Federal Court of Australia

Australian Competition and Consumer Commission v NSW Ports Operations Hold Co Pty Ltd [2021] FCA 720

ORDERS

THE 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    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.

2    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.

3    NSW Ports are a consortium involving Global Infrastructure Partners (GIP) and Industry Funds Management (IFM).

4    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.

5    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.

6    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.

7    Relevant extracts from the compensation and reimbursement provisions are reproduced in Sch 1.

8    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.

9    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.

10    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).

11    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.

12    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

13    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

14    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

15    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.

16    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.

17    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.

18    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.

19    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.

20    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.

21    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.

22    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.

23    Importers and exporters frequently use freight forwarders to manage their imports and exports.

24    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.

25    Transhipments are containers which arrive at a container terminal on one ship, are stored and then leave the container terminal on another ship.

26    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.

27    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).

28    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.

29    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

30    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

31    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.

32    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.

33    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).

34    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.

35    Most shipping cargo in NSW passes through Port Botany, Port Kembla or the Port of Newcastle.

36    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.

37    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.

38    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) Act 2012 (NSW) (the PAAT Act).

39    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.

40    Port Kembla is located about 90 km south of Sydney in Wollongong.

41    Port Kembla is primarily a bulk and vehicle port. It does not have a container terminal, but handles a small volume of containers.

42    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.

43    Kembla Operator operates Port Kembla under a landlord business model.

44    The Port of Newcastle is located about 160 km north of Sydney in Newcastle.

45    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.

46    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.

47    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.

48    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.

49    Other ports in NSW: there are other ports in NSW but none have, or are suitable for the development of, a container terminal.

50    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.

51    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.

52    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

53    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.

54    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.

55    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.

56    In 2005 planning approval was also secured to dredge part of the Hunter River to provide additional capacity for development at the Mayfield site.

57    By 2007 the State had acquired the Mayfield site and transferred it to NPC.

58    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)”.

59    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”.

60    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.

61    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.

62    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.

63    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).

64    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.

65    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.

66    In March 2011 a NSW Liberal/National Coalition government replaced the NSW Labor government.

67    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.

68    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.

69    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.

70    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.

71    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.

72    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.

73    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.”

74    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.

75    In late 2011 and early 2012 Transport for NSW and Infrastructure NSW (State agencies) commenced a review of ports policy for NSW.

76    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.

77    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”.

78    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.

79    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.

80    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.

81    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

82    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.

83    Morgan Stanley recommended that the State not approve the container terminal element of the development of the Port of Newcastle.

84    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.

85    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.

86    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.

87    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).

88    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.

89    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.

90    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).

91    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.

92    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”.

93    The Port Botany Scoping Study also recorded the following matters:

Competition for port services is driven by the relative location and distance from other port facilities, industrial and commercial activities undertaken nearby and relative efficiency of the port. Many bulk ports develop as local monopolies serving the specific cargoes in the adjacent hinterland.

Competition between Australia’s three east coast capital city ports is limited due to distance, with the demand for each port determined to a large extent by the origin and destination of the goods in question. Each of the capital city ports in Australia are destination ports, that is, each port services a captive local market. This is largely due to large geographical distances between the ports and suboptimal road and rail links that make the inland cost of transporting cargo significant and uneconomical.

…

Australia’s three east coast capital city ports are linked via liner shipping services. A liner service is a regular service calling usually on a fixed rotation on set days of the week. This requirement for consistency and the distance to the Australian market creates inter-dependence on the Australian east coast capital city port network of Melbourne, Sydney and Brisbane.

…

Port Botany’s location on the east coast allows it to attract either multiple weekly line-haul or feeder services from all of the major foreign regions with which Australia has significant trading partners. Port Botany is currently serviced by approximately 30 strings, with the greatest capacity on the southbound North-East / East Asia to Australia route (approximately 1.7 million TEU p.a.).

94    The Port Botany Scoping Study also said:

According to SPC’s Import Container Destination Study, ~ 98% of imports through Port Botany are destined to within the Sydney Metropolitan Area. Further, 85% of all containers are destined to, or originate from, within 40 kilometres of the port. This is largely due to the geographical distance between the ports that makes the inland cost of transporting relatively small volumes of cargo significant and uneconomical.

…

In NSW, two sites have been identified as potential new container terminals – the Port of Newcastle and Port Kembla. Port Kembla is the closest to Sydney and therefore the cost of transporting is the cheaper of the two, for the majority of containers. However, for either Port Kembla or the Port of Newcastle it appears uneconomical for shipping lines to call two ports so close to each other. Shipping lines would rather make a single stop at Port Botany (which has excess capacity) where there is already existing and well established supporting infrastructure.

95    The Port Botany Scoping Study identified that investment “highlights” for ports included:

96    In May 2012 NSC received a market study assessment by Price Waterhouse Coopers (PWC) for a container terminal at Port of Newcastle (Mayfield Market Study Assessment). The assessment included discussions with companies involved in shipping and logistics and potential Port of Newcastle customers. The assessment included the following:

•    The propensity of customers to use Newcastle as a major import port would be assisted by changes to the logistics network so that customers could require that liners call at Newcastle and goods could be efficiently distributed to the natural hinterland. This is less likely to be the case while logistics chains remain focused on Port Botany and metropolitan Sydney unless NSC and its strategic partners such as SCT Logistics can ensure delivery of goods into the logistics chain in a time and cost effective manner i.e. as effectively as for goods landed at Botany.

•    In the short term at least, market participants thought it more likely therefore that growth in container trade at Newcastle would be driven by push factors (e.g. further congestion at Port Botany) unless there is extensive upfront capital investment in the Newcastle area (e.g. new distribution centres or changes to the logistics chain) that will “pull” customers to Newcastle.

97    On 16 July 2012 NPC was granted a concept development consent for a concept plan involving development of a container terminal at the Port of Newcastle. A concept development consent requires further development applications to be approved for any development to be carried out in accordance with the approved concept.

98    Also on 16 July 2012 Transport for NSW issued an internal government discussion paper “Options for Container Ports in NSW”. The discussion paper, based on an analysis by economic consultants, concluded that “current road, rail and quayside network capacity is insufficient to support the forecast volumes in 2031” and “Port Kembla is the most cost effective location for an expansion of container handling facilities and network infrastructure is based on the preliminary assessment of forecast freight flows and infrastructure development costs”. It said that further research and analysis was required for the NSW government to make a “bankable” decision on the location of future container terminal development. The supporting consultants’ report considered that Port Botany could provide container capacity of between 6 and 8 million TEU per year (given the third terminal which had been developed) but additional container port capacity would be required in 20 years. The potential locations for that additional capacity were the Port of Newcastle and Port Kembla. The report analysed the capital investment costs, freight transport costs for the road and rail task and network capacity issues to indicate the preferred location for the additional container port capacity, noting that the report should be seen as a “guiding principles” document.

99    The supporting consultants’ report recorded the following matters:

(1)    94% of container volumes are moving to or from metropolitan Sydney with only 6% going to or from regional areas. This split is estimated to continue for the next 20 years;

(2)    to establish a container port at either the Port of Newcastle or Port Kembla will require a significant amount of capital investment to ensure necessary capacity across the container supply chain;

(3)    the estimated project investment costs for Port Kembla is $4.1 billion (if all costs are allocated to the port);

(4)    the estimated project investment costs for the Port of Newcastle is $12.1 billion (if all costs are allocated to the port);

(5)    under a proportional costs allocation, the estimated project investment costs for Port Kembla remains $4.1 billion and the estimated project investment costs for the Port of Newcastle reduces to $6.1 billion;

(6)    the cost of moving containers by road from each port to the Moorebank intermodal terminal is between $277 and $293 per TEU for Port Kembla and is $546 per TEU for the Port of Newcastle;

(7)    the cost of moving containers by rail from each port to the Moorebank intermodal terminal is between $348 and $381 per TEU for Port Kembla and is $439 per TEU for the Port of Newcastle; and

(8)    based on the information available and the preliminary analysis undertaken within this study the Port Kembla site appears the next logical location for a NSW container port when Port Botany reaches capacity The advantages identified in the preliminary analysis for a Port Kembla container port include:

•    Lower estimated capital costs based on infrastructure requirements currently identified and assigned;

•    Lower road and rail transport costs based on the flow of containers into the Sydney metropolitan area; and

•    Greater diversity in transport access routes given multiple road and rail options to Port Kembla from the Sydney metropolitan region.

100    On 27 July 2012 the Treasurer and Minister for Roads and Ports announced that the NSW government would proceed with the long-term lease of both Port Botany and Port Kembla. The announcement said that in relation to the “development of intermodal terminals across South and West Sydney, the Government’s freight strategy to be released later in 2012 would seek to develop Port Kembla as the logical next long term tranche of container capacity after Port Botany”.

101    On 31 July 2012 the Treasurer wrote to NPC noting that the timing of NPC’s request to execute binding contracts with NSC directly intersected with both:

•    the development of the Government’s Freight Strategy, which includes consideration of the State’s long-term container port requirements and will replace the 2003 Ports Growth Plan; and

•    the Government’s recent announcement that it intends to transact Port Kembla along with Port Botany, which has heightened the need to develop a clear State-wide strategy for the provision of container port facilities in New South Wales.

102    The letter noted that Cabinet had decided to support the development of a multi-use cargo facility at Mayfield excluding the proposed container terminal. The reasons for refusing the container terminal were identified as:

•    there is significant unutilised container handling capacity at Port Botany which can service the State’s container freight needs well into the future;

•    TfNSW and INSW have both indicated that they consider Port Kembla the next logical container port development after Port Botany. The Freight Strategy, to be released later in 2012, will therefore seek to develop Port Kembla as the next tranche of container capacity after Port Botany. The 2003 Ports Growth Plan, being nearly 10 years old, is not representative of this Government’s strategy for NSW container port development;

•    we note that the Mayfield development would be on the same timeframe as the Commonwealth’s recently announced intermodal terminal at Moorebank, but would have much less complementarity with that facility than Port Botany or Port Kembla; and

•    industry participants that the project team has interacted with support Port Kembla as the next priority container development after Port Botany.

103    In August 2012 the State met with the ACCC and notified it that Port Botany was well placed to meet demand in the medium to long term and that Port Kembla was expected to be the State’s next container port in the long term. This was for reasons including that it was closer to the high growth industrial area in the western suburbs of Sydney than Port of Newcastle, the capacity of Port Kembla could be optimised by enhancing rail logistics, and planned and potential intermodal facilities (including at Moorebank) would facilitate efficient logistics links to Port Kembla. The key competition concerns of the State were also recorded as being to “[f]acilitate effective competition in the provision of port services in order to promote efficiency and economic growth”.

104    On 22 August 2012 Anglo Ports of NSC wrote to the Treasurer confirming that it would “stand ready to develop Phase 3 (Berths 5 and 6 as a dedicated container terminal) at a time decided by government in the future and most importantly our consortium acknowledge that such a directive may not be authorized for some time (could be 20 years away)”.

105    On 23 August 2012 the Treasurer’s policy adviser wrote to the Treasury to the effect that a summary of a meeting with NSC prepared by NSC attributed inaccurate comments to the Treasurer and required a response aligning with the government’s position that:

1) Tsr acknowledges current container throughput at Newcastle Port related specifically to Hunter region/catchment. Treasurer comfortable with this container operation and expects organic growth for Hunter region only (but not beyond)

2) Future development will be dependent on Planning and Ports process and decisions that will outline the specific development allowed on the Mayfield site and that is consistent with Government ports strategy.

[Help: Can somebody please outline what this process is and put some clearer words around it???]

3) Treasurer only approves of development that will not compromise PB/PK transaction.

106    The Treasurer authorised NPC to continue negotiations with NSC for the development of a multi-cargo facility at Mayfield which would be confined to handling existing container traffic plus “organic growth” (that is, excluding the proposed container terminal). On 30 August 2012 the Treasurer wrote to NSC confirming that it welcomed the future development of non-container operations at Mayfield it having been made clear that the State’s expectation was that “Port Botany will remain the State’s primary container port and that Port Kembla will meet any additional demand for container handling facilities that is created when Port Botany reaches capacity”. The Treasurer said he would request NPC to continue negotiations with NSC as a matter of priority.

107    In October 2012 the State Infrastructure Strategy 2012-2032 was published by Infrastructure NSW under the Infrastructure NSW Act 2011 (NSW) which referred to reasons for preferring the development of Port Kembla as a container terminal port before the Port of Newcastle, being that the vast majority of containers would be expected to be destined for the Greater Sydney area, and investments in WestConnex and the F6 Extension would support the development of Port Kembla. The State Infrastructure Strategy 2012-2032 said:

(1)    “[o]nce Port Botany reaches capacity, (which is not expected to happen during the timeframe of this Strategy), it is planned for Port Kembla to become NSW’s supplementary container port”;

(2)    “[t]he container trade is characterised by the excess of imports over exports. The main freight supply chain task in connection with Port Botany is the distribution of import containers within Sydney: in fact 98 percent of import containers are destined for no further than 50 kilometres from the port gate. It is this proximity to the market that provides Port Botany with its non-replicable competitive advantage”;

(3)    “[c]ontainer trade through Port Botany is forecast to nearly quadruple by 2031, reaching over seven million TEUs, up from two million TEUs in 2011”;

(4)    “[w]ith the development of the third terminal, Port Botany now has the portside infrastructure to move at least seven million TEUs per annum, based on Sydney Ports Corporation estimates”;

(5)    “Infrastructure NSW assumes that through a combination of automation and more efficient labour arrangements, Port Botany will be able to realise its potential throughput. On this basis, Port Botany will be able to handle Sydney’s container trade for at least the next 20 years, and probably longer”; and

(6)    “[b]eyond the timeframe of this Strategy, there may be some benefit to the development of supplementary container port capacity in NSW. For example, an alternative facility could improve the resilience of NSW’s infrastructure in the event that Port Botany wharfage was incapacitated. Planning for this investment will need to start in the 2020s.The Government has announced its expectation that Port Kembla will provide the next logical tranche of container capacity, once Port Botany is fully utilised. Significant investment in landside infrastructure will be required to support Port Kembla. The vast majority of containers to this facility would be expected to be destined for the Greater Sydney area. The recommended investments set out in this Strategy in WestConnex (over the next 10 years) and in the F6 Extension (during the 2020s), will support the development of Port Kembla. Potential rail investments to Port Kembla are assessed in Section 10”.

108    In October 2012 the NSW Parliament passed the PAAT Act. This Act:

(1)    authorised the transfer of ports assets to the private sector or to any public sector agency provided that ownership of the freehold title to the relevant land remained with a public sector agency and a leasehold interest did not exceed 99 years: s 4;

(2)    required the proceeds of any transaction to be paid to the State into the Restart NSW Fund established under the Restart NSW Fund Act 2011 (NSW): s 5;

(3)    provided that the Treasurer has and may exercise all such functions as are necessary or convenient for the purposes of an authorised transaction: s 6;

(4)    provided that an authorised transaction is to be effected as directed by the Treasurer and can be effected in any manner considered appropriate by the Treasurer: s 7; and

(5)    provided that a “port SOC” (defined to include Port Kembla Port Corporation and Sydney Port Corporation: s 3) was subject to the direction and control of the Treasurer in the exercise of any of its functions for the purposes of an authorised transaction while it was a public sector agency and that the Treasurer may give directions for the purposes of an authorised transaction to a port SOC or a transaction entity and that those directions were required to be complied with: ss 11(1) and 11(2).

109    The proposed structure of the privatisation, as explained by the State, involved the State establishing a Port Lessor for each port, initially as a subsidiary of the State-owned corporation that was operating the relevant port (Port SOC). The Port Lessor was to remain State owned. The State also established a Port Manager, which was also a subsidiary of the existing Port SOC. The Port Manager was the trustee of a unit trust. Thereafter:

(1)    on Day 1 of the transaction:

(a)    the State transferred all of the Port land assets of the existing Port SOC to the Port Lessor, together with facilities that attached to that land that might be characterised as chattels;

(b)    the State transferred all other Port assets of the Port SOC that were not land to the Port Manager as trustee of the unit trust;

(c)    the Port Lessor leased the Port land to the Port Manager as trustee of the unit trust under an interim lease;

(d)    the Port Lessor leased the Port Lessor’s chattels to the Port Manager as trustee of the unit trust; and

(2)    on Day 2 of the transaction, the shares in the Port Manager and the units in the Port Manager unit trust were sold to the successful bidder. At the same time, the Port Lessor granted a 99-year lease of the Port land to the successful bidder’s nominated Port lessee.

110    Section 32(1) of the PAAT Act also nullified the development consent condition which imposed the 3.2 million TEU per year cap on Port Botany as a part of the consent to the Port Botany third terminal (“[a] planning control is of no effect to the extent that it would operate to impose a cargo throughput limit for Port Botany”).

111    On 25 October 2012 the State wrote to NPC saying that:

The Freight Strategy to be released later in 2012, which replaces the previous Government’s 2003 Ports Growth Plan, will therefore seek to develop Port Kembla as the next tranche of container capacity after Port Botany.

The Government does not however object to the concept of a container terminal development at Newcastle once Port Botany and Port Kembla are fully developed and developable container handling capacity is fully utilised at both Port Botany and Port Kembla. This is of course subject to any relevant Government approvals required at the time including planning approvals.

112    In November 2012 a Draft NSW Freight and Ports Strategy was published. The purpose of the strategy was to provide a freight network that supported the projected growth of NSW and to balance the needs of freight with those of the broader community and the environment. It said that Port Botany might approach its natural capacity between 2030 and 2040 and that new port infrastructure at Port Botany or Port Kembla might be needed to help relieve these pressures. The draft strategy situated the development of ports within the wider context of the need to develop the road and rail infrastructure that surrounded them. The draft strategy identified Port Kembla as the location for a future container terminal to augment the capacity of Port Botany “when required”. It recognised Port of Newcastle as continuing to be the primary coal export port and continuing to service bulk grain and other commodities.

113    The State provided the draft strategy to bidders for the Botany and Kembla leases, with a memorandum stating that the final strategy was expected to be publicly released in mid-2013.

114    The NSW Long Term Transport Master Plan was published in December 2012. It contemplated the finalisation and implementation of the Draft NSW Freight and Ports Strategy. That draft was finalised in November 2013 in substantially the same terms as the draft.

115    In December 2012 Morgan Stanley prepared a running list of issues for the Port Botany privatisation which referred to “[n]on-compete type restrictions on Sydney Harbour, Newcastle, Kembla if unsold” against which the noted position was “[n]o. (Bidders may alternatively seek a Sydney-airport like right to develop next container tranche within 100 km radius, picking up Kembla)”.

116    By December 2012 there were four final bidders selected for the Port Botany and Port Kembla leases.

117    In a response to the initial bid of NSW Ports on 20 December 2012 Morgan Stanley, on behalf of the Treasurer, informed NSW Ports (and, it may be inferred, the other three bidders) that:

Any mark-ups you make to the Bid Version Transaction Documents should reflect the minimum changes that you require to undertake the Transactions based on the cash consideration outlined by you in Section 4.3 above.

The mark-ups you make to each of the Bid Version Transaction Documents will form part of the State’s Preferred Bidder evaluation considerations. NSW Treasury reiterates that the Bid Version Transaction Documents together with the Day 1 Transaction Documents represent the State’s preferred position with regard to the risk allocation regime, terms and other elements of the Transactions.

The selection of the Preferred Bidder will be based to a significant degree on any proposed changes to the Bid Version Transaction Documents. In particular, any changes to the liability and risk allocation regime set out in the Bid Version Transaction Documents will be viewed unfavourably.

118    As described by the State, in December 2012, the Treasurer issued directions and orders under the PAAT Act to entities including the Ports SOCs and the entities that would function as the Port Lessors (Port Botany Lessor Pty Limited (PB Lessor) and Port Kembla Lessor Pty Limited (PK Lessor)) and the Port Managers (Botany Operator and Kembla Operator). These directions and orders facilitated the necessary steps on Day 1 of the transaction. Those directions and orders included:

(1)    a direction requiring SPC to acquire all of the shares in PB Lessor and Botany Operator;

(2)    directions requiring SPC, PB Lessor and Botany Operator to enter into certain transaction documents, known as Day 1 Documents;

(3)    an order vesting certain assets, rights and liabilities of SPC in SPC and/or PB Lessor in the manner specified in the order;

(4)    a direction requiring PKPC to acquire all of the shares in PK Lessor and Kembla Operator;

(5)    directions requiring PKPC, PK Lessor and Kembla Operator to enter into certain transaction documents, known as Day 1 Documents; and

(6)    an order vesting certain assets, rights and liabilities of PKPC in PK Lessor in the manner specified in the order.

119    In a report to IFM (part of the NSW Ports Consortium) of 25 January 2013 it was recorded that:

3. Revenue largely contracted or monopolistic in nature

Container volumes at Port Botany, which comprise around 50% of total revenues for Port Botany and Kembla, face very limited competition from other ports given the large distances to alternative facilities, and the high cost and inefficiency of moving goods into or out of Port Botany’s catchment area from other ports using road or rail transport. The nearest alternative port, Newcastle, is located 175 kilometres north of Port Botany and does not currently have the capability to handle large container volumes. Port Kembla would be the most serious potential competitor to Port Botany in the medium term, but can instead provide a complementary facility and site for expansion as part of this sale.

Developing the Port of Newcastle for future container shipping is unlikely in the next 20 years and would face a range of constraints. These include attracting reliable container shipping movements and overcoming landside logistic constraints as containers accessing Sydney from the Port of Newcastle also face increasing congestion on the F3 Freeway and capacity constraints on the Northern Sydney Freight Corridor.

…

6. Future expansion opportunities

The opportunity to acquire Port Kembla gives NSW Ports the option to expand the container facilities to meet NSW’s growth requirements as Port Botany reaches capacity. Port Kembla is the logical site for future container expansion as it is in close proximity to Sydney and high growth industrial areas in western Sydney.

120    By mid-February 2013 one bidder, referred to as Hobson, wrote to the NSW Treasury with comments on the draft transaction documents, identifying “fundamental” issues. One such issue was compensation if State policy changed over time to favour the Port of Newcastle as the location of the second NSW container terminal. Treasury considered this showed Hobson was very risk averse and noted that Treasury “could be aggressive and simply state that they should have pointed this out in their indicative bid as we would not have shortlisted them. Ask them why they misled us in their indicative bid?” At a meeting with Hobson on 22 February 2013 Hobson again raised the issue. The Treasury transaction team subsequently identified Hobson as “a significant way from the State’s risk position”, “alone on a number of issues”, and “the least attractive of the Bidders”. Treasury recognised however that a decision would have to be made about the comfort that might be given to bidders around the issue of development of a container terminal at Newcastle, albeit that “the Government’s policy is that any container terminal at Newcastle should only be developed once Port Botany and Port Kembla are full, and in the meantime only organic growth should be allowed”. This was because once the information in respect of NPC’s proposal was disclosed “there may be other bidders that request compensation for a Government sponsored container terminal at Newcastle”.

121    In a meeting on 28 February 2013 the Steering Committee established within NSW Treasury considered that the ongoing discussions between Government and NPC would need to be disclosed to bidders and that once disclosed other bidders may also seek compensation for a Government sponsored container terminal at Newcastle. It was noted that a competing container terminal at Newcastle would impact the value of the Port Botany and Port Kembla transaction by XXXX XXXX XXXX. Existing NSW government policy that such a container terminal would only be permitted once Port Botany and Port Kembla were both full was also noted.

122    Hobson reiterated its concerns about development of another container terminal to the State in correspondence of 1 March 2013. Treasury responded to the effect that it did not intend to communicate with bidders outside of the specified process.

123    The Treasury transaction team updated the Treasurer on 5 March 2013. One item was any change of law relating to Newcastle where this was noted:

•    Bidder seeking protection from State developing a competing container terminal at Newcastle and/or a limitation on competing developments at Newcastle

•    Current status of potential Newcastle development and Government position on this not clear to Transaction Team; accordingly disclosure requirements also unclear but needs to be addressed

•    Once Government disclosure in data room, all Bidders likely to seek protection or to re-price their bids

124    On 5 March 2013 Morgan Stanley said to Treasury that:

2. Competition from Newcastle

This is a risk that the State leases the Botany and Kembla ports to a new private equity group, and then develops competing container capacity at Newcastle. The State’s existing policy position is that Botany and then Kembla ought be developed for containers first, before Newcastle.

Newcastle Port Corporation has been engaged in discussions on the Mayfield site development, including a general cargo port. This could add to container capacity in Newcastle as a result of additional cranes being installed. This raises a grey area of whether a “general cargo facility” which has the ability to handle containers is effectively the same as a container facility. The Transaction Team believes that these discussions should be disclosed once the State’s position on additional capacity at Mayfield is fully determined.

The options for the State include:

a)     Do nothing: Our view is that this is likely to sacrifice material value, even if no containers are developed at Newcastle

b)     Cap the container throughput at Newcastle at some upper bound (albeit this is likely to support a Bidder “ask” for assurance there will be no cap at Botany), over some period of time (to be determined by a review of the Newcastle business plan). Of itself, this may deter proposals for container handling at Newcastle:

c)     Provide assurance that the State will not support any incremental container handling capacity (i.e. cranes) at Newcastle without the consent of the Botany/Kembla Port Lessee, until the State is satisfied (acting reasonably) that Botany and Kembla have been fully developed (this essentially reflects existing State policy)

d)     Provide a rolling assurance to Bidders that the State will not support new container handling capacity being installed with (say) 20 years of the development of private sector capacity. Given the recent development of T3, this would provide an initial period of coverage for the new Port Lessee which would periodically be extended where new container handling is installed from time to time (e.g. at Kembla);

e)     Or, some combination of item b) above and either item c) or d).

125    In a follow-up email to Treasury on 7 March 2013 Morgan Stanley said the options in relation to development of Newcastle were to:

•    Do nothing/allow the development

•    Allow the development and provide comfort to bidders

•    Block the development and leave it at that

•    Block the development and provide comfort to bidders anyway

126    Morgan Stanley said government policy settings had changed in the past and may do so in the future, disclosure was required, all bidders would seek protection once disclosure was clear, the unmitigated value impact to the State was up to XXXX XXXX which likely exceeded the positive benefit of the terminal, and the recommendation was to provide comfort to bidders.

127    Morgan Stanley also described the Newcastle issue as a “new strawman” in an email to the NSW Treasury of 7 March 2013 and suggested provisions to deal with the issue including that the State would not call for or tender for the development of container capacity at Newcastle until both Port Botany and Port Kembla were full; and compensation of the lessees of Port Kembla and Port Botany if container volumes exceeded 200,000 TEUs per year at Newcastle within the first 50 years of the proposed leases. The email said that current State policy was to develop Port Botany to its fullest extent first, then Port Kembla, and only then develop container capacity at Newcastle, and that the long-term leases of Port Botany and Port Kembla were being conducted in this policy environment, albeit recognising that governments cannot bind future decisions of governments. Treasury responded on 9 March 2013 to the effect that once the disclosure was made it would not matter if the government “kills NSC containers” as the bidders would still want compensation.

128    In a follow-up email of 10 March 2013 Morgan Stanley noted that the State would presumably deal with the issue of compensation in any privatisation of the Port of Newcastle “requiring any private developer to pay the state the equivalent of the port logistics contribution at [N]ewcastle for new container growth, and use that to offset some of the cost of paying out on this on the other side”. Similar observations in respect of any compensation required to Port Botany and Port Kembla being offset by a provision in transaction documents relating to the privatisation of the Port of Newcastle were made in other communications from Morgan Stanley to the State in March 2013 and in advice from Transport for NSW to the State who indicated that the Treasurer was “ok” with this.

129    A summary by Morgan Stanley of the key commercial and strategic matters relating to the privatisation of Port Botany and Port Kembla of 13 March 2013 noted that if the State supported some development at Newcastle then its options included:

a)    Do nothing: Our view is that this is likely to sacrifice material value, even if no containers are developed at Newcastle

b)    Cap the container throughput at Newcastle at some upper bound (albeit this is likely to support a Bidder “ask” for assurance there will be no cap at Botany), over some period of time (to be determined by a review of the Newcastle business plan). Of itself, this may deter proposals for container handling at Newcastle;

c)    Provide compensation for container volumes at Newcastle that exceed a reasonable projection of organic growth;

d)    Provide assurance that the State will not support any incremental container handling capacity (i.e. cranes) at Newcastle without the consent of the Botany/Kembla Port Lessee, until the State is satisfied (acting reasonably) that Botany and Kembla have been fully developed (this essentially reflects existing State policy)

e)    Provide a rolling assurance to Bidders that the State will not support new container handling capacity being installed with (say) 20 years of the development of private sector capacity. Given the recent development of T3, this would provide an initial period of coverage for the new Port Lessee which would periodically be extended where new container handling is installed from time to time (e.g. at Kembla);

f)    Or, some combination of items above.

130    The Morgan Stanley summary said that:

Through consultation with Government it has been determined to offer a combination of the following elements which reflect State policy:

•    Items (d) and (e), where the State will not over-invest on top of private sector investment, and will not call for new terminals before Botany/Kembla are full; and

•    Item (c) where the State will provide compensation for container volumes above an organic growth profile, until such time as the other elements above fall away.

The State can mitigate the risks of this approach through:

•    Approving or not approving developments at Newcastle from time to time; and

•    The terms of any lease at the Port of Newcastle can superimpose container growth requirements; and

•    The State could require ongoing financial contributions from any eventual container development at the Port of Newcastle to offset compensation payments to the Lessees of the Ports of Botany/Kembla.

131    The Steering Committee within Treasury briefed the Treasurer on 13 March 2013. Under the heading “Change in Law – Newcastle Container Terminals” the briefing note said:

•    Bidder seeking protection from State developing a competing container terminal at Newcastle and/or a limitation on competing developments at Newcastle

•    Current status of potential Newcastle development not clear; accordingly disclosure requirements also unclear but needs to be addressed

•    Once Government disclosure in data room, all Bidders likely to seek protection or to re-price their bids. [I]f the issue is not addressed, re-pricing of bids creates a potentially material impact on transaction proceeds today, even if Newcastle development does not proceed

•    This bid price impact may well exceed the value to the State of the Newcastle development.

132    The briefing recommended as follows:

•    Must disclose current status of Newcastle and reiterate Government policy (draft Transaction Memo attached). This will make it clear that the State has the ability to call for container developments at Newcastle under the proposed lease

•    Provide regime to Bidders to mitigate impacts of State-sanctioned Newcastle developments that are inconsistent with current policy which Bidders are “buying” today

•    Refer over for preliminary drafting of a “Port Development Sequencing Agreement” which essentially provides contractual support for current Government policy as understood by the Transaction Team, and compensation for impacts of a change in policy

•    The risk for the State in this approach is that (i) it subsequently changes its policies and supports container developments at Newcastle, after having transacted leases at Botany and Kembla on a different basis and (ii) it then has to compensate Botany/Kembla Lessees for this change. (We note that Government could require a Newcastle developer to make a financial contribution to mitigate the costs to Government of such compensation).

133    The regime to be provided to bidders developed into the compensation provisions in the PCDs.

134    The minutes of the Steering Committee meeting of 14 March 2013 recorded that the Treasurer agreed with the recommendations made and was comfortable with the proposed PCDs and compensation provisions. It was noted that the PCDs reflected “the areas of risk that the State has sought to provide comfort to bidders on, including competing container terminal capacity at Newcastle” and that it “confirmed the Government’s policy position with regard to Newcastle, given the Treasurer’s statements that there will be full scale container operations at Newcastle only once Port Botany and Port Kembla are at full capacity”.

135    In a report by IFM to IFM Australia Infrastructure of 14 March 2013 it was reported that:

•    In its current configuration, Port Botany’s capacity (based on quay and yard capacities) is 6.82 million TEUs. This capacity constraint would not be reached until FY35, on the Consortium’s Base Case container forecasts.

•    DPW’s berths could be expanded, such that Port Botany’s capacity increases to 7.65 million TEUs. Capacity in this scenario would not be reached until FY39.

•    The Sydney road network is capable of handling the forecast 7.65 million TEUs, assuming the current 14% rail modal share. Landside access, therefore, is not the key limitation on future growth.

•    Some operational improvements and investment will be required for rail to maintain its current 14% modal share. If this does not happen, the road network could accommodate the additional containers.

136    The report to IFM Australia Infrastructure also noted that:

The IC1 paper [13 March 2013] provides an analysis of the competitive strength of Port Botany and Port Kembla, and their respective current and likely future roles within the NSW economy. A request from the IC1 meeting, however, was the provision of further information in relation to potential competition from the Port of Newcastle and smaller port facilities in the Sydney area as well as the approximate cost premia associated with using the Port of Melbourne.

…

The Port of Newcastle is predominantly a coal export terminal (c.95% of trade), handling only a small amount of containers (about 15k TEUs p.a.). The ability to develop container terminals at the Port of Newcastle is limited by both land constraints and landside logistics.

The existing port facilities do not have additional land that can be developed as container storage areas. The existing facility is estimated to be able to accommodate only up to 500k TEUs per year. While there is potential to increase capacity, existing proposals have only gone up to about 1 million TEUs and this would require construction of additional berths by extensive dredging of contaminated sediments.

On the landside, the current rail line which extends 170km between Newcastle and Sydney offers limited opportunities for significant freight growth as it is shared with passenger services on the same dual track. With priority given to passenger trains and curfews in place for freight trains during morning and afternoon peaks, the rail line can only accommodate about one freight train per hour in each direction, implying the rail link is already close to capacity. The increasing population growth in the NSW Central Coast has also increased pressure to increase passenger services on the rail line. Additional limitations on capacity are due to several bottlenecks on the corridor, tight curves and sections of steep grade that restrict the speed and limit permissible loads of freight trains.

The road connecting Sydney and Newcastle is the F3 freeway which is already highly utilised and frequently congested. The F3 also serves growing population centres on the Central Coast.

Transporting containers from the Port of Newcastle would require:

•    Upgrade to the Northern Sydney Freight Corridor: Approximately $4 billion will be required to upgrade the Northern Sydney Freight Corridor, in addition to current improvement works costing $1.1 billion that are already underway.

•    Incremental transport costs: Newcastle is located further away from Sydney, compared to Port Kembla. Landside traffic would need to travel an additional 60-70 km, adding cost and time. Transporting containers through Newcastle would cost an additional $160 per TEU by road and $100 per TEU by rail, relative to Port Botany.

In comparison, transporting out of Port Kembla would incur smaller incremental transport costs of $100 per TEU by road and $50 per TEU by rail.

•    Additional intermodal container terminal capacity: The majority of the IMTs have currently been developing towards the south-west of Sydney. To accommodate rail from the Port of Newcastle, the Eastern Creek IMT would need to be developed.

•    Improvements to road capacity: Newcastle is connected to Sydney via the F3. Congestion at specific locations on the F3 would need to be addressed to accommodate additional container traffic. The F3-M2 tunnel link has been proposed, with the costs estimated at $4-5 billion.

URS previously analysed the potential for Newcastle to develop its container handling facilities as part of the EIS study for the multi-purpose terminal proposal (URS, 2000) and concluded that Newcastle was being bypassed due to inadequate container handling facilities and less competitive costs than Sydney.

The majority of Sydney’s total container trade services the Sydney metropolitan area (>80%), with the remaining generated from rural NSW. Those generated from rural NSW consist mainly of exports, and of these, approximately one quarter is generated from areas such as northern NSW. As such, the URS analysis concluded that Port Newcastle only had potential and capacity to be developed as a niche export port but not a viable alternative for Sydney’s existing or future container trade.

(Citations omitted).

137    Morgan Stanley undertook some quick modelling of the possible amount of compensation that would be payable based on NSC’s previous proposal for a container terminal at Newcastle. This resulted in a present value of $44.5 million compensation, which was said to be “minimal (even without further mitigants), and well below the amount by which Bidders would be discounting their Botany/Kembla bids”. This was sent to Treasury on 15 March 2013.

138    Also on 15 March 2013 Morgan Stanley emailed Treasury and responded to a question whether there was any unintended consequence of the State’s approach for Newcastle or advantage to the Port Botany/Port Kembla owners, noting that Treasury did not think there was, putting the compensation issues to one side, and saying that at least “with a clear regime in place anyone and everyone looking at a Newcastle deal can value it the same way”. Morgan Stanley considered that the State’s approach to the development of a container terminal at Newcastle should not be an issue for two main reasons “(1) the government doesn’t want containers there anyway so I doubt a Newcastle bidder is going to pay a lot for container optionality in the near term (2) the government can design into Newcastle transaction docs offsetting arrangements to mitigate the damages payable under the PCD anyway. This was discussed with the treasurer who was ok with this”.

139    The draft PCDs were also made available to bidders on 15 March 2013. The PCDs were said to cover a range of matters in relation to “documenting the State’s stated policy to fully develop container capacity at Port Botany and Port Kembla prior to development of container capacity at Port Newcastle. This provides a regime for describing ‘full capacity’ at Port Botany and Port Kembla, and prior to full capacity, a payment mechanism in the event container volumes at Newcastle were to exceed an organic growth profile”. Further, in a transaction memo to bidders of the same date titled “Government commitment to full development of Port Botany and Port Kembla for containers and interaction with proposed development of multi-cargo facilities at Newcastle Port” it was said:

Government recognises that the potential NPC development intersects with the Transactions. Accordingly and in support of the policy position the Government is providing Bidders with a codified regime (including a compensation formula) if container volumes at the Port of Newcastle exceed an organic growth path prior to Port Botany/Port Kembla being fully developed for containers. Bidders should have regard to the draft Port Commitment Deed which is being placed in the data room on 15 March 2013.

140    On 18 March 2013 Transport for NSW sent an email to Treasury saying, in respect of NSC’s proposal for a container terminal at Port of Newcastle:

…leasing berths and land suitable container capable facilities in Newcastle at this time will have an adverse impact on the transaction to enter into long term leases of Port Botany and Port Kembla. A competing container facility in Newcastle will create risk that liner services may shift from the existing port call patterns and impact on future earnings of Port Botany and Port Kembla.

…To address this risk TfNSW understands that the potential bidders for Port Botany and Port Kembla have been advised that the development of a container capable facility at Newcastle is being examined and it is proposed that the lease terms will include a compensation structure.

141    On 19 March 2013 NSW Ports Consortium received advice that the Port Botany and Port Kembla long-term leases deserved a premium as there was limited substitution risk as a result of the proposed Newcastle arrangements. In a report to IFM of 27 March 2013 it was reported that:

In the bid documents, the State has also provided for compensation if the container growth at Newcastle exceeds the “organic” growth projections whilst there is excess capacity at Botany and Kembla, hence providing us with additional protection on diversion of container throughput.

142    The NSW Ports Consortium was announced as the successful bidder for Port Botany and Port Kembla on 12 April 2013.

143    In April and May 2013, as described by the State, the Treasurer pursuant to the powers under the PAAT Act issued a number of further directions to entities including the Port SOCs, PB Lessor, PK Lessor, Botany Operator and Kembla Operator. These directions facilitated the necessary steps on Day 2 of the transaction. Those directions included:

(1)    a direction to SPC to execute a share purchase agreement in respect of Port Botany under which the shares in Botany Operator were sold to Hold Co and the units in the Port Botany Unit Trust were transferred to Hold Co (PB Sale and Purchase Agreement);

(2)    a direction to Botany Operator to enter into various documents, including the Port Commitment Deed for Port Botany;

(3)    a direction to PB Lessor to enter into certain documents, including a lease over land in connection with Port Botany with NSW Ports Botany Property Co Pty Ltd (PB Property) for a period of 99 years. PB Property was Hold Co’s nominated Port Lessee;

(4)    a direction to PKPC to execute a share purchase agreement in respect of Port Kembla under which the shares in Kembla Operator were sold to Hold Co and the units in the Port Kembla Unit Trust were transferred to Hold Co (PK Sale and Purchase Agreement);

(5)    a direction to Kembla Operator to enter into various documents, including the Port Commitment Deed for Port Kembla; and

(6)    a direction to PK Lessor to enter into certain documents, including a lease over land in connection with Port Kembla with NSW Ports Kembla Property Co Pty Ltd (PK Property) for a period of 99 years. PK Property was Hold Co’s nominated Port Lessee.

144    The State noted that under cl 3 of Sch 5 to the PAAT Act the Governor by proclamation was given the power to dissolve SPC and PKPC. By the Ports Assets (Authorised Transactions) (Dissolution of Port Corporations) Proclamation 2016, SPC and PKPC were dissolved.

145    On 31 May 2013, as a condition for completion of the sale and purchase agreements, the Port Botany PCD and the Port Kembla PCD were executed pursuant to the directions of the Treasurer. The Port Botany PCD was executed by the Treasurer for and on behalf of the State, Botany Operator, NSW Ports Botany Property Co Pty Ltd and Hold Co. The Port Kembla PCD was executed by the Treasurer for and on behalf of the State, Kembla Operator, NSW Ports Kembla Property Co Pty Ltd and Hold Co. As noted by the State, none of the State owned corporations (SOCs) previously involved in the operation of Port Botany or Port Kembla was a party to the PCDs. Nor did those SOCs have any role in the preparation of the PCDs.

146    Each PCD has a term of 50 years (unless the leases of the ports are terminated at an earlier time). Clause 3 of each PCD contains a compensation provision. The effect of the compensation provision is that unless Port Botany or Port Kembla are both at Full Capacity (as defined by cl 3.1), the Botany Operator and Kembla Operator are to be compensated if container volumes beyond a defined threshold are diverted from Port Botany or Port Kembla to the Port of Newcastle. Clause 3.3 imposes pre-conditions about which NSW Ports must satisfy the State in order to be able to claim compensation. If the State is satisfied in respect of those pre-conditions, compensation will be payable under cl 3.3 if, for two consecutive financial years, (i) the volume of containers imported or exported through the Port of Newcastle exceeds a threshold of 30,000 TEUs plus natural growth (the Threshold); and (ii) the container traffic through the Port of Newcastle in excess of that threshold causes a reduction in containers imported or exported through Port Botany or Port Kembla. Further:

(1)    by cl 3.4 the amount of compensation payable by the State is the weighted average wharfage charge per TEU imposed by Botany Operator or Kembla Operator on port users, multiplied by the volume of container traffic through the Port of Newcastle that exceeds the Threshold (measured in TEU), with the compensation payable to Botany Operator or Kembla Operator to be paid on a pro rata basis as between those ports, based on the volume of containers handled at each port during the relevant period;

(2)    NSW Ports cannot enforce its right to payment under cl 3.3, unless it complies with cll 3.5 and 3.6: cl 3.7(c), which, among other things, require NSW Ports to make a written submission to the State within 20 Business Days of the end of the relevant financial year (cl 3.6(a)); and

(3)    NSW Ports must use reasonable endeavours to minimise any loss of revenue that may be the subject of a claim under the PCD: cl 6(d).

147    As the State described it, the Port Kembla PCD also contains provisions in respect of the development of Port Kembla. The State noted that:

Under clause 24.2 of the Port Kembla Lease, NSW Ports is obliged to develop Port Kembla to the extent “Feasible” and consistent with (amongst other things) the “actual and anticipated future growth in, and pattern of demand for, Core Port Infrastructure and Port Services” and “the Port Objective”. The notion of whether it is “Feasible” to develop Port Kembla is addressed in clause 24.3 and includes matters such as whether approvals can be obtained, whether the development will optimise the use of the port, whether the development is consistent with growing trade through the port, and whether a reasonable commercial return can be obtained. The “Port Objective” is defined in clause 6.1 as being for Port Kembla to be a major seaborne trade gateway for NSW. In the event that NSW Ports does not comply with its obligations, the port lessor … is entitled to give notice requiring NSW Ports to provide an Upgrade Plan dealing with the development of the port. That plan was required to be given effect to, and if NSW Ports did not do so, the port lessor could step in at NSW Ports’ costs.

(Citations omitted).

148    On 18 June 2013, the NSW government announced that it intended to grant a long-term lease of the Port of Newcastle, subject to completion of a scoping study. The announcement said:

Newcastle will be the big winner from the offer of a long-term lease on the city’s port facilities, NSW Treasurer Mike Baird said today. The Government has announced in the 2013-14 Budget it will proceed immediately to a scoping study on offering a 99-year lease on the Port of Newcastle. Mr Baird said if the transaction was successful, $340 million of the proceeds would be directed towards the revitalisation of central Newcastle, to which the Government has already committed $120 million.

…

“Newcastle has been asked to make many painful adjustments in recent decades, particularly as the city’s proud tradition of steel-making came to a close.

“The city’s time has come.

“The Government’s commitment to Newcastle’s renewal will unlock its potential as a vibrant place to live and visit.

“While the renewal of Newcastle will proceed regardless, the lease of the Port will allow us to turbo-charge this priority project,” said Mr Baird.

…

Mr Hazzard said. “This confirms Newcastle is smack in the centre of the Liberals and Nationals Government’s plan to ensure the Hunter has a bright and pivotal future in rebuilding NSW.

“The community’s voice has been heard loud and clear and the Government intends that Newcastle’s heart will be rejuvenated through the stimulus of a new light rail package.

“It has the potential to be the catalyst for addressing Newcastle’s transport needs and to provide the basis of further light rail extensions in the future.

“If the business community needed any further confirmation that Newcastle should be a magnet for dollars for development – then this is it.”

He said the 99-year lease would not proceed unless the scoping study confirmed value for money.

149    The State retained Morgan Stanley to prepare the scoping study for the Port of Newcastle.

150    On 5 July 2013, Morgan Stanley sent an email to Treasury which referred to the ongoing negotiations between NPC and NSC and said it was “clear that NSC” was not aware of “the PCD compensation regime” or alternatively:

…they must be assuming that the State will be liable for any compensation to NSW Ports. This is not what the Treasurer thinks. …

If Mayfield is to be approved by Treasury/MS it needs to be formally disclosed to NSC including the fact that they will be paying any compensation.

151    Morgan Stanley noted to the Treasury on 19 July 2013 that NSC’s development proposal (which involved two stages and the potential for conversion into a container terminal in stage 2 at the Government’s discretion) might trigger compensation payments under the PCDs which could be offset by either NSC picking up the incremental costs, or by the future port landlord increasing trade charges to cover the costs, or both. Morgan Stanley identified three options – accept NSC’s proposal, reject NSC’s proposal, or confine the proposal to stage one only. It was noted that the first option, enabling the development to proceed, “[m]ay expose the State to liability under the Port Botany Port Commitment Deed … depending on the extent to which containers are diverted from Botany and the extent of recovery of these costs either via contract or statutory port charges”. In respect of the third option it was noted that “PCD exposure remains, given NSC’s forecasts include ~200kTEU even without Berths 5&6”. Morgan Stanley recorded that:

During the sale process, various bidders expressed concern regarding the potential development of container capacity at Newcastle Port, including statements to the effect that left unrestricted, the potential for container development at Newcastle Port would impact their continued participation in the sale process.

During the sale process, the NSW Government reiterated its policy position that [t]here is significant unutilised container handling capacity at Port Botany which can service the State’s container freight needs well into the future, and that Port Kembla will be the next major container port development once Port Botany reaches maximum capacity. It was clearly communicated to bidders that Port Botany and Port Kembla will be the State’s primary container handling facilities until full developable capacity at both sites is reached. Accordingly, and in support of the policy position of the NSW Government, the State provided Bidders with a codified regime (including a compensation formula) if container volumes at Newcastle Port exceed an organic growth path prior to Port Botany or Port Kembla being fully developed for containers (the “Port Commitment Deed” or “PCD”).