Australian Competition and Consumer Commission v NSW Ports Operations Hold Co Pty Ltd
[2021] FCA 720
•29 June 2021
FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v NSW Ports Operations Hold Co Pty Ltd [2021] FCA 720
File number: NSD 2289 of 2018 Judgment of: JAGOT J Date of judgment: 29 June 2021 Catchwords: COMPETITION – privatisation of Port Botany and Port Kembla – port commitment deeds – where provisions of deeds require the State to compensate port operators if container volumes above specified threshold divert to possible container terminal at the Port of Newcastle – alleged contravention of s 45 of the Competition and Consumer Act 2010 (Cth) – whether hypothetical container terminal at Port of Newcastle would operate in same market as Port Botany or Port Kembla – relevant market existing monopoly market for container terminal services in New South Wales – whether compensation provisions had purpose, effect or likely effect of substantially lessening competition – no likely anti-competitive effect of compensation provisions – where provision of port commitment deed relating to privatisation of the Port of Newcastle required port operator to reimburse the State for compensation paid under Port Botany or Port Kembla deeds – whether reimbursement provisions had purpose, effect or likely effect of substantially lessening competition – no likely anti-competitive effect of reimbursement provisions.
STATUTORY INTERPRETATION – Crown immunity – whether s 45 of the Competition and Consumer Act 2010 (Cth) applies to State making and giving effect to port commitment deeds – whether State entering or giving effect to compensation provisions was “carrying on business”– privatisation of ports giving effect to government policy – Crown immunity – whether s 45 applied to first to third respondents making or giving effect to port commitment deeds – derivative Crown immunity – whether application of s 45 to first to third respondents would adversely affect proprietary right or interest of the Crown – where Treasurer had statutory rights to enter privatisation transactions – where legislative intention that statutory rights allow acts necessary or convenient to enter transactions – where compensation provisions necessary or convenient to effect privatisation transactions – s 45 inapplicable by operation of derivative Crown immunity.
Legislation: Competition and Consumer Act 2010 (Cth) ss 2, 2A, 2B, 4, 4E, 4F, 4G, 4L, 45, 51
Competition Policy Reform Act 1995 (Cth)
Competition Policy Reform (New South Wales) Act 1995 (NSW)
Environmental Planning and Assessment Act 1979 (NSW) ss 1.3, 1.4, 4.22, 5.12, 5.14, 5.16, 5.19, 5.23, 5.24, 5.27
Independent Pricing and Regulatory Tribunal Act 1992 (NSW) s 4
Ports and Maritime Administration Act 1995 (NSW) ss 6, 7, 8, 9, 10, 10A, 10B, 12, 13, 16, 17, 21, 47, 61, 62, 67, 77, 78, 80, 81
Ports Assets (Authorised Transactions) Act2012 (NSW) ss 3, 4, 5, 6, 7, 9, 11, 20, 21, 25, 32, 33, 34, 35, 36
State Owned Corporations Act 1989 (NSW) ss 3, 20C, 20E, 20F, 20H, 20I, 20N, 20O, 20P, 20Q, 20R, 20S, 20X, 20Y, Sch 5
Cases cited: Air New Zealand Ltd v Australian Competition and Consumer Commission [2017] HCA 21; (2017) 262 CLR 207
ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) [1990] FCA 710; (1990) 27 FCR 460
Australia Meat Holdings Pty Ltd v Trade Practices Commission [1989] ATPR 50,082
Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99
Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited [2015] FCAFC 103; (2015) 236 FCR 78
Australian Competition and Consumer Commission v Australian Competition Tribunal [2017] FCAFC 150; (2017) 254 FCR 341
Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2006] FCAFC 128; (2006) 153 FCR 574
Australian Competition and Consumer Commission v Baxter Healthcare Pty Limited [2007] HCA 38; (2007) 232 CLR 1
Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2008] FCAFC 141; (2008) 170 FCR 16
Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2013] FCA 909; (2013) 310 ALR 165
Australian Competition and Consumer Commission v Flight Centre Travel Group Limited [2016] HCA 49; (2016) 261 CLR 203
Australian Competition and Consumer Commission v Liquorland (Australia) Pty Ltd [2006] FCA 826
Australian Competition and Consumer Commission v Pacific National Pty Limited [2020] FCAFC 77; (2020) 277 FCR 49
Australian Competition and Consumer Commission v Pacific National Pty Limited (No 2) [2019] FCA 669
Australian Competition and Consumer Commission v Yazaki Corporation [2018] FCAFC 73; (2018) 262 FCR 243
Australian Gas Light Company v Australian Competition & Consumer Commission (No 3) [2003] FCA 1525; (2003) 137 FCR 317
Bass v Permanent Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334
Boral Besser Masonry Limited (now Boral Masonry Ltd) v Australian Competition and Consumer Commission [2003] HCA 5; (2003) 215 CLR 374
Bradken Consolidated Ltd v The Broken Hill Proprietary Company Ltd [1979] HCA 15; (1979) 145 CLR 107
Brophov Western Australia [1990] HCA 24; (1990) 171 CLR 1
Carlton & United Breweries (NSW) Pty Ltd v Bond Brewing New South Wales Ltd [1987] FCA 640; (1987) 16 FCR 351
Carr v Western Australia [2007] HCA 47; (2007) 232 CLR 138
Construction Forestry Mining & Energy Union v Mammoet Australia Pty Ltd [2013] HCA 36; (2013) 248 CLR 619
Cool & Sons Pty. Limited v. O’Brien Glass Industries Limited [1981] FCA 99; (1981) 35 ALR 445
Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd [1982] FCA 193; (1982) 44 ALR 173
Davids Holdings Pty Ltd v Attorney-General (Cth) (1994) 49 FCR 211
Dowling v DalgetyAustralia Ltd (1992) 34 FCR 109
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Hannes v Director of Public Prosecutions(Cth) (No 2) [2006] NSWCCA 373; (2006) 165 A Crim R 151
Hecar Investments No. 6 Pty. Limited v. Outboard Marine Australia Pty. Limited [1982] FCA 114; (1982) 41 ALR 697
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
JS McMillan Pty Ltd v Commonwealth [1997] FCA 619; (1997) 77 FCR 337
Lewis v Australian Capital Territory [2020] HCA 26; (2020) 381 ALR 375
McGraw-Hinds (Aust) Pty Ltd v Smith [1979] HCA 19; (1979) 144 CLR 633
Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountantsin Australia [2002] FCAFC 197; (2002) 122 FCR
Murphy v State of Victoria [2014] VSCA 238; (2014) 45 VR 119
News Limited v South Sydney District Rugby League Football Club Limited [2003] HCA 45; (2003) 215 CLR
NT Power Generation v Power & Water Authority [2002] FCAFC 302; (2002) 122 FCR 399
NT Power Generation Pty Ltd v Power and Water Authority [2004] HCA 48; (2004) 219 CLR 90
Ogden Industries Pty Ltd v Lucas [1967] HCA 30; (1967) 116 CLR 537
Outboard Marine Australia Pty Ltd v Hecar Investments No 6 Pty Ltd [1982] FCA 285; (1982) 44 ALR 667
Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6; (1989) 167 CLR 177
Radio 2UE Pty Ltd v Stereo FM Pty Ltd [1982] FCA 223; (1982) 44 ALR 557
Re Howard Smith Industries Pty Ltd and Adelaide Steamship Industries Pty Ltd (1977) 15 ALR 645
Re Queensland Co‑operative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 8 ALR 481
Re Residential Tenancies Tribunal (NSW); Ex parte Defence Housing Authority [1997] HCA 36; (1997) 190 CLR 410
Re Tooth & Co Ltd (1979) 39 FLR 1
Rural Press Ltd v Australian Competition and Consumer Commission [2002] FCAFC 213; (2002) 118 FCR 236
Rural Press Limited v Australian Competition and Consumer Commission [2003] HCA 75; (2003) 216 CLR 53
Seven Network Ltd v News Ltd [2007] FCA 1062
Seven Network Ltd v News Ltd [2009] FCAFC 166; (2009) 182 FCR 160
Singapore Airlines Ltd v Taprobane Tours WA [1991] FCA 808; (1991) 33 FCR 158
Smith v Capewell [1979] HCA 48; (1979) 142 CLR 509
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Software AG (Aust) Pty Ltd v Racing and Wagering Western Australia [2009] FCAFC 36; (2009) 175 FCR 121
SPAR Licensing Pty Ltd v MIS Qld Pty Ltd (No 2) [2012] FCA 1116; (2012) 298 ALR 69
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Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 1381; (2000) ATPR 41-783
Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 38; (2000) ATPR 41-752
Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607
Trade Practices Commission v CSR Ltd [1990] FCA 521; (1991) 13 ATPR 41-076
Trade Practices Commission v TNT Management Pty Ltd [1985] FCA 19; (1985) 6 FCR 1
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Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Economic Regulator, Competition and Access Number of paragraphs 1634 Dates of hearing: 12 October – 29 October 2020; 1 December – 17 December 2020 Date of further submissions: 18 March 2021; 16 April 2021; 28 April 2021, 29 April 2021 Counsel for the Applicant:
Mr M Borsky QC, Mr R Yezerski, Mr A Barraclough, Ms A Muhlebach and Ms J Watson Solicitor for the Applicant: Australian Government Solicitor Counsel for the First, Second and Third Respondents / Cross-Claimants: Mr N Hutley SC, Dr RCA Higgins SC, Mr B Lim and Mr T Rogan Solicitor for the First, Second and Third Respondents / Cross-Claimants: Gilbert + Tobin Counsel for the Fourth Respondent/Cross-Respondent: Mr SJ Free SC and Mr IJM Ahmed Solicitor for the Fourth Respondent/Cross-Respondent: Minter Ellison Lawyers Counsel for the First, Second and Third Cross-Respondents: Mr G Rich SC and Mr B Hancock Solicitor for the First, Second and Third Cross-Respondents: Allens Linklaters ORDERS
NSD 2289 of 2018 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
Applicant
AND: NSW PORTS OPERATIONS HOLD CO PTY LTD ACN 163 262 351
First Respondent / Cross-Claimant
PORT BOTANY OPERATIONS PTY LTD ACN 161 204 342
Second Respondent / Cross-Claimant
PORT KEMBLA OPERATIONS PTY LTD ACN 161 246 582
Third Respondent / Cross-Claimant
STATE OF NEW SOUTH WALES
Fourth RespondentAND: PORT OF NEWCASTLE OPERATIONS PTY LIMITED ACN 165 332 990
First Cross-Respondent
PORT OF NEWCASTLE INVESTMENTS (PROPERTY) PTY LIMITED ACN 169 286 024
Second Cross-RespondentPORT OF NEWCASTLE INVESTMENTS PTY LIMITED ACN 169 132 441
Third Cross-RespondentSTATE OF NEW SOUTH WALES
Fourth Cross-RespondentTHE COURT ORDERS BY CONSENT THAT:
1.Subject to the orders below and to further order of the Court, pursuant to s 37AI of the Federal Court of Australia Act 1976 (Cth), the reasons for judgment in this matter not be disclosed to or published by any person save for the persons identified in order 2 of the Confidentiality Orders made by Jagot J on 26 March 2020, being:
(a)Court staff and any other person assisting the Court;
(b)the Commission, Commission staff and barristers and external solicitors retained by the Commission for the purpose of the Proceedings;
(c)barristers and the External Solicitors retained by the Respondents or Cross-respondents for the purpose of the Proceedings;
(d)any mediator appointed by the Court in relation to the Proceedings; and
(e)Support Staff of the persons listed in sub-paragraphs (a)-(c).
2.To the extent that the reasons for judgment refer to Confidential Information of a Confidentiality Claimant (as defined by the Confidentiality Orders made by Jagot J on 26 March 2020), an extract from the reasons for judgment containing that Confidential Information may be disclosed to the relevant Confidentiality Claimant for the purpose of obtaining instructions as to whether the Confidentiality Claimant intends to maintain its claim.
3.No later than 2 business days following delivery of the reasons for judgment, the parties’ external legal advisors are to provide to one another a copy of the reasons for judgment which identifies any material pertaining to their client or a third party that is subject to an existing confidentiality claim under the Confidentiality Orders made by Jagot J on 26 March 2020. Such identification is to make clear:
(a)the relevant Confidentiality Claimant; and
(b)whether the material is proposed to be redacted because it is ‘External Only Confidential’, ‘Highly Confidential’, ‘Confidential’ or ‘Value Impact Information’ within the meaning of the Confidentiality Orders made by Jagot J on 26 March 2020 or for another reason.
4.No later than 4 business days following delivery of the reasons for judgment, the parties’ external legal advisors are to respond to the copies of the reasons for judgment provided pursuant to order 3 above, identifying:
(a)any proposed redactions that are agreed; and
(b)any proposed redactions that are not agreed.
5.No later than 7 business days following delivery of the reasons for judgment, the parties’ external legal advisors are to jointly provide the Court with agreed versions of the reasons for judgment reflecting redaction of different material (‘External Only Confidential’, ‘Highly Confidential’, ‘Confidential’ or ‘Value Impact Information’) for the purpose of facilitating the making of such interim orders as may be appropriate to permit those versions to be published to persons entitled to receive them consistent with the Confidentiality Orders made by Jagot J on 26 March 2020 and any further orders.
6.Order 1(h)(iii) of the Confidentiality Orders made by Jagot J on 26 March 2020 be replaced with ‘Michael Jessup and Joe Dowling for the PON.’
7.The proceeding be listed for case management on a date to be confirmed in consultation with the parties to consider the appropriate course in relation to any non-publication or suppression orders under s 37AF of the Federal Court of Australia Act 1976 (Cth).
THE COURT ORDERS THAT:
8.The originating application be dismissed.
9.The cross-claim be dismissed.
10.The parties confer and file agreed or competing proposed orders as to costs within 14 days.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
JAGOT J:
1 INTRODUCTION
[1]
2 BASIC FACTS
[13]
2.1 Participants in the container port supply chain
[14]
2.2 Container shipping
[15]
2.3 Required approvals for a container terminal
[30]
2.4 Ports
[31]
2.5 Transactions and events
[53]
2.6 PON’s preliminary business case
[205]
2.7 ACCC’s contentions about basic facts
[256]
3 CROWN IMMUNITY
[287]
3.1 Statutory provisions
[287]
3.2 Authorities
[298]
3.3 ACCC’s/PON’s submissions
[311]
3.3.1 Crown immunity submissions
[311]
3.3.2 Derivative Crown immunity submissions
[330]
3.4 Consideration
[337]
3.4.1 Crown immunity
[337]
3.4.2 Derivative Crown immunity
[355]
4 WITNESSES
[425]
4.1 Lay witnesses
[425]
4.2 Expert witnesses
[439]
5 MARKET
[446]
5.1 Principles relevant to market definition
[446]
5.2 Some preliminary observations
[466]
5.2.1 Issues
[466]
5.2.2 A key dispute about the market
[472]
5.2.3 The relevant hypothesis about a container terminal at the Port of Newcastle
[478]
5.2.4 Some basic propositions about the market
[491]
5.3 Industry participants
[519]
5.3.1 General
[519]
5.3.2 The use of terms such as “competition”, “substitution” and “market”
[531]
5.3.3 The bidding process
[535]
5.3.4 The s 155 notice
[541]
5.3.5 Oral and documentary evidence – NSW Ports
[551]
5.3.6 Oral and documentary evidence – PON
[583]
5.3.7 Industry experts
[598]
5.3.8 Port of Tauranga and Port of Auckland
[610]
5.3.9 Consideration
[615]
5.4 Economists
[653]
5.4.1 Summary of Mr Smith’s evidence about the market
[654]
5.4.1.1 General
[654]
5.4.1.2 Ports
[659]
5.4.1.3 Stevedores
[667]
5.4.1.4 Port Botany and the Port of Newcastle
[671]
5.4.1.5 Reply report
[681]
5.4.2 Summary of Dr Pleatsikas’s evidence about the market
[686]
5.4.2.1 General
[686]
5.4.2.2 Port Botany, Port Kembla and the Port of Newcastle
[689]
5.4.3 Summary of Mr Ockerby’s evidence about the market
[708]
5.4.3.1 General
[708]
5.4.3.2 Port Botany and the Port of Newcastle – overview
[712]
5.4.3.3 Port Botany and the Port of Newcastle – analysis
[715]
5.4.3.4 Reply to Mr Smith
[734]
5.4.3.5 Reply to Dr Pleatsikas
[745]
5.4.4 Summary of Mr Balchin’s evidence about the market
[747]
5.4.4.1 General
[748]
5.4.4.2 Ports
[749]
5.4.4.3 Port Botany and the Port of Newcastle
[757]
5.4.5 Economists’ joint report
[769]
5.4.6 Economists’ oral evidence
[771]
5.4.7 Consideration
[825]
6 RELEVANT PRINCIPLES - PROSCRIBED PURPOSE AND EFFECT
[894]
6.1 Substantially lessening competition
[894]
6.2 Purpose
[904]
6.3 Likely effect
[915]
7 PURPOSE OF COMPENSATION PROVISIONS
[926]
7.1 Overview
[926]
7.2 Consideration
[931]
8 LIKELY EFFECTS OF IMPUGNED PROVISIONS
[981]
8.1 Some facts and considerations
[981]
8.2 Required exercise
[1031]
8.3 May 2013/May 2014
[1045]
8.4 Likely effect on the State/public operator
[1070]
8.5 Likely effect on NSW Ports
[1105]
8.6 Likely effect on private operator/PON
[1130]
8.6.1 Preliminary observations
[1130]
8.6.2 ACCC’s 10 supporting propositions
[1141]
8.6.2.1 Increasing volumes of containers
[1145]
8.6.2.2 Port Botany’s capacity
[1147]
8.6.2.3 Port Botany road congestion
[1160]
8.6.2.4 Newcastle area container demand
[1163]
8.6.2.5 Suitability of the Port of Newcastle for a container terminal
[1169]
8.6.2.6 Planning approvals
[1172]
8.6.2.7 Capacity to accommodate larger vessels
[1195]
8.6.2.8 Attitude of shipping lines
[1201]
8.6.2.9 PON’s need to diversify
[1203]
8.6.2.10 NSC/MDC proposal
[1211]
8.6.2.11 ACCC’s conclusions
[1212]
8.6.3 ACCC’s reliance on subsequent events
[1222]
8.7 The case for a container terminal at the Port of Newcastle
[1226]
8.7.1 Preliminary observations
[1226]
8.7.2 Other evidence relevant to viability – before May 2014
[1237]
8.7.3 Other relevant matters
[1242]
8.7.4 Ms Calfas’s evidence
[1278]
8.7.5 PON - consultants’ reports
[1281]
8.7.5.1 Preparation of the PON consultants’ reports
[1281]
8.7.5.2 Content of the PON consultants’ reports
[1298]
8.7.5.3 McKinsey & Co September 2020 email
[1364]
8.7.5.4 Conclusions about the PON consultants’ reports
[1365]
8.7.6 The PON PBC
[1397]
8.7.6.1 Content of the PBC
[1397]
8.7.6.2 Abandonment of the PBC?
[1402]
8.7.6.3 Shipping lines subsidising transport to Sydney
[1408]
8.7.6.4 Shipping lines providing regular and sufficient connectivity
[1418]
8.7.6.5 New distribution centres co-locating
[1430]
8.7.6.6 Initial single berth terminal
[1453]
8.7.6.7 Planning approvals required
[1460]
8.7.6.8 Shareholder support required
[1463]
8.7.7 The industrial and economic experts
[1471]
8.7.8 PON’s submissions
[1490]
8.7.9 Some further evidence of Dr Pleatsikas
[1564]
8.7.10 Other submissions by NSW Ports
[1566]
8.7.10.1 Likely effect of the compensation provisions alone
[1566]
8.7.10.2 Port Kembla (again)
[1580]
8.7.11 Key conclusions
[1582]
8.7.12 Further issues
[1612]
9 ORDERS
[1634]
SCHEDULE 1 – EXTRACTS FROM COMPENSATION AND REIMBURSEMENT PROVISIONS
1. INTRODUCTION
The Australian Competition and Consumer Commission (the ACCC) contends that compensation provisions in two Port Commitment Deeds (PCDs) entered into by the State of New South Wales (the State) and the first and second respondents (the Port Botany PCD) and the State and the first and third respondents (the Port Kembla PCD) had the purpose and/or effect or likely effect of substantially lessening competition. The ACCC alleges that, as a result, the first and second respondents (Hold Co and Botany Operator respectively) contravened s 45(2)(a)(ii) of the Competition and Consumer Act 2010 (Cth) as in force on 31 May 2013 (CCA) by making the Port Botany PCD, and the first and third respondents (Hold Co and Kembla Operator respectively) contravened the same provision by making the Port Kembla PCD. The first to third respondents are collectively referred to below as NSW Ports. The ACCC also alleges that the effect or likely effect of giving effect to the compensation provisions would be to substantially lessen competition in contravention of s 45(2)(b) of the CCA. The ACCC seeks pecuniary penalties in respect of the alleged contraventions of the CCA and permanent injunctions preventing NSW Ports from giving effect to the compensation provisions in the future.
NSW Ports are also cross-claimants against the first to third cross-respondents, Port of Newcastle Operations Pty Limited, Port of Newcastle Investments (Property) Pty Limited and Port of Newcastle Investments Pty Limited (collectively, PON), and the fourth cross-respondent, the State. NSW Ports contend that if they are not entitled to so-called “derivative Crown immunity” as a result of which s 45 of the CCA does not apply to the impugned provisions and the Court concludes that the reimbursement provisions in the Port Commitment Deed entered into between the State and the PON parties (the Newcastle PCD) (by which PON agrees to reimburse the State in relation to liability under the compensation provisions in the Port Botany PCD and the Port Kembla PCD) has the effect or would be likely to have the effect of substantially lessening competition, then the reimbursement provisions should be set aside and severed from the Newcastle PCD. The consequence, NSW Ports say, is that there would be no occasion to grant the relief sought by the ACCC against NSW Ports.
NSW Ports are a consortium involving Global Infrastructure Partners (GIP) and Industry Funds Management (IFM).
PON is owned by two 50% shareholders, Gardior Pty Ltd (Gardior), which is the trustee for The Infrastructure Fund (TIF), and China Merchant Port Holdings Co, Ltd (CM Ports). Macquarie Infrastructure and Real Assets (MIRA) manages TIF and Gardior’s investment in PON.
Accordingly, the ACCC seeks relief only against NSW Ports. Hold Co is the corporate vehicle through which the NSW Ports consortium acquired its interest in Port Botany and Port Kembla. Botany Operator and Kembla Operator are wholly-owned subsidiaries of Hold Co.
NSW Ports deny that the ACCC is entitled to the relief it seeks against them and, if the two identified pre-conditions are satisfied (they are not entitled to derivative Crown immunity and the Court concludes that a reimbursement provision in the Newcastle PCD has the effect or would be likely to have the effect of substantially lessening competition), seek relief by their cross-claim against PON.
Relevant extracts from the compensation and reimbursement provisions are reproduced in Sch 1.
The compensation provisions concern the potential operation of a prospective container terminal at the Port of Newcastle during the 50 year term of the PCDs while the container terminals at Port Botany have capacity or a prospective container terminal at Port Kembla has capacity. They provide for the State to pay compensation to NSW Ports for containers diverted from Port Botany (or a container terminal at Port Kembla, if one exists) to a container terminal at the Port of Newcastle (if one exists) above a specified threshold amount. The reimbursement provisions require PON to indemnify the State for payments under the compensation provisions.
I have concluded that the ACCC’s originating application and NSW Ports’ cross-claim must be dismissed. NSW Ports have the benefit of “derivative Crown immunity” in respect of the compensation provisions so that s 45 of the CCA does not apply to NSW Ports in making or giving effect to those provisions. If this is incorrect and the compensation provisions are subject to s 45 of the CCA then, in any event, the purpose of the compensation provisions was not to substantially lessen competition. The likely effect of the making of the compensation provisions was not to substantially lessen competition. The likely effect of giving effect to the compensation provisions in the future will not be to substantially lessen competition.
To the contrary, the position without the compensation provisions as at May 2013 (the date when they were made) and today’s date (after which they may be given effect) is the same as the position with the compensation provisions – PON had and has mere speculative hopes that it might be able to: (a) satisfy its board, its shareholders and the NSW government that a container terminal at the Port of Newcastle while Port Botany has capacity might be viable, and/or (b) persuade the NSW government to change the State policy which has been in place since July 2012, which is to the effect that no new container terminal should be developed in NSW until Port Botany has reached capacity and, when that occurs, the next container terminal should be developed at Port Kembla, not the Port of Newcastle. These mere speculative hopes were and remain far-fetched and fanciful on the evidence, and were and are not a real chance or real possibility. As such, there was and is not any credible threat of entry by PON into the pleaded market for Container Port Services in New South Wales (NSW).
Further, the position with and without the compensation provisions is also otherwise the same. The compensation provisions as at May 2013 had and as at today’s date will have no likely effect on any other aspect of competition, including: (a) any incentives of the State, a public authority, or a prospective private operator of the Port of Newcastle in respect of a prospective container terminal at the Port of Newcastle, or (b) any incentives of NSW Ports in respect of a prospective container terminal at the Port of Newcastle.
While the reimbursement provisions challenged by NSW Ports (if their defence otherwise fails) are a likely effect of the compensation provisions, PON too has the benefit of “derivative Crown immunity” in respect of the reimbursement provisions, so that s 45 of the CCA does not apply to PON in making or giving effect to those provisions. Further, the position without the reimbursement provisions also would be the same as the position with the reimbursement provisions.
2. BASIC FACTS
The following summary is largely taken from the parties’ submissions to the extent that they record facts not in dispute and from the statement of agreed facts. It also includes other parts of the evidence not in dispute.
2.1 Participants in the container port supply chain
Ports are one part of a total supply chain for the import and export of containers. The supply chain includes shipping lines, shippers, port authorities, towage operators, line operators, shipping agents, stevedores, freight forwarders, transport operators, intermodal operators, empty container park operators, and container packing/unpacking facilities.
2.2 Container shipping
Many Australian exports and imports are shipped by sea. The cargo can be carried in many forms. One form is containers. Containerised cargo is shipped in standardised steel boxes. A TEU (Twenty-Foot Equivalent Unit) is a container with standard dimensions of 20 feet long and 8 feet wide and high. It is conventional in the shipping industry to measure the capacity of container ships and port container terminals in TEUs.
Container ships are ships that are purpose built for, and dedicated to, the carriage of shipping containers. Container ships are operated by global shipping lines.
A container terminal is a port terminal comprising specialised infrastructure and equipment that is purpose-built for loading and unloading container ships and transferring containers within and from the port, and which is dedicated to handling the import, export or transhipment of shipping containers from container ships.
A container terminal has the following physical requirements – channel access and depth, turning basin, berths and dredged berthing boxes, landside infrastructure, road and rail connections, and access to intermodal terminals.
Globally, the container shipping industry is moving towards the use of container ships of 14,000 TEUs or more which are also becoming a larger percentage of the total ships in the global container shipping fleet.
In the container import supply chain, generally:
(1)the Australian importer orders goods from overseas and specifies the Australian port to which the goods should be shipped;
(2)the overseas exporter packs the container and arranges for the goods to be transported to the port via a shipping line;
(3)the shipping line is paid by the overseas exporter or the Australian importer;
(4)on arriving at the Australian port, the shipping line pays the port for wharfage (and possibly some other services such as navigation charges and pilotage) and the stevedore to unload and store the container;
(5)the Australian importer pays for a transport/logistics company/freight forwarder to transport the container to a destination, often a distribution or intermodal centre where the container is unpacked and the goods forwarded to the Australian importer; and
(6)the Australian importer pays for the empty container to be returned to the port or an empty container park for the shipping line to collect.
In the container export supply chain, generally:
(1)the Australian exporter or an overseas importer pays a shipping line to transport the goods to an overseas port;
(2)the Australian exporter pays a transport/logistics company/freight forwarder to collect the goods, place them in containers and transport the goods to a location nominated by the shipping line such as an empty container park, inter-modal centre or container terminal;
(3)the shipping line pays the stevedore to receive, store and load the container onto the ship and the port for wharfage (and possibly some other services such as navigation charges and pilotage);
(4)the shipping line ships the container to the overseas port and pays for the unloading and storage of the container at the overseas port; and
(5)the overseas importer pays for the container terminal to be transported to its selected destination.
While the description above describes liability for the making of certain types of payments, all costs in the total supply chain can ultimately be passed on to the importer/exporter.
Importers and exporters frequently use freight forwarders to manage their imports and exports.
Containers are frequently packed and unpacked (or stuffed and unstuffed, in industry parlance) at a distribution centre, to enable cargo to be distributed onwards as required.
Transhipments are containers which arrive at a container terminal on one ship, are stored and then leave the container terminal on another ship.
The contractual arrangements between importers/exporters (or freight forwarders) and shipping lines generally involve standard terms include free alongside ship (FAS), free on board (FOB), cost and freight (CFR), and cost insurance and freight (CIF). The primary difference in the terms concerns the timing of the passing of risk and the responsibility for cargo insurance.
While importers/exporters ultimately pay for the costs in the supply chain, costs are generally divided in the industry into:
(1)blue water costs – the cost of shipping containers across the water from one port to another (usually paid by the importer/exporter or freight forwarder to the shipping line);
(2)quayside costs – the cost of moving a container from the ship across the quay to a train or truck or vice versa (usually paid by the shipping line to the port and stevedore); and
(3)landside costs – the cost of delivering the container to a distribution centre or other facility as required or vice versa (usually paid by the importer/exporter or freight forwarder to various entities involved in land transport, storage and handling).
The largest component, by several orders of magnitude, consists of landside costs. Port charges are part of quayside costs. Quayside costs are the smallest component of the three classes of costs. As noted, it is the shipping line which usually pays the quayside costs, consisting principally of wharfage charges to the port and handling charges to the stevedore. These are charged on a $ per TEU basis.
The parties use various terms to describe the parties in these arrangements. They use some terms interchangeably including importer/exporter, customer (of the ports) and shipper, including freight forwarders. Accordingly, shippers should not be confused with shipping lines, as shipper means importer/exporter or customer of the port. Further, while shipping lines, stevedores, and others involved in the supply chain are also customers of ports (in that they lease land and facilities from the port as landlord), “customer” in these reasons means importers/exporters and freight forwarders as their agents.
2.3 Required approvals for a container terminal
The parties do not agree about the full range of approvals that PON would require in order to construct a container terminal at the Port of Newcastle. For the purpose of this case it is sufficient to note that a range of approvals from the State and, potentially, the Commonwealth would be required either in the form of a new approval or in the form of amendment to an existing approval. Otherwise, this issue is discussed below.
2.4 Ports
Ports in NSW are regulated by the Ports and Maritime Administration Act 1995 (NSW) (PAMA Act). Part 5 of the PAMA Act regulates port charges. Under the definition of “relevant port authority” in s 47(1)(a1) NSW Ports (through Botany Operator) and PON are the relevant port authorities for the charging for wharfage. Botany Operator does not receive navigation or pilotage charges. Relevantly, it receives wharfage charges only from shipping lines. Section 61 regulates wharfage charges. By s 61(2) the charge is calculated by reference to the quantity of cargo (as noted, for containers, this is on a $ per TEU basis). By s 61(3) the charge is payable by the owner of the cargo at specified times (in practice, this is the shipping line and not the importer/exporter). By s 62 the relevant port authority fixes wharfage (and other charges a relevant port authority may levy). By s 62(3) such charges may be fixed at different rates including by reference to cargo (that is, price discrimination by a relevant port authority to different importers/exporters is permissible). By s 67 a relevant port authority may enter into an agreement with any person about a charge and that agreement applies instead of the determination of the relevant port authority. By such an agreement a relevant port authority may also confer other rights and privileges on the person. Under Pt 6 there is a price monitoring scheme to which Port Botany, Port Kembla and the Port of Newcastle are subject by s 78. Under the scheme, charges are publicised and increases in charges must be notified to the Minister.
Section 11 of the Independent Pricing and Regulatory Tribunal Act 1992 (NSW) (the IPART Act) provides that the Independent Pricing and Regulatory Tribunal (IPART) has a standing reference to investigate prices of any “government monopoly service” as specified in Sch 1 which is said to include charges by a relevant port authority under the PAMA Act. By s 4(1) the Minister may declare a government monopoly service. By s 4(2) the regulations or the Minister may declare a government monopoly service if the Minister certifies that it is a service (a) for which there are no other suppliers to provide competition in the part of the market concerned, and (b) for which there is no contestable market by potential suppliers in the short term in that part of the market. No declaration has been made by the Minister in respect of any port. The parties disagree about whether the Minister has power to make any declaration but NSW Ports and the State (which contend that there is such power) acknowledge that the issue does not arise for determination in this case. Accordingly, for present purposes the IPART Act has no application to Port Botany, the Port of Newcastle or Port Kembla. To the extent the economists assumed to the contrary, they are incorrect. But there is a regulatory regime for price disclosures to the Minister as provided for in Pt 6 of the PAMA Act as described above. There is also the potential for price regulation of a port under Pt IIIA of the CCA.
Under a landlord port model, the port operator owns or leases the port land and leases or sub-leases it to operators such as container terminal operators (also known as stevedores), bulk cargo terminal operators and towage operators. In the landlord port model, the port operator receives rent and licence fees from the land leased/licenced to container terminals and other operators. It also receives revenue in the form of wharfage from shipping lines (for containers this is a charge per TEU imported or exported through the port).
Under a vertically integrated or owner and operator model, the port operator may also own and operate a container terminal at the port. In this model, the port operator also provides stevedoring services to container ships, receives containers from container ships, and loads them onto trucks and trains which access the container terminal. In this way, the port operator receives revenue from shipping lines for loading and unloading container ships, and from land-based customers for landside cargo handling services.
Most shipping cargo in NSW passes through Port Botany, Port Kembla or the Port of Newcastle.
Port Botany is located about 15 km south of the Sydney CBD. It is the principal port in NSW and the only port in NSW with container terminals. It has three container terminals operated by independent stevedores. NSW Ports provides land and facilities to these stevedores, DP World, Patrick, and Hutchison, which operate the container terminals. Port Botany opened in December 1979. The addition of the third terminal was the most recent significant development at Port Botany which substantially increased its TEU handling capacity.
In 2016, 95.4% of full import containers destined for NSW, and 91.6% of full export containers originating in NSW, were handled by Port Botany.
Before it was privatised Port Botany was operated by Sydney Ports Corporation (SPC) constituted under the PAMA Act. SPC was a statutory State-owned corporation within the meaning of s 3(1) and Sch 5 of the State Owned Corporations Act 1989 (NSW) (SOC Act). On 2 May 2013, pursuant to s 3(1) of the PAMA Act, the Minister for Roads and Ports declared Botany Operator as trustee for the Port Botany Unit Trust to be the port operator of the private port of Botany Bay (Port Botany) for the purposes of the PAMA Act, commencing on the Completion Date as defined in the Sale and Purchase Agreement – Port Botany. The privatisation was otherwise carried out under the provisions of the Ports Assets (Authorised Transactions) Act2012 (NSW) (the PAAT Act).
Port Botany is operated under a landlord business model under which the operator owns or leases the port and leases or sub-leases parts of the port to port users including terminal operators and stevedores. As noted, Botany Operator’s revenue comprises wharfage fees and rent. Botany Operator does not charge navigation or pilotage fees.
Port Kembla is located about 90 km south of Sydney in Wollongong.
Port Kembla is primarily a bulk and vehicle port. It does not have a container terminal, but handles a small volume of containers.
Before it was privatised Port Kembla was operated by Port Kembla Ports Corporation (PKPC) constituted under the PAMA Act, which was a statutory State-owned corporation within the meaning of s 3(1) and Sch 5 of the SOC Act. On 2 May 2013, pursuant to s 3(1) of the PAMA Act, the Minister for Roads and Ports declared Kembla Operator as trustee for the Port Kembla Unit Trust to be the port operator of the private port of Port Kembla for the purposes of the PAMA Act, commencing on the Completion Date as defined in the Sale and Purchase Agreement – Port Kembla. The privatisation was otherwise carried out under the provisions of the PAAT Act.
Kembla Operator operates Port Kembla under a landlord business model.
The Port of Newcastle is located about 160 km north of Sydney in Newcastle.
The Port of Newcastle primarily handles bulk cargo, mainly coal. It also handles a small number of containers which has slowly increased over the years. Its container handling capacity is confined because it does not have a container terminal.
Before it was privatised the Port of Newcastle was operated by Newcastle Ports Corporation (NPC) constituted under the PAMA Act, which was a statutory State-owned corporation within the meaning of s 3(1) and Sch 5 of the SOC Act.
On 15 May 2014, pursuant to s 3(1) of the PAMA Act, the Minister for Roads and Freight declared Port of Newcastle Operations Pty Limited (as trustee for the Port of Newcastle Unit Trust) to be the port operator of the private port of Newcastle for the purposes of the PAMA Act, commencing on the Completion Date as defined in the Sale and Purchase Agreement – Port of Newcastle. The privatisation was otherwise carried out under the provisions of the PAAT Act.
PON operates the Port of Newcastle under a landlord business model. As it does not have a container terminal it could operate a prospective container terminal under a vertically integrated or an owner and operator model.
Other ports in NSW: there are other ports in NSW but none have, or are suitable for the development of, a container terminal.
Australian ports: the principal container ports in Australia are Port Botany, the Port of Brisbane, the Port of Melbourne, the Port of Fremantle and the Port of Adelaide. Port Botany, the Port of Brisbane and the Port of Melbourne are on Australia’s east coast. The Port of Brisbane is about 930 km north of the Port of Newcastle. The Port of Melbourne is about 870 km south west of Port Botany.
Shipping services along the east coast of Australia typically call at each of the Port of Brisbane, Port Botany and the Port of Melbourne. Shippers and shipping lines would not consider these ports to be substitutes for one another due to the land transport costs involved in shipping goods to or from one State through a port in another State.
If, however, a container terminal was developed at the Port of Newcastle ships would not call at both Port Botany and the Port of Newcastle. Shipping lines would arrange services so that a ship would only call at one or other of these ports in the course of their trip along the east coast of Australia, as well as the Port of Melbourne and the Port of Brisbane.
2.5 Transactions and events
In April 2001 the Broken Hill Proprietary Company Limited (BHP) obtained development consent to build, amongst other things, a container terminal at the Newcastle Mayfield site capable of handling up to 350,000 TEUs per annum and associated road, rail and wharf infrastructure and dredging. This 2001 development consent required that the development be carried out generally in accordance with the matters specified in a number of documents, including an Environmental Impact Statement titled “Development of a Multi-Purpose Terminal and Remediation of the Closure Area, BHP Newcastle Steelworks” dated 11 August 2000 (EIS). Under the EIS, approval was given for a wharf with three berths; two northern berths with a length of 300m and one southern berth with a length of 350m. This configuration and these lengths are also set out diagrammatically in figure 6.9 of the EIS. Under the EIS, the container terminal to be operated contemplated a largely manual terminal. The EIS noted that the terminal would be operated using five portainer cranes, eight rubber tyred gantries (RTGs), 14 tractors, 14 tri-trailers, 14 forklifts, 10 mini-vans and a fuel truck. It was contemplated that trucks would be loaded with containers by RTGs operated manually by operators. It was also contemplated that loading containers for rail transport would occur manually using portainer cranes, tractors, trailers and forklifts. As a summary, the EIS noted that “the Terminal would generally operate in automatic control except for some rail and road loading/unloading operations, and ship loading operations”. Under the EIS, it was contemplated that the railway would be established so as to accommodate four to six railway sidings. The EIS also is premised on the basis that the container terminal at Port of Newcastle will accommodate trains of a length of 640m.
The then NSW Labor government announced a NSW Ports Growth Plan in October 2003. Under that plan it was proposed that Port Botany would first be developed to its full capacity. After Port Botany reached its full capacity, the former BHP Steelwork site known as Mayfield at the Port of Newcastle would be acquired by the State and developed as a container terminal. The NSW Ports Growth Plan said that:
The plan is a set of principles designed to provide strategic direction to allow the private sector to commence planning for the next tranche of major container trade growth through NSW ports, while allowing public sector providers of road and rail infrastructure to settle their long term development plans.
At that time, Port Botany did not have its third terminal and thus had a limited TEU capacity per year which was identified in an NPC report of July 2010 (see below) as 1.6 million TEU per year.
In 2005 planning approval was also secured to dredge part of the Hunter River to provide additional capacity for development at the Mayfield site.
By 2007 the State had acquired the Mayfield site and transferred it to NPC.
In a 2007 submission to the Council of Australian Governments, the NSW Treasury said that major elements of the NSW Ports Plan included the “identification of Newcastle as the next major container port following the exhaustion of the capacity available at Port Botany and the reservation of land for that purpose (at the former BHP site)”.
In late 2007 NPC’s Business Plan 2008/2009-2018/19 referred to the 2003 NSW Ports Growth Plan and the 2007 transfer to it of the Mayfield site, and said that “NPC considers there are good prospects of a container terminal operating on the Mayfield site within the next ten years”.
In May 2008 the NSW Department of Planning released an exhibition draft on NSW Major Ports which included a statement that:
Newcastle Port also has the potential to become the State’s next major container facility when Port Botany reaches capacity, necessitating a planning regime that will preserve the area for port related activities.
NPC began work on a master plan for development of a container terminal at the Port of Newcastle. In April 2009, NPC sought expressions of interest for the development of Port of Newcastle including a container terminal. By late 2009 it had issued an invitation for detailed proposals for development including a container terminal on the site with capacity to handle in excess of one million TEUs of container cargo per year.
In 2009 Hutchison Port Holdings was announced as the operator of the third terminal at Port Botany. The development of the third terminal significantly increased Port Botany’s TEU capacity per year. Apparently in response to concerns about traffic impacts, the development consent for the third terminal included a condition limiting Port Botany to a maximum of 3.2 million TEUs per year.
By May 2010 NPC had selected a consortium known as Newcastle Stevedores Consortium (NSC) as its preferred developer of the Mayfield site. The NSC consortium members included Anglo Ports (a company that provided project and management advice on port operations, investments and acquisitions), Grup TCB (a Spanish company that operated container ports in various countries), SCT Logistics (a provider of freight services) and Newcastle Stevedores Pty Ltd (a supplier of stevedore services at Port of Newcastle).
In July 2010 NPC published a container terminal analysis. The purpose of this analysis was to “confirm the need for Newcastle to be the site for the next NSW container facility, to be available when Port Botany reaches its 3.2 million TEU pa capacity”. The analysis included the following observations:
(1)Newcastle’s container development should proceed at the earliest possible time based on the trade to and from Newcastle’s hinterland, the pressure it will take off Sydney’s road congestion, and the benefits it can provide to NSW importers and exporters;
(2)the vision is to deliver a globally competitive container and general cargo terminal, capable of providing real benefits to the NSW government and importers and exporters on Australia’s east coast;
(3)establishing a container facility in Newcastle would support Australian exporters from the Hunter and regions to the north and north west of Newcastle;
(4)equitable distribution of economic growth potential between Sydney and the regions, including the Hunter region, was approved by Cabinet in 2003 and 2010;
(5)local employment in the Hunter region would be generated;
(6)the presence of Newcastle as a container port would “re-capture” some of the previously lost NSW trade from Brisbane. Establishing the next NSW container terminal south of Sydney would have the opposite impact, i.e. it would provide Brisbane with an opportunity to extend its capture of NSW generated container exports; and
(7)a container terminal in Newcastle would result in a net NSW trade gain whereas any other location risked a net loss of NSW trade to Brisbane.
In 2011 the Commonwealth published its National Ports Strategy 2011. The Strategy focused on the need for an economically, socially and environmentally sustainable future and the need for the nationally co-ordinated master planning of ports to drive supply chain efficiency. The Strategy said:
Ports and related land-side logistics chains are critical to the competitiveness of Australian businesses, which rely on them to deliver business inputs and to take exports to the global market. Long-term integrated plans will help to attract public and private investment in ports and related logistics sectors. Reform can also remove barriers to trade, reduce transaction costs, increase competition and contestibility [sic] and provide important linkages to domestic and global value chains. Ports are therefore critical to productivity and economic growth in Australia.
In March 2011 a NSW Liberal/National Coalition government replaced the NSW Labor government.
In June 2011 NSW Treasury approved NPC entering into commercial negotiations with NSC for the development of the Mayfield site including a container terminal. Negotiations were on the basis that NPC could not bind the State and that State approval to any commercial deal would be required. Shortly thereafter, NPC agreed term sheets with NSC for the development of, among other things, a container terminal at Port of Newcastle.
In September 2011 the NSW government announced that it would privatise Port Botany by way of a 99 year lease and in doing so would ensure that key public interest outcomes were protected.
GIP and IFM formed a bidding consortium for the Port Botany privatisation transaction (NSW Ports Consortium). Ari Droga and Julio Garcia, representatives of NSW Ports, were responsible for co-ordinating the bid of NSW Ports Consortium.
By this stage the negotiations between NPC and NSC were nearing completion. By October 2011, NPC and NSC had finalised agreements for the development of the Mayfield site. In November 2011, NPC sought the State’s approval to execute the agreements with NSC.
On 18 November 2011 the Treasurer informed NPC as follows:
As you are aware, the NSW Government will be undertaking a scoping study into the intended long-term lease of Port Botany. In addition to examining market interest, sale structure, business preparation, and the interests of stakeholder groups, the scoping study will have regard to the State’s longer term port infrastructure needs and the roles of Newcastle and Port Kembla.
We consider that it would be prudent to consider the proposed development of the Mayfield site as multi-cargo facility including a container terminal within the context of an overarching strategy for port infrastructure in NSW.
As a consequence, the Government wishes to wait for the outcome of the scoping study before considering the Mayfield site development as outlined in your letter. The scoping study is expected to be completed by April 2012.
In December 2011 the State engaged Morgan Stanley as a consultant to prepare a scoping and strategy study in relation to the long term lease of Port Botany.
By December 2011 NSW Ports Consortium was receiving preliminary advice that a key consideration for any long-term lease of Port Botany was “competing terminals” and thus the State’s policy in relation to Port Kembla and the Port of Newcastle. The preliminary advice was that a second container port will likely impact on the long term growth and earnings prospects of Port Botany and the risks could be mitigated either by “[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.”
In this period the State also informed NSC that it would not decide whether to approve NSC’s development proposal at Newcastle unless and until the scoping and strategy study for Port Botany was completed.
In late 2011 and early 2012 Transport for NSW and Infrastructure NSW (State agencies) commenced a review of ports policy for NSW.
The Transport for NSW Corporate Plan 2012-2017 noted that:
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.
In February 2012 the Treasurer confirmed to NSC the need for the State to obtain the scoping and strategy study for Port Botany which was anticipated to be received by mid-2012. The Treasurer said, however, that in recognition of the discussions between NSC and NPC the transaction team would consider the question of container port capacity at Newcastle as a priority to allow the NSW Government to respond to NPC on the issue as early as possible. In this regard the Treasurer said he appreciated the time NSC had taken to share its views on this matter and NSC’s interest in developing infrastructure in New South Wales but “from an overall State development perspective it is appropriate that we consider the long term future of container capacity at New South Wales ports as the Government embarks on this important transaction”.
By 8 March 2012 Transport for NSW was advising the Treasury led Port Botany project advisory group (which included Infrastructure NSW and the Department of Planning and Infrastructure) that the economics of containers coming into Newcastle and being railed or trucked down to Sydney was highly questionable given that most containers were destined for within 40 km of Sydney and the State had invested heavily in port infrastructure at Botany which had excess capacity. No party consulted saw the Port of Newcastle as NSW’s next container terminal. All were of the view that Port Kembla should be the location for the next container port.
In March 2012 the NSW Ports Consortium was again advised by its proposed adviser that the threat of a second container terminal at Port Kembla or Port of Newcastle was a key competition issue.
On 30 March 2012 Morgan Stanley noted that one potential bidder for Port Botany wanted clarity on the government’s position about Port of Newcastle as it would compete with Port Botany and lead to value loss.
Morgan Stanley submitted an indicative valuation to the Treasurer on 5 April 2012. They recommended that the existing 3.2 million TEU cap on Port Botany be removed. As to the outstanding issue of a container terminal development at the Port of Newcastle, Morgan Stanley said:
• Botany value loss of XXXX XXXX XXXX
• Bidders will react unfavourably to a competing port owned by Government
• Undermine rationale to remove the Botany cap
• Not supported by stakeholders, including INSW [Infrastructure NSW] and TfNSW [Transport for NSW]
• Will likely increase the NSW container transport task
The overview by Morgan Stanley said:
Issue 7 - Newcastle proposal to develop a container terminal - background NPC tendered a new terminal including a container port, have a preferred proponent, awaiting NSW govt approval + Planning approval. Bottom line is that we have modeled its impact on Botany, XXXX XXXX XXXX value loss, independent of us NPC’s container proposal is not supported by Infra NSW and Transport NSW. Inconsistent message to bidders about government competing with Botany. Recommendation is that the State does not support the Container element of the proposal.
Morgan Stanley recommended that the State not approve the container terminal element of the development of the Port of Newcastle.
Morgan Stanley also recommended that Port Kembla should be the next logical container terminal after Port Botany as Port Botany and Port Kembla were complementary and:
• Service same hinterland – same trade drivers
• Port Kembla and Port Botany will both service Moorebank Terminal
• Port Kembla is the next logical container terminal after Port Botany.
Morgan Stanley suggested that the State seek combined bids for the privatisation of both Port Botany and Port Kembla, and that the Port of Newcastle transaction be staged after Port Botany and Port Kembla.
By 12 April 2012 the Treasury transaction team (including Morgan Stanley) advising the Treasurer noted that:
If the container terminal development were to proceed, the financial impact on proceeds from the Port Botany Transaction is not immaterial, as some container volumes and related revenue would be diverted from Port Botany to Newcastle. In addition, it could undermine the rationale to remove the Port Botany cap or to transact Port Botany and Port Kembla as a potential package, and bidders may see the risk of competing with a Government owned Port of Newcastle as a further negative.
Further, the development of the container terminal would also be on the same timeframe as the SIMTA intermodal development at Moorebank, but would not have any real relationship to that facility (unlike Botany or Port Kembla) and would likely increase the NSW container transport task by requiring additional infrastructure to/from Sydney and Newcastle.
Stakeholder consultation (including with Shipping Australia) for Port Botany has clearly established that Port Kembla is seen as being the preferred location for a container terminal (in preference to Newcastle) once Port Botany becomes full.
…
…a Newcastle container terminal is not supported by the 20-year strategic plans currently being prepared by INSW and TfNSW which are to be publicly released during 2012.
The Treasury transaction team observed that:
Preferred method for dealing with the Botany cap
-The most significant issue for the Transaction arising from the scoping and strategy study is the cap on total container movements at Port Botany. The existing planning approval for the 3rd terminal imposes a cap on container throughput for the entire port (ie all 3 terminals) of 3.2m twenty foot equivalents (TEU) per annum.
-Throughput last year was 2m TEU pa and the port is expected to reach 3.2m TEU pa in about 2017. The physical capacity of the port is estimated to be 8m+ TEU per annum.
-The Port Botany terminals are highly valuable assets. The State’s investment in the new 3rd terminal alone will be nearly $1b by the time it comes into operation next year. Not allowing these assets to achieve their full capacity is a waste of valuable State capital investment and would represent a highly inefficient outcome for the State.
-The Government needs to address the cap issue now regardless of whether the Port Botany transaction proceeds or not. In fact Sydney Port Corporation has already commenced preliminary work to address the cap independent of the transaction. To the transaction advisers’ knowledge, Port Botany is the only major container port in the world that has a whole-of-site cap of this nature.
-The current planning approval does not specify the reason for the cap but it is understood to be a reaction to community concerns about the local impacts of expanding the port, particularly the road traffic impacts.
-Roads are already congested irrespective of the amount of port traffic:
…
-Capping throughput does not encourage Port Botany freight onto rail:
…
-The cap will increase the land transport task and associated costs to the community:
…
-The Transport Masterplan and the INSW strategic plan are progressing on the assumption that throughput at Port Botany will exceed 3.2m TEU pa, and all containers in NSW will call Port Botany until it reaches its natural capacity.
-Unless the cap is removed bidders will significantly discount the value of Port Botany (by up to 30-40% based on current estimates). Infrastructure funds are inherently conservative investors and are unlikely to pay fair value for a growth opportunity that depends on the Government changing pre-existing regulatory settings at some unspecified point in the future.
-To deal with this issue in a timeframe consistent with the government’s announced transaction timetable, a removal of the cap via legislation or via SEPP [State Environmental Planning Policy] is required. (A separate paper will be provided on these two potential mechanisms).
The Treasury transaction team considered that:
Port Kembla and Newcastle may have roles to play in servicing the State’s container needs in the long-term as Port Botany reaches its natural capacity, but shifting container trade to these ports because of the planning cap at Botany increases transport costs artificially and prematurely.
They also said:
If the Government wishes to also transact Port Kembla and Newcastle Port in the near term, the Project Team recommends that the Government combine Port Kembla with Port Botany in the current process and transact Newcastle Port immediately thereafter.
On 4 May 2012 the NSW Ports Consortium wrote to the Treasurer saying:
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).
On 16 May 2012 Treasury sent an email to Morgan Stanley with a proposed letter to NPC to the effect that the State would approve of NSC’s development proposal excluding the container terminal given “the potential for an adverse impact on the [Port Botany] Transaction in a number of respects including financial impacts and adverse buyer perceptions regarding competing with a State-sponsored container terminal”. The final version of this letter was sent by the Treasurer to NPC on 31 July 2012, albeit modified to remove the reference to the potential adverse impact on the Port Botany transaction.
In or about May 2012 Morgan Stanley submitted its Scoping Study to the State in respect of the long-term lease of Port Botany (Port Botany Scoping Study). The Port Botany Scoping Study:
(1)identified the existing 3.2 million TEU per year cap on Port Botany (imposed by a condition of a development consent for the third terminal) was of the highest materiality, saying:
The existing planning approval for Port Botany which imposes a cap on container movements needs to be resolved prior to the Transaction.
The concept of a capacity limit on a port is unique to Port Botany – the Project Team was unable to identify any other port in Australia or globally that has a similar regulatory cap.
The existence of the Container Cap does not resolve landside logistics problems – less than 2% of traffic on the M5 East is related to port traffic.
On current estimates, the 3.2 million TEU p.a. cap will be exceeded in 2017-2018 and therefore the cap needs to be addressed irrespective of the Transaction.
Port Botany as an investment proposition is very different with and without a cap and it would materially affect bidder appetite.
Should the 3.2 million TEU p.a. cap remain, the State will need to develop an alternative container port, either at Port Kembla, Port of Newcastle or elsewhere.
This would mean an inefficient outcome for the State:
•The State has just spent ~A$1 billion in expanding the potential capacity of Port Botany to approximately 6-8 million TEU p.a. Botany would remain significantly underutilised with latent container handling capacity of around 5 million TEU p.a.;
•Requirement to construct a new container port with adequate capacity to meet demand comes with considerable costs, likely to amount to more than A$1 billion in aggregate within the next 5-10 years;
•Additionally, there would be significant investment required in associated road and rail infrastructure (and re-aligning the logistics supply chain) to service container trade going through a new more remote container port and transiting from/to metropolitan Sydney (which is the source of most container traffic); and
•As a result, diverting freight via an alternative container port before Botany has reached capacity comes with a significant increase in the NSW transport task, additional costs to the economy and a negative impact on Gross State Product as there would be a corresponding increase in freight costs for containerised goods, and no offsetting economic benefits.
Recommendation: That the cap be removed prior to the Transaction via a new legislated planning regime. The existing conventional planning approval regime is not able to provide certainty on this issue in a timeframe consistent with Government’s announced Transaction timetable. Removing the cap will allow Port Botany to reach its already installed capacity, increase certainty for bidders and maximise proceeds from the Transaction.
If the cap issue is not resolved prior to the Transaction, or there is no certainty around resolving it, the Project Team recommends the Transaction not proceed;
(2)explained that:
Port Botany currently has a capacity limit of 3.2 million TEU per annum, imposed in 2005 following the 2003 development consent granted under the Environmental Planning and Assessment Act 1979 (EPA Act) to construct the third terminal. According to the “SPC 30 Year Vision ‘Likely’ Growth Scenario”, the Port Botany TEU limit of 3.2 million p.a. is expected to be exceeded in 2018 and the site is estimated to reach its maximum natural capacity of 7 million TEUs p.a. by 2030. If this TEU limit is not removed, it will significantly adversely impact the value that could be realised as part of the Potential Transaction and is an inefficient and artificial constraint on the State’s asset utilisation and its economic demands. It is recommended that this cap issue is resolved prior to a Transaction.
…
Port Botany is crucial to the economic growth of NSW, contributing approximately $50 billion in trade each year. Growth will continue in Sydney and therefore throughput volumes will continue to grow. Freight is a derived demand, and demand for the import of goods in Sydney will not stop at the level of the Port Botany cap. Therefore, the cap will inevitably be lifted to cater for this growth. However, without this certainty potential bidders will not reflect this in their purchase price and therefore the Government will not receive full value for the potential of Port Botany.
(3)identified the development of a competing container terminal at Port of Newcastle as an issue of medium-high materiality and said that:
[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.
(4)said that the “the perceived valuation impact [on Port Botany] may exceed the actual cash impact, as bidders will tend to make conservative assumptions” and “[t]here is the potential for adverse bidder perceptions regarding competing with a State-sponsored container terminals, with bidders already questioning the intentions of the State in this regard”;
(5)recommended 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”;
(6)identified stakeholder issues including the following:
Infrastructure NSW:
•On current forecasts, additional container port capacity will be required in about 20 years (and in the absence of significant productivity improvements at Port Botany, new capacity may be required sooner)
…
•While both Port Kembla and the Port of Newcastle have the potential to develop some container trade, in light of potential constraints at Botany in the future, the incremental costs (both infrastructure investment and transport costs) of transporting containers to destinations in Western Sydney will need to be taken into account
•Believed that Port Kembla was the next logical location for a container terminal in NSW once Port Botany reached capacity
…
Newcastle Ports Corporation:
•Newcastle Ports Corporation Mayfield Container Proposal: Keen to see the proposal progressed as quickly as possible
•Strongly urged the State to recommend NSC’s proposal
…
Port Kembla Port Corporation:
•Believes Port Kembla to be a preferable location for the next container facility in NSW given the proximity to the distribution centres in the West and South-West Sydney
…
Transport for NSW:
•Notes that the economics of containers coming into Newcastle and being railed or trucked down to Sydney is questionable given that most containers are destined to within 40 kilometres of Port Botany and the State has already invested heavily in port infrastructure at Botany (which currently has excess capacity)
•Believes that, although NPC is currently not asking for any funding from the State for the proposed terminal, if the container terminal proposal were approved, it may necessitate additional investment on landside transport infrastructure by the State
…
Infrastructure Australia:
•Strong supporter of the Moorebank Intermodal Facility. Prefer the SIMTA site
•Believes that there are road/rail issues with Kembla and Newcastle, but Kembla is better suited as the next container facility after Port Botany is at full capacity.
(7)as summarised by the State, recorded the views of other stakeholders as follows:
(a)the Finance Minister expressed the view that the container cap on Port Botany should be removed and “Port Botany should be allowed to grow, the Port of Newcastle not required at this stage as a container port”;
(b)the Moorebank Project Office emphasised the importance of increasing the cap on throughput at Port Botany, otherwise the then proposed Commonwealth funded Intermodal Terminal at Moorebank would not be viable;
…
(c)Asciano expressed the view that “[b]oth Kembla and Newcastle are capable of handling containers, but Newcastle is further away from the origin and destination of cargoes and does not have adequate transport infrastructure. Kembla has previously serviced dedicated container ships but will require additional infrastructure to service greater volumes”;
(d)DP World expressed the view that “Port Kembla is the next logical container port, rather than Newcastle. Kembla is closer to the origin and destination of containers”;
(e)Hutchison Port Holdings expressed the view that neither Port Kembla nor Port of Newcastle were ideal container ports when compared to Botany;
(f)Qube Logistics expressed the view that “Port Kembla would be the next logical container terminal after Port Botany. This is primarily due to its location relative to the origination and destination of containers. In particular, Port Kembla would be the ideal location to rail containers directly to the proposed Moorebank Intermodal Terminal”;
(g)Shipping Australia expressed the view that “[s]hipping lines are more likely to call at Port Kembla as it is closer to the origination and destination of containers and closer to the rail links into Sydney … short sea container services currently already call Port Kembla”;
(h)the Commonwealth Department of Finance expressed the view that “[t]o the extent that there is additional container capacity in NSW (after Port Botany, Port Kembla is the next logical option from the point of view of the Moorebank IMT, as with the Maldon-Dombarton rail line it will be connected to the Moorebank IMT via the SSFL [South Sydney Freight Line]”; and
(i)the Commonwealth Department of Infrastructure and Transport stated that neither Port Kembla nor Port of Newcastle offered the most efficient solution and it was “cheaper to send the boxes to Melbourne and truck/train them back 8 hours to Western Sydney where access is easy”;
(Citations omitted).
(8)recorded that:
Analysis and discussions with the industry have indicated the following:
• The Port of Newcastle currently handles 18,000 TEUs of containers from geared vessels, servicing the current Newcastle area. Therefore, containers calling Newcastle are likely to be in small volumes, servicing a niche market (potentially to support the significant coal infuser in Newcastle);
• Less than 10% of NSW container movements according to the NPC management case are expected to flow via a dedicated NPC container terminal;
• International shipping lines are unlikely to call two container terminals within 170 kilometres of each other; and
• Based on stevedoring and landside transport costs, depending on volumes achieved, Newcastle may be competitive for imports bound for the Newcastle hinterland in the medium to long term. However, it is highly unlikely that Newcastle will be cost competitive with Botany for imports destined to the Sydney region.
Therefore, based on the above conclusions, the utilisation of a Newcastle container terminal is questionable, although if it is 100% at risk to the private sector then the returns themselves are not an issue for the State.
(9)recommended that the State not approve the NSC proposed development of a container terminal development at the Mayfield Port of Newcastle site as:
• Valuation Impact – Under the NPC management case, the development of a Newcastle container terminal will have a considerable impact on Port Botany volumes and its cashflows. Furthermore, the perceived valuation impact may exceed the actual cash impact, as bidders will tend to make conservative assumptions. Given the proposal for the container terminal is a concept plan, rather than a Development Approval (and a Development Approval would not be forthcoming before a Transaction is finalised), bidders will consider the impact of a container terminal at Newcastle whether or not it is finally approved, hence affecting transaction value for Port Botany;
• There is the potential for adverse bidder perceptions regarding competing with a State-sponsored container terminals, with bidders already questioning the intentions of the State in this regard;
• Morgan Stanley expects the most significant impact will be on export volumes (at least initially) and that as a consequence a Newcastle terminal will probably reduce the rail modal freight share percentage via Botany, all other things being equal, contrary to Government’s objective to increase rail modal share at Port Botany;
• The approval of another near-term container terminal in NSW may complicate the ability to lift or remove the existing Port Botany development approval capacity cap. The need to lift the Botany cap may not be considered by stakeholders as critical at a time where Newcastle is installing container terminal capacity in parallel;
…
• Although the proposed container terminal is a private sector development and Morgan Stanley’s understanding is that it is at no cost to NPC, it is highly likely that once developed rail and road infrastructure spend to/from the Sydney region will be sought for containers travelling to/from Newcastle;
• An additional container terminal outside Port Botany will result in the Botany footprint being inefficient, as there is currently significant unutilised container handling capacity at Port Botany which can service the State’s container freight needs well into the future;
• A container terminal in Newcastle will undermine the recently announced Moorebank IMT business case. The proposed Moorebank intermodal terminal has no direct relationship with a Newcastle container terminal; and
• Lastly, it is our understanding that a Newcastle terminal is not consistent with the 20 year plans being developed by TfNSW and INSW and it will be highly confusing for bidders if Government approves a terminal in contradiction to its own 20 year policy directions. Note that the 2003 Ports Growth Plan, being nearly ten years old, should not be relied upon as a current strategy for NSW container port development. In any event, this document only referred to the development of Newcastle for containers after Port Botany has reached capacity (which it has not);
(10)noted that most stakeholders (other than NPC) believed that:
• There is significant capacity at Botany, once the cap is lifted; and
• Port Kembla is closer to Sydney, and is the more logical centre for the next major container facility servicing the Sydney Basin. In particular, if the supporting rail network is upgraded, then Port Kembla will complete an “arc” of interconnected rail and intermodal terminals spanning south and south-west Sydney (e.g., Moorebank and Minto).
(11)considered that NSC’s proposal (on the basis of NSC’s assumptions) would mean that:
…container trade is lost [from Port Botany] to NPC from 2015 until 2035, at which point Port Botany reaches the 7.0 million TEU practical capacity limit. As a result, the tangible impact of the proposal is lower container growth at Port Botany between 2015 and 2035. This results in the 7 million TEU not being reached in 2039, as projected under SPC’s 30 Year Vision, but in 2053;
(12)further, said were a container terminal at Newcastle to be developed 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);
(13)recommended that if there was to be another container terminal outside Port Botany that Port Kembla was the logical location due to:
• Proximity to the high growth industrial area in the western suburbs of Sydney;
• Closest international port to Sydney;
• Closest to the proposed intermodal facilities in Moorebank and potentially Eastern Creek;
• Direct access to the proposed South Sydney Freight Line; and
• The current rail infrastructure, particularly if the Maldon-Dombarton Rail Line is constructed, will complete an “arc” of interconnected rail and intermodal terminals spanning south and south-west Sydney;
and
(14)recommended a “light-handed price monitoring model be implemented to cover future port charges”, noting that the “threat of future tariff regulation (as with airports) is significant and will moderate future pricing outcomes”.
These propositions further undermine the case theory of the ACCC and PON to the effect that the impugned provisions had or will have if given effect the likely effect of substantially lessening competition. Propositions (1) to (4) are sound on the evidence. Propositions (5) to (7) have not been undermined in any way by the ACCC or PON either by way of cross-examination or submission.
I also agree with a number of propositions of Dr Pleatsikas about which he was not cross-examined as follows:
(1)“[f]rom an economic perspective, the ultimate objective of competition policy is to promote economic efficiency. Greater efficiency, all else equal, brings price, product quality and product variety benefits to society (and consumers). By contrast, inefficient investments, even if privately profitable, work to the detriment of economic efficiency in general and ultimately harm consumers”;
(2)“…documents and plans from NSW State entities specifically refer to this principle [of overall social efficiency] in developing its strategy for future port-related investments”;
(3)“[i]n developing its strategy for socially efficient port investments, the State of NSW had, by 2012, determined that the most efficient path forward was to promote use of Port Botany as the focus of the State’s container port activities and, only once Port Botany became capacity-constrained, develop a container operation at Port Kembla. The State’s plans envisioned bulk commodities as the focus of operations at the Port of Newcastle. The State’s infrastructure investment plans were consistent with these objectives”;
(4)“…there are circumstances in which an investment by a private party may be profitable for that party, but that investment may not be socially optimal in the sense of promoting economic efficiency”. For example, “political pressures may cause public authorities to invest in duplicative, socially inefficient investments (such as transportation links that are either not needed at all or not needed until some future date) that private parties can leverage to increase the profitability of their (private) assets”;
(5)“[f]rom an economic perspective, the objective of achieving greater social efficiency is not anti-competitive … From an economic perspective, a counterfactual that achieves the objective of a more efficient outcome appears to be more consistent with the State’s objectives” than simply assuming away the impugned provisions. “Other pro-competitive or competitively neutral counterfactuals are also possible given the State’s interest in achieving a socially efficient outcome by discouraging container operations at Newcastle and encouraging them at Port Botany and Port Kembla. Such counterfactuals would likely have made it more difficult to develop a container port at Newcastle”;
(6)“…given the focus on socially efficient outcomes that was a part of the State’s concerns in regard to container port operations, a counterfactual that ensured that any container port development at Newcastle fully internalised any potential negative externalities … may have been economically efficient, pro-competitive and plausible. Under such a counterfactual, a pricing mechanism similar to the ‘reimbursement’ provision, but explicitly tied to the quantum of negative externalities expected, would have been appropriate”; and
(7)“…from an economic perspective, to the extent that the State of New South Wales was concerned with promoting economic efficiency and to the extent that it determined that developing a major container operation in the near term at the Port of Newcastle would adversely impact economic efficiency, actions that would achieve an economically efficient outcome would not, from an economic perspective, be considered anti-competitive”.
(Citations omitted).
Dr Pleatsikas also made these points with which I agree:
(1)“…the ‘compensation’ provision does not protect ‘monopoly’ profits, because regulation would appear to prevent the port operator/landlord from charging monopoly prices … the effect of the ‘compensation’ provision on the bid price was, all else equal, to increase bids by the discounted value of the expected ‘compensation’ that would be paid”;
(2)“…because the ‘compensation’ provision provided for a time-deferred repayment of funds already paid by the winning bidder to the State (adjusted by the discount rate), it should have no impact on conduct”;
(3)to the extent that bidders for the Port of Newcastle considered a container terminal an attractive possibility, they would have “adjusted their bids to account for the ‘reimbursement’ provision (resulting in no adverse long-run incremental costs for developing a container port at Newcastle”;
(4)“…the economic objectives of the antitrust laws is to promote competition, not to assist individual competitors that may … may be pursuing windfall gains”;
(5)“[i]f one properly evaluates the consequences of the Port of Newcastle port operator/landlord contract (e.g., from the proper temporal perspective and mindful of the economic implications of the ‘reimbursement’ provision), one would conclude that it was not anti-competitive because bidders would have had full information about the possibilities of developing a container port at Newcastle and of the specifics of the ‘reimbursement’ provision and could adjust their bids according to their expectations as to their preferred plans for developing a container port there. Those adjustments would have allowed the bidders to develop a container port with no long run incremental cost penalty (at least based on ex ante expectations)”;
(6)PON is in fact seeking a benefit it does not deserve. While Dr Pleatsikas sees the benefit as PON having received a discount on the offer price for the Port of Newcastle to account for the reimbursement payments PON might have to make in the future, and I see the benefit as PON not having paid for a container terminal while Port Botany has capacity and before a container terminal is developed at Port Kembla, the effect is the same. PON is now seeking “a subsidy to help underwrite its container port plans”;
(7)given that the State considered that a container terminal at the Port of Newcastle while Port Botany has capacity would not be socially optimal and could result in negative externalities, “the ‘reimbursement’ provision may operate implicitly to assist in correcting the resulting negative externalities” including:
(a)if the premature development of a container port at Newcastle resulted in under-utilisation of public and/or private assets at Port Botany (because some container traffic otherwise destined for Port Botany may be diverted to Newcastle); and/or
(b)through wasteful use of transportation assets that could occur because, apparently, during the initial phase of the container port development at Newcastle, no local processing of containers would be available, necessitating transport to/from locations close to Port Botany;
(8)“[t]o the extent that the ‘reimbursement’ provision operates to ameliorate or eliminate negative externalities that would reduce economic efficiency, the ‘reimbursement’ provision could not, as a matter of economic theory or principles, be viewed as anti-competitive no matter what product or geographic market definition is utilised (i.e., because the provision could operate to ensure that the Port of Newcastle pays all of the costs – private and social – that the Port’s premature container operation plans may cause to be incurred)”;
(9)“[b]y contrast, Mr Smith treats the ‘reimbursement’ provision as a ‘tax’ on any container operation at the Port of Newcastle. This implicitly does not take into account the savings in the bid price that would accrue as a direct result of the State including the ‘reimbursement’ provision in the contract”; and
(10)[c]ompounding the problematic nature of Mr Smith’s analysis, he implicitly treats the alleged ‘tax’ as an unforeseen factor in governing the decisions of the port operator/landlord at the Port of Newcastle … To the contrary, the discount the ‘reimbursement’ provision engenders in the bid price essentially means the winning port operator/landlord ‘recovers’ (in expected present value terms) its ‘reimbursement’ payments in an up-front discount on its bid price. Consequently, it should have no impact on the competitive conduct of the port operator/landlord at the Port of Newcastle”.
(Citations omitted).
I consider that all of these propositions are sound other than that my conclusion is PON did not pay the State any sum for the potential to develop a container terminal the Port of Newcastle contrary to the State policy. The effect of this conclusion is the same as the conclusion reached by Dr Pleatsikas – PON is seeking a windfall. Even if PON can ultimately establish that its container terminal while Port Botany has capacity would be viable (which is itself not a real chance on the evidence to date), it would still need to persuade the NSW government that it would be in the public interest of NSW overall that it be permitted to construct the container terminal (that is, that existing investments in public and private infrastructure will not be undermined, that the cost of supporting a container terminal at the Port of Newcastle is the best option, and that such a container terminal will not undermine the overall cost and economic efficiency of the container freight handling task in NSW).
The concerns which Dr Pleatsikas raised about the modelling undertaken by Mr Smith are also compelling. As Dr Pleatsikas explained Mr Smith’s modelling (the results of which posited that the impugned provisions are anti-competitive) involves two fixed production locations (Port Botany and the Port of Newcastle), with customers arrayed linearly between them. The template for the model was developed by Harold Hotelling and was designed and constructed to investigate the profit-maximising location of undifferentiated producers (and consumers that are undifferentiated in their demands). However, Mr Smith has used the template to model pricing and profit conduct of highly differentiated producers and highly differentiated consumers. Such an exercise is unlikely to produce any useful output.
Mr Smith’s model also does not differentiate between the two ports other than by their position at the ends of a “linear road” between the two ports, despite the ports being highly differentiated in numerous respects. Mr Smith’s distribution of customers is unrealistic as he has “arrayed customers (who he has assumed are non-differentiated in terms of their demand for port services (and non-differentiated in terms of the commodities they ship) on a one-dimensional straight line between the two ports, with uniform transport costs (no matter the mode) along the line, uniform demand and a uniform density of customers along the line”. In the real world, “customers are highly differentiated and non-uniform in their demands (both as to volume and commodity) and are arrayed in a highly complex and likely non-random manner over a two-dimensional space (i.e., the geographic area of New South Wales)”. Further, “the derivation of transport costs is much more complex, with multiple providers and both road and rail options”.
Further, as Dr Pleatsikas said:
…transport costs directly to a port are not the only consideration in the choice by customers as to which port to utilise. Processing locations, processing costs and other considerations (e.g., shipping schedules) also affect choices. In this regard (as well as the other elements noted in the immediately preceding paragraphs), Mr Smith’s model is so far abstracted from reality that it bears no useful relationship to what actually occurs or would occur in the real world.
(Citations omitted).
Further again, as Dr Pleatsikas said:
…there are no pricing constraints in Mr Smith’s model. In the real world, port operator/landlords are subject to regulation of port charges. Mr Smith, in some versions of his model even posits a pricing strategy of perfect price discrimination (which would allow each port to capture all of the consumer surplus of each user by charging them the maximum price they were willing to pay). A price regulator would not allow such a pricing strategy. The lack of pricing constraints is a serious shortcoming that, even in the absence of all the other problems, would undermine the validity of the models’ results and render these results irrelevant and unrealistic in this context.
(Citations omitted).
And again, as Dr Pleatsikas said:
Mr Smith’s “base” version of the model assumes that the choice of port is influenced only by wharfage charges and local transportation charges. This directly contradicts statements by Mr Smith and by several witnesses for the Applicants that it is total costs (from origin to destination) that influence the choice of port by shippers, importers and exporters.
(Citations omitted).
I thus accept Dr Pleatsikas’s conclusion about Mr Smith’s modelling as follows:
Mr Smith’s “stylised” model is poorly designed, and so abstracted as to be so distant from real world circumstances that it cannot provide useful insight into the marketplace conduct (including, but by no means limited to, the pricing decisions) of port operator/landlords. Consequently, the results of the model are unsound as a matter of economic theory and the application of economic principles to real world issues, particularly in the context of the issues of concern in this case.
I also accept other criticisms Dr Pleatsikas made of the work of Mr Smith, particularly relating to the feasibility of the operation of a container terminal at the Port of Newcastle while Port Botany has capacity. Mr Smith appears to have uncritically accepted all assumptions and comparisons most favourable to PON. For example:
(1)Mr Smith refers to the advantages of the Port of Newcastle attracting larger container ships than can allegedly be accommodated by other ports, but as discussed, this is a largely illusory advantage as the other ports will also be able to accommodate larger ships if necessary;
(2)Mr Smith compares the Port of Newcastle to Gdansk, Tauranga and two terminals in Columbo, Sri Lanka, which are all transhipment hubs. The evidence indicates no real prospect of the Port of Newcastle functioning as a transhipment hub; and
(3)Mr Smith accepts PON’s costs and revenue projections at face value when, as Dr Pleatsikas pointed out, “there are often systematic biases that tend to understate cost projections and/or overstate revenue projections for major infrastructure projects”.
The ACCC and PON have not confronted or overcome these fundamental difficulties for their case theory.
9. ORDERS
For the reasons given, the ACCC’s originating application must be dismissed. NSW Ports’ cross-claim must also be dismissed. Given the involvement of the State and PON, and the cross-claim of NSW Ports, I will give the parties an opportunity to propose costs orders.
I certify that the preceding one thousand six hundred and thirty four (1634) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jagot. Associate:
Dated: 19 July 2021
SCHEDULE 1 – EXTRACTS FROM COMPENSATION AND REIMBURSEMENT PROVISIONS
Port Botany and Port Kembla PCDs
3.3Support
Subject to clause 3.8, if all of the conditions in paragraphs (a) to (e) are satisfied in respect of a Support Period (Relevant Support Period):
(a)the Botany Port Manager demonstrates to the reasonable satisfaction of the State that at least one of Port Botany nor Port Kembla was not at Full Capacity during the whole of the Relevant Support Period;
(b)the EXCESS as calculated in accordance with clause 3.4 in respect of the Relevant Support Period is greater than zero;
(c)the EXCESS as calculated in accordance with 3.4 in respect of the Support Year (if any) immediately prior to the Relevant Support Year was also greater than zero (Previous Support Period);
(d)the Botany Port Manager demonstrates to the reasonable satisfaction of the State that the number of Containers imported or exported by Port Botany in the Relevant Support Period is less (Shortage) than it would have been had EXCESS been zero or less, and that there is both a reasonable, and a material, causal connection and correlation between the amount of EXCESS and the amount of the Shortage; and
(e)the Botany Port Manager demonstrates to the reasonable satisfaction of the State that the number of Containers imported or exported by Port Botany in the Previous Support Period (if any) is less (Prior Shortage) than it would have been had EXCESS for that Previous Support Period been zero or less and that there is both a reasonable, and a material, causal connection and correlation between the amount of EXCESS and the amount of the Prior Shortage,
then the State must pay to the Botany Port Manager in accordance with this clause 3 the amount ofNSupport as calculated under clause 3.4.
…
3.5 Botany Port Manager may make a submissionIf all the conditions in clause 3.3 were satisfied in respect of a Support Period, then within 20 Business Days after the end of that Support Period the Botany Port Manager may make a written submission to the State which:
(a) provides evidence that all of the conditions of clause 3.3 were satisfied;
(b) provides a calculation ofNSupport; and
(c)provides reasonable written details of and supporting evidence for that calculation.
…
3.7 Payment of agreed support or dispute(a)If under clause 3.6 the State accepts a submission by the Botany Port Manager, it must pay the amount of NSupport to the Botany Port Manager within 60 days after notifYing the Botany Port Manager of that acceptance.
(b)If the State rejects a submission made by the Botany Port Manager, either party may take such action including legal proceedings in relation to the matters the subject of the submission as it sees fit.
(c)The Botany Port Manager must not bring legal proceedings, or otherwise seek to enforce clause 3.3, in respect of any alleged EXCESS referred to in clause 3.4 unless it has complied with clauses 3.5 and 3.6 in respect of that alleged EXCESS.
…
6. Limits on claims for support
…(d)Each of Botany Port Manager, Port Lessee and the Purchaser must procure use their respective reasonable endeavours to minimise any loss of revenue that may be the subject of a claim by Port Manager under this Deed.
Port of Newcastle PCD
…3.3 Acknowledgement
Newcastle Port Manager, Newcastle Port Lessee and the Purchaser each acknowledge that the State has entered into the Port Commitment Deeds, under which the State may be required to make certain payments to the Other Port Managers under clause 3 of the respective Port Commitment Deeds.
…
3.6 State may give PC Notice
(a)If after Completion the State becomes obliged to make a payment to an Other Port Manager under clause 3 of a Port Commitment Deed in respect of a Relevant Support Period (as defined in the Port Commitment Deeds), the State may give written notice (PC Notice) to Newcastle Port Manager stating:
(i)the amount of the payment which the State is obliged to make to the Other PortManager under clause 3 of the Port Commitment Deed (PC Payment); and
(ii)providing all material details of the calculation of that payment.
(b)The State may give a PC Notice before the PC Payment is due.
(c)This clause 3.6 applies in respect of each and every payment that the State is required to make on or after the Completion Date, under clause 3 of a Port Commitment Deed.
3.7 Payment to the State by Newcastle Port Manager
Newcastle Port Manager must, within 40 days after receipt of a PC Notice under clause 3.6 of this Deed in respect of a PC Payment, pay the amount of the PC Payment to the State without deduction or set-off.
3
0
8