FEDERAL COURT OF AUSTRALIA

 

Stirling Harbour Services Pty Limited (ACN 008 767 600) v Bunbury Port Authority [2000] FCA 1381

TRADE PRACTICES – natural monopoly - exclusive licence arrangement for provision of towage services in the Port of Bunbury – whether entry into the licence agreement with the successful tenderer has the purpose, or is likely to have the effect, of substantially lessening competition – primary judge correctly applied the test of whether, on consideration of the likely state of future competition in the market ‘with and without’ the impugned conduct, the conduct has a proscribed anti-competitive purpose or effect

TRADE PRACTICES - contestable market theory – whether, in a natural monopoly market, there exist competitive forces that derive from credible threats of entry, rather than from the number of actual contestants – primary judge’s finding that the market was, at most, only weakly contestable was supported by the evidence – primary judge correctly took account of factors which operated as disincentives to entry, in determining the extent of contestability –there was no error in the primary judge’s finding that the threat to the applicant of entry by competitors, was insufficiently credible to exert an effective control over its prices – the fact that details of the agreement were to be negotiated with the preferred tenderer, did not detract from the price and level of service which resulted from the competitive tender process – there was no evidence that a particular less restrictive proposal was likely to have been adopted by the respondent, were it not for the calling of tenders for the exclusive licence – primary judge was correct in concluding that the respondent was exercising regulatory, not market power

APPEALS                                                       )

PRACTICE AND PROCEDURE                 ) – further evidence – whether a Federal Court appeal is an appeal stricto sensu or is by way of rehearing – effect of recent High Court authorities - whether further evidence may be adduced on appeal, in relation to matters which have occurred since the delivery of judgment – court not satisfied that the further evidence would have produced a different result, had it been available at the trial – importance of public interest in the finality of litigation

Bunbury Port Authority Act 1909 (WA)

Port Authorities Act 1999 (WA) ss 5, 30, 32, 34, 35, 35(4), 35(5)

Trade Practices Act 1974 (Cth) ss 2, 2B, 2C, 45, 46, 471

Federal Court of Australia Act 1976 (Cth) ss 27, 28(1)(b)

Federal Court Rules O 52 r 36

Family Law Act 1975 (Cth) s 93A(2)

Queensland Wire Industries Pty Limited v Broken Hill Proprietary Co Limited (1989) 167 CLR 177 cited

Australian Competition and Consumer Commission v Boral Limited (1999) 166 ALR 410 cited

Dandy Power Equipment Pty Limited v Mercury Marine Pty Limited (1982) 64 FLR 238 cited

Outboard Marine Australia Pty Limited v Hecar Investments No 6 Pty Limited (1982) 44 ALR 667 cited

Sodastream Limited v Electronics (Broken Hill) Pty Limited (1985) 60 ALR 427 cited

John S Hayes and Associates Pty Limited v Kimberly-Clark Australia Pty Limited (1994) ATPR ¶41-318 cited

Re: Review of Declaration of Freight Handling Services at Sydney International Airport (2000) ATPR ¶41-754 referred to

Re Queensland Co-Operative Milling Association Limited (1976) 25 FLR 169 applied

Duralla Pty Limited v Plant (1984) 2 FCR 342 discussed

Petreski v Cargill (1987) 18 FCR 68 discussed

Minister for Immigration, Local Government and Ethnic Affairs v Hamsher (1992) 35 FCR 359 cited

Teoh v Minister for Immigration and Ethnic Affairs (1994) 49 FCR 409 cited

Dynasty Pty Limited v Coombs (1995) 59 FCR 122 cited

Hornet Aviation Pty Limited v Ansett Australia Limited (1995) 16 ACSR 445 discussed

White v Minister for Immigration and Multicultural Affairs [2000] FCA 232 discussed

Foyster v Australian and New Zealand Banking Group Limited [2000] FCA 1254 discussed

Re Coldham; Ex parte Brideson [No 2] (1990) 170 CLR 267 discussed

CDJ v VAJ (1998) 197 CLR 172 applied

The Owners of the Ship “Shin Kobe Maru” v Empire Shipping Company Inc (1995) 181 CLR 404 cited

PMT Partners Pty Limited (In liquidation) v Australian National Parks and Wildlife Service (1995) 184 CLR 301 cited

STIRLING HARBOUR SERVICES PTY LIMITED and ANOR v BUNBURY PORT AUTHORITY

 

W 30 OF 2000

 

 

 

BURCHETT, CARR and HELY JJ

29 SEPTEMBER 2000

PERTH

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	W 30 OF 2000

 

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

 

BETWEEN:	STIRLING HARBOUR SERVICES PTY LIMITED (ACN 008 767 600) FIRST APPELLANT   ADSTEAM MARINE LIMITED (ACN 065 888 440) SECOND APPELLANT
AND:	BUNBURY PORT AUTHORITY RESPONDENT
JUDGES:	BURCHETT, CARR and HELY JJ
DATE OF ORDER:	29 SEPTEMBER 2000
WHERE MADE:	PERTH

 

THE COURT ORDERS THAT:

 

1.         The appeal be dismissed with costs.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	W 30 OF 2000

 

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

 

BETWEEN:	STIRLING HARBOUR SERVICES PTY LIMITED (ACN 008 767 600) FIRST APPELLANT   ADSTEAM MARINE LIMITED (ACN 065 888 440) SECOND APPELLANT
AND:	BUNBURY PORT AUTHORITY RESPONDENT

 

JUDGE:	BURCHETT, CARR AND HELY JJ
DATE:	29 SEPTEMBER 2000
PLACE:	PERTH

REASONS FOR JUDGMENT

BURCHETT AND HELY JJ:

1                     Adsteam Marine Limited and Howard Smith Limited each carry on the business of providing towage services in ports around Australia.  Between them, they supply about 80 per cent of the national market for towage services.  Stirling Harbour Services Pty Limited is a company owned as to 50 per cent by wholly owned subsidiaries of each of Adsteam Marine Limited and Howard Smith Limited.  Stirling Marine Services Pty Limited (“SMS”) is a subsidiary of Stirling Harbour Services Pty Limited.  Unless it becomes necessary to distinguish between parent and subsidiary, we will refer to each as “SMS”.  Since 1986 SMS has been the sole provider of towage services in the Port of Bunbury. 

2                     The respondent (“BPA”) was originally established as an incorporated body under the Bunbury Port Authority Act 1909 (WA).  That Act was superseded by the Port Authorities Act 1999 (WA)(“P.A.A”).  BPA provides port facilities and services in the Port of Bunbury, and subject to any direction given by the Minister for Transport, has exclusive control of the port. 

3                     The characteristics of the market for towage services in the Port of Bunbury make it clear that there will be only one supplier of those services, at least in the longer term.  Competition in that market is not economically feasible, as the costs and revenues involved will support only one provider of towage services in the port.  The same may be said of most other ports in Australia.

4                     Until the occurrence of the events with which this case is concerned, SMS supplied towage services in the Port of Bunbury pursuant to a licence granted by BPA in 1986 for a term of fourteen years, determinable on two years’ notice.  The licence was a non-exclusive licence, but in fact SMS was the sole provider of the services in question.  For at least the last ten years, no attempt was made by any other provider of towage services to enter into the Port of Bunbury, and to compete with or displace SMS as the incumbent operator.

5                     Provision of towage services is essentially a fixed cost business, hence, in an efficient market, prices should decrease with volume increases.  There have been some increases in volume in the Port of Bunbury in recent years but the nominal rates charged by SMS for the provision of towage services in Bunbury have neither increased nor decreased since 1988.  It was accepted that this represents approximately a 30 per cent reduction in the real value of the rates in question taking into account the effects of inflation.

6                     On 16 January 1997 BPA wrote to SMS expressing concern that despite an increase in shipping movements in the port, there had been no price reductions for towage services considered or discussed.

7                     Ultimately BPA took the necessary steps to determine the licence agreement under which SMS had provided towage services to the port and on 17 July 1999 advertised (both nationally and overseas) for the submission of tenders for an exclusive licence for a term of five years from 1 July 2000 to provide towage services in the port.  An option for a two year extension of the term was available subject to compliance with certain conditions.  There were eleven responses to the invitation to tender, and by the closing date for tenders (9 September 1999) six tenders had been received.

8                     The appellants claimed that BPA is engaging in anti-competitive conduct by entering upon this process and instituted proceedings in the Court under Part IV of the Trade Practices Act 1974 (Cth) (“TPA”) to prevent BPA from continuing the tender award process.  The proceedings were heard before French J who dismissed the appellants’ claim.

9                     The appellants relied upon ss 45, 46 and 47 of the TPA to support their claims for relief.  Section 47 was put at the forefront of the appellants’ case.  It is not necessary for any close analysis to be undertaken of the terms of any of these sections because, both at first instance and on appeal, the substantial issue was whether the entry into of a licence agreement with the successful tenderer has the purpose, or is likely to have the effect, of substantially lessening competition in the market for the provision of towage services in the Port of Bunbury.

10                  It was common ground that the relevant market is the market for the provision of towage services to shipping operators, and for the right to provide such services, in the Port of Bunbury.  The primary judge noted that, absent concessions, there might be a case for a broader definition of the geographic market, but he dealt with the case on the basis that whilst the parties had chosen to formulate the geographic market narrowly, that appeared to reflect the commercial realities of the situation.  A broader formulation of the market would not have assisted the appellants’ claim.

11                  Amongst the objectives sought to be achieved by TPA is the promotion of competition (TPA s 2) as a means to protect the interests of consumers: Queensland Wire Industries Pty Limited v Broken Hill Proprietary Co Limited (1989) 167 CLR 177, 191.  The objective is to protect and promote the competitive process; not individual competitors: Australian Competition and Consumer Commission v Boral Limited (1999) 166 ALR 410, 442.

12                  There was no dispute but that in determining whether the proposed conduct has the purpose, or has or is likely to have the effect, of substantially lessening competition in the relevant market, the Court has to:

-                     consider the likely state of future competition in the market “with and without” the impugned conduct; and

-                     on the basis of such consideration, conclude whether the conduct has the proscribed anti-competitive purpose or effect

Dandy Power Equipment Pty Limited v Mercury Marine Pty Limited (1982) 64 FLR 238 at 259; Outboard Marine Australia Pty Limited v Hecar Investments No 6 Pty Limited (1982) 44 ALR 667 at 669-670.  The test is not a “before and after” test, although, as a matter of fact, the existing state of competition in the market may throw some light on the likely future state of competition in the market absent the impugned conduct.

13                  The primary judge addressed these questions and did so on the basis that it was for the appellants to demonstrate that the impugned conduct had the proscribed anti-competitive purpose or effect: Sodastream Limited v Electronics (Broken Hill) Pty Limited (1985) 60 ALR 427 at 430; John S Hayes and Associates Pty Limited v Kimberly-Clark Australia Pty Limited (1994) ATPR ¶41-318 at 42,237.  His Honour also noted that the concept of “substantially lessening competition” is evaluative, and that there is only limited assistance to be derived from replacing the (undefined) words of the statute, with other phrases.  His Honour held that the phrase sets out a standard for judicial intervention in respect of the classes of anti-competitive conduct to which it applies.  Whilst recognising that some circularity is involved in this attempted exposition, his Honour held that the standard requires, before that intervention can be invoked, that there be a purpose, effect or likely effect of the impugned conduct on competition which is substantial in the sense of meaningful or relevant to the competitive process.  No challenge was made to this approach on the hearing of this appeal.

14                  The market for the provision of towage services in the Port of Bunbury is a natural monopoly, in which SMS is the incumbent supplier.  Professor Robinson, a witness for the appellants, described the concept of a natural monopoly in a generic sense as “... used to describe a method of production in which it is cheaper for one producer to produce the total industry output than would be the case with any other means of production”.

15                  His Honour found that the volume of towage services required at the port is historically relatively stable and unlikely to undergo any significant increase in the foreseeable future.  That volume is incapable of supporting more than one towage operator having regard to the costs of establishing and operating towage services at the port.  These findings were not challenged on appeal.

16                  It was the appellants’ contention that the presence of “natural monopoly” characteristics does not mean that the market is characterised by an absence of competitive outcomes, as would usually be the case with a true monopoly.  Where there are competitive forces in a natural monopoly market, they derive from credible threats of entry, rather than from the number of actual contestants.  Such a market is said to be contestable, and where perfect contestability exists, the forces of competition are as real as in a market in which there are multiple players.  The competitive forces operating in a perfectly contestable market are just as capable of producing efficient outcomes as is competition between multiple market participants in a fully competitive market.  To be perfectly contestable a market should be characterised by free entry and costless exit, but there are degrees of contestability.  Practical realities may not be in accordance with economic theory, hence economists often refer to a market as “weakly or poorly contestable” or as “strongly contestable” depending on the extent to which the market, in the real world, exhibits the characteristics of contestability.

17                  Professor Robinson asserted that the market for the provision of towage services in Bunbury is contestable, and perhaps even strongly contestable.  His Honour noted that the appellants’ case rests critically upon the proposition that absent an exclusive licence the market is contestable.  Upon the grant of an exclusive licence it ceases to be so for the period of the licence.  His Honour noted that while the conceptual and theoretical elements of Professor Robinson’s testimony were not significantly controverted, their application to the provision of towage services in the Port of Bunbury was.  Professor Robinson’s conclusions about that market were critically dependent upon their factual supports, particularly on the issue of contestability and the underlying assumptions about sunk costs.  On Professor Robinson’s view, the definition of a contestable market rests on four limiting assumptions which, in summary are:

1.                  free entry to and costless exit from the market;

2.                  no sunk costs;

3.                  all firms having access to the same technology which is used efficiently and all firms producing a homogeneous product; and

4.                  firms and consumers in the market having perfect information including complete demand information.

18                  The contestable market theory is concerned with incentives to produce competitive outcomes in the absence of, in this case, “on the water” competition.  Professor Robinson put it thus:

“In a perfectly contestable market comprising one or a small number of firms it is the threat of entry – the potential for competition – which will provide the stimulus for competitive outcomes and discipline in the market.  Incumbent firms will adjust prices, output and quality of service on the basis of the threat of entry from potential entrants; and such a threat is sufficient to eliminate monopoly rents (profits earned from prices in excess of the competitive price).”

19                  However, the primary judge was not persuaded as to the practical applicability of the “contestability” theory to the circumstances as they exist in the Port of Bunbury, because the applicants had failed to show that the relevant market is other than weakly contestable at most.  Professor Robinson accepted that where markets are weakly contestable or not contestable, some regulatory intervention is justified.

20                  The primary judge made the following findings which bear upon the question of contestability:

-           The object of any new entrant would have to be to displace SMS as incumbent.  Most aspiring competitors would regard SMS as a “fairly effective competitor and would not expect an easy competition”.

-           SMS was determined to protect its position in the market.  Its ability to do so was enhanced by its established connection with shipping operators particularly through its volume rebate agreements.

-           The cost of fighting an entry battle with a determined incumbent is a barrier to entry, which enables the incumbent to charge prices at a level calculated to deter entry, but nevertheless higher than might be charged in a fully competitive market.

-           There would be losses associated with the cost of competition against a determined incumbent with interests which transcend immediate interest in the Port of Bunbury and include strategic concerns related to its position throughout Australia and perhaps even globally.

-           Establishment costs are high and would not be fully recovered on exit from the market.

-                     The appellants had not made out their case that sunk costs, particularly in relation to the acquisition of tugs, and their recovery, are not a substantial consideration against entries into the field of providing towage services in small volume regional ports such as Bunbury.

-                     The only barrier to entry considered by Professor Robinson was that of sunk costs in relation to the acquisition of tugs, which on the basis of the appellants’ evidence, he assumed to be not significant.

-                     In forming his views, Professor Robinson had not taken into account the cost of fighting an entry battle with a determined incumbent, whereas any sound theory of contestability must take into account all considerations which would persuade or dissuade a potential competitor from entering if the extent of the threat of entry is to be properly assessed.

21                  Professor Williams, an economist called by the respondent, had expressed the view that a natural monopoly in towage services presents special problems for port operators because, in general, it is unlikely that the forces of competition between rivals in the market can be relied upon to safeguard the interests of port users.  When entry barriers are high, incumbents are able to set high prices and earn excess profits without inducing competitive entry.  In Professor Williams’ view, a competitive bid for a fixed term exclusive licence is a mechanism for introducing competition into the market.  The likely implication of the tender process is that the towage charges in the Port of Bunbury will fall as tenderers compete for the right to service the market.  That competition will be repeated each time the licence is due for renewal.  The absence of competition in the market is sought to be overcome by competition for the market.

22                  Professor Kolsen expressed similar views.  Whilst there is no perfect solution to the problems of a limited market protected in various ways from direct competition, an offer of an exclusive licence enables as many effective tenderers as possible to compete for the market.

23                  His Honour accepted this evidence, as he found that the process of calling for tenders for an exclusive licence with or without a price cap is likely to have a pro-competitive effect in relation to the market for the right to provide towage services.  The exclusive nature of the licence removes or reduces a disincentive to new entrants bidding for the licence, in that the successful tenderer will be assured of a degree of security of tenure to enable entry barriers by way of sunk costs including the costs of “on the water” competition which it would otherwise face in head-to-head competition with a natural monopolist, to be avoided or reduced.  The tender process encourages competitive price and service proposals from new entrants.  It is likely to have a competitive effect which survives the tender process in that the tenderer is tied to the prices and services proposed and cannot increase the prices without the consent of BPA.  There are also termination provisions for failure to perform in accordance with the terms of the agreement.  The initial competitive impulse generated by the tendering process should be supported at a later stage during the term of the licence by commercial pressure on the successful tenderer to continue to look more attractive to shipping operators and BPA than any other likely bidder upon the renewal or regrant of the licence.

 

The future “with”

24                  In Re: Review of Declaration of Freight Handling Services at Sydney International Airport (2000) ATPR ¶41-754, the Australian Competition Tribunal accepted that:

“Economists regard competition for the market, effected to the exclusion of continuing and open competition in the market, as a second-best option.”

Those observations are of no assistance in the present case, because here, the essential debate is whether, and to what extent, competitive forces are operative in the natural monopoly constituted by the provision of towage services in the Port of Bunbury.  If, as his Honour found, that market is at most only “weakly contestable”, then the tender processes by which competition takes place for the market cannot necessarily be dismissed as a second best option.  A balancing process is required.   Indeed, if actual competition between several towage operators is the best option, but is unavailable because of the limited size of the market, the “second best option” is the best available.

25                  Whatever competitive forces exist in relation to the provision of towage services in the Port of Bunbury (with whatever competitive outcomes), will be lost in the scheme which BPA seeks to implement.  An exclusive licensee will be insulated from competitive pressures for the period of the licence, subject to any pressures associated with the extension or renewal of the terms of the licence.  There will be a shift from a natural monopoly to a legally enforced and controlled monopoly, but the market behaviour of the successful tenderer will be regulated by the terms of the agreement which results from the competition for the market brought about by the tender process.  The tender process creates competition between rivals for the opportunity to supply towage services for the next five years on the basis that the prices will be capped.  Competitive outcomes are prescribed or sought within the contract entered into as a result of the bidding process, rather than through the operation of market forces during the term of the contract.  Mr Frederick, the Chief Executive of SMS, accepted that the system of having an exclusive licence on offer produces vigorous competition for the licence in terms of both price and service to be offered.

26                  In the tender documents, BPA stated its expectation that prices for the provision of towage services in the Port will reduce from those currently available.  Tenders will be assessed by BPA on the following criteria:

Amount of licence fee payable to the Authority (10 per cent weighting)

Prices charged for towage services                                (50 per cent weighting)

Provision of substitute tug                                              (5 per cent weighting)

Qualitative services                                                       (35 per cent weighting)

Tenderers must include in their submission the prices that will be charged throughout the term of the licence.  Prices included with the submission are the maximum prices that may apply during the term of the licence, unless BPA otherwise agrees.  Within twelve months of the commencement of the licence, the licensee is to review the charges to determine the possibility of reducing them, but there is no mechanism contained in the tender documents for resolving any dispute about the reduction of charges.

27                  The licence is an exclusive licence for a period of five years, with an entitlement to request an extension of the term for a period of two years.  BPA’s consent to an extension of the term would only be given if the licensee had met all of the Key Performance Indicators (“KPI’s”).  The list of KPI’s is to be agreed in negotiation with the successful tenderer prior to the commencement of the licence, and will include “reduction in costs to port users”.

28                  The tender documents do not contain any entitlement on the part of BPA to terminate the licence in the event that the licensee fails to implement proposed “reduction in costs to port users”, as this is not identified as a “critical KPI”, and BPA’s entitlement to terminate the licence prematurely for failure to meet a KPI is limited to a “critical KPI”.

29                  The competition for the market stops at the point of award of the licence, subject to the incentive to keep prices low if extension or renewal of the term is desired.  However, the competitive effect of the tender process endures for the term of the licence, notwithstanding the fact that rivals are prevented from entering during the term, because the successful tenderer is bound to continue to supply at prices and conditions set under the influence of the disciplining mechanism of competing tenders.

30                  The tender process limits the competition for the market to the potential participants at that time.  If there were a non-exclusive licence, later arrivals into the scene might be a competitive force, particularly in the event of a change in market conditions calling for a downward revision in prices.  And the fact that prices are being fixed for at least five years ahead suggests at least the possibility of an inbuilt cushion into the price to take account of contingencies beyond those forecast.

31                  A 5-7 year exclusive contract introduces a rigidity into the market which may prevent BPA from responding efficiently and competitively (in any rivalry which there is with other ports) to any new forces or innovations which might emerge over the term of the licence.  However, the likelihood of that occurring may not be great, having regard to his Honour’s finding that the volume of towage services at the Port is historically relatively stable, and unlikely to undergo any significant increase in the foreseeable future.

32                  Competition is the process by which market participants are forced to offer products on the best prices and terms possible.  Competition is both the mechanism for discovery of the manner in which goods may be supplied in the cheapest way possible, and the mechanism of enforcement producing the “peril” of business failure for those who fail to supply goods at prices and on terms that match their rivals: Re Queensland Co-Operative Milling Association Limited (1976) 25 FLR 169 at 187-188.  There is a real “peril” for a tenderer which does not put in its best bid, and as earlier indicated, the discipline flowing from the tender process endures throughout the licence term.  The question in this case is whether the competitive outcomes created by the tender process are substantially less than would otherwise result from the free operation of whatever competitive forces exist in relation to the market.

 

Did the primary judge apply the wrong test?

33                  The written submissions lodged by the appellants asserted that although his Honour enunciated the correct test at par [113] of his reasons for judgment, as a wholly forward looking, “with and without” test, he actually and erroneously applied a “before and after” test.

34                  That was not the approach which was adopted by Mr Finch SC, counsel for SMS, in oral argument on the hearing of the appeal.  Whilst counsel accepted that the test is a wholly forward looking “with and without” test, in his submission the present is the most reliable touchstone to the future “without”.  In his submission the public tender process is the second best option.  The best option is: “the continuing and open competitive processes which ... were inherent in the existing market ...”.

35                  The comparison upon which Mr Finch embarked in his submission was between the BPA proposal, and what was referred to as the less restrictive alternative, namely, maintenance of the status quo.  It is apparent that the trial was also conducted upon the basis that the “with and without” test involved a comparison between the BPA proposal, and the existing system.

36                  Having regard to the manner in which the proceedings at first instance, and this appeal were conducted, it is not open to the appellants to contend, as they do in the written submissions, that his Honour erroneously applied a “before and after” test.  The comparison on which his Honour and this Full Court have embarked is the comparison which the submissions of the parties both invited and required.

 

The future “without”

Contestability – globally, nationally and locally

37                  The primary judge accepted that the towage services market is contestable at the national and global levels but concluded that the relevant market is, at most, only weakly contestable.  The appellants contend that logically, the finding that the market for the provision of towage services is contestable at the global and national levels cannot stand with the finding of a lack of contestability on a port by port basis.  The appellants contend that there was no justification in the evidence for the distinction which the primary judge drew.

38                  It was Mr Frederick’s evidence that SMS is, and has been for some time, under considerable pressure from its shipping operator customers to reduce the effective cost of towage services.  SMS has concluded that it cannot effectively increase prices for its towage services by any substantial amount without placing its competitive position at risk.  The provision of towage services in Australian ports, according to Mr Frederick, is highly contestable.  Whilst SMS has neither increased nor reduced its prices in the Port of Bunbury since 1987, there has been a decrease, in real terms, of approximately 32 per cent in the period 1987-1999.

39                  It was also Mr Frederick’s evidence, specifically in relation to the Port of Bunbury, that SMS was vulnerable to potential entry by competitors.  If a competitor were able to offer an equivalent or better service, at a lower price, then SMS would find it difficult to compete.  If each had 50 per cent of the market, then SMS would be in the same position as the new entrant and “it would then come down to whoever was the better competitor under the circumstances”.  The cross-examination of Mr Frederick was such as to challenge his contentions in this respect.

40                  The primary judge did not accept Mr Frederick’s assertion that there are competitive strategies which could see the Bunbury incumbent displaced as a plausible exposition.  It failed to acknowledge the real weight of an incumbent in a Port like Bunbury.  The object of any new entrant would have to be to displace the incumbent.  The incumbent is protected:

-                     by the costs of fighting an entry battle with a determined incumbent;

-                     by the high establishment costs which would not be fully recovered on exit from the market.

Those barriers allow the incumbent to set a price at a level which is higher than the prices which might be charged in a fully competitive market, but which is low enough to deter entry by a competitor.

41                  The market for the provision of towage services in Bunbury, and the national or global market, are different markets, and logic does not compel a conclusion that if the national or global market is contestable, then so too must be the market in Bunbury.  Different forces may be operative in the different markets; there may be influences or forces at the national level which may not be reflected, or not all of which may be reflected, in the local market.  Whilst the cost pressures to which Mr Frederick referred may have an impact in the broader market, it does not follow that they have any effect on competition in the relevant market, particularly having regard to the volume rebate arrangements, and the absence of any direct impact upon the price for provision of towage services in the Port of Bunbury.  Mr Frederick accepted in cross-examination that if there was any price pressure on SMS in relation to the Port of Bunbury, it was reflected by volume discount arrangements which apply to all ports, rather than by any reduction in the prices applicable at Bunbury.

42                  Whether the market for the provision of towage services in the Port of Bunbury is contestable cannot be divorced from a consideration of any competitive advantages enjoyed by the incumbent in the Port, as the two are necessarily related.  His Honour found:

“An important point made by both Professor Williams and Professor Kolsen, the other economist called by the BPA, was that there is a difference between the competitive prices that might be charged as a result of direct and open competition and those that would be charged in order to deter a new entrant into a market characterised by natural monopoly.  I accept that the barriers to entry, at the very least the cost of fighting the entry battle with a determined incumbent, provide the basis of a margin of support for a higher than competitive price to be charged by the incumbent which may nevertheless be sufficient to deter entry.”

43                  There was ample evidence to support this finding.  In cross-examination, Mr Frederick accepted that any new entrant would perceive that SMS would not depart the Port of Bunbury without a fight; that SMS would suffer losses at the Port of Bunbury in order to resist displacement by a new entrant; that losses from an unsuccessful entry would be measured in the $millions and that the volume rebate arrangements which SMS has with shippers are a barrier to entry.  Professor Williams and Professor Kolsen each regarded the cost of the entry contest as a barrier to entry, and Professor Williams demonstrated, why even in a natural monopoly with no barriers to entry, prices are likely to be above the competitive level.

44                  Professor Robinson, the appellants’ expert, conceded that he had not considered these factors in reaching his conclusion about the contestability of the market for the provision of towage services in Bunbury, but accepted that they are matters which ought to be taken into account.

45                  Whilst there was some evidence from Mr Frederick and from other witnesses such as Messrs Riordan (Brambles) and Fletcher (P and O) that they are constrained to act efficiently because they are always looking over their shoulder for potential entrants, evidence of that character is in the nature of a subjective assertion or argument.  Mr Figliomeni, the chief executive officer of the Port of Bunbury, gave evidence that SMS’s net profit from operations has increased since 1988, and expressed the view that “there is an opportunity there” for price reduction.  The rationale for BPA’s action was dissatisfaction with the prices charged by SMS, which, on SMS’ thesis, were the product of market forces as effective as those that would have resulted had there been “on the water” competition.  There was little, if any, concrete evidence of SMS modifying its conduct in the Port of Bunbury because of a perceived threat of entry. 

46                  Mr Frederick gave evidence that SMS has concluded that it cannot sustainably increase prices for its towage services by any substantial amount without placing its competitive position at risk, and that SMS has very limited ability to increase prices in the ports in which it operates without compromising its competitive position.  As against that, Mr Figliomeni did not accept that there was a credible threat of entry in relation to the Port of Bunbury, and, as earlier indicated, it was his view that “there is an opportunity there” for price reduction.  Professor Williams expressed the opinion that there are severe problems in assessing the degree of competitiveness in a market from an examination of financial data of the participant. 

47                  Thus the primary judge was not constrained by the absence of direct financial evidence that SMS had been earning monopoly profits from making the finding noted in par 42 above.  Nor was he precluded by the evidence to which we have referred, from reaching the conclusion, after an overall assessment of the evidence, that the market for the provision of towage services in the Port of Bunbury was only weakly contestable.

48                  This challenge to the decision of the primary judge fails.

Barriers to entry

49                  The primary judge identified the following factors as disincentives to entry into the Port of Bunbury:

-                     high establishment costs, particularly in the acquisition of tugs, which would not be fully recovered on exit from the market;

-                     the cost of fighting an entry battle with a determined incumbent;

-                     the ability of the incumbent to charge a higher than competitive price, but one which is nevertheless sufficient to deter entry; and

-                     the incumbent’s established connection with shipping operators, particularly through its volume rebate agreements.

Those findings were reinforced by evidence of Messrs Shortland, Riordan, Weber and McKenzie that the costs involved are such as to deter entry into the Port of Bunbury without an exclusive licence, which would enable recoupment of costs out of a revenue stream over the period of the licence.

50                  The appellants’ written submissions contended that the primary judge wrongly identified these factors as barriers to entry.  The contention was not taken up, let alone developed, in oral argument.  The basis for the contention is, apparently, the proposition that for the purpose of competition law analysis, a barrier to entry should be regarded as a cost of production for an entrant that is not incurred by an established firm.  An alternative definition of a barrier to entry as any factor which allows an incumbent to earn a monopoly profit, whilst at the same time deterring other entrants from coming in, ought not to be adopted, it is said, because if prospective entrants face precisely the same costs and conditions that incumbents face, but still find entry unprofitable, then the market has attained the appropriate number of players.  New entrants should not be privileged over current market participants.

51                  Economies of scale would not be a barrier to entry on the proposed definition, but would be so regarded under the alternative definition.  Hovenkamp, Federal Antitrust Policy: The Law of Competition and its Practice, 1994, par 1.6, p 40 points out that if scale economies are significant, then an incumbent firm with an established market may have a large advantage over any new entrant, who will enter the market at a low rate of output.  The theory of contestable markets has as its foundation the notion that the ability of the incumbent to charge more, or give less, is constrained by the prospect of ‘hit-and-run’ entry on the part of a potential competitor.  If circumstances exist which, as a pure matter of fact, operate to deter entry, then they should at least raise for consideration the level of contestability of a market in which those circumstances exist.  Hovenkamp (supra) at p 40 asserts that antitrust analysis has mainly used the alternative definition of entry barriers, rather than the definition proposed by the appellants.

52                  Professor Kolsen was of the view that the factors identified by the primary judge were barriers to entry, and entry deterrents, of which account needs to be taken in determining the level of contestability of the market.  Ultimately, in cross-examination, Professor Robinson accepted that any sound theory of contestability would need to take account of all the considerations which would persuade a potential competitor to enter, or dissuade a potential competitor from entering the market, including the entrenched position of an established incumbent.  In oral argument Mr Finch SC admitted that whilst the factors identified by the primary judge might not be technically classified as barriers to entry, they were nonetheless relevant in assessing the contestability of the market.

53                  Accordingly the primary judge was correct in taking account of the factors which operated as disincentives to entry into the Port of Bunbury in determining whether and to what extent the market for provision of towage services in the port was contestable.

54                  Mr Frederick’s evidence was that sunk costs in the provision of towage services are very low, particularly having regard to the active international market for the sale of tugs.  That evidence was contrary to the conclusion of the 1995 ACCC inquiry on the point.  In the light of that report, the primary judge was entitled to conclude, as he did, that he was not persuaded by the assertion of low sunk costs in relation to the capital outlay involved in the acquisition of tugs.  Professor Williams expressed an opinion on the assumption that Mr Frederick’s evidence on this point was accepted.  He did not provide independent evidence of the fact.

55                  The primary judge said:

“I accept that barriers to entry, at the very least the cost of fighting the entry battle with a determined incumbent, provide the basis for a margin of support for a higher than competitive price to be charged by the incumbent which may nevertheless be sufficient to deter entry.

The appellants’ written submissions assert that, in so holding, the primary judge misunderstood the evidence.  It was not suggested, so it is said, that this price gap could exist on a permanent basis, but only for the period of time between the announcement of the price and the point in time at which an entrant could enter the market.  Again, this submission was not taken up in oral argument.

56                  We do not think that the primary judge misunderstood the evidence in this respect at all.  Professor Williams was making the valid point that a credible threat by an incumbent of a price reduction in response to entry may be sufficient to deter entry.  Professor Williams stated:

“This lack of incentive for entry is likely to persist even if towage charges are above competitive levels.  This is because potential entrants would reasonably anticipate that the incumbent operator would reduce charges if a rival entered the market – and it is post-entry, rather than pre-entry charges which will determine whether entry is profitable.”

57                  In cross-examination.  Professor Williams put the point again:

“If somebody perceives a threat of entry and to deter that threat becoming a reality puts their prices down, would one not see that? --- Yes, but the point of the argument is that because the incumbent is able to lower prices when it sees the new entrant, you won’t observe entry.

So that they will set their prices sufficiently low to deter a competitive entry? --- No.  They will set them high, higher than the competitive level, but because any potential entrant when doing its feasibility study will know that the incumbent is able to decrease prices as soon as it appears on the horizon, it will never appear on the horizon so we’ll never observe the up and down of the prices.

Have you ever heard anybody say that that’s the reason that they don’t enter a towage market? --- Yes, I heard a number of people, as I said earlier, say that that is the reason why nobody has entered the Port of Bunbury – one reason why nobody has entered the Port of Bunbury over the last 10 years.

That the incumbent could put their prices down? --- Yes.”

58                  The same view was expressed by Professor Kolsen.  The professor said that one can price by reference to what are thought to be entry deterrent prices, and still make a very good profit - way above what would be competitively normal.

59                  The most comprehensive exposition of the procuring of competitive outcomes, in the absence of actual competition, by the economic forces operating upon a natural monopolist in a perfectly contestable market was put forward by William J Baumol, John C Panzar and Robert D Willig in their work Contestable Markets and the Theory of Industry Structure (1982): see Hovenkamp, op cit, p 34, footnote 18.  The central theme of the book is described by its authors (at 13) as the “power of potential competition to extend the beneficent sway of the invisible hand”, a power which is claimed to be illuminated by the concept of contestable markets.  What is involved in the theory is well expressed at 349:

“A contestable market is one in which the positions of incumbents are easily contested by entrants.  In brief, a perfectly contestable economic market is defined to be one into which entry is completely free, from which exit is costless, in which entrants and incumbents compete on completely symmetric terms, and entry is not impeded by fear of retaliatory price alterations.”

But the invisible hand will only restrain the market incumbent if the existence of the threat of an entrant is credible.  If the position is indeed “easily contested”, if “entry is not impeded by fear of retaliatory price alterations” and exit is “costless”, the risk that entry may actually occur is real and will restrain a natural monopolist.   But the threat must be real.  Where the incumbent is known to be in a position to resist, so as to force an entrant to incur heavy costs and losses, especially if even a short-term profit from a “hit-and-run” operation cannot be expected, the threat of intervention in the market will be unlikely to materialize until the level of monopoly profit becomes particularly high.

60                  On the evidence, there was no error in his Honour’s view that the threat to SMS was simply not sufficiently credible to exert an effective control over its prices.  The actual situation at Bunbury was consistent with the explanation which Hovenkamp, op cit gives (at 36) of the reasons for the ineffectiveness, in many cases, of contestability:

“A major factor preventing markets from being contestable is ‘sunk’ costs – or investments that a firm must make to get into a market, but that cannot be recovered in the event the firm must later exit.  The more cheaply an incumbent can exit the market without abandoning durable and expensive sunk cost items, the more contestable the market and the more competitively it will perform, even though it might have room for only one seller at any given time.  The very notion of ‘hit-and-run’ entry implies that the prospective firm cannot count on staying in the contested market for a long period of time.  For that reason, any amount of irreversible investment acts as a deterrent to contestability.

Further, a market is perfectly contestable only if entry is instantaneous and the incumbent firm is unable to react.  In the airline example [this is the example of an airline servicing a route on which there are only enough passengers to sustain an operation by one airline], if the prospective firm must announce its entry even one day in advance, the incumbent firm may respond by lowering its prices to the competitive level or to a level just below the announced prices of the prospective entrant.  In that case passengers will stay with the incumbent and entry will be unprofitable.

 

The minimum conditions for contestability (costless exit and instantaneous entry) must obtain very strictly, and contestable market performance deteriorates very quickly in response to minor imperfections.  For this reason, contestable market theory is not nearly as robust as the traditional theory of competition, which suggests fairly competitive behavior in spite of a wide variety of imperfections.   This lack of robustness may have made contestability a flash in the pan, so to speak, as economic theories of industrial organisation go.”

 

 

Defects in the BPA proposal

61                  The appellants’ written submissions assert that the primary judge gave no, or no real, consideration to the evidence as to the defects in the BPA proposal in assessing the effect on competition.  Again, this submission was not taken up in oral argument.

62                  The so called “defects” in the BPA proposal are not peculiar to that proposal; rather, to the extent to which they have been identified in the submissions, they are in the nature of obvious problems and difficulties which arise when it is sought to replicate competitive outcomes by competition for an exclusive licence arrangement for a term.  Thus a consequence of exclusivity is that the incumbent is shielded from the forces of competition for the term of the licence.  Surely it cannot be seriously suggested that the primary judge failed to take this into account.  There is no mechanism for price reduction, and an inherent likelihood that the stipulated price maximum would become a de facto price minimum.  It is likely that the winning bidder will have built in a margin into his prices against the risk that costs will rise to a level greater than that projected during the term of the licence, subject to the discipline flowing from the tender process.

63                  However, the issue is not whether competition for a market is a perfect substitute for competition in a market.  As Professor Kolsen said there is no perfect solution to the problems of a limited market protected in various ways from direct competition.  The identified “defects” are obvious problems likely to be encountered when it is sought to replicate competitive outcomes for a market in which there is no competition.  They would necessarily have been taken into account as part of the process of evaluation which led the primary judge to conclude that the process of calling for tenders for an exclusive licence is likely to have a pro-competitive effect in relation to the market.

64                  The fact that the final details of the agreement are to be negotiated between the preferred tenderer and BPA does not detract from the fact that the terms as to price and service have resulted from a competitive tender process.

A less restrictive alternative

65                  The appellants’ written submissions assert that as the concept of lessening competition includes preventing or hindering competition, if there is a less restrictive alternative available to achieve the commercial objective, the failure to utilise that less restrictive alternative involves a lessening of competition.  The submission is that if there is one practical less restrictive alternative to the course proposed, then implementation of the proposal has the effect of substantially lessening competition.

66                  Conduct has the effect of lessening competition in a market only if it involves a reduction in the level of competition which would otherwise have existed in that market but for the conduct in question.  The mere fact that one can conceive of other less restrictive alternatives by which a commercial objective might be achieved is not sufficient of itself to lead to a conclusion that the conduct has the effect of lessening competition.  No amount of cross-examination of experts as to other and less restrictive ways in which an objective might be achieved could lead to the conclusion that implementation of a proposal will have the effect of lessening competition, unless there is material from which it should be inferred that were it not for the exclusive licence proposal, BPA would probably have proceeded in the other, less restrictive way.  The comparison required is between practical alternatives likely to be adopted; not between mere theoretical models.

67                  The appellants’ written submissions refer to a “number of possible alternatives” which were said to have been explored in evidence, and to a more specific proposal suggested by SMS to BPA, referred to as the “Port Kembla alternative”.  However our attention has not been drawn to any evidence which would lead to a conclusion that any particular less restrictive proposal is likely to have been adopted by BPA, were it not for the calling of tenders for an exclusive licence.

68                  That is hardly surprising, as the written submissions seek to put the appellants’ case in this respect in a manner inconsistent with that adopted by Mr Finch SC as the foundation for his argument.  As earlier indicated, the comparison which he invited this Court to embark upon, and which he accepted that it was proper for the primary judge to embark upon, was as indicated in par 34 above.

Market power

69                  BPA is not an agent of the Crown, and does not have the status, immunities and privileges of the Crown (s 5 P.A.A).  BPA’s functions include the facilitation of trade within the Port, and the safe and efficient operation of the Port (s 30 P.A.A).  Subject to any direction given by the Minister, BPA has exclusive control of the Port of Bunbury (s 32 P.A.A).  BPA may provide services (defined so as to include towage), or arrange for those services to be provided (s 35 P.A.A).  BPA requires the Minister’s approval before it issues a licence giving a person an exclusive right to provide port services of a particular kind.  The Minister is not to give that approval unless the Minister considers that the public benefits of exclusivity exceed the public costs, and he must table full reasons for his decision to grant an exclusive licence in parliament (s 35(4) and (5) P.A.A).

70                  In performing its functions, BPA must act in accordance with prudent commercial principles and endeavour to make a profit (s 34 P.A.A).

71                  The primary judge found that the exercise by BPA of a statutory power to license the provision of towage services in the Port of Bunbury is not an exercise of market power, but rather the discharge of a regulatory function conferred upon it by the legislature in the public interest.  In any event BPA was not offering an exclusive licence for any of the proscribed purposes under s 46 of TPA.  Its plain objective is to encourage a range of competitive responses from tenderers who would otherwise be unlikely to seek to enter the market.

72                  The appellants’ written submissions assert that BPA must be exercising market power in granting an exclusive licence, as BPA could itself have provided towage services in the port for the purpose of making a profit.  Had it exercised that power it would have been a market participant.  But the fact is that BPA has not exercised that power, and it is not appropriate to characterise its conduct in granting an exclusive licence to a successful tenderer, as being that of a market participant, when BPA has chosen to act in the alternative role of a market regulator.  The primary judge correctly concluded that BPA was exercising regulatory power, rather than market power.

73                  Further, the grant of the exclusive licence is not to prevent entry, eliminate or damage a competitor or prevent competitive conduct.  The purpose of the tender process is to create competition for the market of a kind that allows all interested parties to participate.  We agree with the primary judge’s conclusion that, in any event, BPA is not offering an exclusive licence for any of the proscribed purposes under s 46.  No error has been demonstrated in relation to his Honour’s conclusion.

Further evidence

74                  The appellants apply pursuant to s 27 of the Federal Court of Australia Act 1976 (Cth) that the Court should receive further evidence.  The further evidence sought to be adduced is in relation to matters which have occurred since the delivery of judgment, namely the identity of the preferred tenderer, the nature and extent of the price reductions expected to flow from the grant of the exclusive licence, and the most recent available draft of the proposed licence agreement for the provision of towage services in the Port of Bunbury.

75                  It was held in Duralla Pty Limited v Plant (1984) 2 FCR 342 that appeals to this Court are not by way of rehearing, but are in the nature of appeals stricto sensu.  That decision has been followed on a number of occasions:  Petreski v Cargill (1987) 18 FCR 68 at 77-78; Minister for Immigration, Local Government and Ethnic Affairs v Hamsher (1992) 35 FCR 359 at 369; Teoh v Minister for Immigration and Ethnic Affairs (1994) 49 FCR 409 at 419, per Lee J; Dynasty Pty Limited v Coombs (1995) 59 FCR 122 at 129; Hornet Aviation Pty Limited v Ansett Australia Limited (1995) 16 ACSR 445 at 450; White v Minister for Immigration and Multicultural Affairs [2000] FCA 232 at para 19; Foyster v Australian and New Zealand Banking Group Limited [2000] FCA 1254 at para 16.  Some of these decisions – Petreski v Cargill, Hornet Aviation, White at para 22 and (semble) Foyster – draw the conclusion that the power conferred by s 27 of the Federal Court Act to receive further evidence on appeal (see O 52 r 36) applies to matters occurring prior to trial but not led at the trial, rather than to matters occurring after judgment.  If those cases are correctly decided, events occurring after the judgment under appeal has been given cannot be taken into consideration in determining what that judgment ought to have been.

76                  Although Duralla Pty Limited v Plant has been followed without being questioned since 1984, after it was decided there have been two decisions in the High Court upon the basis of which an attack on its reasoning could be mounted:  Re Coldham; Ex parte Brideson [No 2] (1990) 170 CLR 267, and CDJ v VAJ (1998) 197 CLR 172.  In Re Coldham at 272, powers conferred on an appellate tribunal to “make such order as it thinks fit” and to “take further evidence for the purposes of an appeal under this section” were held by Deane, Gaudron and McHugh JJ (in their joint judgment) to be “strong indications that the appeal … was by way of rehearing.”  Those features of the appeal there under examination are replicated by s 28(1)(b) and s 27 of the Federal Court of Australia Act.  Furthermore, their Honours’ reasoning (also at 272, and at 274-275) is directly contrary to the view that any “further evidence” cannot include evidence of matters which had occurred after the decision under appeal.

77                  In CDJ v VAJ, the joint judgment of McHugh, Gummow and Callinan JJ states (at 199) that s 27 of the Federal Court of Australia Act and s 93A(2) of the Family Law Act 1975 (Cth) are “similar”, as indeed their language makes clear.  Their Honours state (at 201-202), of an appeal to a Full Court of the Family Court, as a given that calls for no argument, that “the appeal is by way of rehearing”, and also make it plain (at 203) that further evidence on appeal may relate “to events occurring after trial”.

78                  In their discussion of the principles involved, their Honours refer (at 201) to “the principle that a provision conferring judicial power upon a court should be construed liberally and without the making of implications or the imposition of limitations not found in the words used by the legislature.”  See also The Owners of the Ship “Shin Kobe Maru” v Empire Shipping Company Inc (1994) 181 CLR 404 at 421; PMT Partners Pty Limited (In liquidation) v Australian National Parks and Wildlife Service (1995) 184 CLR 301 at 313, 316.

79                  It is inevitable, having regard to Re Coldham and CDJ v VAJ, that the reasoning in Duralla Pty Limited v Plant will have to be reconsidered at some time, as well as the implication drawn from it in Petreski v Cargill and other cases limiting “further evidence” so as to exclude evidence of matters that occurred after judgment.  However, this is not an appropriate case for such a reconsideration.  The appellants’ written submission expressly acknowledges the authority of Duralla Pty Limited v Plant, and “the general rule that a court exercising appellate jurisdiction should not admit evidence of matters occurring post judgment”.  It accepts that the “question before this Court on appeal is whether the decision of French J at first instance was erroneous when made”.  But it argues that the evidence is exceptionally admissible as it goes to the prediction of the future if the impugned conduct is permitted.

80                  The primary judge had to evaluate the likely state of competition affecting the market with the impugned conduct, and to compare that with his assessment of the likely state of competition in the market absent the impugned conduct.  This case was conducted on the basis that the primary judge could and should undertake that process of evaluation even though the tender process had not reached the stage of the selection of the successful tenderer.  Undertakings were given by BPA effectively freezing the tender process pending the hearing and determination of the proceedings at first instance.

81                  In those circumstances it would not be appropriate to admit evidence as to what occurred after the resumption of the tender process, as that would be contrary to the basis on which the trial was conducted.  It is particularly inappropriate for that to be allowed when the introduction of any significant fresh matter would require this Court to undertake the whole process of evaluation afresh, taking into account material which was not before the primary judge, including, as the respondent’s written submission makes clear, evidence in answer to the appellants’ further evidence concerning “the whole tender process and the negotiation of the draft agreement”, which, in fairness, would have to be permitted also.  A Full Court is not well equipped to undertake that task.  It would be contrary to the general public interest in the finality of litigation to allow the case to proceed in that way.  It would also be contrary to the principle stated in CDJ v VAJ (at 202) that “[o]rdinarily, where it is alleged that the admission of new evidence requires a new trial, justice will not be served unless the Full Court is satisfied that the further evidence would have produced a different result if it had been available at the trial.  Without that condition being satisfied, it could seldom, if ever, be in the interests of justice to deprive the respondent of the benefit of the orders made by the trial judge and put that person to the expense, inconvenience and worry of a new trial.”  Even if the Full Court were to hear the evidence itself, the effect would be very much that of a new trial, with its delay, expense, inconvenience and worry; and it is clear that the appellants have not, on the material and argument they have chosen to present to this Court, shown that the further evidence would have produced a different result, had it been available at the trial.

82                  The application to introduce fresh evidence should be refused.

Notice of Contention

83                  The result is that the appeal should be dismissed.

84                  It is not necessary in the light of that conclusion to address the issue raised by the respondent’s notice of contention that, on the proper construction of ss 2B and 2C of the TPA, TPA does not apply to the proposal to let a tender in respect of the provision of towage services in the Port of Bunbury.

85                  The appeal should be dismissed with costs.

I certify that the preceding eighty-five (85) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Burchett and Hely.

Associate:   

Dated:              29 September 2000

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	W 30 OF 2000

 

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

 

BETWEEN:	STIRLING HARBOUR SERVICES PTY LIMITED (ACN 008 767 600) First Appellant   ADSTEAM MARINE LIMITED (ACN 065 888 440) Second Appellant
AND:	BUNBURY PORT AUTHORITY Respondent

 

JUDGES:	BURCHETT, CARR & HELY JJ
DATE:	29 SEPTEMBER 2000
PLACE:	PERTH

REASONS FOR JUDGMENT

CARR J:

INTRODUCTION

86                  I have had the advantage of reading Burchett and Hely JJ’s draft reasons for judgment in this appeal.  I adopt, gratefully, their Honour’s description of the factual background of the matter.  I agree that this appeal should be dismissed and I agree, generally, with their reasons for doing so.  I would, however, like to make some brief observations, some of which will disclose the fairly limited extent to which I differ with those reasons.

87                  A somewhat unusual feature of this matter was that the parties agreed on all aspects of market definition.  The relevant geographic market was that of the Port of Bunbury.  The relevant product market was towage services, which could be considered at two functional levels i.e. the supply of towage services to shipping operators and the provision of the right to supply such towing services, the latter encompassing the grant by the respondent of towage licences, whether exclusive or otherwise.  The market was a natural monopoly, that is, a market which could only support one supplier of the relevant services.  In this case, that circumstance resulted from the volume of demand not being sufficiently high to enable more than one supplier to cover its costs.

88                  At first impression, the proposition that a firm might be granted a 5 year (possibly 7 year) exclusive franchise to service a natural monopoly market, without the result of such grant being a substantial lessening [which includes preventing or hindering – see s 4G of the Trade Practices Act 1974 (Cth) (“the Act”)] of competition in that market, seems to be a very bold one.  Five to seven years is quite a long time for engaging in exclusive dealing if it involves trade in a substantial part of the goods or services in a market.  This case does not involve merely a substantial part of the services in a market – it involves all of them.  However, the case can be seen to be a very special one.

SUBSTANTIAL LESSENING OF COMPETITION – SS 45 AND 47 OF THE ACT

Whether the primary judge applied the wrong test

89                  The appellants contended that the learned primary judge erred because there was no support in the evidence or in logic for the proposition that Adsteam (a term which I shall use to refer to one or both of the appellants and to Stirling Marine Services Pty Ltd the company which has for many years provided towage services in the Port of Bunbury) would be the incumbent in the market if the respondent were to put a non-exclusive licence up for tender. 

90                  In fairness to Adsteam, I think that it is reasonably clear that it made similar submissions to the primary judge – see, for example, AB 468 line 41 to 469 line 12.

91                  However, in my view, his Honour did not fall into the error alleged.  The key part of his Honour’s reasoning can be seen at para 117 where, for the reasons which he there summarised, he found, contrary to Adsteam’s assertion, that the market was at most “weakly contestable”.  It is true that, earlier in his reasons, his Honour had made that assessment principally on the basis of a rejection of the evidence of Mr C J Frederick (Chief Executive Officer of Adsteam) on this point, and an analysis of what had happened in the market to date.  But nowhere in para 117 does his Honour assume that if a non-exclusive licence were put up to tender, Adsteam would be the successful tenderer.  In my opinion, his Honour was correct in assessing the degree to which the market was a contestable one by referring to what had happened in the past and what was happening at the time of his judgment.  As Mr S G Finch SC, senior counsel for Adsteam, observed in argument before us, “one of the most reliable touchstones to the future without [without the exclusive arrangement] is the present”.

92                  I accept that Adsteam sought to persuade the primary judge (as it sought to persuade us) that there were less restrictive alternatives to the proposed exclusive arrangement – see AB 470-471.

93                  However, as the respondent submitted to us, there was no evidence led by Adsteam as to what was likely to occur, either from a regulatory point of view or in the way of future market changes if a non-exclusive licence were offered.  In particular, there was no evidentiary basis for suggesting that an alternative form of regulation to that which had applied for the past 16 years might be implemented or that the degree of competition in the market would change.

94                  In my view, it was clearly open to his Honour to assume that, in the absence of the exclusive arrangement, there would continue to be only one provider of towing services in the market and that the market was at best only weakly contestable.  If his Honour assumed, which I doubt, that Adsteam would, in those circumstances, continue to be the incumbent, then I think he was entitled to do so.  The weight of the evidence from the would-be competitors was that it was the prospect of obtaining an exclusive licence which caused them to be interested in tendering.  His Honour reviewed this evidence in paras 71 to 82 of his reasons.  Mr Hugh Mackenzie of Mackenzie’s Tug Services Pty Ltd, whom he described as “an impressive witness”, swore to the effect that his company would not be able to enter the market unless there was an exclusive deal.  In my view, the most telling single piece of evidence was the fact that for 14 years no firm had applied for a non-exclusive licence to provide towage services in the Port of Bunbury.

95                  It may be useful, in the context of contestability, to make a few brief comments about competition.  In Adamson v West Perth Football Club (Inc) (1979) 39 FLR 199 at 225 Northrop J held (and I respectfully agree with him) that the term competition when used in s 45 of the Act, is used in a commercial or economic sense.  I do not see any basis for suggesting that when the term is used in s 47 of the Act it is used in any other sense.  The decision of the Trade Practices Tribunal in Re Queensland Co-operative Milling Association (1976) 25 FLR 169 continues to provide guidance about the meaning of competition.  Relevantly for present purposes, the Tribunal explained that competition was a device for controlling the disposition of society’s resources, it is a mechanism for firms to discover the services which the community wants and the manner in which they may be supplied in the cheapest possible way.  Competition is a dynamic process, a mechanism of enforcement which expresses itself as rivalrous market behaviour.  There is a range of competition with perfect competition at one end of the range and undue market power at the other.  Effective competition, also known as workable competition, is a situation where rival sellers, whether existing or new potential entrants to the field, keep the market power of the seller or sellers in the market in check by offering or threatening to offer effective inducements.  Competition is a process and whether firms compete is very much a matter of the structure of the markets in which they operate.  On the subject of market structure, in a passage quoted with approval by Northrop J in Adamson, the Tribunal described the condition of entry as being the most important element of market structure.  In a now famous passage the Tribunal explained (at 189):

“… it is the ease with which firms may enter which establishes the possibilities of market concentration over time; and it is the threat of the entry of a new firm or a new plant into a market which operates as the ultimate regulator of competitive conduct.”

96                  Burchett and Hely JJ, in their reasons for judgment, have explained how economists regard contestability in relation to a market which is a natural monopoly.

97                  It seems that contestability in that context is a description used by economists to describe the degree to which there are competitive outcomes in a market which has only one supplier and is only likely, in the relevant time-frame, to have one supplier. 

98                  In my view, and with all due respect to those who hold differently, it is not helpful when applying the provisions of the Act in the context of a natural monopoly, to distinguish between competition for a market and competition in a market.  Where there are credible threats of entry by potential competitors, those threats should be regarded as factors operating in the market.  The threat of entry operates in the market as a regulator of competitive conduct, as the Tribunal explained in QCMA.  The Act is concerned about a substantial lessening of competition (whether in purpose or effect) in a market and it is an unnecessary distraction, in that context, to talk about competition for a market.

99                  In the present case, competition “on the water” is really not, in my view, so different from contestability.  Occasional competition on the water, though the theory of contestability does not depend on actual competition, would strengthen the case for contestability

100               Adsteam mounted two inter-related challenges to his Honour’s findings.  First, his Honour was said to have erred in drawing a distinction between the degree to which there may have been contestability at the global and national levels of the towage services market and the lack of such contestability in the Bunbury market.

101               As Burchett and Hely JJ point out, there was ample evidence to support his Honour’s findings.  Those findings were closely related to his Honour’s findings that there were significant barriers to entry into the Bunbury market.  It is not necessary for me to refer to all of the evidence summarised in the reasons for judgment of Burchett and Hely JJ.  However, I would refer to four matters.  The first is Professor Robinson’s expert evidence.  Professor Robinson (who was called by Adsteam) relied upon Mr Frederick’s evidence about the extent to which Adsteam’s market conduct was constrained by the perceived threat of entry.  But the primary judge did not accept Mr Frederick’s evidence on that point.  In those circumstances Professor Robinson’s evidence on this point simply falls away. 

102               Secondly, I think that Adsteam’s response (or rather the lack of it) to the respondent’s call for Adsteam to consider a reduction in prices is illuminative.  On 16 January 1997 Mr D Figliomeni (Chief Executive Officer of the respondent) wrote to Adsteam expressing the respondent's concern that, despite an increase in shipping movements in the port, there had been no price reductions for towage services considered or discussed.  Mr Figliomeni swore that he wrote to Adsteam because he had been informed that Adsteam had reduced its charges for towage services at Fremantle.  In the letter, Mr Figliomeni asked Adsteam to let the respondent know whether a price reduction was forecast “… given the adequacy of the return demonstrated in the financial statements provided”.  The letter requested an early response.  There was no response and no explanation given for Adsteam’s failure to respond to that letter.  Mr Frederick’s evidence was that prices were not reduced at that time because the increase in volume through the port was not sufficient to justify reductions. 

103               Thirdly, the supposed existence of a threat of competition or a perception of such a threat could well be discounted by many years of non-appearance of any such competitor.  In some 14 years no competitor had emerged.  It was quite clearly open to his Honour to disbelieve Mr Frederick’s evidence that Adsteam was constrained in its behaviour in the Port of Bunbury by the perception of threatened competition, when so much time had passed without the threat becoming a reality.

104               Fourthly, the appellants challenged his Honour’s conclusions about the sunk costs of an unsuccessful competitor on departure from the market.  The appellants submitted that there was no evidence to support his Honour’s findings that there was a risk of significant loss or substantial transaction costs associated with resale of tugs on the international market for second-hand tugs.  His Honour relied on part of a conclusion of the Australian Competition and Consumer Commission’s 1995 Inquiry into the Harbour Towage Declaration which had been exhibited to Mr Frederick’s affidavit.  The relevant conclusion was in these terms:

“With a significant proportion of such expenditure [on tugs] likely to be lost as sunk costs in the event of failure, risks perceived by potential entrants represent a barrier to entry.” 

[I have edited the quotation in paragraph 117 of the primary judge’s reasons and paragraph 6.3 of the Commission’s Report, which appears at AB 781, to reflect what I think was intended.] 

 

105               The Report also stated that evidence given to the Inquiry suggested that there were limited opportunities in the second-hand tugs market in Australia.

106               Senior counsel for the appellants contended that his Honour’s conclusion was not supported by any evidence.  In my view, his Honour was entitled to rely upon the conclusion drawn by the Australian Competition and Consumer Commission which was put into evidence by Adsteam.  Counsel urged upon us Mr Frederick’s evidence to the effect that although the ACCC Report reflected the truth as at 1995, things had changed.  That is true, but Mr Frederick’s evidence about things changing since the Commission’s Report (see AB 505) was in relation to volume discounts.  Mr Frederick (see AB 869) did not say that things had changed in the market for second-hand tugs since 1995.  He simply challenged, as being wrong, that portion of the Commission’s Report which referred to a limited second-hand tugs market in Australia.

107               In my view, it was open to the primary judge to find, as he did, that there was a risk of significant loss or substantial transaction costs if an unsuccessful entrant had to dispose of its tugs.  Indeed, as counsel for the respondent suggested to us, the existence of such a risk is a matter of commonsense, hardly needing evidence.

108               I will make two further comments about barriers to entry.  Adsteam submitted that the primary judge had erroneously identified the following matters, namely, sunk costs, high capital costs, an incumbent’s preparedness to compete aggressively and what it described as a “supposed gap between an entry deterring price” and the competitive price, as barriers to entry.  This was because, on Adsteam’s submission, sunk costs can only constitute a barrier to entry when they must be incurred by an entrant, but not by an established firm.  A similar submission was made in relation to the other costs.  In my view, this is too restrictive a definition of what constitutes an entry barrier for the purposes of the present case.  As I have said, this is a special case.  In my opinion, when assessing the degree of competition in this market, and particularly when assessing entry barriers, it would be appropriate to regard anything which impedes ready entry into the market as being a barrier to entry.  The term “entry barrier” is only a label for use when assessing the degree to which firms are able to enter or are likely to enter the relevant market.

109               The very fact that the market is a natural monopoly itself provides a barrier to entry in the sense that the contest is not to enter the market and secure a viable part of it; an entrant has to be prepared to win the whole market from the incumbent.  In other types of market an entrant may make a successful entry by securing a lesser market share.

110               The fact that the tender process for an exclusive licence provides an opportunity for a competitor to enter the market and for the buyers in the market (the ship operators) to be able to contract with a new tug service proprietor is, in my opinion, an indication of competition being enhanced rather than lessened substantially.

111               It should be noted that the Act has a relevant ambulatory effect.  In the case of engaging in the practice of exclusive dealing, [I focus on this in view of the provisions of s 45(6)], the ongoing provision by the respondent of the benefits of an exclusive towage licence, whether during the term of the initial licence or subsequently, will continue to be assessed in terms of whether, for example, it has or is likely to have the effect of substantially lessening competition in a relevant market.  Much will depend, of course, on the degree to which the structural or behavioural characteristics change over time.

SECTION 46 – WHETHER THE RESPONDENT EXERCISES MARKET POWER WHEN GRANTING AN EXCLUSIVE LICENCE

112               I differ, respectfully, from the views held by the primary judge and by Burchett and Hely JJ to the effect that the respondent, when granting the exclusive licence, is exercising regulatory power, rather than market power.  The question arises because, when s 46(1) is read with s 46(4)(a), the proscription of that section is the misuse of a substantial degree of market power.  The term market power is not defined in the Act.  However, s 46(4)(c) relevantly provides that a reference to power in relation to a market is a reference to power in that market either as a supplier or as an acquirer of goods or services in that market.  It is true that the respondent neither supplies nor acquires towage services.  However, the parties are agreed (and the primary judge accepted) that the market could be considered at two functional levels.  One of those functional levels was the provision of the right to supply towage services.  That is the relevant market in which to assess whether the respondent has market power.

113               The evidence suggests that the respondent intends to extract a premium for the grant of the exclusive licence.  In the document known as the “Project Scope”, that premium was described as a “licence fee” (see AB 1261).  In the evaluation of tenders, the amount of licence fee payable to the respondent was given a 10% weighting compared, for example, to a 50% weighting for the proposed prices for the towage services.  In my opinion, the respondent was a supplier of services in the relevant market and it had near-absolute power as a supplier of those services in that market.  I think that when the respondent grants an exclusive licence to a successful tenderer it will be exercising a substantial degree of market power in the relevant market.  The fact that the eventual source of such power may be statutory does not, in my view, preclude it from being market power.  The proscribed anti-competitive purposes may relate to the market in which the market power exists or any other market – see s 46(1)(a), (b) and (c).

114               However, I agree with the conclusions of the primary judge and Burchett and Hely JJ (and their reasons for those conclusions) that the respondent is not offering an exclusive licence for any of the purposes proscribed by s 46.

FURTHER EVIDENCE

115               I agree with Burchett and Hely JJ that the reasoning in Duralla Pty Limited v Plant (1984) 2 FCR 342 will have to be reconsidered at some time in the light of the two High Court authorities referred to in paragraph 76 of their reasons.  For the reasons which their Honours give at paragraphs 80 and 81 I agree that the appellants’ motion that the Court should receive further evidence should be dismissed.  Furthermore, I think that the risks of injustice to the appellants by our refusal to receive such evidence are minimized by the matters to which I refer in paragraph 26 above.

116               The appeal should be dismissed with costs.

I certify that the preceding eighty-five (85) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Carr.

Associate:

Dated:              29 September 2000

Counsel for the Appellants:	Mr S G Finch SC with Mr P D Evans
Solicitor for the Appellants:	Messrs Freehills
Counsel for the Respondent:	Mr C Colvin with Mr C Stevenson
Solicitor for the Respondent:	Messrs Mallesons Stephen Jaques
Date of Hearing:	29 & 30 May 2000
Date of Judgment:	29 September 2000