports’ witnesses
Before dealing with the ultimate findings of the primary judge on the question of the purpose, effect, or likely effect of the compensation provisions it is helpful to examine the findings of the primary judge on the evidence given. This is so because of the emphasis placed on these findings by the ACCC and because it is necessary to help explain why the case of the ACCC (as to both purpose and effect) was based on an asserted proposition which was not made out. This proposition was adverted to in the discussion of the ACCC’s fifth proposition (see [100]–[102] above).
Mr Julio Garcia was a director of NSW Ports and the head of infrastructure for the North American region for IFM. His evidence was accepted. The primary judge recounted his evidence at J[553]:
(1)early in 2012, he considered that a potential container terminal at Newcastle could be a competitive threat to Port Botany;
(2)substitution by a container terminal at the Port of Newcastle was a perceived material risk for bidders in the Port Botany privatisation process;
(3)while this became less of a concern during the privatisation process, he continues to hold the view that there is potential for competition for Port Botany from a container terminal at the Port of Newcastle at some time in the future;
(4)the compensation provisions were directed at ameliorating the risk of competition from the Port of Newcastle if it were developed with a container terminal in the future (noting that by this stage in the privatisation process Mr Garcia did not consider the compensation provisions to be important but accepted they were favourable to bidders); and
(5)NSW Ports agreed to the compensation provisions so as to enjoy the potential protection they gave from competition by a future container terminal at the Port of Newcastle (noting that Mr Garcia stressed that the provisions gave financial protection to NSW Ports if container volumes at the Port of Newcastle exceeded a certain threshold).
Mr Ari Droga was also a director of NSW Ports and a partner of the Australian business of GIP. His evidence was accepted. The primary judge recounted his evidence at J[554]:
(1)before the PCDs were executed, Mr Droga was conscious of the risk that a competing container terminal could be developed at the Port of Newcastle at some time in the future (noting, however that he considered the risk had been substantially ameliorated by the State announcing its port policy sequencing policy in July 2012 and including Port Kembla with Port Botany into the proposed privatisation. By the time these events had occurred, NSW Ports was comfortable with the risk profile presented by the Port of Newcastle);
(2)if the Port of Newcastle was to be developed with a container terminal ahead of time it may then provide a competitive force to or could potentially compete with Port Botany;
(3)under certain conditions being satisfied, specifically that a fully functioning container terminal was developed at the Port of Newcastle, it could compete with Port Botany for some of the addressable market being serviced by Port Botany or in certain areas currently or in the future;
(4)if a container terminal was developed at the Port of Newcastle, it would not be good for Port Botany. It would be fair to describe that as in the top handful of long-term strategic risks for Port Botany (a risk which had become the subject of more focus as a result of this proceeding); and
(5)the compensation provisions provided NSW Ports with protection if the State changed its mind about its port sequencing policy. NSW Ports was happy to receive that protection. It could provide economic compensation in the event that competitive capacity was developed and exercised over time at Newcastle. He appreciated at the time the compensation provisions were made that their effect was to provide compensation “in the event that there was proof that the terms of the indemnity were activated and within that involved a substitution of a box that otherwise would have gone to Botany going to Newcastle”. He accepted that competition would very likely be a reason for that substitution.
Ms Marika Calfas, the CEO of NSW Ports, gave evidence which was relevantly set out at length at J[555]–[557]. I will deal with Ms Calfas’ evidence to the extent necessary in dealing with the ACCC’s submissions.
The reasons: The purpose of the compensation provisions
After setting out the relevant principles governing “substantially lessening competition” and “purpose” at J[894]–[914], about which no complaint was made on appeal, the primary judge dealt with purpose at J[926]–[980].
The complaints made about the approach of the primary judge as to purpose were not as to any errors in findings of primary facts, but rather were as to the proper characterisation of the facts as found.
The primary judge found (at J[927], [928], [930] and [937]):
(1)that the State’s motive was profit maximisation: to sell to a bidder at a price to reflect the monopoly being sold. The State’s purpose was to ensure that bidders did not discount their bids because of any risk of establishment of a container port at Newcastle (before Botany and Kembla reached capacity) to ensure the State received full value for the sale of an existing monopoly by indemnifying the bidder for the risk that the monopoly might be reduced: J[927].
(2)that NSW Ports’ motive was also profit maximisation: it did not want the profitability of the existing monopoly for which it was paying reduced by a competing container terminal at Newcastle. NSW Ports’ purpose was to ensure that it retained what it paid for – the full extent of the existing monopoly: J[928].
(3)that it was not the purpose of either the State or NSW Ports to prevent or hinder the establishment and operation of a container terminal at Newcastle: J[930].
(4)that the ACCC’s and PON’s submission should be rejected that the purpose of the compensation provisions was:
(a)to prevent or hinder the development of a container terminal at Newcastle; or
(b)to make Port Botany or Port Kembla immune from competition from the Port of Newcastle; or
(c)to enable NSW Ports to act without any constraint from competition that Newcastle might provide: J[937].
Fourth, the compensation provisions were proposed and drafted by the State rather than the NSW Ports consortium. That rather diminishes any suggestion of an anti-competitive purpose held by the latter and rather strengthens the former’s position that its purpose was to provide a form of financial insurance to remove the risk perceived by the latter concerning a change in the State’s policy.
Fifth, the ACCC could not identify any document in which either the State or the NSW Ports consortium expressed their desire to use the compensation provisions as a means to prevent or hinder competition with or from the Port of Newcastle. Contrastingly and for example, a Treasury briefing document dated 13 March 2013 concerning “Key Botany / Kembla Risk Allocation Matters” makes it plain that there was no proscribed State purpose of the type alleged by the ACCC concerning a substantial lessening of competition including raising any barrier to entry at the Port of Newcastle. As its content reveals, one of the risks identified concerned a “Change in law – Newcastle Container Terminals” and the relevant risk allocation being considered. The impact addressed was potential bid price impact, and what was discussed was potential compensation for the impacts of a change in State policy.
Sixth, the NSW Ports consortium’s purpose was to ensure that it retained what it would pay for, namely, the full extent of the existing monopoly of Port Botany in respect of container port services in NSW. Her Honour’s reference to the full extent of the existing monopoly should be taken to mean the full value of, not the full trade within, that monopoly notwithstanding some infelicity in expression. The consortium’s purpose was to retain value, not to prevent diversion of trade.
Now the NSW Ports consortium’s purpose was the subject of oral evidence. And the primary judge had the advantage of assessing the relevant witnesses. As the primary judge found, compensation was identified as an issue in the bidding process by one of the bidders, in relation to the risk that Port Kembla might be subordinated to the Port of Newcastle as the second container port, not that the Port of Newcastle might be developed whilst Port Botany had capacity. The State proposed the compensation provisions to ensure that bidders did not discount their bids on account of sovereign risk about port sequencing policy. The NSW Ports consortium accepted the compensation provisions in a context where the State advised that proposed changes would be viewed unfavourably. The consortium did not consider that there was a realistic prospect of a container terminal being developed at the Port of Newcastle. This all weighs against the submission that either party intended to relieve the NSW Ports consortium from future constraint.
Seventh, although the ACCC contends that the primary judge erred in failing to find that the purpose of the compensation provisions was to substantially lessen competition in circumstances where the reimbursement provision was also contemplated, her Honour expressly referred to the reimbursement provision as part of her analysis of the purpose of the compensation provisions. And as her Honour no doubt considered, although the State had in contemplation the possibility that if the compensation provisions were agreed and the assets at the Port of Newcastle later came to be privatised, one option could be to pass on any liability of the State under the compensation provisions, it did not follow that one of the substantial purposes of the compensation provisions was to impose a liability on a future private operator of the Port of Newcastle.
Eighth, the ACCC contends that when viewed together, the compensation provisions and the reimbursement provision were intended to allocate the financial costs of market entry by the Port of Newcastle. It is said that this should have led the primary judge to conclude that the provisions were intended to prevent or hinder the establishment of a container terminal at the Port of Newcastle, because it forced the operator of the Port of Newcastle to pay to enter the market and thereby erected a barrier to entry. But there was no evidence which reflected any intention to prevent or hinder the establishment of a container terminal at the Port of Newcastle. Moreover, the reimbursement provision was contemplated in the context of a potential privatisation of the Port of Newcastle and similarly reflected the fact that a potential purchaser of the Port of Newcastle should receive what it paid for, namely, a port where, because of State policy, there was no realistic prospect of the development of a container terminal before the capacity of Port Botany and Port Kembla was exhausted. If that position changed, then the operator of the Port of Newcastle would by the reimbursement provision be required to make a payment that reflected the increased value of the asset it had received. But this was not a mechanism to hinder or prevent the development of a container terminal.
Further, it is problematic at the least to say that the State’s foresight of an end sought to be achieved in the future in a later and different contract with a different counterparty is a substantial purpose for including a provision in an earlier contract. The prospect of the first provision may be the reason why the second provision is foreseen and even intended. But it is another thing to say that the second provision is the reason for the first and so a substantial purpose of the first. And the compensation provisions were the occasion for making the reimbursement provision, not the converse. And even if the reimbursement provision was found to have been contemplated at the time of the compensation provisions, that does not make the purpose of the later provision a purpose of the earlier provisions.
I agree with the primary judge that the reimbursement provision added nothing to the characterisation or purpose of the compensation provisions. Indeed, they served to reinforce that the purpose of those provisions was to ensure that bidders for the port assets paid a price that reflected the value of the assets that they received.
In summary, the ACCC’s challenge concerning the purpose case fails. Let me turn to the other dimension to the ACCC’s s 45 case concerning the alleged likely effect of the compensation provisions.
Likely effect of SLC
Let me say at the outset that I have not found it necessary to set out in any detail her Honour’s comprehensive factual narrative. This is because once one has traversed her expansive desert of dry facts, one reaches an oasis at section 8.7.11 of her reasons headed “Key conclusions”. I need only draw from this spring on the competition questions for the most part.
Now the ACCC’s case is that the primary judge should have found, first, that the NSW Ports consortium perceived a credible threat of entry, second, that she should have construed the compensation provisions as making the NSW Ports consortium indifferent to lost volumes and, third, that she erred in finding that the reimbursement provision in the context of the compensation provisions did not raise barriers to entry.
Let me deal shortly with each of these assertions in turn, each of which I have rejected.
The perceptions case
There was a debate before us as to whether such a case was pleaded or run below by the ACCC. On a very generous view of the matter from the ACCC’s perspective, in terms of how the case was run I could not say that it was outside the penumbra around its main themes. I am prepared to deal with its argument if only to dispose of it.
Now only reasonable perceptions constitute cognisable constraints. And in that context, entry must be viable, and the threat of entry must be credible, in order to constitute a cognisable constraint, the relaxation of which could constitute a substantial lessening of competition.
Now in a different context, I said in Australian Competition and Consumer Commission v Pacific National Pty Ltd (No 2) [2019] FCA 669 at [927] to [934]:
Some further observations should be made concerning perception.
First, it will be relevant to consider whether the view is based on detailed analysis and knowledge…
Second, a widely-shared perception will tend to carry greater weight than an idiosyncratic one. In Stirling Harbour, French J said at [73] that “(d)espite the slender empirical foundation for Shortland’s broad perspective it was supported by that of another tenderer, Brambles Ltd”.
Third, whether the perception as to likely future conduct arises from existing conduct within the industry may be relevant. So, for example, in testing whether conduct is likely to occur in the future, one should test whether it is occurring in the present. This is no more than plain vanilla reasoning by induction.
Fourth, the genuineness and stability of the perception over time is relevant…
Fifth, I agree with the respondents that it is incorrect as a matter of law to take an erroneous perception, if that be shown, of an incentive and ability to discriminate into account in determining whether conduct is likely to substantially lessen competition. The purpose of the CCA is to increase the welfare of Australians through the promotion of competition (s2). Competition enhances welfare because it leads to economic efficiency. Taking a demonstrably erroneous perception into account in assessing whether conduct is likely to substantially lessen competition would not increase economic efficiency. To the contrary, it would prevent assets from being acquired by entities that can operate them most efficiently and therefore place the most value on them. It would decrease productive efficiency ie the production of goods at the minimum possible cost under existing technology. And if potential investors know that the price that they will obtain from the future sale of assets may be reduced by potential bidders’ erroneous perceptions, it would decrease the amount that they are willing to pay for those assets. This would then prevent capital flows from being directed to the places where they will be most effective, resulting in a reduction in allocative efficiency as well ie ensuring that resources are allocated, through price, to their highest-value use among all competing uses.
Sixth, under ordinary market conditions, an entity’s perceptions of its competitors’ behaviour are informed by outward manifestations of their strategy through their conduct, and other market intelligence properly received through customers and the like...
Clearly, the corollary of such propositions is that only reasonable perceptions are relevant.
Now in terms of the evidence before her Honour, there was objectively no credible threat of entry by a private operator at the Port of Newcastle. So, any perception on the NSW Ports consortium’s part of such a threat of entry would not have been reasonable. On that basis any alteration of that perception so as to loosen any constraint it applied to the consortium’s behaviour could not constitute a substantial lessening of competition.
But in any event, the evidence did not support a finding that the NSW Ports consortium perceived or was likely in the counterfactual, that is, in the future world of no compensation provisions, to perceive the Port of Newcastle as a threat.
First, there were two different aspects of the State’s policy of potential interest at the time of the bids for the Port Botany and Port Kembla assets being: (a) whether there could be any second container port whilst Port Botany had capacity; and (b) which port would be second after Port Botany reached capacity. The first aspect remained relevant to the issues before us, but the second aspect was not. The ACCC did not prove a case in relation to Port Kembla. Now there was no evidence that the NSW Ports consortium perceived any real chance that the State would permit the Port of Newcastle to be developed before Port Botany reached capacity. And nothing in the ACCC’s cross-examination of the consortium’s witnesses established otherwise.
Second, it is conceptually wrong to equate, on the one hand, a perceived risk that a bidder considers material to a decision whether to invest and at what price with, on the other hand, a perception that the investor may be competitively constrained in the carrying on of the business once it has been purchased. As the primary judge found, in the context of this particular investment decision the perceived risk would result in a disproportionate discount to the bid price. The evidence was that the bidders, unsurprisingly, were conservative about risk. That fact is relevant to why the risk involving a change to the State’s policy was material to the investor. But that risk could not thereafter be assumed to operate as a similarly material competitive constraint going forward. I agree with the NSW Ports consortium that this conflates different conceptions of materiality. As the consortium put it, a conservative investor is not necessarily a conservative port operator.
Third, the NSW Ports consortium perceived the likelihood of a container terminal being established at the Port of Newcastle to be low, and as her Honour said not necessarily even real. I agree with the consortium that the ACCC cannot salvage from this finding a meaningful prospect of new entry by multiplying the unreal probability by large consequences to obtain a supposedly material risk. Section 45 requires proof of a real chance of a substantial lessening of competition. The magnitude of the consequences of entry for an incumbent do not lower the threshold at which a chance of a substantial lessening of competition becomes meaningful.
I will not linger further. I reject the perceptions case. Let me turn to the second strand of the ACCC’s challenge.
Construction and effect of the compensation provisions in the world with those provisions
Now for the ACCC to succeed in establishing that the NSW Ports consortium was constrained by a perception of a threat of entry by the Port of Newcastle, it had to show that the compensation provisions relieved the consortium from any constraining effect of the alleged perception. But this argument went nowhere.
The compensation provisions did not have any effect of relieving any such constraint. Clauses 3 and 6(d) operated to deny compensation to the NSW Ports consortium for volumes that were lost to the Port of Newcastle where the consortium failed to engage in ordinary competitive behaviour to retain volumes. Let me elaborate by taking cl 3 first.
Now there are two causation pre-conditions in cl 3.3(d) and each performs separate work. I should also say that cl 3.3(e) is relevantly isomorphic although I do not need to discuss cl 3.3(e) further.
The first causal pre-condition being the requirement for a shortage, as defined by reference to the defined term concerning excess, ensures that Port Botany is not compensated for volumes that it loses to the Port of Melbourne or that the Port of Newcastle wins from the Port of Brisbane. This requirement achieves the purpose of ensuring that Port Botany is only compensated for volumes it loses to the Port of Newcastle.
The second causal pre-condition being the requirement to demonstrate both a reasonable and a material causal connection and correlation between the excess and the shortage plays an additional role. And it must be given work to do.
The second pre-condition directs attention to the NSW Ports consortium’s own behaviour. As the consortium correctly submitted, this may be discerned from the purpose of the provisions. Getting full value for the asset sold and purchased required addressing the perceived risk that the State’s policy might change so as to modify the extent of the monopoly for sale by permitting entry at the Port of Newcastle before Port Botany reached capacity. In that scenario, some traffic would inevitably be diverted from Port Botany to the Port of Newcastle. This was traffic that lay within what was described as the incontestable hinterland. If the State’s policy changed and a functional terminal was constructed at the Port of Newcastle, such traffic would fall within the Port of Newcastle’s hinterland. The purpose of the provisions was to stop bidders discounting their bids against this possible reduction in the size of Port Botany’s hinterland and therefore container volumes.
So, such a purpose required discrimination between, on the one hand, containers which the mere fact of entry at the Port of Newcastle would divert from Port Botany’s hinterland and, on the other hand, containers which Port Botany may lose to the Port of Newcastle for other reasons, not because their origins or destinations now lay beyond contest, but because Port Botany had dropped its service levels or increased its prices.
So, in order to demonstrate that the cause of the loss of containers to a new entrant at the Port of Newcastle was the fact of entry, the NSW Ports consortium would have had to satisfy the State that it was entry rather than any lapse or default on the consortium’s part that prompted the diversion.
So, the second causal pre-condition in cl 3.3(d) performed that discriminating function. Compensation was only to be paid for volumes lost to the Port of Newcastle because there was a terminal at the Port of Newcastle, not because of deficiencies in the consortium’s own conduct.
So, compensation being paid was dependent on the NSW Ports consortium demonstrating the requisite causal connection to the reasonable satisfaction of the State. The time at which that was to occur was one or two years after the volumes had been lost. And in order to satisfy the State that the preconditions were met, the consortium had to exclude the possibility that the lost volume was due to its own indifference. I agree with the consortium that it could only do that by engaging in ordinary competitive behaviour, and as though the compensation entitlement did not exist.
I should also note that cl 6(d) operated separately to similar effect.
Further and generally, I agree with the submission of the NSW Ports consortium that a reasonable operator of high fixed-cost infrastructure, not enjoying monopoly profits and subject to price constraints through regulation, when faced with a reduction in throughput, and in the absence of any other means of recovering its costs, would seek to maintain and extend its market and attract whatever volumes it could. That is, it would engage in ordinary competitive conduct. So by requiring the consortium to conduct itself in response to a container terminal at the Port of Newcastle as if it did not have the benefit of the compensation provisions, cll 3.3(d) and 6(d) ensure that the consortium will do just this. In other words, ordinary competitive conduct is not the antithesis of the object of the compensation provisions, but rather is both assumed and required.
In summary, the second matter raised by the ACCC goes nowhere. Let me turn to the final aspect of the ACCC’s challenge on this part of the case.
Whether the reimbursement provision heightened barriers to entry
Now the primary judge found that unless there was a real chance of a container terminal being constructed at the Port of Newcastle whilst Port Botany had capacity, then the cost impost on the PON consortium for every container handled above the relevant threshold would be a mere theoretical cost. In other words, there would be no real chance of the PON consortium ever incurring this cost. Put another way, for the reimbursement provision to have any meaningful effect on the PON consortium’s incentives, there would have had to have been a real commercial chance of entry in a future world without the reimbursement provision.
But there was no such prospect of entry. As the primary judge said, a container terminal at the Port of Newcastle whilst Port Botany had capacity was a mirage. Entry at the Port of Newcastle before Port Botany reached capacity presupposed that viability could be demonstrated, including as a necessary integer of persuading the State to change its policy. But the ACCC did not prove a real chance of this. But even if viability could be shown, the State would then have had to be persuaded to change policy. But as her Honour found, the prospect of the relevant policy changing was variously described as fanciful, far-fetched, infinitesimal or trivial.
Now part of the ACCC’s case proceeded on the basis that likely effects should be assessed from the perspective of a future shareholder of the PON consortium evaluating the marginal costs of operating a terminal after the consortium’s bid for the port had prevailed. But such a proposition was contradicted by expert evidence that was not rejected by her Honour.
Further, the ACCC’s effects case was based on an assessment of future likelihoods at the date when the compensation provisions were entered into. Of course the likely effect of the compensation provisions on barriers to entry at the Port of Newcastle was to be assessed through the standard comparison of forward-looking factual and counterfactual hypotheses by reference to the effect of the compensation provisions upon prospective bidders for the Port of Newcastle, at the time of entry into of, relevantly, the Port Botany PCD.
Now on the primary judge’s findings, the factual future hypothesis from May 2013 encompassed the reimbursement provision. In that factual future hypothesis, a rational prospective private operator of the Port of Newcastle, quantifying the present value of the future cash flows of the asset under sale to fix its bid price, would have brought future liabilities under the reimbursement provision to account. So, the price to be paid for the Port of Newcastle in the factual future hypothesis had to accordingly reflect any effect that the reimbursement provision was anticipated to have on the bidder’s future cash flows.
Now as the NSW Ports consortium correctly submitted, to the extent that the impugned provisions operated to diminish anticipated cash flows, that diminution would rationally have been reflected in the prevailing bidder’s price, which would have been discounted by the net present value of that anticipated liability, and so in the prospective costs as at May 2013 of developing a container terminal at the Port of Newcastle.
But in the counterfactual future hypothesis, where anticipated future cash flows from the Port of Newcastle did not require adjustment for future liabilities under the impugned provisions, bid prices would not have been reduced by the present value of those liabilities. But the corollary of those liabilities not being present in the counterfactual future hypothesis would have been that no discount would rationally have been applied to bid prices in the counterfactual. Bid prices would have increased in the counterfactual future hypothesis by the same amount of their reduction in the factual future hypothesis on account of the impugned provisions.
So, I agree with the NSW Ports consortium that in essence the relevant costs associated with developing a container terminal at the Port of Newcastle, assessed as it must be as at May 2013, was accordingly the same in the factual future hypothesis as in the counterfactual future hypothesis.
In summary, this part of the ACCC’s challenge must also fail.
Cross-Appeal
Now the NSW Ports consortium also cross-appeals from the dismissal of their cross-claim. The cross-appeal, like the cross-claim below, arises only if the ACCC establishes a likely effect of substantially lessening competition in the circumstances of both the compensation provisions and the reimbursement provision. But the consortium says that if there is such a likely effect, that is not a likely effect of the compensation provisions, but of the reimbursement provision for which the consortium cannot be liable.
Now for the cross-appeal to have been enlivened, I would need to have concluded that the primary judge should have found that the relevant provisions of the CCA did apply to the State and the NSW Ports consortium and that the compensation provisions had the likely effect of substantially lessening competition. But as is apparent from what I have already said, I have not so concluded.
But let me assume for the moment that I had so concluded. Is there any substance in the NSW Ports consortium’s cross-appeal?
The NSW Ports consortium points out that the primary judge found that as at May 2013 when the compensation provisions were made, a future reimbursement obligation attached to the sale of Newcastle was a highly probable prospect. Her Honour also said that a substantial lessening of competition occasioned by that likely reimbursement obligation was a likely effect of the compensation provisions within the meaning of s 45. The consortium says that that latter step involved error.
The NSW Ports consortium says that where impugned conduct makes future illegal conduct factually likely but not legally required, any illegal effects of that subsequent voluntary conduct ought not to be treated as effects of the prior conduct actionable under s 45. Two reasons are advanced for the consortium’s contention.
First, it is said that on the necessary assumption that the future reimbursement provision will substantially lessen competition, s 4L of the CCA must be brought to account. The effect of s 4L is that the provision will be invalid and unenforceable and severed from the contract. The invalidity and unenforceability would apply from the point in time of the inclusion of the provision. Looked at prospectively from May 2013, the future reimbursement provision would be illegal and would therefore not be permitted by law to have the effect of substantially lessening competition. Therefore it is said that that effect cannot be an effect of the compensation provisions.
Now the NSW Ports consortium accepts that it would be absurd for a person who makes an illegal contract to avoid the legal consequences that attach to that illegality because of those very consequences. But they say that the analysis called for here is at a step removed. It is whether the compensation provisions contravene s 45 because a subsequent contract, made by different parties, albeit as a probable response to the compensation provisions, has an illegal effect. The consortium says that in analysing that future illegal effect, the primary judge ought not to have put aside the legal consequences that the CCA attaches to that future illegality. It says that those legal consequences, namely, severance, are as essential as the factual circumstances are when postulating the hypothetical future with the compensation provisions.
Second, the NSW Ports consortium says that s 45 does not operate to make a corporation responsible for a likely effect of its contract that involves independent illegal conduct of other parties. The consortium prayed in aid Smith v Leurs (1945) 70 CLR 256 where Dixon J said (at 262):
…It is … exceptional to find in the law a duty to control another’s actions to prevent harm to strangers. The general rule is that one man is under no duty of controlling another man to prevent his doing damage to a third…
The NSW Ports consortium says that the primary judge wrongly set aside this principle on the basis that the issue did not concern any duty on the consortium. That was said to be erroneous on at least two levels. It was said by the consortium that this case concerns an alleged duty, backed by penalties, on the NSW Ports consortium not to make the compensation provisions because, in the future, the PON consortium and the State were likely to make a different and illegal contract. Further, it was said by the consortium that this policy of the law extends beyond narrow conceptions of duty and is based upon considerations of practicality and fairness, and may have application in contexts where there is an inter-relationship between questions of legal responsibility and causation.
So the NSW Ports consortium says that just as assessments of legal causation involve value judgments about the appropriate scope of legal responsibility, so the concern of competition law with effects or likely effects, accompanied by penalties, may involve similar value judgments about the appropriate limits of legal responsibility.
And merely because a “but for” analysis may point to unlawful conduct by third parties being an effect of prior conduct, the NSW Ports consortium says that it does not follow that the illegal results of that conduct are to be treated under s 45 as effects or likely effects of the prior conduct.
Further, the NSW Ports consortium says that this policy of the law can be seen to have been implemented in various authorities recognising that hypothetical scenarios which must be assessed to determine likely effects should not be populated with illegal conduct. It is said that in constructing hypothetical states for legal comparison, it is not appropriate to assume that illegal conduct will be engaged in.
Now both futures to be posited in an effects analysis under s 45, namely, the “future with” and the “future without” the impugned provision, involve forward-looking hypothesis. It is a matter of comparing two hypothetical worlds. And the NSW Ports consortium says that once it is recognised that in a s 45 effects analysis both factual and counterfactual scenarios are hypothetical, neither scenario is exempt from the principle that positing unlawful conduct in hypothetical scenarios is impermissible.
The NSW Ports consortium says that the primary judge should therefore have excluded unlawful conduct by the PON consortium and the State from the posited hypothetical future with the compensation provisions.
Further, it is said that this approach is supported by common-sense notions of likely effect and avoids unjust and unreasonable outcomes. The NSW Ports consortium says that on the primary judge’s approach, lawful agreements which are apt to elicit obvious commercial responses by others in contravention of s 45 are liable to be invalidated and their makers liable to penalty. It is said that even pro-competitive measures would be outlawed if a likely response was anti-competitive conduct. And it is said that these outcomes would eventuate even in circumstances where one or both parties to the initiating event did not participate in or even foresee the responsive contravention.
Further, the NSW Ports consortium says that the primary judge wrongly found that to penalise the consortium for any proven anti-competitive effect of the reimbursement provision would be to hold it responsible for the likely effects of its own conduct, when those effects could not be brought about without the independent, voluntary intervention of the State and the PON consortium in making the reimbursement provision.
Analysis
Now the NSW Ports consortium’s cross-appeal does not challenge the primary judge’s findings that the reimbursement provision was a natural and factual consequence of the compensation provisions.
Rather, the NSW Ports consortium contends that if it had been found that the compensation provisions were contrary to s 45 by reason of having the likely effect of substantially lessening competition, then the primary judge erred in considering that any substantial lessening of competition occasioned by the reimbursement provision was a likely effect of the compensation provisions. This error is said to arise because it is impermissible to have regard to the alleged illegal operation of the reimbursement provision, even if as a factual matter the reimbursement provision was the probable consequence of the compensation provisions and had the likely effect of substantially lessening competition.
But I would reject this contention for the following reasons.
First, it is a question of fact as to whether a particular provision was likely to have the effect of substantially lessening competition. As such, I agree with the ACCC that it would be wrong to impose on that factual inquiry unnecessary constraints by reason of a priori assumptions. The primary judge correctly noted that her task was to determine a question of objective fact. She found that in considering the effect of the compensation provisions it was not illegitimate to have regard to the fact that the reimbursement provision was the likely effect of the compensation provisions. In my view this correct outcome accords with her Honour’s finding about the genesis of the reimbursement provision and with the point that if the compensation provisions did not exist, then the reimbursement provision would not exist.
Second, the NWS Ports consortium contends that the primary judge’s approach to s 4L of the CCA involved error. In this connection, the consortium contends that the effect of s 4L is to render invalid an impugned provision from the time of its inclusion in the relevant contract. It further contends that as at the time of entry into of the compensation provisions, the reimbursement provision looked at in the future would be illegal and would not be permitted by law. Consequently, it is said that any anti-competitive effect of the reimbursement provision cannot be brought to account in respect of the compensation provisions.
But this contention ignores at a factual level the connection between the compensation provisions and the reimbursement provision, and treats legal norms as if they could automatically change facts including in hypothetical scenarios.
Further, s 4L does not require one to exclude from analysis the factual effects of particular actions. As the primary judge noted, such an interpretation and application of s 4L would eviscerate s 45. If one was to exclude from the purview of any effects analysis a likely consequence of a contractual provision, then many potential anti-competitive provisions would be excluded from the operation of s 45 provided that they were severable. Now although s 4L provides the legal rule which governs the consequences of a contravention of inter-alia s 45, it does not dictate that in assessing factual and counterfactual scenarios relevant to the operation of s 45 it is to be assumed that any contracts apply in the restricted manner described in s 4L, notwithstanding the factual finding as to the nature of those contracts.
Third, although the NSW Ports consortium has suggested a distinction between the immediate effect of a contract as substantially lessening competition and a consequential effect of substantially lessening competition by reason of a process involving intermediate steps, I agree with the ACCC that this distinction is illusory and finds no reflection in the statutory language. Indeed, the fact that the focus of the inquiry is on likely effect necessarily requires an assessment of the consequences of the provision, which mandates analysis of the factual consequences that flow from the provision.
Fourth, although the NSW Ports consortium contends that there is a policy of the law that a corporation should not be held responsible for a likely effect of its contract where that effect involves independent illegal conduct of other parties, to attempt to exclude from the operation of s 45 certain effects of conduct by reference to such a policy would be to create a gloss on the words of the statute that is neither justified in the text nor warranted by the policy underlying it. Moreover, the policy that was referred to by Dixon J in Smith was described in circumstances where what was being considered was whether there was a duty to control other persons or prevent them from causing harm. But that is an irrelevant scenario in the present context. The necessary statutory task under s 45 is to assess the likely effects of a particular contractual provision. A finding that one such effect involves the subsequent actions of other parties does not involve the imposition of a duty to control such other parties’ actions. Further, and assuming for the sake of the argument that the ACCC had not failed on its appeal, this is not a situation where the consortium may have been held liable for the self-standing creation of the reimbursement provision. Nor would it have been a matter of making the consortium legally responsible for the actions of others. Rather, it would have been a case where the consortium would have been held liable for the effects of its own conduct.
In summary, although the NSW Ports consortium has sought to characterise the entry into of the reimbursement provision as independent illegal conduct of other parties, the reimbursement provision was not independent of the compensation provisions. It followed on from the compensation provisions. And the terms of the reimbursement provision depended for its operation on the compensation provisions. And in any event and contrary to what the consortium has asserted, there is no general principle that in assessing the effects of anti-competitive conduct it is necessary to exclude from consideration conduct that might itself be unlawful.
So, if the ACCC’s appeal had been allowed on grounds 3, 8, 9 and 10, I would in any event have dismissed the cross-appeal.
Conclusion
For the foregoing reasons, both the appeal and the cross-appeal must be dismissed. I otherwise agree with the orders proposed by Allsop CJ.
I certify that the preceding two hundred and ninety-four (294) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach. Associate:
Dated: 23 February 2023
SCHEDULE OF PARTIES
NSD 751 of 2021 Respondents
Fourth Respondent:
STATE OF NEW SOUTH WALES
Fifth Respondent:
PORT OF NEWCASTLE OPERATIONS PTY LIMITED ACN 165 332 990
Sixth Respondent:
PORT OF NEWCASTLE INVESTMENTS (PROPERTY) PTY LIMITED ACN 169 286 024
Seventh Respondent:
PORT OF NEWCASTLE INVESTMENTS PTY LIMITED ACN 169 132 441
Cross-Appellants
Second Cross-Appellant:
PORT BOTANY OPERATIONS PTY LTD ACN 161 204 342
Third Cross-Appellant:
PORT KEMBLA OPERATIONS PTY LTD ACN 161 246 582
Cross-Respondents
Second Cross-Respondent
PORT OF NEWCASTLE OPERATIONS PTY LIMITED ACN 165 332 990
Third Cross-Respondent
PORT OF NEWCASTLE INVESTMENTS (PROPERTY) PTY LIMITED ACN 169 286 024
Fourth Cross-Respondent
PORT OF NEWCASTLE INVESTMENTS PTY LIMITED ACN 169 132 441
Fifth Cross-Respondent
STATE OF NEW SOUTH WALES
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