Federal Court of Australia

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

File number:

NSD 2289 of 2018

Judgment of:

JAGOT J

Date of judgment:

29 June 2021

Catchwords:

COMPETITION – privatisation of Port Botany and Port Kembla port commitment deeds – where provisions of deeds require the State to compensate port operators if container volumes above specified threshold divert to possible container terminal at the Port of Newcastle – alleged contravention of s 45 of the Competition and Consumer Act 2010 (Cth) – whether hypothetical container terminal at Port of Newcastle would operate in same market as Port Botany or Port Kembla – relevant market existing monopoly market for container terminal services in New South Wales – whether compensation provisions had purpose, effect or likely effect of substantially lessening competition – no likely anti-competitive effect of compensation provisions where provision of port commitment deed relating to privatisation of the Port of Newcastle required port operator to reimburse the State for compensation paid under Port Botany or Port Kembla deeds whether reimbursement provisions had purpose, effect or likely effect of substantially lessening competition – no likely anti-competitive effect of reimbursement provisions.

STATUTORY INTERPRETATION Crown immunity – whether s 45 of the Competition and Consumer Act 2010 (Cth) applies to State making and giving effect to port commitment deeds whether State entering or giving effect to compensation provisions was carrying on business privatisation of ports giving effect to government policy Crown immunity – whether s 45 applied to first to third respondents making or giving effect to port commitment deeds – derivative Crown immunity – whether application of s 45 to first to third respondents would adversely affect proprietary right or interest of the Crown – where Treasurer had statutory rights to enter privatisation transactions where legislative intention that statutory rights allow acts necessary or convenient to enter transactions where compensation provisions necessary or convenient to effect privatisation transactions – s 45 inapplicable by operation of derivative Crown immunity.

Legislation:

Competition and Consumer Act 2010 (Cth) ss 2, 2A, 2B, 4, 4E, 4F, 4G, 4L, 45, 51

Competition Policy Reform Act 1995 (Cth)

Competition Policy Reform (New South Wales) Act 1995 (NSW)

Environmental Planning and Assessment Act 1979 (NSW) ss 1.3, 1.4, 4.22, 5.12, 5.14, 5.16, 5.19, 5.23, 5.24, 5.27

Independent Pricing and Regulatory Tribunal Act 1992 (NSW) s 4

Ports and Maritime Administration Act 1995 (NSW) ss 6, 7, 8, 9, 10, 10A, 10B, 12, 13, 16, 17, 21, 47, 61, 62, 67, 77, 78, 80, 81

Ports Assets (Authorised Transactions) Act 2012 (NSW) ss 3, 4, 5, 6, 7, 9, 11, 20, 21, 25, 32, 33, 34, 35, 36

State Owned Corporations Act 1989 (NSW) ss 3, 20C, 20E, 20F, 20H, 20I, 20N, 20O, 20P, 20Q, 20R, 20S, 20X, 20Y, Sch 5

Cases cited:

Air New Zealand Ltd v Australian Competition and Consumer Commission [2017] HCA 21; (2017) 262 CLR 207

ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 1) [1990] FCA 710; (1990) 27 FCR 460

Australia Meat Holdings Pty Ltd v Trade Practices Commission [1989] ATPR 50,082

Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99

Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited [2015] FCAFC 103; (2015) 236 FCR 78

Australian Competition and Consumer Commission v Australian Competition Tribunal [2017] FCAFC 150; (2017) 254 FCR 341

Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2006] FCAFC 128; (2006) 153 FCR 574

Australian Competition and Consumer Commission v Baxter Healthcare Pty Limited [2007] HCA 38; (2007) 232 CLR 1

Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2008] FCAFC 141; (2008) 170 FCR 16

Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2013] FCA 909; (2013) 310 ALR 165

Australian Competition and Consumer Commission v Flight Centre Travel Group Limited [2016] HCA 49; (2016) 261 CLR 203

Australian Competition and Consumer Commission v Liquorland (Australia) Pty Ltd [2006] FCA 826

Australian Competition and Consumer Commission v Pacific National Pty Limited [2020] FCAFC 77; (2020) 277 FCR 49

Australian Competition and Consumer Commission v Pacific National Pty Limited (No 2) [2019] FCA 669

Australian Competition and Consumer Commission v Yazaki Corporation [2018] FCAFC 73; (2018) 262 FCR 243

Australian Gas Light Company v Australian Competition & Consumer Commission (No 3) [2003] FCA 1525; (2003) 137 FCR 317

Bass v Permanent Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334

Boral Besser Masonry Limited (now Boral Masonry Ltd) v Australian Competition and Consumer Commission [2003] HCA 5; (2003) 215 CLR 374

Bradken Consolidated Ltd v The Broken Hill Proprietary Company Ltd [1979] HCA 15; (1979) 145 CLR 107

Bropho v Western Australia [1990] HCA 24; (1990) 171 CLR 1

Carlton & United Breweries (NSW) Pty Ltd v Bond Brewing New South Wales Ltd [1987] FCA 640; (1987) 16 FCR 351

Carr v Western Australia [2007] HCA 47; (2007) 232 CLR 138

Construction Forestry Mining & Energy Union v Mammoet Australia Pty Ltd [2013] HCA 36; (2013) 248 CLR 619

Cool & Sons Pty. Limited v. O’Brien Glass Industries Limited [1981] FCA 99; (1981) 35 ALR 445

Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd [1982] FCA 193; (1982) 44 ALR 173

Davids Holdings Pty Ltd v Attorney-General (Cth) (1994) 49 FCR 211

Dowling v Dalgety Australia Ltd (1992) 34 FCR 109

Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640

Hannes v Director of Public Prosecutions (Cth) (No 2) [2006] NSWCCA 373; (2006) 165 A Crim R 151

Hecar Investments No. 6 Pty. Limited v. Outboard Marine Australia Pty. Limited [1982] FCA 114; (1982) 41 ALR 697

Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298

JS McMillan Pty Ltd v Commonwealth [1997] FCA 619; (1997) 77 FCR 337

Lewis v Australian Capital Territory [2020] HCA 26; (2020) 381 ALR 375

McGraw-Hinds (Aust) Pty Ltd v Smith [1979] HCA 19; (1979) 144 CLR 633

Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia [2002] FCAFC 197; (2002) 122 FCR

Murphy v State of Victoria [2014] VSCA 238; (2014) 45 VR 119

News Limited v South Sydney District Rugby League Football Club Limited [2003] HCA 45; (2003) 215 CLR

NT Power Generation v Power & Water Authority [2002] FCAFC 302; (2002) 122 FCR 399

NT Power Generation Pty Ltd v Power and Water Authority [2004] HCA 48; (2004) 219 CLR 90

Ogden Industries Pty Ltd v Lucas [1967] HCA 30; (1967) 116 CLR 537

Outboard Marine Australia Pty Ltd v Hecar Investments No 6 Pty Ltd [1982] FCA 285; (1982) 44 ALR 667

Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6; (1989) 167 CLR 177

Radio 2UE Pty Ltd v Stereo FM Pty Ltd [1982] FCA 223; (1982) 44 ALR 557

Re Howard Smith Industries Pty Ltd and Adelaide Steamship Industries Pty Ltd (1977) 15 ALR 645

Re Queensland Co‑operative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 8 ALR 481

Re Residential Tenancies Tribunal (NSW); Ex parte Defence Housing Authority [1997] HCA 36; (1997) 190 CLR 410

Re Tooth & Co Ltd (1979) 39 FLR 1

Rural Press Ltd v Australian Competition and Consumer Commission [2002] FCAFC 213; (2002) 118 FCR 236

Rural Press Limited v Australian Competition and Consumer Commission [2003] HCA 75; (2003) 216 CLR 53

Seven Network Ltd v News Ltd [2007] FCA 1062

Seven Network Ltd v News Ltd [2009] FCAFC 166; (2009) 182 FCR 160

Singapore Airlines Ltd v Taprobane Tours WA [1991] FCA 808; (1991) 33 FCR 158

Smith v Capewell [1979] HCA 48; (1979) 142 CLR 509

Smith v Leurs [1945] HCA 27; (1945) 70 CLR 256

Software AG (Aust) Pty Ltd v Racing and Wagering Western Australia [2009] FCAFC 36; (2009) 175 FCR 121

SPAR Licensing Pty Ltd v MIS Qld Pty Ltd (No 2) [2012] FCA 1116; (2012) 298 ALR 69

SST Consulting Services Pty Limited v Rieson [2006] HCA 31; (2006) 225 CLR 516

Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 1381; (2000) ATPR 41-783

Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 38; (2000) ATPR 41-752

Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607

Trade Practices Commission v CSR Ltd [1990] FCA 521; (1991) 13 ATPR 41-076

Trade Practices Commission v TNT Management Pty Ltd [1985] FCA 19; (1985) 6 FCR 1

Universal Music Australia Pty Ltd v Australian Competition and Consumer Commission [2003] FCAFC 193; (2003) 131 FCR 529

Wynyard Investments Pty Ltd v Commissioner for Railways (NSW) [1955] HCA 72; (1955) 93 CLR 376

Bank voor Handel en Scheepvaart NV v Administrator of Hungarian Property [1954] AC 584

Town Investments Ltd v Department of the Environment [1978] AC 359

United States v EI du Pont de Nemours & Co 351 US 377 (1956)

Division:

General Division

Registry:

New South Wales

National Practice Area:

Commercial and Corporations

Sub-area:

Economic Regulator, Competition and Access

Number of paragraphs

1634

Dates of hearing:

12 October – 29 October 2020; 1 December – 17 December 2020

Date of further submissions:

18 March 2021; 16 April 2021; 28 April 2021, 29 April 2021

Counsel for the Applicant:

Mr M Borsky QC, Mr R Yezerski, Mr A Barraclough, Ms A Muhlebach and Ms J Watson

Solicitor for the Applicant:

Australian Government Solicitor

Counsel for the First, Second and Third Respondents / Cross-Claimants:

Mr N Hutley SC, Dr RCA Higgins SC, Mr B Lim and Mr T Rogan

Solicitor for the First, Second and Third Respondents / Cross-Claimants:

Gilbert + Tobin

Counsel for the Fourth Respondent/Cross-Respondent:

Mr SJ Free SC and Mr IJM Ahmed

Solicitor for the Fourth Respondent/Cross-Respondent:

Minter Ellison Lawyers

Counsel for the First, Second and Third Cross-Respondents:

Mr G Rich SC and Mr B Hancock

Solicitor for the First, Second and Third Cross-Respondents:

Allens Linklaters

ORDERS

NSD 2289 of 2018

BETWEEN:

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

Applicant

AND:

NSW PORTS OPERATIONS HOLD CO PTY LTD ACN 163 262 351

First Respondent / Cross-Claimant

PORT BOTANY OPERATIONS PTY LTD ACN 161 204 342

Second Respondent / Cross-Claimant

PORT KEMBLA OPERATIONS PTY LTD ACN 161 246 582

Third Respondent / Cross-Claimant

STATE OF NEW SOUTH WALES

Fourth Respondent

AND:

PORT OF NEWCASTLE OPERATIONS PTY LIMITED ACN 165 332 990

First Cross-Respondent

PORT OF NEWCASTLE INVESTMENTS (PROPERTY) PTY LIMITED ACN 169 286 024

Second Cross-Respondent

PORT OF NEWCASTLE INVESTMENTS PTY LIMITED ACN 169 132 441

Third Cross-Respondent

STATE OF NEW SOUTH WALES

Fourth Cross-Respondent

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]

2    BASIC FACTS

[13]

2.1    Participants in the container port supply chain

[14]

2.2    Container shipping

[15]

2.3    Required approvals for a container terminal

[30]

2.4    Ports

[31]

2.5    Transactions and events

[53]

2.6    PON’s preliminary business case

[205]

2.7    ACCC’s contentions about basic facts

[256]

3    CROWN IMMUNITY

[287]

3.1    Statutory provisions

[287]

3.2    Authorities

[298]

3.3    ACCC’s/PON’s submissions

[311]

3.3.1    Crown immunity submissions

[311]

3.3.2    Derivative Crown immunity submissions

[330]

3.4    Consideration

[337]

3.4.1    Crown immunity

[337]

3.4.2    Derivative Crown immunity

[355]

4    WITNESSES

[425]

4.1    Lay witnesses

[425]

4.2    Expert witnesses

[439]

5    MARKET

[446]

5.1    Principles relevant to market definition

[446]

5.2    Some preliminary observations

[466]

5.2.1    Issues

[466]

5.2.2    A key dispute about the market

[472]

5.2.3    The relevant hypothesis about a container terminal at the Port of Newcastle

[478]

5.2.4    Some basic propositions about the market

[491]

5.3    Industry participants

[519]

5.3.1    General

[519]

5.3.2    The use of terms such as “competition”, “substitution” and “market”

[531]

5.3.3    The bidding process

[535]

5.3.4    The s 155 notice

[541]

5.3.5    Oral and documentary evidence – NSW Ports

[551]

5.3.6    Oral and documentary evidence – PON

[583]

5.3.7    Industry experts

[598]

5.3.8    Port of Tauranga and Port of Auckland

[610]

5.3.9    Consideration

[615]

5.4    Economists

[653]

5.4.1    Summary of Mr Smith’s evidence about the market

[654]

5.4.1.1    General

[654]

5.4.1.2    Ports

[659]

5.4.1.3    Stevedores

[667]

5.4.1.4    Port Botany and the Port of Newcastle

[671]

5.4.1.5    Reply report

[681]

5.4.2    Summary of Dr Pleatsikas’s evidence about the market

[686]

5.4.2.1    General

[686]

5.4.2.2    Port Botany, Port Kembla and the Port of Newcastle

[689]

5.4.3    Summary of Mr Ockerby’s evidence about the market

[708]

5.4.3.1    General

[708]

5.4.3.2    Port Botany and the Port of Newcastle – overview

[712]

5.4.3.3    Port Botany and the Port of Newcastle – analysis

[715]

5.4.3.4    Reply to Mr Smith

[734]

5.4.3.5    Reply to Dr Pleatsikas

[745]

5.4.4    Summary of Mr Balchin’s evidence about the market

[747]

5.4.4.1    General

[748]

5.4.4.2    Ports

[749]

5.4.4.3    Port Botany and the Port of Newcastle

[757]

5.4.5    Economists’ joint report

[769]

5.4.6    Economists’ oral evidence

[771]

5.4.7    Consideration

[825]

6    RELEVANT PRINCIPLES - PROSCRIBED PURPOSE AND EFFECT

[894]

6.1    Substantially lessening competition

[894]

6.2    Purpose

[904]

6.3    Likely effect

[915]

7    PURPOSE OF COMPENSATION PROVISIONS

[926]

7.1    Overview

[926]

7.2    Consideration

[931]

8    LIKELY EFFECTS OF IMPUGNED PROVISIONS

[981]

8.1    Some facts and considerations

[981]

8.2    Required exercise

[1031]

8.3    May 2013/May 2014

[1045]

8.4    Likely effect on the State/public operator

[1070]

8.5    Likely effect on NSW Ports

[1105]

8.6    Likely effect on private operator/PON

[1130]

8.6.1    Preliminary observations

[1130]

8.6.2    ACCC’s 10 supporting propositions

[1141]

8.6.2.1    Increasing volumes of containers

[1145]

8.6.2.2    Port Botany’s capacity

[1147]

8.6.2.3    Port Botany road congestion

[1160]

8.6.2.4    Newcastle area container demand

[1163]

8.6.2.5    Suitability of the Port of Newcastle for a container terminal

[1169]

8.6.2.6    Planning approvals

[1172]

8.6.2.7    Capacity to accommodate larger vessels

[1195]

8.6.2.8    Attitude of shipping lines

[1201]

8.6.2.9    PON’s need to diversify

[1203]

8.6.2.10    NSC/MDC proposal

[1211]

8.6.2.11    ACCC’s conclusions

[1212]

8.6.3    ACCC’s reliance on subsequent events

[1222]

8.7    The case for a container terminal at the Port of Newcastle

[1226]

8.7.1    Preliminary observations

[1226]

8.7.2    Other evidence relevant to viability – before May 2014

[1237]

8.7.3    Other relevant matters

[1242]

8.7.4    Ms Calfas’s evidence

[1278]

8.7.5    PON - consultants’ reports

[1281]

8.7.5.1    Preparation of the PON consultants’ reports

[1281]

8.7.5.2    Content of the PON consultants’ reports

[1298]

8.7.5.3    McKinsey & Co September 2020 email

[1364]

8.7.5.4    Conclusions about the PON consultants’ reports

[1365]

8.7.6    The PON PBC

[1397]

8.7.6.1    Content of the PBC

[1397]

8.7.6.2    Abandonment of the PBC?

[1402]

8.7.6.3    Shipping lines subsidising transport to Sydney

[1408]

8.7.6.4    Shipping lines providing regular and sufficient connectivity

[1418]

8.7.6.5    New distribution centres co-locating

[1430]

8.7.6.6    Initial single berth terminal

[1453]

8.7.6.7    Planning approvals required

[1460]

8.7.6.8    Shareholder support required

[1463]

8.7.7    The industrial and economic experts

[1471]

8.7.8    PON’s submissions

[1490]

8.7.9    Some further evidence of Dr Pleatsikas

[1564]

8.7.10    Other submissions by NSW Ports

[1566]

8.7.10.1    Likely effect of the compensation provisions alone

[1566]

8.7.10.2    Port Kembla (again)

[1580]

8.7.11    Key conclusions

[1582]

8.7.12    Further issues

[1612]

9    ORDERS

[1634]

Schedule 1 – EXTRACTS FROM COMPENSATION AND REIMBURSEMENT PROVISIONS

1.    INTRODUCTION

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 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 NPCs 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 Governments 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 States 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”).

152    Morgan Stanley recommended that negotiations be permitted to proceed with respect only to stage one (excluding the proposed container terminal), noting that:

We are of the view that there is no commercial case for NPC to include Stage 2 in the lease area in the context of the Transaction, given the very long lead time until it is likely to be developed, and the risk that it is never actually developed at all given the lack of any time-based trigger it appears that the only rationale for incorporation of Stage 2 is to is to maintain the optionality for a container terminal as part of the development to address a perceived probity concern arising from the scope of the original procurement process (which included a container terminal).

We do not have the same level of concern with Stage 1 of the development, as we understand that two tenants have already been identified and committed (ICL and Cargill). Financial returns to NPC from Stage 1 appear to be adequate, and it may provide scope for additional break bulk and general cargo volumes at the port which may be value-accretive to the Transaction.

If Government was to authorise NPC to proceed with a modified form of NSCs proposal, incorporating Stage 1 only, then a number of matters would need to be addressed in the negotiations with NSC, including:

    arrangements to limit non-organic container growth and/or transfer liability to NSC for any compensation payable to the Port Botany lessee in the event that the PCD compensation arrangements are triggered;

    a thorough review of NSCs funding plans and business case to confirm viability and capability to deliver.

In addition, any probity risks arising from the original expression of interest process would need to be considered. We note that NPC has asserted, on the basis of legal advice, that any variation of the proposal to exclude a container element (which relies on Stage 2 development) may expose NPC to the risk of claims from non-NSC participants in the original expressions of interest process

We also note that the concept of a Stage 1 only development has not been tested with NSC, and the impact on their business case and appetite to proceed is not known at this stage. In particular, to the extent that containers are fundamental to their business case, and the PCD arrangements either remove this element or impose material compensation exposure upon NSC, they may not be prepared to proceed at all. If Government is supportive of a Stage 1 only development, then this will need to be tested with NSC as an immediate priority. In practice, there is a very high level of uncertainty that a Stage 1 only development could be progressed to a sufficiently advanced state by the time the Transaction process commenced that bidders could fully value it.

153    Morgan Stanley provided the Treasurer with a report on 22 July 2013 in which it said that if proceeding with stage one only was acceptable to NSC, then NPC could progress negotiations subject to inclusion “of a satisfactory mechanism to ensure any compensation liability under the Port Commitment Deed is passed back to NSC”.

154    In the report, Morgan Stanley identified NSC’s two stage development proposal, stage 2 (berths 5 and 6 and potential future container terminal) having a volume based development trigger with no firm time based development commitment. Primary concerns about NSC’s proposal included that:

    Capability of NSC to deliver proposal is not known

– We do not believe they have funding committed at this time

– Ability to advance proposal to a state of commitment/deliverability within the transaction timeframe that would allow bidders for the long-term lease to fully value to development is highly uncertain

    Project may trigger compensation from State under the Port Commitment Deed

– NSC forecasts ~200k TEU during Stage 1, notwithstanding that the project has no dedicated container handling infrastructure

– However, we think that ~200k TEU during Stage 1 is unlikely due to

– The lack of dedicated container facilities to efficiently lift that many TEU, particularly when the berths will also be used by general and bulk cargo; and

– A low likelihood that shipping lines and logistics companies will vary their routes etc. to call on Newcastle in that volume, particularly when the cost of container transfer at the Stage 1 berths is likely to be high due to the lack of dedicated facilities.

– If they realised these forecasts (which we and others consider unlikely), and NSW Ports could establish diversion of trade from Botany, PCD compensation may be triggered

– PCD compensation payments 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

– In the absence of the NSC proposal proceeding, the future port landlord would need to use trade charges to cover these costs, should they arise via other developments. This will be developed further under the terms of the transaction generally and the head lease specifically.

155    Morgan Stanley reiterated its stage one only recommendation and said that if this was acceptable to NSC then NPC may be authorised to progress negotiations subject to a “drop dead date” in advance of the long-term lease process commencing (e.g. November 2013) and inclusion of a satisfactory mechanism to ensure any compensation liability under the Port Commitment Deed would be passed back to NSC. They also noted that:

There is a relatively high likelihood that these conditions may not be met (particularly the “drop dead date”) in which case, NPC would be required to suspend negotiations with NSC, allowing a future port owner to then determine whether they wished to recommence negotiations or progress an alternative use for the site.

156    In July 2013 NSW Ports’ Managing Director reported to NSW Ports’ board that:

The proposed lease of the Port of Newcastle has generated a great deal of press and fuel to the campaign by the journalist Greg Cameron for Newcastle to become a container port. One of the likely bidders for Newcastle is Anglo Ports who are promoting a container terminal within their approach (as part of a multi purpose facility). It is important for NSW Ports to be active in monitoring the NSW Government i.e. our bid was based upon NSW Government policy of Kembla being the next port to develop container facilities and not Newcastle.

Whilst there would be considerable doubt about the long term viability/sustainability of a container terminal at Newcastle (as the related road/rail infrastructure would not [sic] be prohibitive) nevertheless it is a highly political issue.

157    The Treasurer wrote to NSC on 26 July 2013 to the effect that the Government did not support NSC’s current proposal but was interested in seeing if NSC and NPC could agree a revised development involving only stage one. The letter said negotiations should be conducted with NPC and would be subject to final approval from the Government.

158    On 2 August 2013 the Treasury transaction team in respect of the privatisation of the Port of Newcastle considered the disclosure to bidders of the Port Botany and Port Kembla PCDs in a document titled “Mayfield Development Negotiation Parameters”. The proposed disclosure said:

During the Botany/Kembla process, Bidders were concerned that after the transactions were completed and the purchase price had been paid, the State might develop competing container capacity at Newcastle to divert container traffic to that Port.

To deal with this concern, a regime was put in place that in effect would hold the Botany/Kembla lessees whole (via financial payments) if container development occurred at Newcastle that diverted containers from those ports above an assumed organic growth profile from a starting volume of 30,000 TEUs.

This regime came with a number of important carve outs:

The State requires that the financial obligations under this arrangement be mirrored by the developer of any container capacity at Newcastle. Ultimately these arrangements do not prevent container volume growth at Newcastle, but the costs of doing so will need to be borne by the container developer (i.e. by making payments to the State). On a per-container basis, the costs of this will progressively increase as the containers taken via Newcastle exceed the organic growth threshold.

The amount of the compensation payable to the Port Botany or Port Kembla Lessee will be the amount by which containers through Newcastle Port exceeds that permitted under the regime, multiplied by the weighted average price per TEU of wharfage charges actually imposed at Port Botany during the relevant period.

159    At a subsequent meeting on 6 August 2013 between Treasury, NPC and NSC, NSC was advised that “it was government policy to concentrate container traffic initially at Botany, then at Port Kembla, and that any container development at Newcastle which took container revenue from Botany or Kembla would involve payment according to the Newcastle Container Development contribution payments regime”. In the Mayfield Development Negotiation Parameters, Treasury identified negotiation parameters with NSC as including the following:

(1)    any revised development proposal will cover the original “Stage 1” land and berths 2, 3 and 4. It will exclude the “Stage 2” land and berths 5 and 6; and

(2)    any proposal to conduct container operations at the site will need to take into account the government’s policy that Port Kembla will be the next major NSW container port after Port Botany. Consequently:

(a)    the development will not include any dedicated container handling infrastructure and will be restricted to handling organic container volumes which are incidental to bulk and general cargo trades; and

(b)    NSC will be liable to fund any commitments otherwise payable by Government entities if it is in breach of these restrictions.

160    The Managing Director of NSW Ports followed up his report in July 2013 by seeking information from the board about the State’s position on the development of a container terminal at Newcastle. A board member provided the Managing Director with a summary of the compensation provisions which the Managing Director considered a “very good outcome”. The Managing Director requested the full documents (the Port Botany and Port Kembla PCDs) and caused a review of them to be conducted, subsequently reporting to the NSW Ports board in August 2013 that:

The arrangements entered into with the Government to protect NSW Ports from potential future competing container activity in Newcastle has been reviewed and it provides a clear and secure protection for NSW Ports.

161    By 13 September 2013 the negotiations between NSC and NPC about the proposed lease and project delivery agreement were complete. NPC notified NSC that it would be seeking approval of the NPC board to take the project (modified to exclude the development of a container terminal) to the NSW government seeking government approval and delegation to enter into binding agreements. NPC noted that “NPC does not and cannot represent that the Project will receive such approval, or that the Project will in fact proceed beyond this point”. The NPC board approved the referral of the project to the NSW government. Around this time NSC became a consortium known as Mayfield Development Corporation (referred to below as NSC/MDC).

162    On 17 September 2013 Morgan Stanley recommended to the State that NPC continue to negotiate a revised lease with NSC/MDC provided that the agreement transferred to NSC/MDC the risk of the State being exposed to any obligation to pay compensation to NSW Ports under the PCDs for container growth at Newcastle in excess of agreed limits. A draft deed dated 10 October 2013 contained provisions which precluded NSC from conducting or permitting any activity that would be likely to create a liability for the State under the Port Botany or Kembla PCDs (cl 3.3(a)) and obliged NSC to make a payment to the State in the event such a liability were to arise due to NSC’s conduct (cl 3.5).

163    In September 2013 Morgan Stanley also provided its interim scoping study for the privatisation of the Port of Newcastle to the State which confirmed that there was no reason that the proposal should not proceed.

164    In late October 2013, Morgan Stanley advised NSW Treasury not to enter into binding agreements with NSC/MDC “on the eve” of a broader privatisation transaction affecting the Port of Newcastle.

165    By that time NSC/MDC had also changed its position and was no longer willing to enter into an agreement with the State to accept the State’s liability under the PCDs. NSC/MDC proposed instead that:

    the State would instead transfer its potential liability under the Port Commitment Deed to a future holder of the long-term lease of the Port of Newcastle (the “Port Lessee”); and

    the terms of MDC’s lease with NPC would provide that MDC would work with a future Port Lessee to agree an equitable basis upon which it would share any liability arising to Port Lessee under the Port Commitment Deed (effectively an “agreement to agree”).

166    Morgan Stanley recommended against this revised proposal. In around November 2013, the Treasurer issued a direction under the PAAT Act for NPC to cease negotiations with NSC/MDC, and those negotiations ended.

167    The NSW Freight and Ports Strategy (the Strategy) was published in November 2013 and, in respect of the sequencing of container capacity, was the same as the November 2012 draft. It embodied the State policy as it had crystallised by July 2012 (the NSW government having announced on 27 July 2012 that Port Kembla would be privatised with Port Botany and was the next logical location for a container terminal in NSW). The Strategy contemplated a 20 year time horizon so that the policies could give certainty over the long term to private investors. The Minister’s message accompanying the Strategy said:

(1)    “[a]n efficient and effective freight network is the cornerstone of economic productivity and growth. It reduces the cost of everyday goods and services, underpins the strength of our economies, and generates vital employment. Freight matters to every person in the State”;

(2)    “[u]nderpinning this Strategy is the need to address the significant challenges NSW will face in the next 20 years amidst the doubling of the State’s freight task. These challenges include: increasing the efficiency of the existing network infrastructure, expanding network capacity to support economic growth, funding infrastructure construction and funding the growing operations and maintenance task in line with increasing utilisation of the network”; and

(3)    “[t]he NSW Government has partnered with industry and the community to develop the Freight and Ports Strategy. A four month consultation period following the draft Strategy’s release in November 2012 was instrumental in strengthening this Strategy, ensuring valued perspectives on key issues raised such as air freight, coastal shipping, regional road freight productivity and infrastructure funding were integrated in the final version”.

168    The Strategy recorded that the “movement of freight is a basic element of logistics”. As the NSW government provides the physical network for the movement of freight “there is an inexorable link between the actions of government and the performance of logistic tasks across the economyTransport of freight is critical to the State economy and the efficiency of the transport network contributes to the success and growth of NSW as well as being significant to maintaining national defence interests and capability. Conversely, inefficiencies, friction and capacity constraints in the transport network add costs for manufacturers, producers and consumers”. Further, the “role of government in the freight task focuses on delivering network capacity to enable supply chain efficiency. This includes removing obstacles for achieving best practice, creating capacity and, where necessary, becoming involved in the marketplace to ensure the network operates efficiently”.

169    The Strategy said it is “a core component of the State’s overall strategic planning framework. The Strategy “will provide a framework for industry, all levels of government and stakeholders to guide investment and other decisions to enhance freight logistics in NSW”. The Strategy identified land use planning and infrastructure investment as key tools of government to a transport network in NSW that allows the efficient flow of goods to their market”. The Strategy identified that the “existing throughput of two million Twenty Foot Equivalent Units (TEU) per annum at Port Botany is projected to increase to a total of seven million TEU by 2031” and “road upgrades and improved rail operations to support a doubling of freight on rail by 2020 are critical to meeting the forecast growth at Port Botany by 2031”.

170    According to the Strategy:

While there is currently significant spare capacity, constraints on container movements at Port Botany will depend on the rate of growth of containers, as well as the productivity levels that can be achieved by the stevedores and overall optimisation of the port. Depending on the rate of growth, from a planning perspective it appears reasonable to expect that Port Botany might approach its natural capacity between 2030 and 2040. New port infrastructure at Port Botany and/or Port Kembla may be required to help relieve these pressures, and will need to be supported by significant land freight network improvements.

171    The Strategy said that “Port Botany will remain the key container port in NSW, given current planning and investments to date”. Further, “Port Botany will continue to grow to accommodate the future container demand in NSW. This growth will be supported by improvements to the supply chain connecting to the port and will be considered as part of the overall transport planning being undertaken for the Port Botany and Sydney Airport Precinct”. The Strategy said “[w]ith continuing investment in the port and related supporting infrastructure, it is important that Port Botany’s capacity is fully utilised to accommodate long term container trade growth Meeting the challenge of seven million TEU per annum will only be possible if the arterial road and rail connections servicing the port can efficiently transport trade volumes”. The Strategy also said “Port Kembla has been identified as the location for the development of a future container terminal to augment the capacity of Port Botany when required and “expansion of Port Kembla for high intensity container operations when Port Botany reaches throughput capacity will require containers to be moved by both road and rail”. The Strategy identified that the Port of Newcastle would “continue to be NSW’s primary coal export port” and “continue to service bulk grain and other commodities”.

172    The Strategy said that “[a]t present, 85 per cent of import and export containers originate or are destined for locations within a 40 kilometre radius of Port Botany. Approximately 14 per cent of container movements occur by rail, with the rest by road. The existing capacity of intermodal terminals in Sydney is inadequate to meet the growing demand for import and export container movements”. Further, “[w]hile government does not need to be directly involved in the development or operation of intermodal terminals, it has a role in identifying and protecting land and freight corridors. Government also has a role, where necessary, in identifying supporting road and rail infrastructure. The development of appropriate intermodal terminals in the Sydney metropolitan area and regional areas will contribute to increasing freight moved by rail, particularly in the container market”.

173    The Strategy identified the need for developing network capacity “just in time” to meet forecast usage demand given the significant network infrastructure task facing NSW over the next 20 years. The Strategy identified Transport for NSW as a key body responsible for assessing the priority of “freight infrastructure projects to ensure value for money outcomes”. According to the Strategy “[p]lanning decisions need to consider freight logistics needs and network implications”.

174    The State must have received and accepted the final scoping study for the privatisation of the Port of Newcastle which confirmed that the privatisation could proceed and it then announced its proposal to privatise the Port of Newcastle by long-term lease on 5 November 2013. The announcement said:

The NSW Government will proceed with the long-term lease of the Port of Newcastle to fund the revitalisation of central Newcastle and priority infrastructure across NSW, Treasurer Mike Baird and Ports Minister Duncan Gay announced today.

Mr Baird said the government had received and considered the recommendations of the comprehensive scoping study, which confirmed it is in the State’s interest to go ahead with the lease of the Port of Newcastle – the world’s largest coal exporting port.

“Today is an exciting day for the people of Newcastle, who are one step closer to achieving the much-needed revitalisation of their city centre – a major investment which will be made possible through funds raised by the lease of the Port,” said Mr Baird.

“The scoping study has revealed strong initial interest from investors for this transaction, that if successful, will drive economic growth and the renewal of Newcastle by fast-tracking critical infrastructure needs in the region.

Mr Baird said an Expressions of Interest process will be launched later this month, with the Government to shortlist qualified parties for the next round of the process.

“As one of the largest ports in Australia, the Port of Newcastle plays a critically important role in the export of coal and the movement of other cargo,” said Mr Baird.

“In addition, the Port has tremendous ongoing growth and development potential, and has extensive strategic port-side land available for the future growth of general cargo, dry bulk and bulk liquids.”

Mr Gay said the lease will include more than 700 hectares of land owned by the Newcastle Port Corporation (NPC), as well as all road and rail infrastructure and wharves owned by NPC within the port boundary.

Mr Baird said there was strong interest from both Australian and overseas investors for State-owned assets, as demonstrated by the recent long term lease of Port Botany and Port Kembla.

175    The State then invited expressions of interest for leases of the land and assets of the Port of Newcastle. At this time coal constituted 95% of the throughput at the Port of Newcastle and 70% of its revenue. It was also forecast at this time that coal exports from the Port of Newcastle would increase in the period up to 2043. The Port of Newcastle handled container traffic of only 15,000 TEUs per year. By contrast, Port Botany handled in excess of 2 million TEUs annually. Port Botany also had substantial additional capacity, particularly since the removal in 2012 of a previous volume cap of 3.2 million TEUs annually.

176    The Information Memorandum issued by the State to potential bidders for the Port of Newcastle in December 2013 said:

In the long term, steady growth in container traffic will eventually exhaust the land and berth capacity for containers at Port Botany (which has limited potential for further footprint expansion) and Port Kembla (subject to its future development path) where land availability to cater for ongoing vehicle growth may compete with future container developments. The much larger land footprint at the Port of Newcastle makes it the logical next tranche of container capacity once other port capacity is approaching saturation. Depending on the rate of growth and extent of development of capacity at other ports, it is foreseeable that there could be demand for large-scale development of container terminals at Newcastle on a 30 to 40-year type timeframe.

177    The Information Memorandum said:

In July 2012, the NSW Government indicated that Port Kembla was to become the next container port after Port Botany. Port Kembla’s container facilities are unlikely to be required for some time, with Port Botany’s planning constraint on TEU throughput removed in 2012. Given this, a container terminal at the Port of Newcastle may not be required until after 2040.

178    The Information Memorandum said:

Newcastle has the greatest development opportunity of NSW’s major ports with 190Ha of developable land, while Botany and Kembla have limited or no land currently available for development and would need to reclaim land to build additional terminal areas and berths.

The Hunter region contributed approximately $36Bn to Gross State Product (in FY12) including an estimated $18.9Bn contribution from the local coal industry. In addition to the Hunter Valley mining industry, Newcastle is the second largest population centre in NSW and a key industrial centre for the State. In 2012, in a report for the State Infrastructure Strategy, Deloitte Access Economics estimated long-term growth in GRP for the Hunter to be 2.5% (real).

179    The Information Memorandum also identified the compensation provisions in the PCDs and said:

The financial obligations of the State under this arrangement will be passed to the Newcastle Port Lessee under the Port Commitment Deed (“PCD”). The Acquirer is not prevented from developing container facilities at the Port; however, the Acquirer will be required to compensate the State for any costs under the Botany/Kembla Port Commitment Deed that result from container developments at the Port of Newcastle. Based on current forecasts, container volumes are not expected to trigger any liability under the PCD for the Port Lessee/Acquirer, and the State sees the risk of costs arising under the PCD as being within the control of the Acquirer.

Notwithstanding the PCD, the Acquirer may choose to further develop container trade at the Port and seek to attract container volumes above the PCD Threshold. The Acquirer will need to determine commercially whether the incremental value of revenues derived from land rental and port charges from all container movements sufficiently offsets any PCD payments prior to the end of the arrangements.

180    The draft Newcastle PCD made available to bidders in February 2014 included provisions reflecting this arrangement.

181    In March 2014 the Treasury transaction team for the privatisation of the Port of Newcastle advised bidder Hallen (ultimately the successful bidder) that the risk of development of a container terminal at Newcastle outside of the port lease area was a merely hypothetical and remote risk. They said:

The Port Commitment Deeds provided to NSW Ports for the Port Botany and Port Kembla transactions allocated hypothetical risks of a large scale premature container development in light of the fact that the NSW Government was the then owner of the Port of Newcastle. The State is extremely reluctant to enter into further rounds of documentation to govern even more remote hypothetical scenarios related to competing privately- funded container developments at Newcastle. We suggest Hallen consider the following:

    After grant of the Newcastle Port Lease, the NSW Government will no longer hold any relevant property interests at the Port of Newcastle. Nor does it have the appetite to fund or the expertise to undertake a container port development. As such any port-related development at Newcastle would need to be privately funded.

    The State considers it extremely unlikely that a private developer would develop new container facilities at Newcastle in direct competition to Port Botany and Port Kembla where those ports were not fully developed and had actual or potential additional capacity, and in circumstances where the Newcastle Port Manager didn’t see the commercial merit in developing these facilities itself and may in fact actively oppose the introduction of upstream containers.

    The Newcastle Port Manager has substantial control of and recourse to Port users in respect of any such risks given its statutory charging powers, surplus land capacity, relationship with RMS in respect of the channel and other submerged lands required to be accessed by a third party development and the fact that the Ports and Maritime Administration Act (PAMA) does not have the facility for appointment of a second contemporaneous Port Manager.

182    Hallen did not agree that this risk was hypothetical but said that on the basis of commercial and legal advice it did not intend to challenge the compensation clause (that is, the reimbursement provisions) in the draft Newcastle PCD.

183    The Treasury transaction team for the privatisation of Port of Newcastle advised the Treasurer on 10 April 2014 that:

Under the Port Commitment Deed (PCD), the State has a residual risk exposure to make container payments to NSW Ports in the event that:

    The Newcastle Private Co triggers container payments, and

    The State terminates the lease and elects to take back the port instead of re-leasing it.

Transaction team’s view is that there is a very low probability of container payments being triggered:

    the numeric threshold in the PCD is more than twice the current container throughput at Newcastle, and under forecasts prepared by ACIL Allen container volumes at Newcastle are not expected go close to the PCD threshold

    NSW Ports would need to demonstrate that containers had been diverted from Botany/Kembla to Newcastle

    The nature of the landside logistics task is focussed on Botany and south-western Sydney, meaning it is unlikely to be economic for large-scale container facilities to be developed in Newcastle before Botany and Kembla are at capacity

    Financiers are likely to require some level of assurance or control over container developments, as the cost is essentially borne by them. That is, in a termination scenario the cost of container payments would be reflected in the business valuation and hence the proceeds that are returned to lenders (see Financier Side Deed section below)

    The State has a high degree of discretion over whether the lease is terminated, and in the event it is terminated, whether the port is re-leased or retained by the State.

184    On 30 April 2014, the State announced that it had agreed to lease the Port of Newcastle to a consortium (the Port of Newcastle Consortium), which subsequently became PON, comprising of CM Ports and TIF, and that the long-term lease would deliver gross proceeds to the State of $1.75 billion.

185    CM Ports is listed on the Hong Kong Stock Exchange. It is China’s largest port operator and operates some 38 ports in 18 different countries around the globe. The majority of those ports are or include container terminals. TIF is a wholesale investment fund that invests in unlisted infrastructure assets in Australia and overseas. It is convenient to also note here that MIRA, which has managed TIF’s investment in PON since 2018, is a division of the Macquarie Group and one of the world’s leading infrastructure investors and managers. The board of the first cross-respondent, PON Operations, now has seven members, comprising three directors nominated by MIRA (Messrs FitzSimons, Kwiatkowski and Dines); three nominated by CM Ports (Mr Liu, Ms Luk and Mr Sun); and an independent Chairman (Prof Green).

186    Also on 30 April 2014 the State entered into transactions effecting the privatisation of the Port of Newcastle in favour of the PON entities. As noted, PON is ultimately owned as to 50% by TIF and as to 50% by CM Ports. Since late 2018 MIRA has managed TIF’s investment in PON.

187    On 30 May 2014 the Treasurer for and on behalf of the State and PON entered into the Newcastle PCD. This was a condition of completion of the Newcastle Sale Agreement by which the privatisation of Port of Newcastle was principally effected, along with the Newcastle Port Lease.

188    Clause 3 of the Newcastle PCD requires PON to reimburse the State for any payments it is required to make to Botany Operator or Kembla Operator under the compensation provisions in the Port Botany PCD and the Port Kembla PCD. Specifically the Newcastle PCD:

(1)    will operate for a term of 50 years (cl 2);

(2)    if NSW Ports makes a submission under cl 3.5 of the Port Botany or Port Kembla PCDs, seeking payment from the State, the State and PON must consult together on a response and PON may take over the conduct of the State’s response (cl 3.5);

(3)    if the State becomes obliged to make a payment under the compensation provisions, the State may give notice to PON, stating the amount the State is obliged to pay (cl 3.6); and

(4)    within 40 days of receipt of such a notice from the State, PON must pay to the State the amount referred to in the notice, without deduction or set-off (cl 3.7).

189    Clauses 3.6 and 3.7 of the Newcastle PCD are together referred to as the reimbursement provisions.

190    At the time the Port of Newcastle was privatised PON was required to submit a Port Development Plan within six months. The Port Development Plan 2015-2020 said:

(1)    Port of Newcastle is strategically located within the northern catchment of New South Wales and is well positioned to capitalise on the established export supply chains of the Hunter Valley and beyond. Over the next five years we expect strong growth in coal export trade, alongside an increase in some non-coal commodities; namely, the import of bulk liquids such as fuels;

(2)    the strategic planning framework guiding infrastructure within NSW is the NSW 2021 Plan, supported by the State Infrastructure Strategy 2012-2032, the NSW Long Term Transport Master Plan 2012, and the NSW Freight and Ports Strategy 2013, which provide progressively more policy detail on freight and port infrastructure development priorities to create greater efficiencies and improvements; and

(3)    Port of Newcastle handles container trade from geared vessels at East Basin 1 and 2 Berths in Carrington and Mayfield 4 Berth. This is anticipated to continue during 2015-2020 in its current form, with potential for some gradual organic growth and fluctuation in trade associated with regional demand. There are no plans for the development of a major dedicated container terminal within the timeframe of this Port Development Plan.

191    In March 2015 the NSW Liberal/National Coalition government was re-elected.

192    In August 2015 NSW Ports received a consultant’s document by Mott MacDonald comprising a 30 year masterplan. This document recorded that “[b]ased on the trade forecasts provided by NSW Ports, Port Botany will require additional capacity in approximately 2043 (base case) or as early as 2037 (upper bound trade forecast). This involved a maximum TEU capacity at 2045 of 7.91 million TEU per year and a planned capacity at 2045 of 7.12 TEU per year.

193    In March 2016 Anglo Ports made an unsolicited proposal to PON to develop a container terminal on the Mayfield site. DP World Australia Ltd (DP World Australia), a stevedoring business, also made an unsolicited proposal in May 2016 for the same purpose. Both proposals involved high level concepts but no commercial feasibility analysis. The PON board considered the proposals in July 2016. DP World Australia made a presentation to PON about the opportunity in September 2016. In its presentation DP World Australia identified challenges DP World Australia faced in its existing terminal at Port Botany. DP World Australia proposed a staged development over seven years culminating in a 1 million TEU per year container terminal from year 7 onwards. In October 2016, PON entered into a memorandum of understanding with DP World Australia, whereby it agreed to work exclusively with DP World Australia for a period to undertake due diligence and feasibility analysis of a container terminal development and operation at the Mayfield site. PON continued to deal with DP World Australia in respect of due diligence and feasibility studies until mid-2018. No deal was finalised by the time the memorandum of understanding expired. DP World Australia maintained that the PCDs made the project unviable for it and was unwilling to take on any obligation under the Newcastle PCD. DP World Australia’s CEO said subsequently that a container terminal at Newcastle would be attractive but for the PCDs, and that it was hard to see “it working with that handbrake”.

194    The State’s NSW Freight and Ports Plan 2018-2023 records the following:

    Given the significant cost of new infrastructure, the NSW Government and industry need to boost the performance and utilisation of the State’s existing roads, rail, ports, pipelines and airports;

    We will increase the share of rail freight at Port Botany to 28 per cent by 2021;

    The NSW freight and ports network is fundamental to the State’s future $1.3 trillion economy;

    The largest growth in freight volumes in NSW will occur in Greater Sydney, which will see the freight task increase by almost 50 per cent by 2036;

    Port Botany plays a major role in the NSW economy as a gateway for international trade. It is the primary container port and NSW’s primary bulk liquid and gas port;

    90% of imports remain within 60km of Port Botany;

    Significant rail freight capacity upgrades in Sydney including: Port Botany Rail Line Duplication the last three kilometres of railway line to Port Botany; Cabramatta Loop passing loop to support operations at Moorebank Intermodal Terminal; and Western Sydney Freight Line corridor protection for future rail connections to serve Western Sydney Airport, Western NSW and Port Botany;

    Intermodal terminals within Greater Sydney are critical for increasing the utilisation of the rail freight network, particularly containers to and from Port Botany. There are a number of metropolitan intermodals under construction, including the Moorebank Intermodal Terminal;

    Port Kembla has been identified as the location for the development of a future container terminal to augment capacity of Port Botany when required;

    Recognising Port Botany’s role as the primary container facility in NSW and plans for Port Kembla as the location for the development of a future container terminal, the efficient operation of Port Botany and Port Kembla requires the coordination of a wide range of stakeholders, including stevedores, road and rail freight operators and networks; and

    NSW government actions to support that include improving Port Botany rail window management, investigating productivity boosting technologies for Port Botany, investigating second truck marshalling area in Port Botany, and improving both the movement of empty containers into and out of Port Botany (including the use of rail) and their utilisation.

195    In response to a stakeholder issue identified as “need for containerised freight at Newcastle Port” the NSW Freight and Ports Plan 2018-2023 said:

The Plan recognises the interest of the Port of Newcastle in diversifying and expanding the port’s trade base. An initiative has been included in the Plan to support the Port of Newcastle as the commercial operator of the port, to explore other trade opportunities as they deliver their masterplan, such as examining landside capacity constraints that may need to be addressed beyond the timeframe of this Plan.

The NSW Government policy position is that Port Kembla has been identified as the location for the development of a future container terminal to augment capacity of Port Botany when required. Current arrangements do not prohibit the development of a container terminal at the Port of Newcastle but rather allow for the growth of container volumes through Newcastle that service the region.

196    On 25 February 2019 NSW Ports held a strategy day, the outcomes of which referred to a container terminal at Port Kembla and said “there was support to resolve the preferred concept design and address the operational issues for an outer harbour development”, “[t]iming and land area for a PK container terminal should be part of our overall thinking of our core trade land requirements as part of our 30 year master plan review”, and “[a]greement that we keep the vision alive by finalising the technical analyses but no need to rush into the other proposed stages of this work — it is too premature. Will be better clarity through review of 30 year master plan”. NSW Ports said that “we need to continue to pursue Maldon Dombarton as being essential for a container terminal in PK”. This is a reference to the Maldon to Dombarton Rail Link. Infrastructure Australia recommended against proceeding with that rail link in 2017 as in the short to medium term, there is no clear economic basis for the project to proceed, as there is sufficient capacity on the existing lines to meet projected rail freight demand. Apart from this, NSW Ports:

(1)    in mid-2018 commissioned a consultants’ report to “undertake an analysis piece setting out the benefits and opportunities of Port Kembla as NSWs second container port” (KPMG, “Quay Conclusions” Report (February 2019) (KPMG report)). The KPMG report was finalised in February 2019 and was released by NSW Ports on the basis that it confirmed that “Port Botany is the State’s key container port, and a new container terminal will not be needed until the mid-2040s. The KMPG report found the NSW Government’s container port strategy, which would see Port Kembla developed as the next container port in NSW to augment capacity at Port Botany, still stands as the most efficient and effective way of meeting the State’s container export and import demands”;

(2)    in mid-2018 met with shipping lines, bulk liquid operators, stevedores, port operators and freight forwarders across Shanghai, Hong Kong and Singapore and, amongst other things, “presented our container terminal strategy explaining why Port Kembla was selected as the next container port after Botany and the geographical distance from the market to the Port of Newcastle”;

(3)    engaged with the government and the media in respect of the role of Port Kembla as the second container port for New South Wales; and

(4)    in 2019 engaged with key stakeholders in the Illawarra region noting that “[i]n light of the recent media regarding a container terminal at Port of Newcastle, we have engaged with the guests at this dinner to present the case for the container terminal at Port Kembla. Each is supportive of a container terminal at Port Kembla and they have been conducting their own advocacy in this regard”.

197    In August 2018 three board members of NSW Ports identified the development of a container terminal at Port of Newcastle as one of the top five risks facing NSW Ports.

198    In October 2018 NSW Ports responded to a notice issued by the ACCC under s 155 of the CCA. One part of the response said, based on the assumption that a viable container terminal is operational at Port of Newcastle (that is, assuming all necessary landside infrastructure has been built), the potential LGAs (local government areas) that would become Contestable Areas are set out in Annexure B. Annexure B shows 16 local government areas as a “Contestable Area” between Port of Newcastle and Port Botany. The notice defined “Contestable Area” as a local government area in which it is financially viable for a Shipper (defined as an importer or exporter of goods that initiates the transport of their containerised goods on ships) to import or export their goods through more than one port. The evidence is that because NSW Ports did not have this information available it retained consultants to prepare the response. The response was prepared by consultants without the definition of “Contestable Area” and within 24 hours.

199    A 2019 NSW Ports’ strategy day identified as a strategic risk “significant new competition by other port” as “possible”. That risk remained in NSW Ports’ 2020 risk register. The only noted “specific initiative” against this risk is “Defend ACCC Prosecution”. The register also identifies several “Ongoing Actions” regarding this risk factor, including “Maintain capability of infrastructure”, “Competitive pricing” and “Customer relations”.

200    In the past few years (2017 to 2020) the State (and Commonwealth) has made substantial investments in public infrastructure designed to facilitate the efficient use of Port Botany and Port Kembla as container terminals. As described by the State, these infrastructure investments include:

(1)    the development of the Port Botany Rail Line Duplication project, supported by $400 million from the Commonwealth government. This project involves a dedicated freight only rail track from Port Botany to near Marrickville. This project was added to the Infrastructure Australia priority list and was made on the assumption that containers moving through Port Botany were expected to increase by 4.5 million TEUs over the coming decades. The project was designed to provide the capacity to meet forecast rail demand generated by the Moorebank Intermodal Terminal, Enfield Intermodal Terminal, St Marys Intermodal Terminal and future terminals;

(2)    the Sydney Gateway Project, which had a project value of $2.4 billion. This project involved various road connections and upgrades to provide a high capacity connection from Sydney Airport and Port Botany to the WestConnex. The purpose of the project included to reduce congestion on existing roads to Port Botany and to support the efficient distribution of freight between Port Botany and logistic centres in western Sydney;

(3)    the reservation of land for the western Sydney Freight Line. This is a future transport link that will provide a dedicated freight link between Port Botany and the Western Parkland City;

(4)    the rezoning of land for the Mamre Road precinct in western Sydney to protect it for use as a future intermodal terminal. This precinct will have an area of 999 hectares. This terminal will have dedicated access to Port Botany via the western Sydney Freight Line and is anticipated to have a cost of $2.6 billion;

(5)    the Moorebank Intermodal terminal, which is a 241 hectare precinct on Commonwealth land, and which is designed to deal with up to 1.05 million TEU of international containerised freight per year. The terminal is designed to deal directly with freight from Port Botany. It is the largest intermodal logistics precinct in Australia. There has also been private sector investment in the precinct, including the development of distribution centres by Woolworths across 26 hectares at a cost of $700-$780 million to Woolworths and $420-$460 million to Qube;

(6)    the St Marys Intermodal Freight Hub, which it is anticipated will deal with up to five 600m trains per day from Port Botany and with an annual throughput of 301,000 TEU;

(7)    the M1 Princess Motorway Improvements for Picton Road to Bulli Tops. The objectives of these improvements include to increase the reliability of access into and out of Port Kembla, including for general freight, larger restricted access vehicles and high performance freight vehicles; and

(8)    the M1 Princess Motorway Mount Ousley Interchange. This involves road upgrades on the M1 motorway. The objectives of the proposal include to “provide for the growing freight task including supporting the expanding port at Port Kembla”. This proposal was expressly developed in the context of the State’s policy that Port Kembla would become the State’s second container port.

201    In January 2020 NSW Ports received a contestable cargo capture plan from consultants. One of the plan’s objectives is to gain and retain contestable cargo” including by “maintain[ing] competitiveness v. other ports”. It said “‘contestable cargo’ in the context of this plan refers to cargo which is contestable between different sea-ports as well as cargo which is contestable between coastal shipping and overland rail”. The plan noted that the vast majority of import cargo being handled through Port Botany and Port Kembla is not contestable by other ports given the proximity of those ports to the inland destination relative to that of the nearest competing ports. Contestable cargo included containerised products, such as panels for a solar farm or fertiliser, bound for regional NSW for which importation through Melbourne or Brisbane may be a viable alternative to Port Botany. Potential actions included:

XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

(Original emphasis).

202    In February 2020 Infrastructure Australia published its priority list of nationally significant infrastructure needs. The priority initiatives include an east coast deep water container port capacity over the next 10-15 years. An accompanying diagram showed the east coast with three container terminals, at Melbourne, Sydney and Brisbane. The report noted that as shipping companies tend to service multiple ports along a route they choose the vessel size by reference to the capacity of all ports along the route. While Sydney could accommodate ships of 10,000 TEUs, Melbourne was limited to approximately 8,000 TEU vessels. The report said:

No Australian port can accommodate the larger, more energy-efficient ships carrying more than 14,000 TEUs. Therefore, Australia is unable to benefit from the potential cost reductions and efficiency improvements because of its container port constraints (both wharf-side and land-side).

203    The report identified the initiative as infrastructure improvements enabling larger vessels to access ports on the east coast and said this “could require channel deepening at existing ports, development of new port locations and enhanced land-side access infrastructure at ports”. Further:

Given the preference of cargo ships to make multiple stops on a route, a network of deep water ports will likely be required, rather than a single port at a given location. This incentivises shipping lines to provide larger vessels to service Australia and maximises potential economic efficiencies. Any capital investment should be considered in the context of pricing arrangements to avoid impeding competition.

204    In September 2020, NSW Ports rejected an open offer by the ACCC to resolve its claims in the proceeding without any penalties being payable by NSW Ports, provided NSW Ports gave an undertaking preventing it from enforcing or giving effect to the compensation provisions, and made a costs contribution.

2.6    PON’s preliminary business case

205    Since no later than October 2016 PON has been in contact with the ACCC about the compensation and reimbursement provisions in the PCDs. PON representatives met with the ACCC in October 2016. The ACCC informed PON that to pursue a case it would need the assistance and cooperation of PON on factual elements of the case. The ACCC noted that there needed to be a real likelihood of another entrant competing in the market. PON noted that the Mayfield site had potential opportunity for a container terminal but PON would need to work through the business case to see if a container terminal would work. PON noted an increasing move towards containerisation so PON needed to be “on the front foot”. The ACCC said that “in order to establish the case, we would need shipping lines saying in a rational and supported way that if there was a container terminal at PoN, they would use it in a meaningful way, may divert current shipments from PB or PK to PoN, and why, costs, time etc”. Further, that it would be relevant if “someone with relevant expertise, funds, and a willingness to develop the terminal existed”. PON said it would need to get more certainty about the commerciality of the project but would continue to engage with the ACCC. PON anticipated completing a business case for the project mid-way through 2017.

206    In March 2018 the Managing Director of CM Ports wrote to PON saying that:

CMPort would hereby express our keen intention on cooperating with PoN in developing and operating the Newcastle Container Terminal. Moving forward, we will set up a dedicated team to work with PoN in performing a feasibility study over a period of 1 year. Concurrently, we may also submit a business proposal in adherence with any deadlines set forth by PoN.

207    In May 2018 the Managing Director of CM Ports wrote to Gardior, the trustee for TIF, saying:

kindly consider this an expression of our keen intention to further cooperate with TIF by means of Port of Newcastle (PoN), or a newly formed Joint Venture with TIF, in owning, developing and operating the Newcastle Container Terminal. Moving forward, we shall set up a dedicated team to work with TIF in conducting a feasibility study over the course of one year. Concurrently, we may also submit a business proposal in accordance with any deadlines set forth by PoN.

208    On 11 May 2018 PON’s Chair, Mr Green, in an internal email said:

I wanted to look into how we mount a case for XXXX XXXX XXXX XXXX XXXX XXXX as we move to large scale container volumes. Once XXXX XXXX XXXX XXXX, even if only on a wish list initially, it also assists the case for the primary asset, in our case the container terminal. We should start thinking how we proceed on rail infrastructure, including the prospect of a XXXX XXXX XXXX XXXX through western Sydney. We would quickly lose public support if it became evident we were transferring Sydney’s traffic problems to Newcastle roads – rail connectivity will be a XXXX XXXX, so long as we can find someone to pay for it.

209    PON’s Executive Manager Communication responded on 11 May 2018 as follows:

From a PR perspective, if we make this a key part of our business case, it negates our government cost savings message and could help government and competitors XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

210    In July 2018 the Managing Director of CM Ports wrote to PON saying:

…it is our intention to further invest in PON with the purpose of developing the Newcastle Container Terminal (NCT) into a world-class deep water facility capable of handling Ultra Large Container Vessels (ULCVs); i.e. for PON to XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

Moving forward, we are in support of forming a joint project team with members from both PON and CMPort. We may then follow a tentative work plan that includes physical environmental surveys, XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX, and the design & construction stage, to be followed by official acceptance upon completion. With your valued support, it is our aim to complete the project as per the estimated timeline reflected in the NCT Project Plan Outline.

211    PON’s current CEO, Mr Carmody, was appointed in August 2018 with the mandate of “removing” the Newcastle PCD, so that PON can diversify its business through the development of a container terminal.

212    PON’s Chair, Mr Green, met with PON’s shareholder, TIF, in August 2018. Mr Green recorded that:

The Board was also interested in progress on the container terminal though it was interesting and somewhat disappointing to note that they were not themselves entirely convinced of the possibility or desirability of such a development, seemingly because of the risks involved. Again there was only scant evidence of familiarity with the operational impact of the PCD, the process required to remove it, and the significant implications of a favourable ACCC decision. However there were some reasonable questions about the logistics of unwinding the PCD for the government and NSW Ports, and how we should go about addressing these. The Board provided no guidance on how it would work with CMP on a business plan for the container terminal, though it did indicate a preparedness to XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX. Clearly there will have to be some bilateral discussions between Gardior and CMP on how we go forward with regard to XXXX XXXX XXXX XXXX XXXX in the event that the PCD is removed or mitigated.

213    In response to a query by the ACCC on 27 September 2018 Mr Carmody said in an internal PON email:

The lack of a fully developed container terminal business case and the lack of formal agreement from TIF is quickly coming back to bit[e] us.

We will delay ACCC interviews and next week will have to be totally focused on getting a business case pull together.

…We will have to use external consultants.

Does anyone have anything that approaches a business case document that we can build off? I know there are multiple documents – but is there an actual primary document?

214    PON engaged a number of external consultants to investigate aspects of the feasibility of a container terminal development at Port of Newcastle, and began preparing a Preliminary Business Case (the PON PBC) which was ultimately finalised and presented to PON’s board in February 2019.

215    The PON PBC is not a final investment proposal. A detailed business case and business plan (including detailed supply chain and financial analyses and a marketing plan) would have been required to progress the project towards shareholder approval. The PON PBC was based on consultants’ reports including:

(1)    Deloitte Access Economics, “NSW Container and Port Policy – Port of Newcastle”, March 2018 (Deloitte report);

(2)    AECOM, “Port of Newcastle - Rail Capacity Assessment”, April 2018;

(3)    Lycopodium, “Port of Newcastle: Container Transport Economics Study”, August 2018) Lycopodium report);

(4)    AECOM, “Mayfield Container Terminal Development: High Level Concepts and Costings”, November 2018;

(5)    AlphaBeta Strategy & Economics, “Global Gateway for New South Wales: the Economic Impact of a Container Terminal at Port of Newcastle”, December 2018 (AlphaBeta report); and

(6)    AECOM, February 2019 “Assessment of Shipping Channel Constraints”.

216    There is evidence that PON was heavily involved in the preparation of the consultants’ reports to ensure that they properly reflected PON’s case that the development of a container terminal at Port of Newcastle was viable and appropriate for the State of New South Wales.

217    The PON PBC proposed that a prima facie case exists for PON to develop a highly automated, integrated and efficient container terminal (using XXXX XXXX XXXX XXXX XXXX XXXX XXXX in the stacking yard) in three stages:

(1)    stage 1 – XXXX TEU capacity. Stage 1 works include the development of XXXX XXXX XXXX and the installation of XXXX XXXX cranes. It will be automated; able to service container vessels up to XXXX TEUs; and capable of receiving XXXX long trains. It is estimated to cost over XXXX XXXX;

(2)    stage 2 XXXX TEU capacity. Stage 2 works include the development of a XXXX XXXX XXXX; the extension of the XXXX XXXX XXXX XXXX and the installation of an additional XXXX XXXX cranes. It will be able to accommodate vessels up to XXXX length overall (LOA) and capable of receiving XXXX long trains. It is estimated to cost over XXXX XXXX; and

(3)    stage 3 XXXX TEU capacity. Stage 3 works include the development of a XXXX XXXX, the installation of an additional XXXX XXXX cranes and XXXX rail mounted gantries. It will be able to accommodate ultra large container vessels up to XXXX LOA. It is estimated to cost over XXXX XXXX.

218    The PON PBC said:

While this report contains conclusions and recommendations as a result of the Base Case analysis, it should be noted that a more thorough evaluation of the proposed design remains a work in progress.

219    The PON PBC said that the stage 1 development, excluding capital dredging, would be built within the existing planning approval. This is a reference to the 2001 development consent. The PON PBC said stages 2 and 3 would require new planning approvals.

220    The PON PBC noted that Newcastle is not currently a location for distribution centres and said that initially, products that are imported to Newcastle, and ultimately sold or consumed in the Port’s catchment, may need to be transported to existing warehousing or distribution centres in Sydney before being sent back to Newcastle as part of aggregated freight consignments” but that “[o]ver time, supply chains will realign to take advantage of lower congestion, shorter transport distances and available and affordable industrial land in Newcastle. As future Distribution Centre capacity is created, imports will be deconsolidated and distributed both locally and to the Port’s catchment providing even greater savings. It noted XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX offered enormous opportunity to augment the facilities and services provided by the proposed Newcastle container terminal. It described XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX. The PON PBC said:

XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

221    The PON PBC noted that shipping lines are almost certainly not going to consider calling both Newcastle and Sydney in the same service, so ships calling Newcastle will need to be able to do full container exchanges that will include containers with freight servicing the Sydney market, as well as containers with freight servicing PON’s catchment. The volume forecasts assumed that:

the average mix will be achieved by shipping lines acting rationally, wanting to maximise exchanges and balance the mix such that, if required, they may cross-subsidise where necessary. Shipping lines may cover or reduce the cost of transfers to Sydney of freight landing in Newcastle.

222    The PON PBC identified the lack of existing infrastructure as a weakness of the proposal and that:

An efficient supply chain for containers to and from Newcastle, including intermodal services, Distribution Centres, ECPs [empty container parks] and related container services to support the terminal, does not currently exist.

This lack of infrastructure creates a need for the repositioning of Sydney freight and catchment imports that need access to Sydney Distribution Centres in the early stages of development. There is a potential cost implication of this repositioning.

223    The PON PBC said:

XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

224    The PON PBC said:

While this Preliminary Business Case assumes the successful removal of the PCD, lack of political policy support may have a material impact on the likelihood and timing of the required planning approvals.

225    The PON PBC said that the current obligations of the PCD” (defined in the Glossary as “Port Commitment Deed – the contractual commitment of the NSW Government to pay NSW Ports for containers shipped through a future container terminal developed at the Port of Newcastle, for another 50 years”) will result in negative NPVs (net present values) for PON at all stages of the project and negative NPV for the total project in stage 1. It also noted that PON is pursuing a range of legal and political strategies to either have the obligations of the PCD removed or significantly reduced.

226    The PON PBC refers to Port Botany, Port Melbourne and Port Brisbane as competing or competitor ports.

227    The PON PBC assumed the development of a container terminal would be supported by substantial equity and debt from PON’s shareholders.

228    Before the PON PBC was prepared, on 26 June 2018, PON met with Mr Dent, the then General Manager Operations/Logistics of ANL (a shipping company) who noted that:

ANL would be more likely to provide services to PON if there was the XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

…from a shipping line perspective price, service levels and cargo volumes are key and they would need to be sure they can get the contributing import cargoes to move via Newcastle and quickly distributed to destination.

…ANL makes most of its money on the import trade. (southbound from Asia).

…it would be beneficial if PON could provide detail of XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

229    A report to PON’s board in November 2018 recorded that the advice from shipping lines, shipping consultants and CM Ports had been consistent:

    Lines are almost certainly not going to consider calling both Newcastle and Sydney in the same service.

    Ships calling Newcastle will need to be able to do full container exchanges that will include containers with freight from or to the Sydney market as well as containers with freight from or to the PON catchment area.

    Lines have contracts and commercial arrangements that may take up to three years to change.

    Shipping lines want to be able to capitalise on the economies of scale from larger ships and larger exchanges. Ports with facilities that handle larger ships will have an advantage.

    Shipping lines have indicated intention to grow ships sizes to from the current largest size of 8,500 TEU to 10,000+TEU

230    In a speech in 2018 Mr Carmody said:

We dont see Port of Newcastle Container Terminal as competition for Botany or Brisbane our container port is global-facing and its natural catchment is regional New South Wales.

231    In January 2019 Mr Kwiatkowski (a director of PON Operations) reviewed the draft PON PBC and noted:

Business Case states that there will be a need for substantial shareholder equity in the project financing mix, who likes this? Even if shareholders were to be generous, the project would be non-bankable on the basis of such Business Case.

232    In February 2019, on presentation of the PON PBC, PON’s board approved progress to “Decision Gate 2A”, that is, the preparation of a “Detailed Business Case” at a cost of about $3.4 million.

233    In March 2019 the NSW Liberal/National Coalition government was re-elected.

234    In May 2019 PON reported to its shareholders including that:

(1)    the fact that the Liberals had been re-elected in New South Wales has a negative impact on the potential to remove the Newcastle PCD;

(2)    PON was assisting the ACCC to prosecute its case against NSW Ports;

(3)    despite the uncertainty about the Newcastle PCD there was work on the Newcastle Container Terminal project that it would be efficient and prudent to undertake now; and

(4)    continuing momentum on the project is critical to credibility with new customers, NSW Government and is the central tenet of the ACCC proceedings.

235    PON’s shareholders agreed to establish a Steering Committee for the project. The Steering Committee subsequently approved the formation of a Project Management Team, which would be assisted by CM Ports and MIRA.

236    In October 2019 one of PON’s directors, Mr Kwiatowski, said shipping industry insiders were uneasy about a statement of Mr Carmody that “I would argue with the changes going on in the shipping world, there will be a cascading effect on the larger vessels into the Australian trade and if we actually have somewhere for them to call, we’ll probably start getting them”. Mr Kwiatowski said:

…industry experts know how serious investments decisions in port business are made. It’s not done on a basis of: “we’ll spend X million $ on infrastructure and equipment, some customers will come”. There were some cases, where following the above route [of Mr Carmody, ie of developing a port for larger vessels to call] produced very costly and ultimately unwanted port infrastructure’s “white elephants”.

237    In November 2019 Mr Dent noted to PON in respect of PON’s PBC that:

With only 2-3 calls per week in stage one will customers (importers/exporters) change their supply chain arrangements? Most of their cargo will still be going via Port Botany and if now split over two ports they may find their transport (road/rail) costs via Port Botany going up as they now have reduced volume. The customers will have volumes related tariffs and possibly volume incentives as well. The saving for a smaller volume via PoN may be offset by additional costs/ loss of rebates via Port Botany. Was this tested when the preliminary business case was put together?

238    Mr Dent also noted that:

Whilst the industry will espouse support for an alternative to Port Botany, lines will be concerned with the fact there is just the one berth initially, with the second berth four years after the commencement of operations stage one.

Vessels are often off schedule and should it clash with an on window vessel further delay[s] are to be expected. Port Botany has the luxury of multiple berths and operators, better able to manage off window vessels. Vessel delays and the cost of schedule rectification is a big issue for the lines. If vessels experience delays in PoN they may bypass for Port Botany.

239    In November 2019 the PON board approved a budget for further work on the container terminal project. The evidence is not entirely clear but the estimate of the cost of the further work is some $7.47 million. That budget included expenditure on market and supply chain analyses, hydrological and geotechnical studies of the shipping channel and berths at Port of Newcastle, and the development of a design simulation to consider the design, configuration and operation of the terminal.

240    In February 2020 PON’s board was presented with a PCD Resolution Strategy which “identified the advantages of substantive political involvement to facilitate resolution of the Newcastle PCD and therefore accelerate the MDT [multi-purpose deepwater terminal] project”.

241    On 16 April 2020 PON considered the success fees that should be paid to its employees, including Mr Carmody, if certain results were achieved including the removal of the Newcastle PCD. A base case outcome recorded that:

PCD is removed by government with a fair payment/contribution from PON (reflecting the low probability ascribed to container terminal operations buy [sic] bidders in 2014).

242    On 23 April 2020 a report to PON’s board recommended the board approve a “budget of up to $3.8M to develop the full MDT Business Case to support the ACCC -v- NSW Ports court proceedings”. The report also said:

The 2018 preliminary business case is 18 months old and due to changes in macro-economic conditions, along with time, no longer carries currency. Consequently, a new full MDT Business Case is required to support the ACCC -v- NSW Ports court proceedings, mediation, NSW State Deal and future financing.

243    The same report to PON’s board said:

XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

244    On 24 April 2020 PON wrote to the Prime Minister saying:

Since privatisation of the Port of Newcastle in 2014, we have been working on a proposal to develop a cutting-edge container terminal on the east coast of Australia that can return international competitiveness to our international logistics.

The owners of the Port of Newcastle have been seeking to make the investment for several years. Due to the resistance experienced to date, our funding envelope for the project has been between XXXX (current Stage 1) and XXXX (optimal Stage 1). This range represents the investors refusal to provide investment to the project while the Port Commitment Deed penalty remains in place and the uncertainty that the NSW Government would approve a larger development than the current planning approvals the Port has (these approvals date back to 2001, when the NSW Government was going to build a container terminal in Newcastle).

To complicate matters, as you would appreciate, the COVID-19 pandemic has hit the investment sector hard and PON is no exception. Consequently, the ability of PON to contribute to the costs of planning works and make contributions to capital costs in the current environment is hampered.

Given the uncertainty of global investment funds, the temporary downturn in international container shipping and the economy’s need for immediate significant private investment, I write to you today seeking your support in a number of areas to fast-track this project so it can deliver these benefits in a much shorter timeframe than was originally envisaged.

We seek your assistance in the following areas –

1.    XXXX XXXX XXXX XXXX

XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

2.    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

3.    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

245    PON thereafter engaged McKinsey & Co to prepare an “investment grade” business case, including financial analysis. The objective of this engagement was “an investment grade business case for the MDT. This investment case will be required to be of a standard that is suitable to assure shareholders and potential investors of PON of both the benefits and risks associated with the construction and operation of this terminal.

246    Further consultants’ reports obtained by PON include:

(1)    market analysis by Ocean Shipping Consultants (OSC), in respect of which a final report dated 5 May 2020 has been completed;

(2)    a terminal design simulation undertaken by TBA Group. PON asked TBA to consider alternative design options, including revised staging for the construction of the terminal, in order to come up with an optimal design for the terminal;

(3)    a hydrological study concerning the shipping channel and berths at Port of Newcastle, which is being undertaken by DHI/SeaPort OPX;

(4)    a geotechnical study to inform any requirements for ground improvements and suitable pavement options for a container terminal, undertaken by Douglas Partners;

(5)    a planning pathways study and related studies by WSP (who advised that “existing approvals do not reflect future development of the MDT as a modem facility designed to meet current and future needs of the port. The information provided on preferred future planning pathways for the MDT has assumed that a significantly revised layout is required to achieve an appropriate form of development”); and

(6)    a navigation screening study prepared by DHI/SeaPort OPX.

247    Mr Dent reviewed OSC’s draft report in March 2020 and noted the following:

The executive summary needs further work, having a clear conclusion and recommendation. What I take away from the report is that Port Botany has ample capacity and that a subsidy is required if a terminal is to be established in Newcastle.

248    OSC’s final report, “Port of Newcastle Supply Chain Analysis for a Container Terminal” was provided to PON in May 2020 (OSC report).

249    McKinsey & Co informed PON in August 2020 in an update document that, as to potential volumes through a Port of Newcastle container terminal:

    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

250    McKinsey & Co also informed PON that the container terminal would need to have XXXX XXXX XXXX XXXX to attract importers, so a XXXX XXXX XXXX was not feasible.

251    By September 2020 TBA had recommended to PON a proposed MDT involving XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

(1)    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

(2)    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

(3)    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX

(4)    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

252    In September 2020 PON noted that XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

253    On 25 September 2020 McKinsey & Co emailed Mr Dent of PON to this effect:

We are hearing some conflicting views about the destination for containers in NSW which has a significant impact on the investment case (since the destination for containers influences the extent of the cost equalisation we need to offer). Would you mind emailing the shipping lines we spoke to (OOCL, PIL, ANL) in order to ask them for their answer to the email below please? If they were able to share a view ASAP that would be really helpful.

254    This email noted the view of McKinsey & Co that the destination of containers from Port Botany to the distribution centre where disaggregation (or unstuffing) occurs is XXXX to western Sydney, XXXX to the rest of Sydney and XXXX to outside of Sydney.

255    The evidence was to the effect that the “investment grade” business case prepared by McKinsey & Co was anticipated to be available for presentation to PON’s board in November 2020. The hearing continued until 17 December 2020. No “investment grade” business case (prepared by McKinsey & Co or otherwise) was tendered in evidence.

2.7    ACCC’s contentions about basic facts

256    The ACCC contended that there were 10 key matters of fact, nine of which were principally founded on the documentary evidence (the tenth also depending on the evidence of witnesses which is dealt with separately). It is convenient to record my response to the ACCC’s contentions about the 10 key contentions. The contentions are identified below in italics.

257    First, the State’s policy, from around 2003 to 2012 was that the Port of Newcastle would be the next location at which a container terminal would be developed after Port Botany.

258    The State policy from 2003 to 2012 was that after Port Botany reached its full capacity as a container terminal, the next container terminal to be developed would be at Port of Newcastle.

259    This policy, insofar as it identified Port of Newcastle as the next container terminal to be developed after Port Botany reached full capacity, was under question from late 2011 when the State announced it would privatise Port Botany and Transport for NSW and Infrastructure NSW commenced a review of ports policy for NSW. From March 2012 it was apparent that there were serious issues of concern within the State and its advisers about the Port of Newcastle being the next container terminal to be developed after Port Botany reached full capacity. On 27 July 2012 the Treasurer and Minister for Roads and Ports announced that the State would seek to develop Port Kembla as the logical next long term tranche of container capacity after Port Botany. This policy decision was reflected in the State Infrastructure Strategy 2012-2032 published by Infrastructure NSW in October 2012. It was also reflected in the State’s draft NSW Freight and Ports Strategy published in November 2012. This draft also identified that the expectation was that Port Botany might approach its natural capacity between 2030 and 2040, after which new port infrastructure at Port Botany or Port Kembla might be needed.

260    This policy was also reflected in the NSW Long Term Transport Master Plan was published in December 2012. The policy remained unchanged in the final NSW Freight and Ports Strategy published in November 2013. It remains unchanged to date. The State has implemented a number of significant infrastructure decisions subsequently reflecting this policy.

261    Accordingly, at the time the compensation provisions were made on 31 May 2013 the policy of the State was that: (a) Port Botany would be developed to full capacity first, (b) it was anticipated that Port Botany may approach its natural capacity between 2030 and 2040, after which new port infrastructure at Port Botany and Port Kembla may be required, (c) after Port Botany and Port Kembla had reached their full capacity, the next container terminal in NSW would be developed at the Port of Newcastle.

262    Second, in at least the period from 2010 to 2013, a private sector consortium was interested in developing a container terminal at the Port of Newcastle.

263    NSC/MDC was selected by NPC as the preferred developer of a container terminal at the Port of Newcastle by May 2010. NPC was permitted to negotiate with NSC/MDC in June 2011 on the basis that it could not bind the State and that State approval to any commercial deal would be required. By October 2011 NPC and NSC/MDC agreed a term sheet and draft contracts for the proposed development. When NSC/MDC sought approval to enter into the agreements the State informed it that development of a container terminal at the Port of Newcastle would be considered in the context of an overarching strategy for port infrastructure in NSW. As a result, the State would not agree to the development of a container terminal at Port of Newcastle. It would agree only to the development of a multi-use cargo facility. NPC was permitted to negotiate with NSC/MDC on this basis only. By that time, in July 2013, the State was also contemplating the privatisation of the Port of Newcastle. Negotiations between NPC and NSC/MDC continued on the limited basis approved by the State. By November 2013 the Treasurer had directed NPC to cease negotiations altogether.

264    The NSC/MDC proposal for a container terminal at the Port of Newcastle never moved beyond a concept phase. Even in concept, the proposed container terminal was phase 2 of the proposed development with no timing commitment. It may be inferred that NSC/MDC did not have funding in place for the development. The advisers to the State also considered that there was no commercial justification for the inclusion of phase 2 in the development proposal. NSC/MDC said that it was ready to develop a container terminal “at a time decided by the government in the future” which it acknowledged may not be for 20 years. In other words, NSC/MDC did not propose to develop a container terminal contrary to the State policy that Port Botany’s capacity should be used first.

265    Third, there was a link between the change in the State’s policy with respect to Newcastle being the location for NSW’s next container terminal, and the work done for the State by Treasury and Morgan Stanley, regarding the Port Botany privatisation, in late 2011 and 2012.

266    If by this, the ACCC means that the State changed its policy because it proposed to privatise Port Botany, I disagree. The State decided to privatise Port Botany first, it may be inferred, because such a privatisation was the policy of the NSW Liberal/National Coalition government elected in March 2011 and, secondly, because Port Botany is NSW’s only dedicated container terminal and the State policy was always that Port Botany would be developed to its full capacity before any other container terminal would be developed. At the same time as the privatisation of Port Botany, the State was reviewing its port development strategy through the work of Transport for NSW and Infrastructure NSW. The interim outcomes of that review informed with the conclusions reached by the Treasury and Morgan Stanley, that Port Botany should be developed to capacity as a container terminal, then Port Kembla, and only then the Port of Newcastle. The conclusions reached by the Treasury and Morgan Stanley did not drive the conclusions reached by Transport for NSW and Infrastructure NSW. Rather, the Treasury and Morgan Stanley considered the interim conclusions and recommendations of Transport for NSW and Infrastructure NSW which informed their own conclusions.

267    Accordingly, the privatisation of Port Botany did not cause the State’s change of policy. It coincided with the State’s change of policy but the change of policy was not driven by the fact of the privatisation of Port Botany. The change in the State policy was an outcome only of the consideration of efficient and cost-effective infrastructure development for NSW.

268    Fourth, the State was told in 2012 and early 2013 that the Port of Newcastle could compete with Botany and that bidders for Botany and Kembla would consider that risk of competition to be material.

269    It is correct that the State was told that if a container terminal was developed at the Port of Newcastle it would compete with Port Botany. It is apparent from the course of the communications as a whole that by “compete” what was meant was that if a container terminal was developed at the Port of Newcastle it would divert some container trade away from Port Botany and that, despite the State policy to the contrary, this perceived risk had a not immaterial value to the Port Botany privatisation because bidders would make conservative assumptions about the perceived risk.

270    Fifth, before the privatisation of Port Botany in 2013, the State was told that bidders for Port Botany and Port Kembla would want protection from that risk of potential competition from Newcastle.

271    Subject to the observation above in relation to the fourth point, it is correct that the State’s focus was to protect bidders from the financial effects of the perceived risk that the State policy might change in the future, as a result of which a container terminal may be developed while Port Botany has capacity or while a container terminal at Port Kembla has capacity. .

272    Sixth, the Compensation Provisions were directed to providing that protection, and the Treasurer himself signed off on the Compensation Provisions on that basis in March 2013.

273    If, by “that protection”, it is understood to mean the protection described in fifth point above, this is correct.

274    Seventh, the State contemplated the effects of the Compensation Provisions, including the State withholding approval for a container development at the Port of Newcastle and/or requiring investors in a privatised the Port of Newcastle to reimburse or indemnify the State for its liability under the Compensation Provisions.

275    The State did not contemplate that withholding approval for a container development at the Port of Newcastle would be an effect of the compensation provisions. Rather, it contemplated that it had four options which included doing nothing, allowing the development of a container terminal at the Port of Newcastle and providing comfort to bidders, blocking the development of a container terminal at the Port of Newcastle, and blocking the development of a container terminal at the Port of Newcastle and providing comfort to bidders anyway.

276    In this regard, it is also necessary to recall that the development of a container terminal at the Port of Newcastle meant the NSC/MDC development proposal as described above, which NPC had been pursuing (with the State’s approval until 2012) from a time when that pursuit was consistent with the policy of the State, at least to the extent of the next container terminal, after Port Botany had reached capacity, being at the Port of Newcastle.

277    It is also necessary to recall that the State’s policy at the time was that Port Botany be developed to full capacity first, then Port Kembla, and only then Port of Newcastle. For this reason the advisers to the State considered the risk of development of a container terminal at Port of Newcastle contrary to the State policy to be a “straw man” that, nevertheless, had to be dealt with given its potential impact on the value bidders would attribute to Port Botany and Port Kembla.

278    The State did contemplate that if the compensation provisions were included as part of the privatisation of Port Botany and Port Kembla, the State could offset any potential liability under those provisions in the transactions effecting the privatisation of the Port of Newcastle.

279    Eighth, the Treasurer himself contemplated a reimbursement obligation as a consequence of the Compensation Provisions before he executed the Port Botany and Port Kembla PCDs containing the Compensation Provisions on behalf of the State.

280    This is correct.

281    Ninth, the Reimbursement Provision was in fact imposed as a consequence of the Compensation Provisions.

282    In my view, this is correct.

283    Tenth, since becoming the owner of Port Botany and Port Kembla, the NSW Ports Respondents have held the view that a Newcastle Terminal would compete with Port Botany if the Botany and Kembla PCDs were not in place, and have been concerned about that prospect.

284    As discussed below, this submission needs to be unpicked. On the evidence, NSW Ports considers that the compensation provisions provide it with financial protection if the State policy changes and a container terminal is developed at the Port of Newcastle and diverts containers away from Port Botany before Port Botany reaches capacity.

285    On the evidence, the reimbursement provisions are irrelevant to NSW Ports other than to the extent that they argue that, if anything has an anti-competitive effect, it is the reimbursement provisions alone and not the compensation provisions.

286    NSW Ports also does not accept that there is a credible threat of entry by a container terminal at the Port of Newcastle in the reasonably foreseeable future and has not done so since the State policy changed, the cap on Port Botany was removed, and Port Kembla was privatised with Port Botany.

3.    CROWN IMMUNITY

3.1    Statutory provisions

287    References below are to the provisions of the CCA as in force at 31 May 2013 (the date the Port Botany and Port Kembla PCDs were executed).

288    Section 2 of the CCA provides:

The object of this Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.

289    Section 2B provides:

(1)    The following provisions of this Act bind the Crown in right of each of the States, of the Northern Territory and of the Australian Capital Territory, so far as the Crown carries on a business, either directly or by an authority of the State or Territory:

(a) Part IV;

(b) Part XIB;

(c) the other provisions of this Act so far as they relate to the above provisions.

(2)    Nothing in this Act renders the Crown in right of a State or Territory liable to a pecuniary penalty or to be prosecuted for an offence.

(3)    The protection in subsection (2) does not apply to an authority of a State or Territory.

290    By s 4 an authority” in relation to a State or Territory means: (a) a body corporate established for a purpose of the State or the Territory by or under a law of the State or Territory, or (b) an incorporated company in which the State or the Territory, or a body corporate referred to in paragraph (a), has a controlling interest.

291    By s 4E:

For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services.

292    Section 4F provides:

(1)    For the purposes of this Act:

(a)    a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding, or a covenant or a proposed covenant, shall be deemed to have had, or to have, a particular purpose if:

(i)    the provision was included in the contract, arrangement or understanding or is to be included in the proposed contract, arrangement or understanding, or the covenant was required to be given or the proposed covenant is to be required to be given, as the case may be, for that purpose or for purposes that included or include that purpose; and

(ii)     that purpose was or is a substantial purpose; and

(b)    a person shall be deemed to have engaged or to engage in conduct for a particular purpose or a particular reason if:

(i)     the person engaged or engages in the conduct for purposes that included or include that purpose or for reasons that included or include that reason, as the case may be; and

(ii)    that purpose or reason was or is a substantial purpose or reason.

293    Section 4G is in these terms:

For the purposes of this Act, references to the lessening of competition shall be read as including references to preventing or hindering competition.

294    Section 4L is as follows:

If the making of a contract after the commencement of this section contravenes this Act by reason of the inclusion of a particular provision in the contract, then, subject to any order made under section 51ADB or 87, nothing in this Act affects the validity or enforceability of the contract otherwise than in relation to that provision in so far as that provision is severable.

295    Section 45, in Div 2, Pt IV of the CCA, included these provisions:

(2)    A corporation shall not:

(a)    make a contract or arrangement, or arrive at an understanding, if:

(i)     the proposed contract, arrangement or understanding contains an exclusionary provision; or

(ii)     a provision of the proposed contract, arrangement or understanding has the purpose, or would have or be likely to have the effect, of substantially lessening competition; or

(b)     give effect to a provision of a contract, arrangement or understanding, whether the contract or arrangement was made, or the understanding was arrived at, before or after the commencement of this section, if that provision:

(i)     is an exclusionary provision; or

(ii)     has the purpose, or has or is likely to have the effect, of substantially lessening competition.

(3)    For the purposes of this section, competition, in relation to a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding, means competition in any market in which a corporation that is a party to the contract, arrangement or understanding or would be a party to the proposed contract, arrangement or understanding, or any body corporate related to such a corporation, supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the provision, supply or acquire, or be likely to supply or acquire, goods or services.

(4)    For the purposes of the application of this section in relation to a particular corporation, a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding shall be deemed to have or to be likely to have the effect of substantially lessening competition if that provision and any one or more of the following provisions, namely:

(a)    the other provisions of that contract, arrangement or understanding or proposed contract, arrangement or understanding; and

(b)    the provisions of any other contract, arrangement or understanding or proposed contract, arrangement or understanding to which the corporation or a body corporate related to the corporation is or would be a party;

together have or are likely to have that effect.

296    Section 45 of the CCA was subsequently amended but not in a manner which any party suggests is material to this case. The key provisions are now s 45(1) (in equivalent terms to s 45(2) above and s 45(3) (which remains in substantially similar terms to s 45(3) above). Section 45(4) remains identical.

297    Section 51 of the Act in May 2013 (and now) provides that in deciding if a person has contravened Pt IV anything done in, relevantly, a State, if the thing is specified in and specifically authorised by an Act passed by the Parliament of that State or regulations made under such an Act, that thing must be disregarded.

3.2    Authorities

298    Bradken Consolidated Ltd v The Broken Hill Proprietary Company Ltd [1979] HCA 15; (1979) 145 CLR 107 concerned the application of the Trade Practices Act 1974 (Cth) (Trade Practices Act) to the Commissioner for Railways of the State of Queensland. Section 8(1) of the Railways Act 1914 (Qld) provided, among other things, that the Commissioner represented the Crown and had all the powers, privileges, rights and remedies of the Crown. Gibbs ACJ (as he then was) at 114 referred to Wynyard Investments Pty Ltd v Commissioner for Railways (NSW) [1955] HCA 72; (1955) 93 CLR 376 in which it was held that a statutory body representing the Crown had the immunities of the Crown: at 114. Otherwise, Gibbs ACJ identified that the Commissioner was, in a number of respects, subject to direct control of the legislature, Governor or Minister. All moneys payable to the Commissioner were payable into Consolidated Revenue. Contracts into which the Commissioner entered were of no effect until approved by the Minister. Accordingly, these matters also confirmed that the Commissioner was an agent of the Crown and entitled to Crown immunity: at 115.

299    Gibbs ACJ referred to the “established rule of construction that no statute binds the Crown unless the Crown is expressly named therein or unless there is a necessary implication that it was intended to be bound”: at 116. The Trade Practices Act bound the Crown in right of the Commonwealth insofar as it carried on a business but was silent about the Crown in right of the States: at 116. As such, the statute did not bind the Crown in right of the State. Further, if the statute was enforced against the other parties to the contracts it would prejudice the Commissioner “just as much as if its provisions had been directly enforced against him”: at 123. As a result, the statute could not apply to the transactions: at 124.

300    Stephen J reasoned to the same effect: at 127-129.

301    Mason and Jacobs JJ referred to an identical presumption of legislative intention not to bind the Crown as between the Crown in right of the Commonwealth and the Crown in right of the States: at 136. Accordingly, the absence of an intention to bind the Crown in right of Queensland exonerated both the Commissioner and the other parties to the transactions from the provisions of the Trade Practices Act: at 137-138. Murphy J dissented concluding that the Trade Practices Act bound the Crown in right of the States: at 140.

302    In the joint judgment of Mason CJ, Deane, Dawson, Toohey, Gaudron and McHugh JJ in Bropho v Western Australia [1990] HCA 24; (1990) 171 CLR 1 at 15 it was observed that the rule that legislative provisions are prima facie inapplicable to the Crown is a rule of statutory construction. Further, the presumption extends beyond the Sovereign to the activities of governmental instrumentalities or agents acting in the course of their duties as such. They observed at 19 that:

[T]he historical considerations which gave rise to a presumption that the legislature would not have intended that a statute bind the Crown are largely inapplicable to conditions in this country where the activities of the executive government reach into almost all aspects of commercial, industrial and developmental endeavour and where it is a commonplace for governmental commercial, industrial and developmental instrumentalities and their servants and agents, which are covered by the shield of the Crown either by reason of their character as such or by reason of specific statutory provision to that effect, to compete and have commercial dealings on the same basis as private enterprise.

303    At 21-22 their Honours continued:

Once it is recognized that the rule does not, of itself, provide an impregnable foundation for its own observance, there can remain no basis in principle for unqualified insistence upon the rule as an inflexible one, with the stringent implications which recent cases have accorded it. In other words, once it is accepted that a legislative intention to bind the Crown may be disclosed notwithstanding that it could not be said that that intention was “manifest from the very terms” of the statute or that the purpose of the statute would otherwise be “wholly frustrated”, fundamental principle precludes confinement of the general words which the legislature has used in a way which will defeat that intention. Such a legislative intent must, of course, be found in the provisions of the statute including its subject matter and disclosed purpose and policy when construed in a context which includes permissible extrinsic aids. If such a legislative intent does appear from the provisions of a statute when so construed, it must necessarily prevail over any judge-made rule of statutory construction including the rule relating to statutes binding the Crown.

That being so, earlier judicial statements to the effect that it must be manifest from the very terms of the statute itself that it was the legislative intent that the general words of a statute should bind the Crown, or that it must be apparent that the purposes of the statute would be wholly frustrated unless the Crown were bound, should be read as applying to the context of the particular statutory provisions involved in the cases in which they were made. Such statements should no longer be seen as precluding the identification of such a legislative intent in other circumstances or as warranting the overriding of a legislative intent which can be discerned in the provisions of a statute when construed in context.

304    The joint judgment continued at 23-24 to this effect:

In the case of legislative provisions enacted subsequent to this decision, the strength of the presumption that the Crown is not bound by the general words of statutory provisions will depend upon the circumstances, including the content and purpose of the particular provision and the identity of the entity in respect of which the question of the applicability of the provision arises.

Always, the ultimate questions must be whether the presumption against the Crown being bound has, in all the circumstances, been rebutted, and, if it has, the extent to which it was the legislative intent that the particular Act should bind the Crown and/or those covered by the prima facie immunity of the Crown.

305    Justice Brennan in Bropho said this at 28 to the same effect:

[T]he presumption cannot be put any higher than this: that the Crown is not bound by statute unless a contrary intention can be discerned from all the relevant circumstances. As the Court must determine whether the legislature intended … that the statute should affect the activities of the Executive Government, the circumstances which properly relate to that question must be considered. Those circumstances include the terms of the statute, its subject matter, the nature of the mischief to be redressed, the general purpose and effect of the statute, and the nature of the activities of the Executive Government which would be affected if the Crown is bound.

306    In NT Power Generation Pty Ltd v Power and Water Authority [2004] HCA 48; (2004) 219 CLR 90 McHugh ACJ, Gummow, Callinan and Heydon JJ considered s 2B of the Trade Practices Act, which provided that the Pt IV of the Act bound the Crown so far as the Crown carried on a business. They said:

(1)    the word “business” normally is a wide and general word: [66];

(2)    the purpose of introducing s 2A (and, I note, s 2B) was to ensure that the Commonwealth Government (and, I note, State governments) should, in its commercial activities, be subject to the same regime as corporations: [66];

(3)    for s 2B to apply the conduct need not itself be the actual business engaged in. It need only be in the course of the relevant entity carrying on a business: [67];

(4)    nothing in the Act limits the meaning of “business” by reference to the criteria for market definition: [69]; and

(5)    the only question is: what business was the relevant entity carrying on? So far as it was carrying on a business, s 46 applied to it: [70].

307    The joint judgment in NT Power also said that in Bropho it was concluded that “a search for legislative intent that the general words of statutes should bind the Crown should be conducted without the restrictive limitations of the traditional rule: [19]. Their Honours additionally referred at [167]-[168] to the observations of Kitto J in Wynyard Investments at 394 in relation to derivative Crown immunity. Justice Kitto identified three classes of case:

(1)    ‘‘a provision, [which] if applied to a particular individual or corporation, would adversely affect the exercise of an authority which he or it possesses as a servant or agent of the Crown to perform some function so that in law it is performed by the Crown itself’’;

(2)    cases “in which a provision, if applied to a particular individual or corporation, would adversely affect some proprietary right or interest of the Crown, legal equitable or statutory’’; and

(3)    ‘‘an anomalous class of cases where a provision creating a liability by reference to the ownership or occupation of property would, in its application in respect of certain kinds of property, impose a burden upon the performance of functions which, though not performed by servants or agents of the Crown, are looked upon by the law as performed for the Crown’’;

308    Their Honours identified at [170] that the relevant question in this regard was whether the application of s 46 to the entity claiming derivative Crown immunity:

‘‘would be, for a legal reason, an interference with some right, interest, power, authority, privilege, immunity or purpose belonging or appertaining’’ to the Government … [citing Wynyard Investments]. More recently, this Court said that the interference to be looked for is a ‘‘divesting’’ of ‘‘property, rights, interests or prerogatives’’ [Bass v Permanent Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334 at [42], per Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and Callinan JJ] belonging to the Government. The better view is that the principle applies to proprietary, contractual and other legal rights and interests and not otherwise, notwithstanding that it has been said to extend to ‘‘arrangements or understandings’’ [Bradken at 137, per Mason and Jacobs JJ; see also Bank voor Handel en Scheepvaart NV v Administrator of Hungarian Property [1954] AC 584 at 621, 624, per Lord Reid; at 629, per Lord Tucker; at 632, per Lord Asquith of Bishopstone].

309    Their Honours rejected the argument that a financial impact on the Northern Territory Government (as opposed to prejudice to property rights, legal rights, legal interests or legal prerogatives) was sufficient to enliven derivative Crown immunity: [173]-[175].

310    In Australian Competition and Consumer Commission v Baxter Healthcare Pty Limited [2007] HCA 38; (2007) 232 CLR 1 Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ, in a joint judgment, identified the issue as whether ss 46 and 47 of the Trade Practices Act applied to conduct of a trading corporation in, or in connection with, negotiations for, entry into, or performance of, a contract with a State or Territory government where the governments conduct is not in the course of carrying on a business. Those sections bound the Crown in right of a State or Territory so far as the Crown carries on a business, either directly or by a government authority (s 2B). The argument was thus one of derivative Crown immunity: [1]. Their Honours said:

(1)    “[w]hen, in 1995, s 2B was added, providing that certain provisions of the Act bound the Crown in right of a State or Territory when carrying on a business, the conclusion reached in Bradken was reversed in so far as the Crown was carrying on a business, but reinforced in so far as the Crown was not carrying on a business; [43];

(2)    “[t]here is nothing unusual about a circumstance in which making or giving effect to a contract involves an offence by one party to the contract but not by the other. The consequences of such illegality for the rights of the respective parties will not necessarily be the same. Furthermore, there is nothing unusual about the Act applying to one party to a transaction, or proposed transaction, but not to the other”: [44] (citations omitted);

(3)    as Gibbs J said in McGraw-Hinds (Aust) Pty Ltd v Smith [[1979] HCA 19; (1979) 144 CLR 633 at 643-644], the fact that an offence is one that may not be committed by the Crown is no reason for concluding that it may not be committed against the Crown”: [47];

(4)    [t]he reasons given in Bradken for the conclusion that ss 45 and 47 of the Act did not apply to the conduct of the Queensland Commissioner for Railways must now be regarded, in the light of this Court's decision in Bropho, as too widely expressed”: [52];

(5)    “[t]wo things are clear. First, the proposition applied in Bradken was regarded as a corollary of the principle about Crown immunity. Secondly, both the proposition about Crown immunity and its corollary are principles of statutory construction. The Courts statement in Bradken of the principle about Crown immunity no longer accurately represents the law. It has been overtaken by the decision in Bropho”: [58];

(6)    (after referring to the reasons of Kitto J in Wynyard Investments at 393-394, including that the “cases in which a statutory provision not binding on the Crown must be denied an incidence upon a subject of the Crown because that incidence would be in legal effect upon the Crown” fall into the three classes Kitto J identified), “[w]e are concerned with the second of these classes, bearing in mind that what is involved is the incidence in legal effect upon the Crown. General references to unspecified forms of prejudice to interests of the Crown in a context such as this are unhelpful. There were references in the argument for the respondents to the right of States to enter into contracts, where what was in contemplation would be described more accurately as a freedom For reasons already given, whether and to what extent it is to the advantage of executive governments, Commonwealth or State, for corporations dealing with them to be unfettered by laws which promote competition, is a question to which there is no simple answer. Because of its power to make laws with respect to trading corporations, it is a question on which the language of the federal Parliaments legislation is decisive, subject to s 51(1)”: [60];

(7)    (after referring at [61] to the reasons of Kitto J in Wynyard Investments at 396 which focus on an interference with “some right, interest, power, authority, privilege, immunity or purpose belonging or appertaining to the Crown”): “[t]he need for concentration on legal consequences in this context has been stressed in recent times by this Court in NT Power … [at [170]]. The principle of construction to be applied is that, since the Act does not bind the Crown in right of a State or Territory when it is not carrying on a business, then, save to the extent to which a contrary intention appears, the Act will not be read so as to divest the Crown of proprietary, contractual or other legal rights or interests. Consistently with Bropho, such a contrary intention may appear from the language of the Act, and its objects and subject matter as emerging from that language: at [62];

(8)    it would be wrong to conclude that ss 46 and 47 had no application to any conduct of the first respondent in relation to its dealings with the second, third and fourth respondents. The first respondent was a trading corporation. A conclusion that, in carrying on dealings with a government in the course of its own business, it enjoyed a general immunity not available to the government when the government was carrying on business itself would be remarkable. Such a conclusion would be impossible to reconcile with the object of the Act as now declared in s 2. Furthermore, such a conclusion would go far beyond what is necessary to protect the legal rights of governments, or to prevent a divesting of proprietary, contractual and other legal rights and interests. As a result of changes to the Act since Bradken, State and Territory governments no longer enjoy any general immunity from the Act. Acting under s 51(1), State and Territory Parliaments may legislate to protect governmental interests, but the legislative emphasis on the specificity with which they must do that (increased since Bradken) draws attention to the importance attached to the pursuit of the object declared in s 2”: [64];

(9)    [u]nderlying this argument is the idea that the Act operated so as not to enact any law that would circumscribe the freedom of the Crown in right of a State or Territory to make any kind of contract it wished, and, furthermore, that the Act preserved the Crown’s freedom in that respect, by providing that corporations dealing or negotiating with the Crown should be free to propose and make any kind of contract, unfettered by any constraint under the Act. These ideas cannot be supported by reference to any established principle of statutory construction, and they are impossible to reconcile with the purpose and subject matter of the Act. It is one thing to read the Act so as not to divest the Crown of legal rights. It is another thing altogether to read the Act as giving an executive government (as distinct from a Parliament acting under s 51(1)), including all its servants and agents, a freedom not enjoyed when the government itself is carrying on business, from any impact of laws enacted for the promotion of competition and fair trading in the public interest. And it is even more unlikely that that freedom extends to all persons dealing with that executive government”: [68];

(10)    “[i]n order to protect legal rights of the Crown, it is not necessary to deny that entering into or performing a contract could involve a contravention of s 46 or s 47 by a non-government party The outcome is determined by the application of the detailed legislative scheme concerning remedies. It is not dictated by a general conclusion that, in order to preserve the Crowns immunity, it is necessary also to extend a general immunity to any non-government party negotiating or contracting with the Crown”: [70];

(11)    “[t]he reaction of South Australia to Offer 1A hardly suggests that the conduct of the first respondent was within its contemplation. Even if it had been, the purpose of the Act is to promote competition, which is a process which operates for the public benefit, not to satisfy the expectations of parties: [73];

(12)    “[a]s a matter of construction of the Act, however, it is wrong to conclude that it operates to preserve unfettered the contractual capacities of the Crown, to the extent of withholding the application of the Act from conduct by non-government parties in response to an invitation to tender”: [73]; and

(13)    “[t]he construction urged by the respondents imposes a very extensive qualification upon the Act’s object of promoting competition and fair trading in the public interest, in the name of the protecting of the capacities of the Crown, a qualification strikingly at odds with the way the Act deals with governments when they themselves carry on a business”: [74].

3.3    ACCC’s/PON’s submissions

3.3.1    Crown immunity submissions

311    The ACCC submitted that three matters are relevant to the application of s 2B. First, as a question of construction, what does “the Crown” mean for the purposes of s 2B? Second, as a matter of fact, who was engaged in carrying on the business of SPC, PKPC and NPC? Third, when will conduct be conduct that falls within the phrase “so far as the Crown carries on a business, either directly or by an authority of the State or Territory”?

312    As to the first matter, the meaning of Crown, the ACCC submitted that the concept includes the executive government of the particular polity, which is comprised of ministers, government departments, public servants, statutory authorities, officials, and statutory corporations: NT Power Generation v Power & Water Authority [2002] FCAFC 302; (2002) 122 FCR 399 at [160], citing Town Investments Ltd v Department of the Environment [1978] AC 359 at 381. The Crown “acts in its day to day activities through the agency of its public service and through other institutions or instrumentalities created for the purpose” and its “functions nowadays extend beyond traditional, or clearly regal, functions of government to activities of an entrepreneurial or commercial kind which, in general, were previously engaged in only by subjects of the Crown”: Re Residential Tenancies Tribunal (NSW); Ex parte Defence Housing Authority [1997] HCA 36; (1997) 190 CLR 410 at 438.

313    Accordingly, the ACCC submitted that where the State carries on a business through a corporation that is either incorporated for a State purpose, or in which the State has a controlling interest, such corporations are to be treated as the Crown for the purposes of the CCA. This construction is consistent with the purpose of the provision, being to secure “equivalent treatment of non-government and government business”: NT Power at [71]. Thus, s 20F of the SOC Act provided that SPC, PKPC and NPC, as SOCs under that Act, did not represent the State unless the SOC Act or any other Act expressly provided. Section 2B of the CCA expressly provides that so far as those corporations carry on a business they are the Crown for the purposes of the CCA. As such, the ACCC submitted that the distinction sought to be drawn by the other parties between the State and the SOCs, SPC, PKPC and NPC, is illegitimate. The ACCC said the relevant inquiry is whether the Crown is carrying on the business, irrespective of whether the Crown does so directly or by an authority.

314    As to the second matter, the persons engaged in carrying on the business, the ACCC submitted that the starting points are the PAMA Act and the SOC Act.

315    The PAMA Act: relevant provisions include:

(1)    ss 6-8: establishing SPC, PKPC and NPC as statutory SOCs;

(2)    s 9: specifying the objectives of port corporations, being (a) to be a successful business (and to this end, inter alia, to maximise the net worth of the State’s investment in the port corporation); (b) to promote and facilitate trade through its port’s facilities; (c) to ensure that port safety functions imposed by the Act are carried out properly; (d) to promote and facilitate a competitive commercial environment in port operations; and (e) to improve productivity and efficiency in its ports and the port-related supply chain;

(3)    s 10: specifying the principal functions of a port corporation, being to (a) to establish, manage and operate port facilities and services in its ports; (b) to exercise the port safety functions for which it is licensed in accordance with its operating licence; and (c) to facilitate and co-ordinate improvements in the efficiency of the port-related supply chain;

(4)    s 10A: by which the responsible Minister may give a port corporation a direction in relation to the exercise of any of the corporation’s functions in connection with its principal objectives under s 9(d) (to promote and facilitate a competitive environment in port operations) and s 9(e) (to improve productivity and efficiency in its ports and the port related supply chain). A port corporation was required under that section to comply with any such direction;

(5)    s 10B: by which regulations could be made to promote the economically efficient operation of, use of and investment in land-based port facilities and port-related supply chains;

(6)    s 12: relating to “port safety functions”;

(7)    s 13: relating to performance standards and quality assurance programs for services under operating licences;

(8)    s 16: concerning a direction by the Minister for the transfer of assets to a ports corporation;

(9)    s 17: concerning a direction by the Minister for the transfer of port safety assets, rights and liabilities of a ports corporation to Roads and Maritime Services (the Authority); and

(10)    s 21(1): that the voting shareholders of a ports corporation were to consult the Minister about various matters including any proposed recommendation about the appointment of a director and any proposed action of the voting shareholders concerning the preparation, completion or modification of a port corporation’s statement of intent.

316    The SOC Act: relevant provisions include:

(1)    s 20C: concerning the transfer of assets, rights and liabilities of the State to a statutory SOC in exchange for the issue of shares or on any other basis;

(2)    s 20E: specifying the principal objectives of statutory SOCs;

(3)    s 20H: that a statutory SOC was to have only two shareholders, the Treasurer and another Minister nominated as a voting shareholder;

(4)    s 20I: the establishment of the portfolio Minister;

(5)    ss 20N-P: the power of the portfolio Minister to give the statutory SOC directions and notices with which it must comply;

(6)    s 20Q: concerning the constitution of statutory SOCs including that the Ministers who are the voting shareholders of a statutory SOC are responsible for ensuring that the constitution of the SOC contains certain provisions;

(7)    s 20R: to the same effect as s 20Q concerning subsidiaries of a statutory SOC;

(8)    s 20S: concerning dividends;

(9)    s 20X: concerning the acquisition and disposal of assets requiring the approval of the voting shareholders;

(10)    s 20Y: concerning the sale or disposal of a statutory SOC’s undertaking requiring approval of the voting shareholders;

317    The ACCC thus noted that the executive government, including the Treasurer, exercised a significant control over, and responsibility for, SPC, PKPC and NPC. It follows, said the ACCC, it is not to treat the conduct of the statutory SOCs and of the members of the executive as distinct. Rather, these involved different functions within the one business. The State, through the statutory SOCs in which members of the executive government played a significant role, was carrying on the business of operating the ports.

318    The ACCC said it was not significant that the privatisation of the ports was effected by legislation. The legislation, the PAAT Act, does not signify that the State was not carrying on the business of operating the ports. To the contrary, it signifies that the State was involved in that business because it legislated to provide for the business assets to be transferred to another entity.

319    According to the ACCC, it was also not significant that the proceeds of the long term leases were to be invested in a particular fund. The fact that money is designated for a particular purpose does not signify that the State was or was not carrying on a business.

320    As to the third matter, the question when conduct falls within the phrase “so far as the Crown carries on a business, either directly or by an authority of the State or Territory”, the ACCC said that the answer is that any conduct engaged in in the course of carrying on that business is subject to the operation of the CCA. The conduct need not itself be the actual business engaged in: NT Power at [67]. Accordingly, as the ACCC put it:

In the present case, the State was carrying on the business of operating the ports. In the course of operating that business, the State made a decision to privatise two of those ports. In the course of implementing that decision, the State decided to enter into a clause that would provide bidders for the leases of the ports with protection from competing business from the third port (the business of which the State proposed to continue to carry on for a period post privatisation of the other two ports). The subject matter of the clause was the everyday business of the ports, namely the physical traffic of container flow through the ports. The broader purpose of the Compensation Provisions was also one that served that business, such that the entry into the PCDs can be characterised as conduct engaged in in the course of carrying on that business. A private trading corporation that engaged in such conduct would be caught by the CCA. So should the Crown. The fact that the decision was entered into in relation the privatisation of the business does not mean that it was not entered into in the course of carrying on that business. It is only if the inquiry is erroneously limited to whether the impugned conduct itself constitutes the business engaged in that such an argument can succeed. However NT Power stated conclusively that such an approach should not be taken.

(Citations omitted).

321    According to the ACCC it is immaterial that the sale of each port was a one off event. The sales were in the course of carrying on the business of operating the ports.

322    The ACCC said that it is also immaterial that the compensation provisions do not come into effect until after the State has entered into long term leases and thereby effectively disposed of the business of operating the ports. The provisions were entered into by the State as a party to a contract that was entered into in the course of carrying on a business, and the State would give effect to that obligation in the same capacity. It is that capacity which characterises the conduct of the State, not the time at which the contractual entitlement to payment under the (allegedly) anticompetitive provisions is ultimately triggered.

323    According to the ACCC, JS McMillan Pty Ltd v Commonwealth [1997] FCA 619; (1997) 77 FCR 337 is distinguishable. Justice Emmett said that:

(1)    [t]he expression carry on business, in its ordinary meaning, signifies a course of conduct involving the performance of a succession of acts and not simply the effecting of one solitary transaction’: per Gibbs J in Smith v Capewell [[1979] HCA 48;] (1979) 142 CLR 509 at 517”: 354;

(2)    the Commonwealth, in providing printing services under the guise of the Australian Government Printing Service (AGPS), was carrying on a business within the meaning of s 2A of the Trade Practices Act: 355;

(3)    by s 2A “the Commonwealth is to be bound only where the conduct complained of is engaged in, in the course of carrying on the business”: 356;

(4)    the “conduct of the Commonwealth in issuing the request for tender and in dealing with prospective tenderers was not activity engaged in in carrying on the business which has hitherto been carried on by the Commonwealth under the name AGPS”: 356;

(5)    the “conduct complained of is that of officers of the Commonwealth who have had nothing to do with the day-to-day operations of the AGPS. It is conduct quite divorced from the carrying on of that business”: 356-357; and

(6)    “[a] one off decision to cease engaging in the activities of AGPS, to dispose of the plant and equipment relevant to those activities, to undertake not to engage in those activities in the future and, in the capacity of client, to invite private enterprise to take on those activities, is not conduct in the carrying on of a business”: 357.

324    The same distinction, submitted the ACCC, cannot be drawn in the present case for the reasons given above. In JS McMillan the impugned conduct was not engaged in for any purpose that served the business of AGPS. It was not conduct that was designed to secure the revenue or the value of the assets of the business. In the present case, the compensation provisions served a purpose directly related to the business of the ports, and should be characterised as conduct in the course of carrying on that business.

325    Alternatively, the ACCC submitted that if not distinguishable, JS McMillan must be either read down as provided for in NT Power or should not be followed as it is incorrect.

326    Further, the ACCC submitted that even if entry into the compensation provisions was not conduct undertaken in the course of carrying on the businesses of Port Botany and Port Kembla, it was conduct undertaken in the course of carrying on the business of the Port of Newcastle.

327    As a result, according to the ACCC, the State did not enjoy Crown immunity when it entered into the compensation provisions. As such, NSW Port cannot enjoy derivative Crown immunity. If the State did enjoy Crown immunity then, in any event, the ACCC submitted that NSW Ports did not enjoy derivative immunity.

328    PON made submissions to the same effect. PON also said that the entry into the PCDs (and the compensations provisions) was in the course of the State carrying on the business of operating the ports because:

(1)    the State’s business of operating ports continued until it privatised Port of Newcastle in 2014. It would be curious if the a business was being carried on both before and after the entry into the long-term leases, but that the entry into the agreements effecting those transactions was not a part of carrying on that business;

(2)    the terms of the Port Botany and Port Kembla PCDs were closely related to the ongoing conduct of the State’s business. In particular, the compensation provisions concerned the State’s obligation to make payments to NSW Ports in the event that it, or its successor in its business of operating the Port of Newcastle, conducted that business in a manner that led to diversion of container volumes from Port Botany or Port Kembla;

(3)    the lease transactions in general, and the entry into the PCDs in particular, were conduct of the State acting through the Treasurer. The Treasurer was one of the voting shareholders of the SOCs through which the State conducted the business of operating ports; and

(4)    the involvement of the Treasurer in both the operations of the State’s business and the entry into the PCDs and the State’s ongoing conduct of the business of operating ports mean that JS McMillan can have little relevance to the conclusions in this case.

329    PON also submitted that the other relevant business carried on by the State is, in effect, that of a landlord of land suitable for operating a port. Prior to the entry into the long-term leases, the State was the owner of that land through the SOCs. By entering into the long-term leases, the State transitioned to carrying on a business as a landlord, deriving revenue from the letting of land suitable for port operations. That business was one that included the leasing of the land at which Ports Botany and Kembla operated and subsequently leasing the land on which the Port of Newcastle operates.

3.3.2    Derivative Crown immunity submissions

330    The ACCC noted that s 45(2)(a)(ii) of the CCA as at 31 May 2013 provided that a corporation shall not make a contract if a provision of the proposed contract has the purpose, or would have or be likely to have the effect, of substantially lessening competition. Section 45(1)(b) presently provides that a corporation must not give effect to a provision of a contract if that provision has the purpose, or has or is likely to have the effect, of substantially lessening competition. Those provisions apply generally to trading corporations. Section 51(1) of the CCA empowers State and Territory Parliaments to exempt conduct in a State or Territory from Part IV of the CCA. This confirms that the CCA is intended to have broad and general application, including to trading corporations dealing with the Crown: see Baxter at [48], [73].

331    The ACCC noted that in Baxter Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ referred to the Trade Practices Act not being read so as to divest the Crown of proprietary, contractual or other legal rights or interests: [62]. The contrary approach, of focusing only on some prejudice to or adverse effect upon, some proprietary, contractual or other legal rights of the Crown, is not supported by Baxter. Further, no proprietary, contractual or other legal rights of the Crown may be identified in this case.

332    As to ss 6 and 7 of the PAAT Act, the ACCC submitted that those provisions enabled the Treasurer to exercise all such functions as are necessary or convenient for the purposes of an authorised transaction (ss 3 and 4, the transfer of ports assets to the private sector or to any public sector agency) and for an authorised transaction to be effected as directed by the Treasurer in any manner considered appropriate by the Treasurer. They do not set aside the matrix of federal and state laws within which the Treasurer must otherwise operate. So much is clear from s 25(2) of the PAAT Act (the provisions of the PAAT Act only prevail where identified in regulations as an inconsistent provision for the purposes of s 25). There are no such regulations. Further, the compensation provisions do not effect an authorised transaction. They do not transfer any port assets. Section 7 thus has no operation with respect to the compensation provisions. Section 7 does not confer any relevant legal right. And s 45 does not prejudice or interfere with, still less divest the State of, any legal right.

333    As to the State’s contractual rights, the ACCC submitted that the fact that (if the ACCC is correct) s 4L would apply and the compensation provisions would be severed from the Port Botany and Port Kembla PCDs does not mean that the State is divested of a contractual right. The State did not have absolute freedom to contract when carrying on business: Baxter at [68]. In any event, severance of the compensation provisions divests the Crown of an obligation to pay compensation, not a legal right. An obligation is not a right: Ogden Industries Pty Ltd v Lucas [1967] HCA 30; (1967) 116 CLR 537 at 586.

334    As to the State’s proprietary rights in the port assets, the ACCC submitted that the argument does not go beyond that relating to s 7 of the PAAT Act. And as was said in Baxter, governmental, commercial, and political interests or freedoms should not be confused with legal, equitable, or statutory rights or interests: at [60]. As the ACCC put it a right to deal with assets “in a value-maximising way” can mean no more than value-maximising within the confines of the laws of Australia.

335    As to the State’s implementation of policy, the ACCC submitted that this is not a legal right or interest that will engage derivative Crown immunity.

336    PON supported these submissions. According to PON:

(1)    s 45 manifests a clear intention that it is to apply to an entity such as NSW Ports in respect of the compensation provisions in the PCDs. Section 45 applies to any corporation;

(2)    45 applies to a State so far as it is carrying on a business. NSW Ports was and is carrying on a business, so if s 45 did not apply to it in respect of its conduct in making and giving effect to the compensation provisions, it would be in a better position than the State otherwise would be, an anomalous result as noted in Baxter at [64], [68];

(3)    the purpose of s 2B, to ensure that the Crown is in the same position as other corporations so far as the State is carrying on a business, would be defeated if NSW Ports was not so subject in carrying on its business: NT Power at [15], [21]-[27];

(4)    the mere fact that s 45 does not apply to the State in respect of its conduct (if that be the case) does not mean that s 45 cannot apply to a party contracting with the State. It is also not necessary to protect the legal rights of the State to extend any immunity to NSW Ports: Baxter at [44], [70]. This is particularly so given the operation of s 4L severing the contravening provisions: SST Consulting Services Pty Limited v Rieson [2006] HCA 31; (2006) 225 CLR 516 at [36], [40];

(5)    the State’s freedom to contract with corporations is constrained by the obligation of the corporations to comply with the law: Baxter at [60], [68]. Equally, the State’s capacity to enter into transactions authorised by the PAAT Act is not absolute and is also constrained by the obligation of the corporations with which the State transacts to comply with the law. This is reinforced by s 31(1) of the Interpretation Act 1987 (NSW) (the Interpretation Act) (an Act or instrument shall be construed as operating to the full extent of, but so as not to exceed, the legislative power of Parliament);

(6)    to require corporations dealing with the State not to make or give effect to contracts that have the purpose or effect of substantially lessening competition, is at least as likely to benefit the State as it is to adversely affect the State’s interests: Baxter at [48], [60]; and

(7)    on the facts of the present case, no legal right or interest of the State will be impaired or adversely affected by s 45 applying to NSW Ports. Crown immunity benefits only the Crown and whoever asserts it must do so on behalf of the Crown: Wynyard Investments at 395. The invalidity or unenforceability of the compensation provisions will not affect any right of the State, as the provisions impose a liability on the State. NSW Ports asserts Crown immunity for its own benefit, not that of the State.

3.4    Consideration

3.4.1    Crown immunity

337    The State is bound by Pt IV of the CCA so far as it carries on a business, either directly or by an authority of the State: s 2B. It necessarily follows that, otherwise, the State is not bound by Pt IV of the CCA: Baxter at [43].

338    In formulating the State policy, the NSW government was not carrying on a business. Accordingly, the implementation of the State policy is not subject to s 45 of the CCA. This issue is discussed further below in the context of the likely effect of the impugned provisions.

339    As the State submitted, the CCA Act is not an Act that “otherwise expressly provides” for the purposes of s 20F of the SOC Act (which provides that SOCs do not represent the State unless the SOC Act or any other Act so provides). The reference to “Act” in s 20F means an Act of the NSW Parliament: ss 12 and 65 of the Interpretation Act, Hannes v Director of Public Prosecutions (Cth) (No 2) [2006] NSWCCA 373; (2006) 165 A Crim R 151 at [721]. But in any event, s 20F of the SOC Act does not mean that the State is not carrying on a business by an authority of a State for the purposes of s 2B of the CCA. Section 20F means only that the SOCs do not represent the Crown for the purposes of NSW law.

340    What business was the State carrying on? Given the terms of the PAMA Act and the SOC Act, the most apt answer is that SPC and PKPC were each carrying on a business of operating their respective ports. As discussed below, PON’s assumption that through these entities the State was carrying on a single business does not sit comfortably with the statutory regime under which the ports were operated.

341    Irrespective of s 20F of the SOC Act, it must follow in the terms of s 2B of the CCA, that the State was carrying on those businesses by an authority of the State (that is, by the SOCs). But the State must also be right that this does not mean that every aspect of the State’s dealings with the ports was in the course of carrying on the businesses of operating the ports. The fact that members of the executive government were involved in the carrying on of the business of each SOC does not have this consequence. In other words, the fact that it may be accepted that the State played a significant role in each SOCs carrying on of the business of operating the ports does not answer the relevant question. The question is whether the State entered into or would give effect to the compensation provisions in the course of carrying on those or another business.

342    Contrary to the ACCC’s submissions, the State did not decide to privatise the two ports in carrying on the businesses of operating those ports or the Port of Newcastle. It decided to privatise the ports as a matter of government policy. The compensation provisions did not serve the purpose of the carrying on of those businesses, that is, the businesses of the State operating the two ports through the SOCs. The provisions had nothing to do with those businesses. The compensation provisions served the purpose of ensuring that bidders did not discount their bids on account of the risk that the State policy might change so that the State could maximise the value it obtained from the privatisation. This is not to confine the impugned conduct to the businesses engaged in, but is to focus on the question whether the conduct is in the course of carrying on the businesses. As the State submitted:

(1)    the decision to privatise the port assets was not a decision made by SPC or PKPC, or a decision in which they had any involvement;

(2)    the decision was made by the executive government to implement NSW government policy;

(3)    the privatisations could not be effected under the SOC Act or PAMA Act, which regulated the SOCs in their conduct of the business of operating the ports;

(4)    the privatisations could only be effected under the provisions of the PAAT Act, which had nothing to do with the SOCs in their conduct of the business of each in operating their ports;

(5)    to the extent that the SOCs were involved in any of the privatisation transactions, it was only because they held relevant assets that were to be dealt with pursuant to the directions given by the Treasurer; and

(6)    the SOCs, responsible for the business of operating their respective ports, were not parties to the Port Botany or Port Kembla PCDs.

343    As NSW Ports also submitted, the SOCs were legally disabled from disposing of their fixed assets or main undertakings without the approval of shareholder Ministers by ss 20X and 20Y of the SOC Act. As NSW Ports put it:

That highlights the legal delineation, in this particular statutory context, between the carrying on of the business of operating ports and the disposition of the assets and main undertakings of the business. The latter acts were removed from the purview of the business and placed within the political control of the Ministers having oversight of the State-owned corporations.

(Original emphasis).

344    As NSW Ports also put it, the fact that the SOCs were subject to political control does not mean that the political control is itself necessarily an act in the course of the SOC carrying on its business.

345    The State, in effect, decided to carry on the business of operating each port through a SOC. It could have, but did not, structure those undertakings as one business. By the enabling legislation for SOCs, it structured the operation of the ports in NSW as three separate businesses. When it came to the decision to privatise the ports, this had nothing to do with the SOCs. They had no role to play other than to be divested of their assets to other new State entities (a separate entity for each port, supporting the conclusion that the port operations involved three separate businesses) so that there could then be a transfer of those assets to private sector entities. The fact that the businesses were separate is also supported by the event in relation to Port Kembla, where the decision to include the assets of that port with Port Botany in the privatisation was made late in the day. SPC and PKPC were also dissolved in 2016 by the Ports Assets (Authorised Transactions) (Dissolution of Port Corporations) Proclamation 2016, and no longer have any existence. It is not apparent how giving effect to the compensation provisions could be in the course of carrying on of the business of operating the ports by those non-existent entities. As NSW Ports submitted, the compensation provisions, when made, were directed to circumstances that could arise, if at all, in the future when the State would not be carrying on the Port Botany and Port Kembla businesses.

346    The fact that the Port Kembla and Port Botany PCDs and the compensation provisions concern the operation of the ports is immaterial. The issue is whether the making of the compensation provisions and the giving effect to those provisions was or would be in the course of the State carrying on the businesses of operating the ports (which it did through the SOCs). As the State put it:

Even if the subject matter of the Compensation Provisions related to operational matters (in the strained sense which the ACCC suggests), the conduct of the State in proposing the Compensation Provisions and executing the Port Commitment Deeds containing such provisions was not in any relevant sense of an operational kind forming part of the business previously carried on by SPC and PKPC.

347    Nor, for the reasons given, can I accept that in entering into or giving effect to the compensation provisions the State was acting in the course of carrying on the business of operating the Port of Newcastle through NPC. To adopt the words of the State again:

If it is contended that because the Port Commitment Deeds touched upon container traffic that might pass through the Port of Newcastle, then this is too tenuous a connection to affect the character of the activity. The mere fact that a contract might mention the operations of another different and separate business does not mean that the contract is made in the course of that different and separate business.

348    Further relevant indicators that in privatising Port Botany and Port Kembla (and in the course of doing so, entering into the compensation provisions) the State was not conducting itself in the course of carrying on the businesses of operating the ports include that for each of Port Botany and Port Kembla, the privatisation was a single event, albeit comprised of a series of steps. In other words, each Port could be privatised once only. There is no regular or systematic series of acts involved in privatising a port, in contrast to the regular and systematic series of acts involved in the business of operating the ports: Murphy v State of Victoria [2014] VSCA 238; (2014) 45 VR 119 at [46]-[47].

349    No inconsistency between JS McMillan and NT Power is apparent. In JS McMillan Emmett J accepted that the Commonwealth was carrying on a printing business through the AGPS. He did not accept that the sale by tender of that business was in the course of carrying out that or any other business by the Commonwealth. In NT Power the point made was that the conduct need not itself be the business but need only be in the course of the carrying on of the business.

350    It is not that the sale of a business can never be in the course of carrying on that business. Whether that is so or not must depend on the facts concerning the business and the sale. On the facts of the present case, I consider that the State was carrying on businesses of operating the ports through the SOCs. The privatisation of Port Botany and Port Kembla, however, had nothing to do with the course of those or any other businesses. It was a decision of NSW government policy implemented outside the context of the operation of any business.

351    To the extent it is necessary to deal with PON’s submissions separately, the following responses may be given:

(1)    PON incorrectly assumes that the State, by the SOCs, was carrying on a single business of operating ports in NSW so that, when Port Botany and Port Kembla were privatised, the State continued to operate Port of Newcastle through NPC. The assumption is not self-evidently correct. From the provisions of the PAMA Act and the SOC Act, as summarised above, a more obvious and natural conclusion is that the State was carrying on three separate business – the operation of Port Botany through SPC, Port Kembla through PKPC, and Port of Newcastle through NPC. If that is so, the operation of each business of Port Botany and Port Kembla, respectively, ceased on privatisation. Those businesses did not continue as PON posits

(2)    in any event, if it is the case that the State was carrying on a single business of operating the three ports, then the fact that the State continued to carry on that business in respect of the Port of Newcastle does not mean that the privatisation of Port Botany and Port Kembla was in the course of carrying on the business of operating the three ports. Rather, the privatisation of two of the ports, in the circumstances (which includes the statutory context described above), was a step separate and distinct from the operation of the (assumed single) business;

(3)    the terms of the PCDs did concern the operation of the Port of Newcastle either by the State though NPC or by a private entity on privatisation. Again, however, that fact does not mean the conduct of privatisation of Port Botany and Port Kembla was in the course of the carrying on the business of operating the ports, let alone the course of each business of operating each port. The PCDs were merely an obligation to the private entity operating Port Botany and Port Kembla contingent on the nature of the operation of the Port of Newcastle;

(4)    the dual role of the Treasurer, as the person effecting the privatisation and as a voting shareholder on the SOCs, does not mean that every or any action of the Treasurer should be taken to have been performed in the exercise of his functions in this second capacity. The statutory scheme regulating the SOCs and the privatisation makes this clear. The Treasurer was not acting as a voting shareholder in SPC or PKPC in effecting the privatisation. He was acting in a designated role under the PAAT Act having nothing to do with his role as a voting shareholder in the SOCs when effecting the privatisation; and

(5)    it is correct that in JS McMillan the persons responsible for effecting the tender had nothing to do with the operation of AGPS: see at 356-357. It is difficult to accept, however, that this fact was determinative. If it were, the application of the statutory scheme to the Crown would depend on the coincidence of the identity of the personnel the Crown used to effect its objective. The key point in JS McMillan was that the conduct of the tender for the sale of the AGPS business was “quite divorced from the carrying on of that business”: at 357. In the present case, as noted, the Treasurer was vested with various functions. But there cannot be any doubt that, under the statutory scheme, those functions were separate and distinct. In exercising his functions under the PAAT Act, the Treasurer was not acting as a voting shareholder of any SOC. He was involved in conduct separate and distinct from the operation of each SOC. Accordingly, JS McMillan is not irrelevant. It discloses the importance of identifying the business or businesses the Crown is carrying on either directly or through an authority of the Crown. The conduct must be in the course of carrying on such a business before ss 2A or 2B are engaged.

352    PON’s alternative submission that the State made and would give effect to the compensation provisions in carrying on a business of leasing land suitable for port operations is also unpersuasive. There was no such business (or businesses) when the ports were vested in the respective SOCs responsible for their operation. The argument is that the State entered into such a business at the time it granted each long-term lease of the port. The PCDs, however, were separate and distinct from any such business. The Treasurer is the State party to the Port Botany and Port Kembla PCDs. The parties to the PCDs do not include the landlords, PB Lessor or PK Lessor. The PCDs operate for a term of 50 years and not the term of the leases of the ports (which are for 99 years). The obligations of the State under the PCDs are separate and distinct from the State’s rights and obligations as landlord through PB Lessor and PK Lessor. The SOCs and PB Lessor or PK Lessor are only in the PCDs to the extent that they are the subject of releases by the relevant private entities. It cannot be said that the Treasurer entered into the PCDs in any function as landlord. His entry into the PCDs was not in the course of carrying on the business of leasing ports. The entry was in the course of ensuring the State received maximum value for money in privatising the ports. The fact that the privatisation was effected in part by the entry into leases of land by the State, through the relevant authorities of the State, does not mean that the privatisation itself was in the course of carrying on the business of being a landlord of the ports. Rather, the carrying on of that business (assuming it to be such) was a consequence of the privatisation.

353    Contrary to PON’s further submissions, the fact that the State retains an active role in the operations of Port Botany and Port Kembla under the leases of those ports (by requiring the ports to be used and developed effectively for port purposes) does not mean that the State is continuing to conduct the business or businesses of operating the ports. It is obvious that the State has an interest in ensuring that the ports are effectively used and developed as ports. That is part of its governmental functions. Equally, the privatisation of the ports was part of its governmental functions. Neither the fact of its ongoing role in the operation of the ports, nor its role as port landlord, mean that it entered into or would give effect to the compensation provisions in the PCDs in the course of carrying on any business.

354    For these reasons, I do not accept that s 2B was engaged with respect to the State’s conduct in making the compensation provisions in the PCDs or would be engaged by the State giving effect to the compensation provisions in the PCDs. Accordingly, Pt IV of the CCA did not and does not apply to the State’s conduct in that regard.

3.4.2    Derivative Crown immunity

355    The conduct of the State in making and giving effect to the compensation provisions is not subject to s 45 of the CCA. Accordingly, so far as the conduct of NSW Ports is concerned as the other contractual party which made and may give effect to the compensation provisions, the question is whether the application of s 45 to NSW Ports would “adversely affect some proprietary right or interest of the Crown, legal equitable or statutory’’ (Kitto J’s second category of case of derivative Crown immunity in Wynyard Investments at 394).

356    To the extent that it was submitted that this third category of case was confined to a divestment of a proprietary right or interest of the Crown, legal equitable or statutory, in the sense that the legal right must be destroyed or removed absolutely, I would disagree. Justice Kitto referred to “adversely affect” and interference for a legal reason in Wynyard Investments. In NT Power at [170] the High Court did not suggest that Kitto J’s formulation was too broad, but noted that it had been said in Bass v Permanent Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334 at [42] that the required interference was a divesting of the legal right. I do not consider that, by this, the High Court meant that the legal right had to be destroyed or removed absolutely. A legal right may be divested in whole or part. A partial divestment is nevertheless a divestment. Whether an interference for a legal reason with a legal right amounts to a divestment of the legal right must depend on the nature of the right and of the nature and extent of the interference with it.

357    Contrary to the State’s submissions, it is not apparent that the reasoning in Baxter depended on the fact that the contravening conduct of the private entity was unilateral, involving the making of an offer: at [32], [35], and [44]. As the High Court noted at [44], the legislation extends to contracts which, by definition, do not involve unilateral action. Nevertheless, it is also apparent from the High Court’s reasoning that the fact that the conduct involved unilateral action by the corporation, in effect, against South Australia, made the outcome in Baxter more readily apparent than might otherwise have been the case: at [73].

358    Nor is it apparent that the reasoning would not apply to a case where the impugned conduct may be described as an outworking of State policy. In this regard, I accept that the compensation provisions support the State policy as adopted by July 2012. But the compensation provisions were (and are) not the means by which that policy was (or is) effected. The policy was (and is) effected primarily by the publication of the various State planning and strategic documents, including the NSW Freight and Ports Strategy released in November 2013. The more recent NSW Freight and Ports Plan 2018-2023 reflects the fact that the policy of sequencing and the relevant order of ports remains as identified in the NSW Freight and Ports Strategy. The State policy would remain irrespective of the validity or enforceability of the compensation provisions.

359    It is also doubtful that the State had a relevant right or interest in pursuing its policy objectives so as to engage the principle of statutory construction that, subject to any contrary intention, legislation is presumed not to operate to divest the Crown of a legal right or interest. I am unable to conceive of the State’s interest in pursuing its policy objective of ports development sequencing as a kind of legal right or interest at all. It is also unnecessary to so conceive of the State’s interest in its own policy because its policy involves a strategic infrastructure plan in the public interest of NSW as a whole. It has nothing to do with the carrying on of any business or any concern about competition between Port Botany and the Port of Newcastle. The agencies of the State involved in developing the State policy and the NSW government in adopting it were focused only on the most economically efficient and least costly (for the public, for private developers, and for those involved in the NSW container freight task) options for NSW as a whole. The State policy has nothing to do with the carrying on of any business and by s 2B the relevant provisions of the CCA did not and do not apply to the formulation, adoption and implementation of that policy.

360    A necessary corollary of the fact that s 45 of the CCA does not apply to the State in respect of the making or giving effect to the compensation provisions is that, unless a contrary intention appears, s 45 also does not apply to NSW Ports if that would involve the “incidence in legal effect” (Kitto J in Wynyard at 393) of s 45 upon the State, in the sense that it would divest the State of some legal right. This does not mean s 2 of the CCA (the object of the CCA to, relevantly, enhance the welfare of Australians through the promotion of competition) is irrelevant. The object of the Act, as disclosed in Baxter at [62] and [64], is relevant to the question whether the CCA evinces a contrary intention.

361    I do not accept the State’s proposition that because s 2B evinces a clear legislative intention that Crown immunity should apply in a manner that protects the non-business related interests of the Crown, it necessarily follows that derivative Crown immunity applies to NSW Ports. In Baxter the Crowns in right of the States were not running a business. By s 2B, ss 46 and 47 of the Trade Practices Act did not apply to them. Yet those provisions did apply to the corporation dealing with the Crowns.

362    Sections 6 and 7 of the PAAT Act give the Treasurer plenary power to effect the transfer of port assets over which the State had (and has) proprietary rights. The fact that, in exercising those powers, the State was (and is) not bound by Pt IV of the CCA does not automatically mean that a corporation dealing with the State in respect of the transfer of port assets is not so bound. That consequence follows only if, first, the application of Pt IV of the CCA to the corporation would involve the legal incidence of those provisions falling upon the State so as to divest the State of a legal right and, second, the CCA does not evince a statutory intention that its provisions should so extend.

363    In the present case, it is apparent that in giving effect to the authorised transactions under the PAAT Act to transfer the assets of Port Botany and Port Kembla to NSW Ports, the Treasurer considered that in order to maximise the value the State could obtain for the assets it was necessary or convenient to enter into the compensation provisions. In summary, if the compensation provisions were not included in the authorised transactions the Treasurer considered that entities bidding for the port assets would discount their bids to account for the perceived risk that State policy as to the sequencing of container development (both the fact and the order of sequencing) might change. If this occurred, the State would not be obtaining what it perceived to be maximum value for its assets. As the State put it, the compensation provisions were a form of insurance for the other party to the authorised transactions to deal with an issue of sovereign risk.

364    At this stage, the consideration of the concept of a “legal right” may be deferred. It is noticeable that in Baxter the High Court may be inferred to have characterised the so-called “right” in that case (the general freedom to contract) as a mere freedom” or “capacity”: at [68], [72], [73], [74]. But it cannot be said that the High Court’s reasoning was simply that there was no divestment of a relevant legal right of the Crown, so no question of statutory construction arose. Rather, statutory construction considerations were relevant. They indicated that the application of the statutory provisions to a corporation negotiating and contracting with the executive for the supply of a product in the circumstances as existed in Baxter was not modified by the principle of statutory construction that, subject to any contrary intention, legislation is not to be construed so as to divest the Crown of a legal right.

365    In this regard, it is necessary to note that there are two “contrary” statutory intentions which may be relevant.

366    If the relevant question is the contrary legislative intention that Pt IV applies to the Crown (that is, contrary to the presumption that legislation does not bind the Crown), the CCA gives an express answer in ss 2A and 2B – Pt IV applies only so far as the Crown is carrying on a business.

367    If the relevant question is the contrary legislative intention that Pt IV applies to a corporation that is not the Crown even if the effect of so doing is to apply Pt IV to the Crown so as to divest the Crown of any legal right, the CCA does not give an express answer – and Baxter is not authority for the proposition that such a general contrary legislative intention exists.

368    This second question of statutory construction is identified in Baxter at [62]. The reasoning at [64] ff in Baxter includes that there is no general legal right of the Crown to make any contract it wishes. Rather, the untrammelled capacity to make such contracts as the Crown wishes is a mere “freedom”: at [68]. Interfering with that freedom does not involve divesting the Crown of a legal right: at [68]. Concluding to the contrary is unnecessary to protect the Crown’s legal rights: at [70]. The real question is the extent to which the second principle of statutory construction (that the Act is not to be construed so as to divest the Crown of legal rights) modifies the application of the statutory provisions: at [66]. This principle of statutory construction is different from concluding that the executive is free from any impact of the competition laws (in distinction from Parliament acting under s 51): at [68]. The Trade Practices Act did not operate to “preserve unfettered the contractual capacities of the Crown”: at [73]. Preserving the “capacities” of the Crown in this way would impose a “very extensive qualification upon the Act’s object of promoting competition and fair trading in the public interest”: at [74]. It would also be inconsistent with the restrictions imposed by s 51(1) of the CCA on the capacity of a Parliament to exempt anti-competitive behaviour from the Act and would seem to give the public officials of States and Territories a wider power to give dispensations from the operation of Commonwealth law than State or Territory legislatures: at [73].

369    If Pt IV of the CCA applies so that NSW Ports could not make or give effect to the compensation provisions, there is no doubt that the State would be divested of its capacity under the PAAT Act, at least in part, to enter into the authorised transactions as the Treasurer considered necessary or convenient (a capacity which included the giving of various directions to the SOCs to enable the transactions to be carried out). The arguments of the ACCC and PON against this conclusion are unpersuasive.

370    First, it may be accepted that the compensation provisions do not themselves effect the authorised transactions. But they are provisions which were necessary or convenient to enable the authorised transactions to be effected. They are provisions “for the purposes of an authorised transaction” as provided for in ss 6 and 7(2) and (3) of the PAAT Act.

371    Second, it is also not to the point that the severance of the compensation provisions from the PCDs would divest the State of a liability (in distinction from a right). This submission focuses upon the consequence of the (assumed) contravention – severance of the compensation provisions by operation of s 4L of the CCA. The relevant focus, however, is the antecedent operation of the statutory provisions of the PAAT Act which vested the Treasurer with statutory authority to do that which was necessary or convenient to effect the authorised transactions (that is, the transfer of the State’s proprietary rights) including by contract. It is those rights which may be divested in part if Pt IV of the CCA applies to the other contracting party, NSW Ports. In any event, the compensation provisions contain mutual rights and obligations as between the State and NSW Ports. It is the State which determines if the compensation provisions are engaged: cl 3.3(a), (d) and (e). The State obtains a release from any other liability: cl 3.9. Further, as NSW Ports and the State submitted, the relevant principle of statutory construction concerns the rights and interests of the Crown: Baxter at [59], [60].

372    Third, while it may be accepted that there is no legal right in the State to deal with its assets in a way that maximises their value, this submission also fails to confront the fact that it is the statutory authority vested by the NSW Parliament in the Treasurer to effect the authorised transactions that is being divested in part by the application of Pt IV of the CCA to the other party to the authorised transaction.

373    Fourth, it is not material that it may be inferred that NSW Ports is asserting derivative Crown immunity for its own benefit. The State is also asserting that NSW Ports has derivative Crown immunity, presumably for the State’s benefit. Accordingly, it cannot be said that the assertion is not for the benefit of the State.

374    By applying s 45 to the other party to the authorised transaction, the State would be prevented by s 45 from doing what it could lawfully otherwise do irrespective of s 45 (because it was not carrying on a business in effecting the authorised transactions). This conclusion, it seems to me, is inescapable. But this conclusion would have applied equally in Baxter. The application of ss 46 and 47 to the corporation in Baxter necessarily prevented the executive of South Australia from negotiating as it saw fit, despite the fact that at the time of the negotiation the executive objected to the corporation’s conduct. While the High Court did not decide this issue, there are sufficient indications in the reasons to conclude that the attitude of the Crown to the conduct cannot be determinative or, perhaps, even relevant: at [73]. This is a necessary conclusion. If it were otherwise, the application of statutory provisions to the Crown would depend upon the mere coincidence of whether the Crown perceived the conduct of the other corporation to be favourable or unfavourable (a perception which, as Baxter, shows, may change over time).

375    Accordingly, one feature that distinguishes the present case from Baxter should not be seen as relevant – that the Treasurer considered the compensation provisions to be in the interests of the State. I have also rejected above two other purported distinguishing features – that the compensation provisions involve bilateral conduct (that is, they include the State) rather than unilateral conduct (that is, they involve conduct of the corporation alone) and that the compensation provisions reflect or are an outworking of the State policy. As to the former, as discussed, Baxter indicates that bilateral contractual conduct is also potentially regulated: at [68], [70]. As to the latter, as discussed, the State’s policy is supported by the compensation provisions but no more, and the interest of the State in pursuing its policy objective cannot be considered to be a legal right or interest of the relevant kind to engage the second principle of statutory construction identified above.

376    The real distinguishing features of the present case when compared to Baxter include, first and foremost, the fact that the Treasurer’s effecting of the authorised transactions was specifically enabled by the provisions of the PAAT Act. This is not some general amorphous “right” or “freedom” of the executive government to enter into contracts of supply. We are dealing with a specific statutory capacity of the Treasurer to effect the authorised transactions, being the transfer of identified port assets in which the State had proprietary rights of ownership, as necessary or convenient and without limitation.

377    Second, the body vested with functions under the PAAT Act is a Minister of the Crown, the Treasurer, and not the executive at large. By s 33 of the PAAT Act, the Minister may only delegate functions under the Act to the Secretary of the Treasury or to any other Public Service employee prescribed by the regulations (none being prescribed).

378    Third, the context is also not the general supply of goods (in which the Crown had no legal rights) to the executive, but the transfer by the State of a specific class of assets, the three ports in NSW which the State owned, as identified in the PAAT Act.

379    Fourth, it may be inferred from the provisions of the SOC Act and the PAAT Act that the relevant class of assets, the three ports owned by the State, are of high policy and economic significance to the State. In particular, s 5 of the PAAT Act required the proceeds of sale of the three port assets to be paid into the Restart NSW Fund. This is a fund established under the Restart NSW Fund Act 2011 (NSW), s 6 of which provides that the purpose of the Fund is to improve economic growth and productivity in the State.

380    In these circumstances, it is difficult to avoid the conclusion that the PAAT Act vested specific statutory rights in the Treasurer as a Minister representing the Crown. It is equally difficult to avoid the conclusion that applying Pt IV of the CCA to the conduct of NSW Ports, as the other contracting party, would apply the legal incidence of the CCA to the Treasurer who was not otherwise so bound. That reality should be directly confronted. But would applying s 45 of the CCA to NSW Ports divest the Crown of a legal right? And does the CCA evince a contrary intention to apply its provisions to the conduct of NSW Ports even if that does involve divesting the State of a legal right?

381    As noted, the first question posed above necessarily involves consideration of the nature of the legal right and the nature and the extent of the asserted divestment of that right.

382    The PAAT Act defines the nature of the relevant right. If, for example, the PAAT Act provided that it operated subject to the CCA, then it could not be concluded that the CCA operated to divest the State of any legal right. The statutory rights vested in the Treasurer would not then extend to making or giving effect to any provision that contravened the CCA.

383    Section 31 of the Interpretation Act is not material. That section is concerned with the legislative power of the NSW Parliament. It does not exceed the power of the NSW Parliament to make a law which authorises the Crown to engage in conduct which would otherwise contravene the CCA. Such a law may nevertheless be a law for the the peace, welfare, and good government of New South Wales”: s 5 of the Constitution Act 1902 (NSW) (NSW Constitution Act). Further, as the State submitted, the second principle of statutory construction, if it is engaged, means that the CCA does not apply to the conduct of NSW Ports. The CCA is not ousted by the PAAT Act. It simply does not apply because of the operation of the second principle of statutory construction. Contrary to the submissions of the ACCC, the concept of the State exceeding its power never arises.

384    For the same reasons, s 36 of the PAAT Act is also immaterial because it concerns a provision of the PAAT Act being invalid because it exceeds the legislative power of the NSW Parliament.

385    Nor do I consider s 25 of the PAAT Act to be material. Section 25 is concerned with the relationship between the PAAT Act and other State legislation, not legislation of the Commonwealth. Even if the State had wished to it could not have prescribed the CCA in a regulation under s 25(2) as that section applies only to State legislation.

386    The relevant provisions are ss 34(1) of the PAAT Act which provide that the PAAT Act “binds the State and, in so far as the legislative power of the Parliament of New South Wales permits, the other States, the Territories and the Commonwealth” and s 35(1)(c) of the PAAT Act which provides that it is the intention of the Parliament of New South Wales that the operation of this Act should, as far as possible, include operation in relation to the following things, acts, transactions and matters (wherever situated, done, entered into or occurring) that would, apart from this Act, be governed or otherwise affected by the law of another State, a Territory, the Commonwealth or a foreign country”.

387    When ss 34(1) and 35(1)(c) are read with ss 6 and 7 of the PAAT Act, it is not difficult to infer a legislative intention of the NSW Parliament that the statutory rights vested in the Treasurer by the PAAT Act should not be circumscribed by the operation of any law of the Commonwealth to the extent such a law would be inconsistent with the Treasurer effecting an authorised transaction as necessary or convenient.

388    The fact that the PAAT Act was enacted after the enactment of s 51 of the CCA does not indicate to the contrary. In this regard, the first version of s 51 was introduced by the Competition Policy Reform Act 1995 (Cth) which commenced on 17 August 1995. NSW enacted, in response, the Competition Policy Reform (New South Wales) Act 1995 (NSW) (Competition Policy Reform (New South Wales) Act). Sections 13 and 14 of this latter Act apply the “application laws” of NSW and other jurisdictions to the Crown so far as the Crown carries on a business, subject to the exemptions in s 15.

389    But the fact that the PAAT Act does not amend the Competition Policy Reform (New South Wales) Act does not mean that the NSW Parliament intended Pt IV of the CCA to apply to the Treasurer exercising functions as a representative of the Crown under the PAAT Act.

390    For one thing, s 51 operates in the context of s 2B which provides that the CCA applies to the Crown only insofar as it is carrying on a business and, in exercising functions under the PAAT Act, the Treasurer is not carrying on a business on behalf of the Crown.

391    For another, s 51 operates in the context of the principle of statutory construction that, subject to a contrary intention, legislation is not to be construed as divesting the Crown of a legal right including a statutory right.

392    Further, if there is inconsistency between the PAAT Act and the CCA, the latter would prevail by operation of s 109 of the Commonwealth Constitution. In other words, as the State submitted, there was no occasion or need for the NSW Parliament, in the PAAT Act, to exclude the operation of s 45 of the CCA expressly.

393    Finally, as NSW Ports submitted, s 51 permits States to authorise conduct which would otherwise be contravening conduct, but does not answer the question of what conduct would be contravening conduct requiring authorisation. In other words, s 51 of the CCA presupposes the existence of contravening conduct. If the conduct is not contravening because the State is not carrying on a business and thus s 2B of the CCA is not engaged, or because the CCA does not contain a contrary intention to the application of the presumption that a statue is not to be construed as divesting the Crown of a legal right, then amendment of the Competition Policy Reform (New South Wales) Act to exempt conduct for the purpose of an authorised transaction from the operation of Pt IV was unnecessary. Lack of such amendment cannot thereby be taken as indicative of any intention of the NSW Parliament that the CCA Act was to apply to authorised transactions under the PAAT Act.

394    It is more difficult to discern a legislative intention of the NSW Parliament in the PAAT Act that any private entity should not be circumscribed by the CCA in its dealings with the Treasurer in respect of an authorised transaction. To adopt the reasoning the High Court used in Baxter at [65] and [73], assume the private entities tendering for the port assets colluded with each other, their purpose being to substantially lessen competition for those assets in contravention of the CCA. Could it be inferred that the NSW Parliament intended the PAAT Act to operate to exempt the private entity from complying with the CCA? Such an intention seems unlikely.

395    This latter proposition, however, is not an answer to the relevant question in the present case. The PAAT Act may evince one intention with respect to the conduct of the Treasurer in respect of the effecting of an authorised transaction and another intention with respect to a private entity in respect of an authorised transaction. If the identification of the relevant right is determined by the provisions of the PAAT Act, as I consider it must be, then I conclude from the scope, purpose and language of the PAAT Act that the NSW Parliament intended that the Treasurer be empowered to effect an authorised transaction as necessary or convenient and unaffected by the provisions of the CCA. Such an intention is unsurprising given: (a) the Treasurer was not carrying on any business in exercising functions under the PAAT Act, and (b) accordingly, the Treasurer was not bound by the CCA in exercising functions under the PAAT Act given the terms of s 2B of the CCA.

396    It must follow from this that the relevant statutory rights vested in the Treasurer by the PAAT Act include the right for the Treasurer to negotiate and contract on terms which would involve the other party to the authorised transaction, if a corporation, contravening the CCA. This is necessary because of the bilateral character of any authorised transaction. I do not accept that this construction of the PAAT Act is precluded by the principle of legality. It is not apparent how the principle that legislation is not to be construed so as to interfere with fundamental rights is engaged in the circumstances of the present case.

397    This said, it is not possible to infer that the NSW Parliament intended that any private entity with which the Treasurer was negotiating and/or contracting in respect of an authorised transaction could engage in conduct against the Treasurer in contravention of the CCA.

398    This creates a difficulty in characterising the relevant statutory rights under the PAAT Act. If those rights enable the Treasurer alone to engage in conduct contravening the CCA, they are meaningless because every authorised transaction may involve a private entity which would otherwise be bound by the CCA. Yet it cannot be inferred that the NSW Parliament intended a private entity which would otherwise be bound by the CCA from engaging in conduct against the Treasurer which would contravene the CCA.

399    One thing, however, seems clear. Just as the perception of the Crown about whether conduct is in or against its interests cannot determine (or perhaps even affect) the application of the CCA, so too it would be unsatisfactory for the Crown’s perception to determine the nature and extent of the statutory rights vested in the Treasurer by the PAAT Act. Perceptions may change over time, as Baxter demonstrates.

400    Concepts other than perception, however, are both available and discernible from the provisions of the PAAT Act which I consider inform the characterisation of the relevant statutory right of the Treasurer under the PAAT Act.

401    By s 6 of the PAAT Act the Treasurer has and may exercise all such functions as are necessary or convenient for the purpose of an authorised transaction. By s 7(1), an authorised transaction is to be effected as directed by the Treasurer and can be effected in any manner considered appropriate by the Treasurer. By s 9(1), for the purposes of an authorised transaction, the Treasurer may establish or direct the establishment of a transaction company. By s 11, each port SOC and transaction entity is subject to the direction and control of the Treasurer. By s 19, the Treasurer may make vesting orders under Sch 4 for the purposes of an authorised transaction. By s 20(1), the Treasurer may make severance orders in relation to fixtures for the purposes of an authorised transaction. By s 21, the Treasurer may direct a public sector agency to grant any relevant authorisation relating to port assets to a new operator.

402    The scheme of the PAAT Act thus enables the Treasurer to do what is required to be done for the purposes of an authorised transaction. On this basis, the legislative intention of the NSW Parliament in enacting the PAAT Act may be discerned. The NSW Parliament intended that the statutory rights vested in the Treasurer by the PAAT Act included the Treasurer, for the purposes of an authorised transaction, requiring the other party to the transaction to engage in conduct that would otherwise contravene the CCA.

403    The concept of the Treasurer requiring the other party to engage in conduct that would otherwise contravene the CCA does not resolve all uncertainty. But it does involve objective considerations. It is a question of fact answered by reference to the circumstances at the time of the conduct. That relevant fact cannot change. The Treasurer either did or did not require the conduct at the relevant time. This characterisation of the statutory right constitutes a relatively clear criterion to distinguish between conduct authorised by the PAAT Act (or purported to be authorised given that the provisions of the CCA are yet to be considered) and conduct not authorised by the PAAT Act.

404    In the present case, on the evidence, the Treasurer required NSW Ports to agree to the compensation provisions. Morgan Stanley, on behalf of the Treasurer, informed bidders on 20 December 2012 that changes to the transaction documents should be minimised as they represented the State’s preferred position and that any changes to the liability and risk allocation regime would be viewed unfavourably. The Treasurer proposed the compensation provisions to bidders on 15 March 2013 as part of the risk allocation regime. In doing so, the compensation provisions were described as a codified regime if container volumes at the Port of Newcastle exceeded an organic growth path before Port Botany and Port Kembla were fully developed. NSW Ports did not request any change to the compensation provisions. It accepted the provisions as proposed by the Treasurer.

405    Against this background, the question whether the application of s 45 to NSW Ports in respect of the compensation provisions would divest the State of a legal right may be answered. The answer to that question is “yes”. If s 45 of the CCA applies to the other party to the authorised transactions involving Port Botany and Port Kembla, NSW Ports, then the CCA would operate to divest the Crown of part of the statutory right it vested in the Treasurer, being the statutory right to transfer part of the proprietary rights of the State in the three identified ports to NSW Ports by contract and as part of that transaction to require NSW Ports to engage in conduct that might otherwise contravene provisions of the CCA (noting that s 4(1) of the PAAT Act prevented the Treasurer from transferring ownership of the land comprised in the port assets).

406    It is true that s 45 would not operate to divest the Treasurer of the whole of the statutory rights vested by the PAAT Act or the whole of the State’s proprietary rights in the three port assets or the whole of the contractual rights in respect of effecting the authorised transactions. But it must be concluded that it would operate to divest the Treasurer of an important aspect of those rights – the right of the Treasurer to require the other party to the authorised transaction to engage in conduct, including making and giving effect to contractual provisions, that would otherwise contravene s 45 of the CCA, being a provision which does not apply to the Treasurer in exercising functions under the PAAT Act. This is a sufficient divestment of legal rights (statutory, proprietary and contractual) to engage the relevant principle of statutory construction. That is, it is presumed that the CCA Act does not have this operation unless, “from the language of the Act, and its objects and subject matter as emerging from that language” (Baxter at [62]), that intention may be discerned.

407    This brings me to the second question, whether the CCA evinces a contrary intention to this presumption. Unlike in Baxter, where the existence of the relevant legal right was itself dubious, it is necessary to confront this question directly in the present case.

408    It is convenient to acknowledge immediately that the issue is not whether the Commonwealth Parliament may be inferred to have had in mind the PAAT Act when it enacted the CCA. Plainly, this could not be the case given that the CCA was enacted in 2010 and the PAAT Act in 2012. The issue is whether it may be inferred that the Commonwealth Parliament, in enacting the CCA, intended that s 45 should apply to a corporation in the kind of circumstances involved in the present case, where the effect of such application will be to divest the State of the kind of statutory, contractual and proprietary rights granted by the PAAT Act.

409    To the extent that the relevant rights vested in the Treasurer by the PAAT Act might be characterised as a statutory enabling of a mere freedom to contract as appears necessary or convenient to the Treasurer, the result in Baxter weighs in favour of concluding that the relevant contrary intention of the CCA Act exists.

410    In contrast to Baxter, however, are the four distinguishing features already noted: (a) the existence of the PAAT Act as the source of the statutory rights in respect of the transfer by the State of a class of assets owned by the State (rather than the existence of a general concept of freedom enjoyed by all competent persons and bodies to contract to acquire goods in which the Crown had no pre-existing proprietary rights), (b) the fact that the class of assets is confined to three identified ports owned by the State (rather than goods sought to be acquired by the Crown in respect of which the Crown has no legal rights), (c) the fact that the PAAT Act vests the statutory right in a Minister of the Crown specifically, subject only to a confined power of delegation in s 33 of the PAAT Act (rather than the right being exercisable by members of the executive), and (d) the context of dealing with the three ports, which may be inferred to be of high significance to the State’s policy and economic objectives, as confirmed by the provisions of the SOC Act and the PAAT Act, and the fact of payment of the proceeds of sale into the Restart NSW Fund (rather than a contract for supply, albeit of an important medical product, in Baxter).

411    Further, we are not dealing with statutory rights alone, let alone statutory rights which might be described as a mere freedom to contract. The statutory rights relate to the transfer of the State’s proprietary rights in the three ports by the making of contracts with, relevantly, private entities.

412    As a result, it is more difficult to say in the present case that the construction for which the State and NSW Ports advocate would impose a “very extensive qualification upon the Act’s object of promoting competition and fair trading in the public interest”: Baxter at [74]. As the Full Federal Court observed in Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd [2006] FCAFC 128; (2006) 153 FCR 574 at [102]:

The amount involved in the combined purchases of goods and services by the executive governments of the States and State instrumentalities is massive and, as this case illustrates, in many fields would dominate demand. It is one thing to exempt the executive government from legislative prohibition as to conduct, particularly where the dominant position of the executive government in many markets would complicate procurement. It is another to have a substantial area of commerce in which restrictive practices can be carried on by all those dealing with a government, perhaps to the disadvantage of the public purchasing authority, but also to the detriment of other suppliers and consumers.

413    The qualification upon the object of the CCA in the present case, however, would be far more confined. It would apply only to authorised transactions under the PAAT Act, which concern only the transfer by contract of the State’s proprietary rights in the three nominated ports in NSW, Port Botany, Port Kembla, and Port of Newcastle.

414    This brings me back to the scope, purpose and language of the CCA as the determinant of legislative intention. Each of the features of the CCA to which the ACCC and PON referred is relevant to the existence or otherwise of the relevant contrary intention. Section 45 of the CCA applies to all trading corporations. By s 2, the object of the CCA is to promote competition to enhance the welfare of Australians. States can specifically exclude conduct from the application of Pt IV by enacting legislation of the relevant kind under s 51. In negotiating and contracting the authorised transactions, NSW Ports was a trading corporation acting in the course of carrying on its business. Had the State also been effecting the authorised transactions in the carrying on of a business, s 45 of the CCA would have applied to it by operation of s 2B. These features of the CCA also all weigh in favour of the existence of the relevant contrary intention.

415    Other considerations, however, are also relevant. Section 45 of the CCA does not apply to the Treasurer at all (as an individual). The Treasurer, however, is a representative of the Crown and, by s 2B of the CCA, Pt IV applies to the Crown but only so far as the Crown carries on a business either directly (which must include the carrying on of a business through one of its Ministers) or by an authority of the State. Section 2B evinces a clear intention that the CCA does not apply to the Crown if is not carrying on a business. The CCA was enacted in the context of the existence of the presumption that, subject to a contrary legislative intention, legislation is not to be construed as divesting the Crown of legal, including statutory, proprietary and contractual, rights.

416    The search for legislative intention necessarily involves an evaluation of the weight to be given to competing considerations, recognising that legislation “rarely pursues a single purpose at all costs”, and thus the issue may not be identifying the purpose of the legislation, but how far the legislation goes in pursuit of that purpose: Construction Forestry Mining & Energy Union v Mammoet Australia Pty Ltd [2013] HCA 36; (2013) 248 CLR 619 at [40]-[41] citing Carr v Western Australia [2007] HCA 47; (2007) 232 CLR 138 at [5]-[7].

417    The nature of the legal rights of the Crown in question (statutory, contractual and proprietary rights in respect of a specific and confined class of assets of high policy importance to the State), the circumstances in which those rights may be exercised (by the Treasurer or a confined class of delegates only), and the effect of the application of s 45 of the CCA to NSW Ports (to divest the State of an important aspect of those statutory, contractual and proprietary rights) are all important factors in determining whether the CCA contains an intention contrary to the presumption that legislation is not to be construed so as to divest the Crown of legal rights.

418    I consider that the CCA does not evince a statutory intention that s 45 should operate to divest the State of its statutory, proprietary and contractual rights to effect an authorised transaction under the PAAT Act, including the right of the Treasurer to require the counterparty to engage in conduct that contravenes s 45 of the CCA for the purpose of the authorised transaction.

419    The object of the CCA in s 2 is to be read in the context of the provisions of that Act as a whole. Those provisions include s 2B which applies Pt IV of the CCA to the State so far (but only so far) as it is carrying on a business. The exercise of functions under the PAAT Act do not involve the State carrying on a business. The rights vested in the Treasurer under the PAAT Act to give effect to an authorised transaction require a counterparty to which the port assets may be transferred and the PAAT Act expressly contemplates that such a counterparty may be a private entity (which might otherwise be subject to the CCA). Applying s 45 of the CCA to the counterparty necessarily involves applying that provision to the Crown and thereby divesting it of those rights. In the context of s 2B, s 2 of the CCA is not determinative. That is, the object of enhancing the welfare of Australians through the promotion of competition is not pursued by the CCA at any cost. Insofar as the Crown is concerned, the object is pursued only so far as the Crown is carrying on a business.

420    Nor is s 51 of the CCA determinative. Section 51 is also to be read in the context of the CCA as a whole which includes s 2B. Section 2B is specific to the States. It evinces a clear legislative intention that Pt IV of the CCA is not to apply to the State except insofar as it is carrying on a business. Section 51 is not specific to the States or any person dealing with the States. It may apply to “anything done in a State”. It is difficult to conclude that ss 2, 45 and 51 of the CCA indicate a legislative intention that s 45 of the CCA should apply to a corporation in the position of the counter-party under the PAAT Act, when the effect of that would be to apply s 45 to the State so as to divest the State of legal rights when the State is not itself carrying on a business, apparently contrary to the terms of s 2B.

421    In contrast to the present case, in Baxter the application of ss 46 and 47 of the Trade Practices Act to the corporation did not involve applying those provisions to South Australia. The conduct in issue was proposed to and not required by South Australia. The application of the provisions to the corporation did not divest South Australia of any legal right. It merely potentially qualified a future capacity of members of the South Australian executive to acquire goods in which South Australia enjoyed no pre-existing rights on any basis those members saw fit. The capacity to acquire goods is not unique to the State. It is a capacity shared by all persons. The acquisition of goods by members of the executive does not necessarily involve any high governmental function or policy, and in Baxter it was not suggested the goods in question involved any such consideration. As such, there were no criteria by which the goods in Baxter could be distinguished from any other goods. If ss 46 and 47 did not apply to the corporation in those circumstances, a vast swathe of commercial activity in Australia (purchasing of any goods by any level of government) would be exempt from the operation of those provisions of the CCA. In the circumstances in Baxter the question of how far the CCA went to achieve its object in s 2 could be answered without great difficulty – nothing indicated that the relevant provisions of the CCA were not to apply to a corporation dealing with the Crown in the course of the carrying on of the business of the corporation where the application of those provisions to the corporation would not divest the Crown of any legal right (in that there was neither a legal right of the Crown nor its divestment) and the non-application of those provisions would remove such a large area of commercial activity (supply of goods generally to a government) from the purview of the Act.

422    The circumstances of the present case stand in stark contrast to those considered in Baxter.

423    For these reasons, s 45 of the CCA did not apply to NSW Ports to the extent that it made the compensation provisions and does not apply to NSW Ports to the extent that it may give effect to the compensation provisions in the future. It follows that the ACCC’s originating application and the cross-claim of NSW Ports must be dismissed.

424    I consider the balance of the issues in the matter assuming my conclusions about Crown immunity and/or derivative Crown immunity above are incorrect.

4.    WITNESSES

4.1    Lay witnesses

425    A number of the lay witnesses hold specialist expertise in respect of the operation of container terminals and were able to give opinion evidence relating to that matter.

426    Before making brief comments about my overall impression of the witnesses, I will record my view that it is to be expected that the lay witnesses called for PON and NSW Ports had an interest in supporting their respective cases. In respect of some aspects of their evidence, this inevitable tendency was more apparent in the evidence of the PON representatives than the NSW Ports representatives. This does not mean that I consider the PON representatives were dishonest or consciously biased. Other than in one respect (an aspect of the evidence of Mr Liu), I accept that the PON representatives were giving their honestly held opinions. Even in respect of that aspect of Mr Liu’s evidence, I do not consider that he was being dishonest.

427    Julio Garcia: Mr Garcia is the head of infrastructure for the North American region for IFM. He was appointed a director of NSW Ports shortly after its bid to acquire the Port Botany and Port Kembla assets and was a director at the time of entry into the PCDs relating to those ports. I have no concern about his veracity.

428    Ari Droga: Mr Droga is a partner of the Australian business of GIP. He was a director of NSW Ports at the time of its bid to acquire the Port Botany and Port Kembla assets and entry into the PCDs relating to those ports. I have no concern about his veracity.

429    Adrian Croft: Mr Croft is an executive director at IFM and was a director of NSW Ports at the time of its bid to acquire the Port Botany and Port Kembla assets and entry into the PCDs relating to those ports. I have no concern about his veracity.

430    Marika Calfas: Ms Calfas is the CEO of NSW Ports. She is an environmental engineer. She was employed by SPC (which operated Port Botany) from 2001 until May 2013, during which time she was responsible for environmental management and planning of the port, Sydney Harbour, and the Cooks River and Enfield intermodal terminals. She was directly involved in SPC’s $1 billion expansion of Port Botany between 2001 and 2013. She was also responsible for SPC’s 30 Year Strategic Vision. She started working for NSW Ports in June 2013 as the general manager of planning and infrastructure. She became the executive general manager – strategy, planning and infrastructure in 2014. She was made interim CEO then CEO in 2015. I have no concern about her veracity.

431    Maciej Kwiatkowski: Mr Kwiatkowski is a director of PON appointed by MIRA. His experience is in the development and operation of container terminals. He gives evidence about the operation of container terminals and specific evidence about the suitability of Port of Newcastle for the development of a container terminal and the viability of such a development with and without the reimbursement provisions in the Newcastle PCD.

432    Mr Kwiatkowski’s evidence did not initially disclose the key differences between the Port of Gdansk (which he managed) and the Port of Newcastle. As NSW Ports submitted, the Port of Gdansk was identified as a priority or “core” node of the trans-European transport network, being of “the highest strategic importance for achieving the objectives of the trans-European transport network policy”. Poland was required by the European Union (the EU) to develop the transport network including the Port of Gdansk. The EU co-funded the development of the Port of Gdansk. As a result, no proper comparison can be drawn between the Port of Gdansk and the Port of Newcastle. Mr Kwiatkowski also gave some evidence about matters where he did not know all of the relevant facts.

433    Subject to these reservations, I have no concern about his veracity.

434    Hugh FitzSimons: Mr FitzSimons is a director of PON appointed by MIRA. He too expressed opinions about the Port of Newcastle using Port of Gdansk as a comparator, but readily accepted the differences in cross-examination. Having regard to his evidence as a whole, it is apparent that he had no direct involvement with the development decisions in respect of the Port of Gdansk, as those decisions had been made before he became a director of Deepwater Container Terminal (DCT) Gdansk.

435    Subject to these reservations, I have no concern about his veracity.

436    Yunshu (Nelson) Liu: Mr Liu is a director of PON appointed by CM Ports. English is not his first language. Having taken that fact into account, I nevertheless do not accept one aspect of Mr Liu’s evidence, being the alleged effect of the compensation provisions (as opposed to the reimbursement provisions) on the potential decision-making of CM Ports. Otherwise Mr Liu compared the Port of Newcastle to the Colombo International Container Terminal (CICT) when the CICT was supported by the Sri Lankan government and substantial public funding. Mr Liu also presented himself as in part responsible for the development of the CICT as a transhipment hub when the Port of Colombo was already a recognised transhipment hub before CM Ports developed the CICT. In these circumstances the ACCC’s submission that Mr Liu gave his evidence without advocacy or concern as to whether his evidence assisted the ACCC’s or PON’s interests in the case is an over-statement. I consider that Mr Liu’s evidence was skewed towards PON’s interest and this fact must be recognised in assessing the weight to be given to his evidence.

437    Craig Carmody: Mr Carmody was appointed as the CEO of PON in August 2018. His experience in the industry is limited. He had no involvement with the industry in 2010. From 2010 to 2013 he was a policy adviser to government including in respect of infrastructure development. For a short period thereafter he worked at a consultancy reviewing maritime infrastructure in Australia. He was then employed by a subsidiary of Maersk (the world’s largest transporter of shipping containers) as head of its strategy and corporate affairs in Australia. His lack of long experience and highly specialised knowledge in this industry is relevant to the assessment of the weight that should be given to his opinions. He also advanced some opinions about matters in respect of which he had limited knowledge. However, I do not doubt his opinions were honestly held.

438    Noel Dent: Mr Dent was a consultant to PON and from October 2019 has been employed by PON. He is a former general manager for operations and container logistics at ANL. I have no concern about his veracity.

4.2    Expert witnesses

439    Pleun (Peter) van Duijn: Mr van Duijn was called by the ACCC as an industry expert. He has significant experience in the development and operation of container terminals. I have no concern about his veracity.

440    Alexander King: Mr King was called by the State as an industry expert. He has significant experience in the development and operation of container terminals. I have no concern about his veracity.

441    Patrick Smith: Mr Smith was called by the ACCC as an economic expert. It is necessary to separate his manner of presentation in the hearing from the substance of his opinions. In his oral evidence Mr Smith was long-winded, sometimes non-responsive, and apparently reluctant to make concessions which I consider should have been made. He did tend to make speeches when a direct answer to the question would have been more helpful. NSW Ports submitted that, as a result, Mr Smith was an unsatisfactory expert witness who approached the task of giving evidence as an advocate for the ACCC, rather than with a view to providing assistance to the Court on matters within his expertise.

442    Having sat through Mr Smith’s evidence I understand why NSW Ports considered it appropriate to make this submission and I do not criticise it for doing so. That said, I do not consider that Mr Smith was doing other than giving his honest expert opinions. His manner of giving evidence seemed to me to be more a reflection of his personality than any lack of impartiality. I would prefer to evaluate his evidence based on its substance and apparent cogency or otherwise, rather than the manner in which the oral evidence was given.

443    Christopher Pleatsikas: Dr Pleatsikas was called by NSW Ports as an expert economist. His evidence was direct, clear and concise. He was impressive in his written and oral evidence.

444    Jeffrey Balchin: Mr Balchin was called by NSW Ports as an expert economist to give evidence concerning the catchment areas of Port Botany and Port of Newcastle if the latter developed a container terminal and the commercial feasibility of the development of a container terminal at the Port of Newcastle. His evidence was direct, clear and as concise as it could be given the tasks he undertook. He was impressive in his written and oral evidence.

445    Jason Ockerby: Mr Ockerby was called by the State as an expert economist. His evidence was direct, clear and concise as it could be given the tasks he undertook. He was impressive in his written and oral evidence.

5.    MARKET

5.1    Principles relevant to market definition

446    In Boral Besser Masonry Limited (now Boral Masonry Ltd) v Australian Competition and Consumer Commission [2003] HCA 5; (2003) 215 CLR 374 McHugh J identified that:

(1)    “[t]he inclusion of the terms substitutable and competitive with in s 4E also means that market definition must be determined in accordance with economic principles. The terms of the Act have economic content and their application to the facts of a case combines legal and economic analysis”: [247];

(2)    “[i]n economic terms, a market describes the transactions between sellers and buyers in respect of particular products that buyers see as close or reasonable substitutes for each other given the respective prices and conditions of sale of those products”. As observed in Re Queensland Co‑operative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 8 ALR 481 (QCMA) at 517:

A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them … Within the bounds of a market there is substitution – substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. … Whether such substitution is feasible or likely depends ultimately on customer attitudes, technology, distance, and cost and price incentives.

… [I]n determining the outer boundaries of the market we ask a quite simple but fundamental question: If the firm were to 'give less and charge more' would there be, to put the matter colloquially, much of a reaction:

[248];

(3)    “[i]n determining the ambit of the market, the cross-elasticities of both supply and demand [whether consumers or producers can replace one product with another without a great deal of difficulty in response to price or condition changes] are relevant”. As Dawson J said in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6; (1989) 167 CLR 177 at 199:

In setting the limits of a market the emphasis has historically been placed upon what is referred to as the demand side, but more recently the supply side has also come to be regarded as significant. The basic test involves the ascertainment of the cross-elasticities of both supply and demand, that is to say, the extent to which the supply of or demand for a product responds to a change in the price of another product. Cross-elasticities of supply and demand reveal the degree to which one product may be substituted for another, an important consideration in any definition of a market: [251];

(4)    “[t]hus, the market is the area of actual and potential, and not purely theoretical, interaction between producers and consumers where given the right incentive – a change in price or terms of sale – substitution will occur”: [252]; and

(5)    “[t]he views and practices of those within the industry are often most instructive on the question of achieving a realistic definition of the market. The internal documents and papers of firms within the industry and who they perceive to be their competitors and whose conduct they seek to counter is always relevant to the question of market definition”: [257].

(Citations omitted).

447    To the same effect as this last proposition above, in Australian Competition and Consumer Commission v Liquorland (Australia) Pty Ltd [2006] FCA 826 Allsop J (as he then was) said at [444]:

If, in the real commercial world, the firm in question takes the trouble to be concerned about restricting a new entrant’s capacity, because of the potential effect on the sales and profits of its nearby local outlets (and not because of any concern about the potential effect on sales and profits of other, more widely situated, outlets), that may assist in a conclusion as to the importance of the closeness of competition and the concern as to additional constraints in that local area. The reality of the concern of the firm in question may assist in the illumination of the correct framework to analyse that conduct Woolworths submitted that whilst the purposive approach requires the relevant market to be defined by reference to the conduct sought to be impugned, the alleged purpose is not a relevant consideration in determining the market in which that purpose is to be assessed. I do not accept that submission. The impugned purpose in connection with the provisions of the relevant deed is the conduct to be assessed. The very fact that the firm behaved with that purpose may tell one something of the market. Further, it is the market analysis or tool best adapted to consider that conduct which is to be chosen.

448    At [442] in Liquorland Allsop J (as he then was) said:

Thus, the identification of the market as the correct analytical tool or instrumental concept to assess the conduct in question will be assisted by the recognition of the close competition and factors dealing with constraints that may be seen to be affected or advanced by the conduct in question. This relationship between the conduct the subject of analysis, and the correct market for its analysis takes place in the context where value judgments must be made in an economy where markets overlap and where the geographical boundaries (for the reasons given earlier) are likely to be blurred: cf Queensland Wire at 195-96 per Deane J.

449    Similarly, Greenwood J in Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2013] FCA 909; (2013) 310 ALR 165 at [970] said:

To the extent that a firm perceives itself as free from any constraint to charge more and give less in a particular field of activity, those perceptions are highly significant in marking out the boundary of the field of transactions. If a firm, by its conduct, seeks to exclude another firm from entry into a field of activity, that field of transactions is likely to properly reflect the relevant field of activity for analysis.

450    In Re Tooth & Co Ltd (1979) 39 FLR 1 at 38-39 the Trade Practices Tribunal identified that the delineation of a market should comprehend the “maximum range of business activities and the widest geographic area within which, if given a sufficient economic incentive, buyers can switch to a substantial extent from one source of supply to another and sellers can switch to a substantial extent from one production plan to another”. Further, the consideration of longrun substitution possibilities rather than shortrun and transitory situations is required recognising that “the market is the field of actual or potential rivalry between firms”.

451    In Australian Competition and Consumer Commission v Flight Centre Travel Group Limited [2016] HCA 49; (2016) 261 CLR 203 at [69] Kiefel J (as she then was) and Gageler J stressed that market definition is “purposive or instrumental or functional”.

452    In Air New Zealand Ltd v Australian Competition and Consumer Commission [2017] HCA 21; (2017) 262 CLR 207 Kiefel CJ, Bell and Keane JJ said at [12] that the “authorities confirm that a market, within the meaning of the TPA, is a notional facility which accommodates rivalrous behaviour involving sellers and buyers” and should be understood in the sense of an area of potential close competition in particular goods and/or services and their substitutes (citing Deane J in Queensland Wire at 195). At [26] their Honours said that “concepts such as market and cross-elasticity of supply and demand provide no complete solution to the definition of a market. Much will depend upon the context in which the question arises. The exercise of market definition needs to take into account the conduct in question and its effects, and the statutory terms governing the question (citations omitted). At [27] their Honours said “[s]ection 4E treats substitutability as the principal driver of the rivalrous behaviour accommodated by a market. The act of switching or substitution marks the conclusion of that rivalry: one of the rivals has prevailed. At [31] their Honours said that on the facts of that case “Australia was not merely the end of the line for services generated by an interplay of forces of supply and demand occurring outside Australia”. Rather the tussle between suppliers to obtain orders was competition in Australia.

453    At [39] in Air New Zealand Nettle J agreed that market definition involves a fact-intensive exercise centred on the commercial realities of the market and competition. His Honour said at [40], “where sellers are engaged in marketing their goods and services, or perceive themselves to be competing, in areas beyond the area in which they are located, commercial reality is likely to dictate that the market includes those further areas”.

454    At [60] in Air New Zealand Gordon J observed that a market must have economic and commercial reality and must not be artificial or contrived (citing Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Limited [2015] FCAFC 103; (2015) 236 FCR 78 (ANZ) at [138]). Continuing to cite ANZ at [138], her Honour said at [61]:

The identification of the market must therefore “accurately [and] realistically describe and reflect the interactions between, and perceptions and actions of, the relevant actors or participants in the alleged market, that is, the commercial community involved”.

455    At [62] in Air New Zealand Gordon J stressed that, depending on the purpose of the exercise, the definition of the market may be different. Her Honour continued at [78] in these terms:

competition is a dynamic process, rather than a situation, which expresses itself as “rivalrous market behaviour” – behaviour that involves “independent rivalry in all dimensions of the [service] offered to consumers”. Competition is the means to protect the interests of consumers, not competitors. This is why it has been rightly said, in later decisions in the Federal Court, that competition may take many forms and that the way competitors behave is likely to tell you something of the market. As has been explained, the functional approach to market identification requires consideration of the alleged anti-competitive conduct. Considering “competition” and identifying the “market” are thus part of the same process; “it is for the sake of simplicity of analysis that the two are separated”.

(Citations omitted).

456    At [127] in Air New Zealand Gordon J said:

A market is commonly described by reference to four dimensions – product (here, the types of services supplied), function (where within the supply chain the services are supplied), geography (the physical area in which the services are supplied) and time (the period in which the supply occurs) [Flight Centre at [67]]. Those dimensions, and that form of analysis, are tools. They are not the starting point of the process of market identification for the purposes of considering the application of particular provisions of the TPA. A court begins with the problem at hand (the impugned conduct) and asks: what market identification best assists in the assessment of that conduct and its asserted anti-competitive attributes? What process best assists in that assessment is determined by “the substantive criteria for the particular contravention in issue … in the commercial context the subject of analysis” [Flight Centre at [69] quoting ANZ at [137]].

457    In Australian Competition and Consumer Commission v Yazaki Corporation [2018] FCAFC 73; (2018) 262 FCR 243 at [143] the Full Court of the Federal Court said:

It is important to recognise that the process of market identification is not done in a vacuum, nor is it an enquiry about a stable unitary extant thing; rather it is a process to answer a question whether a particular contravention has occurred. The first step is to identify “precisely what it is that is said to have been done in contravention of the section”: Queensland Wire 167 CLR 177 at 195 (Deane J). One must then ask “what market identification best assists the assessment of the conduct and its asserted anti-competitive attributes”: Gordon J in Air New Zealand 344 ALR 377 at 390 [58], citing Liquorland at [437].

458    Their Honours stressed at [150] in Yazaki that a market includes an area of potential close rivalry.

459    In Australian Competition and Consumer Commission v Pacific National Pty Limited [2020] FCAFC 77; (2020) 277 FCR 49 the Full Court of the Federal Court observed that:

(1)    the identification of markets must be the essential first step in assessment of present competition and likely competitive effects”: [101];

(2)    “[t]he word substantially as used in the section is imprecise. However, the Courts have consistently said that, in each of sections 45, 47 and 50, the word does not connote a large or weighty lessening of competition, but one that is real or of substance and thereby meaningful and relevant to the competitive process” [104];

(3)    “[a]s observed by Professor M Brunt in an article that has been referred to many times in the cases, the market concept is an instrumental concept designed to assist in the analysis of processes of competition and sources of market power; market definition is but a tool to facilitate a proper orientation for the analysis of market power and competitive processes – and should be taken only a sufficient distance to achieve the legal decision (Market Definition Issues In Australian And New Zealand Trade Practices Litigation (1990) 18 Australian Business Law Review 86 at 93 and 126-7). Market definition is also an evaluative exercise because its object is to describe, and thereby define, in a given area of trade and commerce the competitive constraints affecting suppliers and acquirers”: [138]; and

(4)    “[t]he degree of lessening that satisfies the legal standard is encapsulated by the word substantially which, as observed earlier, is imprecise but has been interpreted as meaning real or of substance, thereby connoting a lessening that is meaningful to the competitive process”: [138].

460    In Australian Gas Light Company v Australian Competition & Consumer Commission (No 3) [2003] FCA 1525; (2003) 137 FCR 317 (AGL) French J (as he then was) said, in the context of an acquisition case:

[348]    The meaning of likely reflecting a real chance or possibility does not encompass a mere possibility. The word can offer no quantitative guidance but requires a qualitative judgment about the effects of an acquisition or proposed acquisition. The judgment it requires must not set the bar so high as effectively to expose acquiring corporations to a finding of contravention simply on the basis of possibilities, however plausible they may seem, generated by economic theory alone. On the other hand it must not set the bar so low as effectively to allow all acquisitions to proceed save those with the most obvious, direct and dramatic effects upon competition. By the language it adopts and the function thereby cast upon the Court and the regulator in their consideration of acquisitions s 50 gives effect to a kind of competition risk management policy. The application of that policy, reflected in judgments about the application of the section, must operate in the real world. The assessment of the risk or real chance of a substantial lessening of competition cannot rest upon speculation or theory. To borrow the words of the Tribunal in the Howard Smith case [Re Howard Smith Industries Pty Ltd and Adelaide Steamship Industries Pty Ltd (1977) 15 ALR 645], the Court is concerned with commercial likelihoods relevant to the proposed merger. The word likely has to be applied at a level which is commercially relevant or meaningful as must be the assessment of the substantial lessening of competition under consideration – Rural Press Limited v Australian Competition and Consumer Commission [2003] HCA 75[; (2003) 216 CLR 53] at [41].

[349]    The term competition was the subject of consideration in the decision of the Trade Practices Tribunal in QCMA at [511-512]. The Tribunal regarded rivalrous market behaviour as the expression of competition. It is a process rather than a situation. It requires both that prices should be flexible, reflecting the forces of demand and supply, and that there should be independent rivalry in all dimensions of the price-product-service packages offered to consumers and customers.

[350]    Competition in a market is not assessed by a snapshot view of participant behaviour at a particular time. The theatre of competition is a theatre of real actors and shadow actors. The shadows are cast by the potential for new entry. The competitive process is informed by the rivalry of the participants and the potential rivalry of potential participants. Competition so understood is conceptually distinct from the idea of the market and the elements of market structure which may constrain or facilitate it. Those structural elements are referred to, inter alia, in the factors set out in s 50(3) of the Act.

[351]    The word substantial in substantial lessening of competition is another term requiring qualitative judgment which suggests that the use of analogues such as large or weighty would misdirect. It applies to lessening which encompasses hindering or preventing competition (s 4G). As I said in Stirling Harbour Services Pty Ltd v Bunbury Port Authority … [[2000] FCA 1381; (2000) ATPR 41-783 at [13]] there is only limited assistance to be gained by replacing the words used in the Act with other words. A description of the kind of judgment required by the word substantially, which appears recently to have been approved in the High Court, is that the effect of the acquisition be meaningful or relevant to the competitive processRural Press Ltd at [41].

[352]    In determining whether it could be said that there is likely to be a substantial lessening of competition in a market it is necessary to consider the future state of the relevant market with and without the proposed acquisition – Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd … [[1982] FCA 193; (1982) 44 ALR 173 at 191]; Outboard Marine Australia Pty Ltd v Hecar Investments [No 6 Pty Ltd [1982] FCA 285; (1982) 44 ALR 667 at 669-70].

461    In Rural Press Limited v Australian Competition and Consumer Commission [2003] HCA 75; (2003) 216 CLR 53 (Rural Press HCA) Gummow, Hayne and Heydon JJ said:

(1)    “[t]he views and practices of those within an industry can often be most instructive not only on the question of achieving a realistic definition of the market, but also on the question of assessing the quality of particular competitive conduct in relation to the level of competition and the impact of its cessation”: [45];

(2)    a new entrant into a monopoly market may introduce competition into that market. An arrangement under which the new entrant withdraws from that market, accordingly, can substantially lessen competition in that market: [46]; and

(3)    on the facts in that case “[w]hile neither the area nor the increases in sales, advertising revenues and profits achieved were large, it does not follow that the River News did not achieve a substantially pro-competitive impact by its move south or that the arrangement did not have a substantially anti-competitive impact in causing its retreat north. The move was profitable. There was no reason to suppose that it would not remain profitable or that Waikerie Printing would not seek to continue gaining those profits. The trial judge found that but for the arrangement Pick would have continued to publish the River News in the Mannum area. The success of Pick’s experiment invalidates the Rural Press parties’ argument that regional newspaper markets in South Australia must inevitably be single firm markets. The fact that the River News continued to be available after April 1998 does not mean that competition was not substantially lessened: the Rural Press parties have not successfully challenged the findings of the trial judge that from April 1998 it ceased to promote circulation or seek advertising revenue in Mannum, and that its circulation dropped “very significantly”: [44].

(Citations omitted).

462    In Seven Network Ltd v News Ltd [2009] FCAFC 166; (2009) 182 FCR 160 at [353]-[354] the Full Court of the Federal Court identified the standard analytical tool for identifying a market as the hypothetical monopolist test or SSNIP (a small but significant non-transitory increase in price) test which posits that two products will be in the same market if the producers of one of those products could not profitably impose a SSNIP above the competitive level without losing sales to the producers of the other product, where the SSNIP is an increase of 5% to 10% above the competitive level. At [355]-[356] they explained why the SSNIP had to be above the competitive price and not a monopoly price in order to avoid the “Cellophane fallacy”: Cellophane Case (United States v EI du Pont de Nemours & Co 351 US 377 (1956)). The Cellophane fallacy involves a failure to recognise that if the price at which a product is sold is a monopoly price then no further profit-increasing prices are feasible. That is, while consumers will switch from the monopoly priced product A to another product B if there is any posited increase above the monopoly price for product A, this does not mean product A and product B are in the same market because product B has not prevented product A from being sold at the monopoly price.

463    At [660] in Seven Network the Full Court said:

The trial Judge also considered that much of the evidence did not distinguish between competition and close competition, a distinction which his Honour considered to be critical in this case. It is unlikely that any person, not an economist or competition lawyer, would draw such a distinction. The witnesses may not have described the perceived competition as “close”, but it does not follow that it was not. In any event, “closeness” is a matter of degree. The evidence must be scrutinised in context to identify the sense in which the term “competition” was used. It should not be dismissed as ambiguous unless the ambiguity cannot be resolved.

464    In Seven Network at [670] the Full Court said:

We do not treat the SSNIP test as being irrelevant to the question of market identification. However a qualitative application of the test requires identification of its purpose. As we understand it, the test looks to the actual or likely effect of competitive conduct, or potential competitive conduct, upon price and other conditions of supply, including quality of the product. However competitive conduct may not have an immediate and obvious effect upon those matters. Particularly in a relatively new industry, competitors may be looking for longer term, rather than shorter term, advantages. The “richness” of the concept of competition referred to in [QCMA] means that competition may take many forms. Its effects may be immediate or delayed. The SSNIP test addresses the effects of competition, but it does not define the way in which it occurs.

465    In Davids Holdings Pty Ltd v Attorney-General (Cth) (1994) 49 FCR 211 at 242 von Doussa J said that:

Transport costs are important in determining the geographic ambit of a market for goods where transport costs are a significant factor in relation to the value of the goods: Australia Meat Holdings Pty Ltd v Trade Practices Commission [1989] ATPR 50,082 per Davies J at 50,092 (Sheppard J agreeing at 50,097).

5.2    Some preliminary observations

5.2.1    Issues

466    The issues are whether the impugned compensation (and, on the cross-claim, reimbursement) provisions involved the proscribed statutory purpose or had when made or will have in the future the proscribed statutory effect of substantially lessening competition in the pleaded market for the supply of Container Port Services in NSW.

467    The time at and circumstances under which the claimed proscribed purpose and likely effect of the making of the impugned provisions are to be evaluated is the date on which the impugned provisions were made (31 May 2013 for the compensation provisions and 30 May 2014 for the reimbursement provisions). The likely effect of giving effect to the impugned provisions may extend over the 50 year term during which the provisions operate (until 2063 for the compensation provisions and 2064 for the reimbursement provisions respectively). In this latter respect, it is necessary to evaluate the likely effect of giving effect to the impugned provisions as at today’s date for the reasonably foreseeable future, recognising the length of the term of the impugned provisions of 50 years.

468    As noted, by s 4E of the CCA, a “market” for goods and services means, relevantly, a market for goods and services that are substitutable for, or otherwise competitive with (relevant) goods and services. Section 45(1) proscribes conduct making or giving effect to a contract that has the purpose, or would have or be likely to have the effect, of substantially lessening competition. By s 45(3), competition means competition in a market.

469    The pleaded market is a market for the supply of Container Port Services in NSW. Container Port Services, as pleaded, means the operator of a port making available to shipping lines, stevedores and land transport operators the use of land and facilities at the port on or from which shipping lines, stevedores and land transport operators provide Container Services and making available to shipping lines services to assist a ship to navigate into and out of the harbour and channel.

470    Container Services, as pleaded, means the services provided by shipping lines, stevedores, and land transport providers when cargo is shipped into and out of NSW. These Container Services comprise:

(a)     Shipping lines transport containerised cargo by sea to or from ports in NSW.

(b)     Stevedores load and unload containerised cargo and empty containers on to or from ships, trains or trucks, transport containerised cargo and empty containers within the port, provide storage facilities for containers within the port, and transport empty containers to and from any external storage facilities.

(c)     Land transport operators transport containerised cargo to or from a sea port by rail or road (to or from the container’s origin or destination).

(d)     The demand for Container Services is complementary: there is no demand for one type of Container Services independent of demand for the other types of Container Services.

471    Subject to some immaterial matters, NSW Ports denied and the State admitted the existence of this market.

5.2.2    A key dispute about the market

472    At the risk of over-simplification, a key dispute between the parties about the market issue may be summarised as follows. The parties all accepted that the relevant potential effect of the impugned provisions related to the likelihood a container terminal being established and profitably operating at the Port of Newcastle. The ACCC and PON contended that without the impugned provisions there was and is a real chance and real possibility that a container terminal would be established and profitably operate at the Port of Newcastle. NSW Ports and the State contended that without the impugned provisions there was and is no real chance or real possibility that a container terminal would be established and profitably operate at the Port of Newcastle.

473    The ACCC and PON also contended that, as it is common ground that if a container terminal is operating at the Port of Newcastle it will capture a not immaterial portion of container volumes currently serviced by Port Botany, there will be competition between those ports in the market for the supply of Container Port Services in NSW.

474    NSW Ports and the State contended that if a container terminal is operating at the Port of Newcastle then the existing monopoly market serviced by Port Botany would divide into two separate monopolistic markets, one serviced by Port Botany and one serviced by the Port of Newcastle, with insubstantial overlapping areas. This is because: (a) application of the hypothetical monopolist test involving a SSNIP shows that the two ports would not be close substitutes in terms of Container Port Services, and (b) on a catchment area analysis, given the locations of Port Botany and the Port of Newcastle, the overwhelming determining factor for using one port rather than the other will be land transport costs, and small but significant changes to wharfage fees (the cost of Container Port Services) could not affect the decisions of importers/exporters or shipping lines to use one or other port.

475    NSW Ports and the State thus contended that each customer that could use the Port of Newcastle if developed as a container terminal (“could” in the sense of possible having regard to the customer’s location, business structure and shipping requirements) will use the Port of Newcastle if the total cost of doing so will be less than the total cost of using Port Botany. Equally, each customer that could use Port Botany (in the sense of possible having regard to the customer’s location, business structure and shipping requirements) will use Port Botany if the total cost of doing so will be less than the total cost of using Port of Newcastle. As any cost differential between the two ports would be overwhelmingly dominated by land transport costs, no change in the cost of Container Port Services by the ports will be able to influence the choice of port by a customer. That is, customers for which the Port of Newcastle provides the relative land transport cost advantage will switch from Port Botany to the Port of Newcastle and there will be nothing that Port Botany can do to entice them to switch back. This “one off switch”, it was submitted, does not involve a process of competition in a market as required by the CCA. It involves the creation of two smaller monopolistic markets out of one existing large monopolistic market for Container Services in NSW.

476    This aspect of the dispute involved a substantial portion of the evidence and the submissions. However, as the following discussion explains, market identification is a tool for the purpose of competition analysis. The only available market permitting such an analysis is the one the ACCC identified the existing market for Container Port Services in NSW. Further, the two separate monopolistic markets proposed by NSW Ports and the State do not and will never exist. Those posited markets are the result of simplifying assumptions, in particular the assumption of ceteris paribus, that all other things will be equal between Port Botany and the Port of Newcastle assuming the Port of Newcastle has a container terminal.

477    The compensation and reimbursement provisions which comprise the impugned conduct pre-suppose that a container terminal in fact exists at the Port of Newcastle which is capable of handling containers diverted from Port Botany. But the fact that the impugned provisions make this assumption does not mean that it is appropriate in evaluating the effect of the impugned provisions to assume circumstances such as all things being equal between the two ports contrary to the reality of the existing market for Container Port Services in NSW and the likelihood of any container terminal at the Port of Newcastle entering that market.

5.2.3    The relevant hypothesis about a container terminal at the Port of Newcastle

478    Another important matter needs to be identified at the outset. There is an existing container terminal at Port Botany. There is no container terminal at either Port Kembla or the Port of Newcastle. Since July 2012 the State policy, as subsequently reflected in a number of published strategic planning documents, is that the existing container capacity at Port Botany will be used before any new container terminal is developed in NSW and that the next container terminal in NSW will be at Port Kembla not the Port of Newcastle (which, under the State policy, is third in line). I refer to this policy as the State policy, but it is important to recognise that it is a policy of the NSW government adopted in July 2012 on the basis of recommendations by State agencies including Transport for NSW and Infrastructure NSW, which consulted with other State agencies (including the Department of Planning) in formulating their recommendations.

479    Accordingly, the relevant issue is not simply the operation of any container terminal at the Port of Newcastle. The impugned provisions are more confined in their operation. The impugned provisions are only engaged if a container terminal at the Port of Newcastle results in the diversion of containers from Port Botany (or Port Kembla) to the Port of Newcastle in circumstances where Port Botany (or Port Kembla) has not reached Full Capacity (as defined in the Port Botany and Port Kembla PCDs).

480    It follows that the only hypothetical container terminal at the Port of Newcastle which is relevant to the operation of the impugned provisions is one which is capable of handling diverted container volumes from Port Botany (or Port Kembla), and is operating before Port Botany (or Port Kembla) has reached Full Capacity as defined in the Port Botany and Port Kembla PCDs.

481    The focus of the evidence and submissions in this case, however, was the relationship between a (hypothetical) container terminal at the Port of Newcastle and the actual container terminals at Port Botany while Port Botany has capacity. None of the submissions or expert evidence focused on the relationship between a (hypothetical) container terminal at the Port of Newcastle and a (hypothetical) container terminal at Port Kembla. That potential dynamic thus remains in the realm of speculation. The assumption underlying the expert evidence was that Port Botany has continuing capacity, but that its capacity was finite and would be reached sooner (according to the ACCC and PON) or later (according to NSW Ports and the State).

482    There is insufficient evidence enabling rational inferences to be drawn and conclusions reached about the relationship between a (hypothetical) container terminal at the Port of Newcastle and a (hypothetical) container terminal at Port Kembla assuming Port Botany has reached Full Capacity. This latter assumption would be necessary if that relationship were to be analysed, because NSW Ports holds the long-term lease over both Port Botany and Port Kembla. NSW Ports, it is also clear on the evidence, would not develop a container terminal at Port Kembla while Port Botany has capacity.

483    This lack of evidence may reflect another reality about the operation of the PCDs.

484    The point is that the PCDs cannot operate in respect of Port Kembla unless a container terminal has been constructed and is operating at Port Kembla. This appears from: (a) aspects of the definition of Full Capacity in cl 3.1, in particular cl 3.1(h) and (i), (b) cl 3.3(d) which refers to the number of containers imported or exported by Port Kembla in the Relevant Support Period, (c) cl 3.3(e) which refers to the number of containers imported or exported by Port Kembla in the Previous Support Period, and (d) cl 3.4 which calculates the NSupport which will necessarily be zero if Port Kembla does not have a container terminal.

485    This means that the only potentially relevant hypotheses are the operation of a container terminal at the Port of Newcastle: (a) while Port Botany has capacity, or (b) while Port Kembla has capacity, which necessarily means after a container terminal is constructed and operating at Port Kembla. That is, the compensation provisions (and thus the reimbursement provisions) would not operate at all if Port Botany has reached Full Capacity and Port Kembla has no container terminal.

486    Assume Port Botany has reached or will soon reach Full Capacity. The choice for the NSW government would be between implementing the State policy, for the next container terminal to be developed at Port Kembla, or to change the State policy and support the next container terminal being developed at the Port of Newcastle. One thing is clear – it is that the NSW government would not support the development of container terminals at both ports. The impugned provisions cannot be relevant to this future choice by the State. The impugned provisions cannot operate because Port Botany will be at Full Capacity before the next container terminal is operating and there will be no container terminal at Port Kembla.

487    As a result, it cannot be said that the impugned provisions make it any less likely that the NSW government will change the State policy to enable a container terminal to be constructed at the Port of Newcastle after Port Botany has reached Full Capacity but before any container terminal is constructed at Port Kembla. The impugned provisions simply do not speak to the making of that choice in those circumstances. Other circumstances will be relevant to that choice, including the State policy, but not the impugned provisions.

488    In theory, it is possible that within the term of the impugned provisions a container terminal might be constructed and operating at Port Kembla, Port Kembla might not be at Full Capacity, and PON might wish to construct a container terminal at the Port of Newcastle. The problem for the ACCC and PON is that this theoretical possibility is completely in the realm of speculation. No evidence addresses this possibility.

489    These considerations lead to the conclusion that the only hypothesis relevant to the potential operation of the impugned provisions, and in any event the only one which has a proper evidentiary foundation enabling the drawing of rational inferences and conclusions, is the operation of a container terminal at the Port of Newcastle while Port Botany has capacity. The evidence adduced only permits an assessment of whether there is a real chance or real possibility of a substantial lessening of competition by the making or giving effect to the impugned provisions within the context of this hypotheses.

490    For these reasons, when I refer to a container terminal at the Port of Newcastle below, I mean a container terminal at the Port of Newcastle while Port Botany has capacity.

5.2.4    Some basic propositions about the market

491    It is convenient to record some basic propositions about the market which I consider inform the resolution of the issues in dispute.

492    First, the impugned provisions were made in the context of the existing market for Container Port Services in NSW. Accordingly, their likely effect at the time of their making is necessarily to be assessed by reference to that market.

493    Second, a container terminal at the Port of Newcastle will be a new entrant into the existing market. There is no dispute that in the existing market for Container Port Services in NSW, Port Botany enjoys a monopoly over most of the State. Its monopoly does not extend to certain regions where, in the south, some export container volumes are handled through the Port of Melbourne and, in the north, some export container volumes are handled through the Port of Brisbane; but otherwise Port Botany enjoys a monopoly over NSW containers.

494    Third, it is not in dispute that a container terminal at the Port of Newcastle will not immediately enter the existing market on the basis of equivalent functionality to Port Botany. PON does not suggest such an entry into the market is possible. On the evidence, it is apparent that a container terminal at the Port of Newcastle would not be functionally equivalent to Port Botany for a number of years (and possibly may never achieve that equivalence).

495    Fourth, and accordingly, the assumption that all things are equal between Port Botany and a container terminal at the Port of Newcastle on entry by the latter into the existing market bears no resemblance to reality.

496    Fifth, even if a container terminal at the Port of Newcastle achieves sufficient functional equivalence with Port Botany, there is no basis to infer that this state will continue. On the evidence, there are a number of dynamic circumstances which would affect the relative functionality of the two ports. Those circumstances include: (a) the container handling capacity of each port (the capacity of the Port of Newcastle container terminal is proposed to increase in stages), (b) the efficiency of stevedoring services offered by each port, (c) the road and rail connectivity of each port, (d) the shipping connectivity of each port, and (e) the convenient location of distribution and storage centres (for example, for empty containers) for each port, which may be made available either on port land or outside of the port.

497    While the two ports do not ultimately control these port functionality factors (other than (a), but subject to government approval), it cannot be assumed that they are unable to materially influence them as part of their conduct in the market for Container Port Services. The economists called by NSW Ports and the State assumed or proposed that a port had no material influence on these factors but, as will be explained, this is contrary to the evidence.

498    NSW Ports and the State submitted that at least (b) to (e) of these port functionality factors do not form a part of the pleaded Container Port Services. Rather, (b) to (d) are part of or connected to the pleaded Container Services, while (e) involves private developers making their own development decisions.

499    The problem with this submission is that the pleaded Container Port Services involve the port making land and facilities at the port available for the pleaded Container Services. In so doing, a port can (and must be inferred would) ensure that as part of the provision of Container Port Services, the port facilitated and enhanced the efficient provision of Container Services.

500    Take stevedoring services as an example. Stevedoring services are not part of Container Port Services and it is common ground that competition between stevedores occurs in a different market from the market for Container Port Services. However, in providing Container Port Services to stevedores, ports can (and it must be inferred on the evidence do) make available land and facilities in a manner which the port considers will be most advantageous to the maximisation of the use of the port by importers/exporters and shipping lines. Conduct of a port in making land and facilities available to stevedores (which is part of the pleaded Container Port Services) which has the purpose or effect of maximising the profitability of Container Port Services by enhancing the efficiency of stevedoring services (a part of Container Services) is itself conduct in the market for Container Port Services.

501    The same conclusion must apply to conduct of a port in relation to the making available of land and facilities to other entities involved in the container supply chain, including shipping lines (to which a port makes available berths etc) and road and rail and land transport entities (to which a port makes available land and facilities). To the extent that a port may also make land and facilities available within a port to distribution and logistics services, this necessarily also forms a part of Container Port Services to land transport entities (that is, distribution and logistics service providers are themselves land transport entities).

502    In each case, if in making available land and facilities as part of Container Port Services, the port is acting to maximise the profit of its Container Port Services by facilitating maximum use of Container Services by importers/exporters and shipping lineswhich it rationally must be  then the port is acting in the market for Container Port Services.

503    The consequence of potentially dynamic port functionality over time, materially influenced by the port itself, tends to support the view that I have reached that to focus on an assumed steady state of equivalent functionality between the container terminals (actual at Port Botany and hypothesised at the Port of Newcastle) is liable to result in misconceptions about the relevant market and to negate the capacity to evaluate the likely effects of the impugned provisions.

504    Apart from these considerations, there are five examples against which the results of the economic analyses about the relevant market can be tested. These examples suggest that the analysis of the economists called by NSW Ports and the State assuming a container terminal at the Port of Newcastle which is functionally equivalent to Port Botany is not the best analytical tool for the identification of the relevant market.

505    One, the conclusion that entry by a container terminal at the Port of Newcastle would divide Port Botany’s existing monopoly into two smaller separate monopolies results from the fact that orthodox application of a SSNIP to the assumed functionally equivalent ports demonstrates that neither port will act as a close price constraint on the other.

506    A necessary corollary of this analysis is that the existing three eastern seaboard ports (the Port of Melbourne, Port Botany and the Port of Brisbane) are also each monopolists. All of the economists agree that these three ports are monopolists and compete with one another only at the margins of their natural catchment areas (which means the area of a port’s relative land transport cost advantage compared to the next closest port, as explained further below). In other words, it should be the case that the price of Container Port Services charged by Port Botany (consisting only of wharfage fees) is not closely constrained by the price charged by the other two eastern seaboard ports.

507    The evidence, however, is to the contrary. NSW Ports set Port Botany’s prices for all export containers no higher than the prices of the Port of Melbourne and the Port of Brisbane for export containers. It did so because it in fact competes with the Port of Melbourne for export containers from the southern and south-western region of NSW and with the Port of Brisbane for export containers from the northern region of NSW. That is, Port Botany’s prices for all export containers was driven by competition in relation to areas and customers within those areas that would be described as “marginal” (in that the areas are at the margins of Port Botany’s catchment area and the customers are too small in number to cause a SSNIP to identify any close constraining of each other’s prices). According to NSW Ports, it set prices for all export containers so as not to lose a marginal number of customers from marginal areas to other ports when a SSNIP would show that it could have profitably increased its price for export containers by at least (and in fact more than) 5-10%.

508    While the threat of price regulation of Port Botany’s prices is real (and Dr Pleatsikas and Mr Ockerby considers that threat explains Port Botany’s prices), it is clear from Ms Calfas’s evidence that Port Botany’s prices for export containers are in fact set to ensure no loss of containers to the Port of Melbourne or the Port of Brisbane. Apparently marginal competition is driving the price of all export containers handled by Port Botany other than in respect of the one case of price discrimination in which Port Botany engages (discussed below).

509    Two, Dr Pleatsikas’s application of the SSNIP test would indicate that a container terminal at Port Kembla, only 90 km from Port Botany, would also be in a separate market for Container Port Services from Port Botany. While Dr Pleatsikas gave evidence that this might not be so because of potentially high elasticity of demand as between Port Botany and Port Kembla, his quick analysis during oral evidence indicated that the numerical results of a SSNIP, even assuming high elasticity of demand, would yield the result of separate markets for Port Botany and Port Kembla. Once the whole of the evidence is understood, this proposition is implausible.

510    Three, the economic analyses of Dr Pleatsikas, Mr Ockerby and Mr Balchin would not have predicted or countenanced the existence of a customer in respect of which NSW Ports profitably implements price discrimination. Yet such a customer exists. XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

511    Four, it is not in dispute that ships come to markets. In the ordinary course, shipping lines ensure their ships servicing the east coast of Australia call at each of the Port of Melbourne, Port Botany and the Port of Brisbane. It is common ground that if there is a functionally equivalent container terminal at the Port of Newcastle, ships will not call at both Port Botany and the Port of Newcastle. They will call at one or other of those ports, as well as the Port of Melbourne and the Port of Brisbane. This indicates that, for the purposes of shipping lines, functionally equivalent container terminals at Port Botany and the Port of Newcastle would be close substitutes for one another. The economic analyses of Dr Pleatsikas, Mr Ockerby and Mr Balchin does not explain this fact.

512    Five, the supply of Container Port Services is subject to network externalities. Calls by ships increase cargo and increased cargo increases calls by ships. The industrial experts, Mr van Duijn and Mr King, both considered that ports generally compete with each other to increase their global shipping connectivity, but that such competition was not apparent as between Port Botany, the Port of Melbourne and the Port of Brisbane because ships generally call at all three ports. They also agreed that if there was a functionally equivalent container terminal at the Port of Newcastle, ships would choose to call at either Port Botany or the Port of Newcastle. The analysis of Dr Pleatsikas, Mr Ockerby and Mr Balchin does not allow for potential competition between Port Botany and the Port of Newcastle to influence ships to choose to call at one port in preference to another.

513    Apart from these five examples, the inescapable fact is that there is an existing market for Container Port Services in NSW. NSW Ports, via Port Botany, is the principal supplier of those services. If a (sufficiently) functional container terminal exists at the Port of Newcastle, then, in effect: (a) nearly every customer of that port will be a former or otherwise potential customer of Port Botany (some may possibly be attracted from the Port of Brisbane), and (b) every ship that calls at that port will otherwise have called at Port Botany. These facts tend to support my conclusion that the relevant market for any competition analysis is the existing market for Container Port Services in NSW, and that the posited two separate monopolistic markets hypothesis is not the best tool for that purpose.

514    Further, assume Dr Pleatsikas, Mr Ockerby and Mr Balchin are right – even if all that is occurring can be accurately described as the bifurcation of one existing larger monopoly into two new smaller monopolies, that bifurcation will be a dynamic process, responding to changes in the port functionality factors identified above.

515    Additionally, the assumption that neither port will be able to materially influence any of the port functionality factors in their favour, despite it being common ground that they will be motivated to do so, would need to be supported by clear and cogent evidence before I would accept it. But the evidence, such as it is, is to the contrary. If the ports are or would be engaged in rivalry to ensure that the port functionality factors favour them, in order to maximise their supply of Container Port Services, then it is inherently implausible that they are not or would not be operating in the same market. At the least, any competitive effects analysis should extend to such rivalrous conduct on the basis that it may be in the same market.

516    Ultimately, insofar as the identification of the relevant market is concerned, it is necessary to recognise that the “market” is “an instrumental concept, designed to assist in the analysis of processes of competition and sources of market power. In this case, it is the identification of a market that best enables the court to evaluate the issues”: Dowling v Dalgety Australia Ltd (1992) 34 FCR 109 at 132. As explained further below, the market which best enables the required analysis in the present case is the existing market for Container Port Services in NSW.

517    There are other issues in dispute about the pleaded market including: (a) the extent to which on the hypothesis of a (sufficiently) functionally equivalent container terminal operating at the Port of Newcastle the respondents’ posited one off switch of customers from the existing Port Botany monopoly to the hypothetical Port of Newcastle monopoly is realistic or is an incomplete and oversimplified description of what is likely to occur, and (b) the existence of any area or customers between Port Botany and the Port of Newcastle which might be contestable between the ports.

518    With these preliminary observations in mind, the evidence about the market issue can be assessed.

5.3    Industry participants

5.3.1    General

519    The ACCC and PON relied on the views of industry participants to support the proposition that a container terminal at the Port of Newcastle would compete with the container terminal at Port Botany (and any container terminal at Port Kembla in the market for Container Port Services in NSW).

520    It is appropriate to observe immediately that the documentary and oral evidence discloses that the industry participants, in common with the economists called by NSW Ports and the State, assumed a hypothetical container terminal at the Port of Newcastle sufficiently functionally equivalent to Port Botany, including the necessary landside development (specifically, proximate distribution centres) and shipping connectivity (as described above) to enable the Port of Newcastle to present a viable alternative to Port Botany for exporters/importers and shipping lines.

521    It is also convenient to identify some propositions which are either uncontroversial or are clear on the evidence and which form part of the relevant context.

522    First, Port Botany is currently the only container terminal port in NSW and services, in effect, nearly all of NSW. The evidence supports the existence of some confined areas of competition as between Port Botany and the Port of Melbourne XXXX XXXX XXXX and as between Port Botany and the Port of Brisbane XXXX XXXX XXXX XXXX XXXX XXXX.

523    Second, Port Botany currently operates as a monopoly for Container Port Services across the majority of NSW. It is common ground between the parties (except for perhaps the Port of Newcastle) that Port Botany does not generally compete in the same market as Port of Melbourne or Port of Brisbane for Container Port Services. As noted, evidence of competition is confined to areas towards the margins of what are generally accepted to be the “natural catchment areas” or “hinterlands” of the ports. These are the areas where one port has a relative land transport cost advantage compared to the next closest port. One of the economists, Mr Balchin, gives a different meaning to “catchment area” (as the area to or from which the port in fact handles containers) and “hinterland” (as the area over which the port has a land transport cost advantage relative to other ports). Unless used in the context of Mr Balchin’s evidence, in these reasons, “catchment area” and “hinterland” both mean the area over which the port has a land transport cost advantage relative to the next closest port.

524    Third, if a container terminal is operating at the Port of Newcastle which is sufficiently functionally equivalent to Port Botany, then it is common ground that a substantial number of existing customers of Port Botany for Container Port Services (that is, importers/exporters) would switch from Port Botany and become customers of the Port of Newcastle. Further, a substantial number of potential future customers who would otherwise use Port Botany would instead use the Port of Newcastle. As noted, if a customer’s business enables it to use either port and it is posited that both ports have functionally equivalent container terminals, then it is uncontroversial that a customer’s decision about which port to use will be driven by the total supply chain cost which is dominated by the land transport cost. Further, it is not in dispute that the price of Container Port Services (effectively, wharfage) is a small part only of the total supply chain cost. The dominant cost component is land transportation which is dictated by the distance to and from the respective ports.

525    I note that the ACCC and PON contended that this third uncontroversial proposition is sufficient to establish that there would be competition in the pleaded market between Port Botany and a container terminal at the Port of Newcastle. They also contended that, in any event, the evidence establishes that: (a) more than a mere one off switch will occur if a container terminal is developed at the Port of Newcastle, and (b) while each port will have a natural catchment area, those areas will overlap to some extent.

526    Fourth, if the Port of Newcastle has a sufficiently functionally equivalent container terminal, it is common ground that a ship will not call at both Port Botany and the Port of Newcastle. A ship will call at one or other of those ports (that is, ships will call at Port Melbourne, Port Botany and the Port of Brisbane, or will call at Port Melbourne, the Port of Newcastle, and the Port of Brisbane).

527    Fifth, there are large areas of NSW where it is clear that there is a substantial difference in land transportation costs as between Port Botany and the Port of Newcastle.

528    Sixth, and as a result, on the assumption of sufficient functional equivalence between container terminals, each port would have a natural catchment area or hinterland where the use of the port by importers/exporters would be driven by their own distribution requirements and the cost of land transport to and from the ports.

529    Seventh, there is a 50 km green wedge around the Hawkesbury River that separates the northern suburbs of Sydney from the Central Coast. This fact is relevant because it explains why Ms Calfas was unable to identify a customer between Port Botany and the Port of Newcastle which would be contestable between the two ports assuming the functional equivalence of their respective container terminals. It also explains the evidence of Mr Ockerby and Mr Balchin about the confined number and extent of “in between” or “marginal” customers and areas as between Port Botany and the Port of Newcastle.

530    Eighth, I accept the evidence of the economists that a monopolist seeks to maximise the extent of its monopoly and the use of its facilities. It does not do so because of competition in a market (by definition, it does not have competition), but because it is rational for it to do so to maximise profits. On the same basis, however, it must be accepted that a monopolist would seek to protect its monopoly from any change in circumstances including the threat of competition or the entrant of another would be monopolist over part of its existing monopoly.

5.3.2    The use of terms such as “competition”, “substitution” and “market”

531    I accept that, as Dr Pleatsikas explained:

commercial enterprises tend to use the word “market” in a very different way than economists often use the same word and concept

The concept of a market in the context of competition analysis is a very specific economic concept. So I don’t think that applying commercial common sense is the right standard to use when defining a market in a competition case. There’s a very specific set of economic principles that are brought to bear to determine what a relevant market is. And ignoring those principles in favour of some vague standard of commercial common sense is certainly – can result in the possibility that you end up with something that isn’t a relevant market from an economic perspective.

532    I also accept that lay descriptions of “competition”, “substitution” and “market” may apply to both: (a) the case theory of the ACCC and PON, that if a functional container terminal is operating at the Port of Newcastle it would compete with Port Botany in the market in NSW for Container Port Services, and (b) the case theory of NSW Ports and the State, that if a functional container terminal is operating at the Port of Newcastle it would: (i) bifurcate Port Botany’s existing monopoly by a process of one off switching by existing customers of Port Botany who are within the Port of Newcastle’s catchment area to the Port of Newcastle, and (ii) operate in its own market, separate and distinct from the market of Port Botany (which would be reduced to its catchment area, being the area over which it enjoys a land transport cost advantage compared to the Port of Newcastle). The lay descriptions to this effect, accordingly, are ambiguous.

533    The perceptions of industry participants have been identified in the authorities as a material (even highly material) consideration to identifying the relevant market and competition within the relevant market. In the circumstances of the present case, these perceptions confirm the uncontroversial facts that there is an existing market for Container Port Services in NSW largely supplied by Port Botany and that a sufficiently functionally equivalent container terminal at the Port of Newcastle will result in a substantial number of customers of or who would otherwise use Port Botany switching to the Port of Newcastle. This proposition is accepted on both case theories.

534    The perceptions of industry participants are also relevant, however, because they disclose: (a) the recognition by industry participants that the effect of any container terminal at the Port of Newcastle will be on and in Port Botany’s existing market for Container Port Services in NSW, and (b) whether the participants consider that the ports would be: (i) powerless in the face of an inevitable switch from Port Botany to the Port of Newcastle (as the economists for NSW Ports and the State assume), or (ii) able to materially influence decisions of importers/exporters and shipping lines as to which port to use either by controlling the price of Container Port Services or by influencing one or more of the port functionality factors to their respective advantage/disadvantage.

5.3.3    The bidding process

535    NSW Ports in its letter of 4 May 2012 identified the two ports as servicing the same market if a container terminal was developed at the Port of Newcastle. In the letter, NSW Ports also referred to the risk of substitution from a second container terminal in NSW. The second container terminal in contemplation of NSW Ports at the time was at the Port of Newcastle. NSW Ports also referred to “potential competing container ports” in the letter, by which it meant the Port of Newcastle (or Port Kembla).

536    Further, it is apparent from the bidding process that NSW Ports did not want a container terminal to be developed at the Port of Newcastle. This is because it anticipated that such a container terminal would result in a substantial number of customers using the Port of Newcastle rather than Port Botany.

537    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

538    As NSW Ports submitted, this statement is consistent with the compensation provisions giving NSW Ports financial protection against customers substituting the Port of Newcastle for Port Botany should a container terminal be developed at the Port of Newcastle in the future. I agree with NSW Ports that no Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298) inference can arise from the fact that NSW Ports did not call Mr Blood to give evidence. There is no unexplained failure to call Mr Blood. In common with the other lay witnesses, Mr Blood’s views about potential competition in the future from the Port of Newcastle if it were to be developed as a container terminal confirm the uncontroversial fact that, on the assumption of sufficient functional equivalence, substitution as identified will occur.

539    Those involved in the privatisation process on behalf of the State shared the views of NSW Ports that a (sufficiently functionally equivalent) container terminal at the Port of Newcastle would result in a substantial number of customers using the Port of Newcastle instead of Port Botany. The recognition of this fact is the explanation for the inclusion of the impugned provisions in the PCDs.

540    Because of the problem of potential ambiguity about meaning, I am unable to agree with the ACCC and PON that the descriptions of “competition”, “market” and “substitution” in the documents relating to the privatisation process are powerful evidence of the views of industry participants that a container terminal at the Port of Newcastle would compete in the same market as Port Botany and any container terminal at Port Kembla. They are powerful evidence, however, that if a sufficiently functional container terminal is operating at the Port of Newcastle it will cause a substantial number of customers to substitute the Port of Newcastle for Port Botany for their containers. This process, even if it ultimately creates a new separate market for the Port of Newcastle, would also transform Port Botany’s existing market. Accordingly, if, as NSW Ports and the State contended, the process of transformation ultimately involves the creation of two separate markets, that effect is wrought upon the existing market. The industry participants are right to have perceived that fact.

5.3.4    The s 155 notice

541    The ACCC and PON relied on the fact that NSW Ports answered the s 155 notice issued by the ACCC on 18 October 2018 by identifying 16 local government areas as a contestable area as between Port Botany and Port of Newcastle. It will be recalled that the s 155 notice defined a “Contestable Area” as a local government area in which it is financially viable for a shipper (which must mean importer/exporter) to import or export their goods through more than one port. Further, because NSW Ports did not have this information available it retained consultants to prepare the answer. The consultants prepared this answer within 24 hours without the definition of “Contestable Area” being available to them. NSW Ports also qualified its answer to the effect that it assumed that a viable container terminal is operational at the Port of Newcastle, meaning that all necessary landside infrastructure has been built. In other words, the answer assumes sufficient functional equivalence period between Port Botany and the Port of Newcastle in terms of Container Port Services. The response to the s 155 notice was reviewed by Ms Calfas who recognised that the notice was an important document and that that NSW Ports needed to answer as accurately as it could.

542    The ACCC and PON submitted that by its answer NSW Ports admitted that a container terminal at the Port of Newcastle would compete with Port Botany in 16 local government areas. The response, they said, confirmed that there is a substantial geographic area in NSW in which a container terminal at the Port of Newcastle would compete with Port Botany. Alternatively, the response is sufficient to describe the geographic dimension of a market in which Port Botany and the Port of Newcastle would compete in the supply of Container Port Services.

543    NSW Ports submitted that the evidence shows that as recently as November 2018 NSW Ports was unable to identify which areas of NSW would become “Contestable Areas” if a sufficiently functional container terminal was developed at the Port of Newcastle, which is why NSW Ports had to retain consultants to prepare an answer to question 20 in the s 155 notice. Further, NSW Ports submitted that material weight could not be given to the answer as an admission by it given that the consultants prepared the response without the definition of “Contestable Areas” and within 24 hours. According to NSW Ports, in these circumstances, it is unclear what the response means and it is clearly not a considered view of NSW Ports as an industry participant.

544    I consider that the answer to the s 155 notice is an admission by NSW Ports. The fact that the answer was prepared by consultants within a short period of time does not mean that the answer is other than an admission. Nor does the fact that the consultants did not have the definition of “Contestable Areas”. For one thing, the consultants must have given some meaning to the term “Contestable Areas”. The natural inference to draw is that they gave the phrase its ordinary meaning of “disputable” as between Port Botany and the Port of Newcastle assuming the latter was developed with a functional container terminal. In context, this must mean that in the hypothesised circumstance a customer rationally may choose either Port Botany or the Port of Newcastle to provide the relevant service.

545    This inference is supported by the fact that three areas are not identified in the answer as “Contestable Areas” between Port Botany and the Port of Newcastle, being Armidale, Inverell and Newcastle. This indicates that the view taken was that these areas were not contestable by Port Botany at all. This is reinforced by the fact that Armidale is identified as contestable by Port Brisbane. Further, NSW Ports did have the definition of “Contestable Area” and must be taken to have agreed with the consultants’ proposed answer on the basis of that definition. Otherwise, NSW Ports would not have submitted the answer to the ACCC. Accordingly, the answer is a previous representation by NSW Ports which is against its interests in this proceeding.

546    However, there are other considerations which indicate that the admission should be weighed along with all of the other evidence rather than being treated as determinative of any issue in dispute in and of itself.

547    One, it is not apparent how NSW Ports (which did have the definition) reached the view that it was financially feasible for importers/exporters to ship their goods through Port Botany or the Port of Newcastle in the hypothesised circumstance.

548    Two, to the extent this was the criterion that the consultants used (in the sense that it is inherent in the ordinary meaning of a “contestable” area), it is also not apparent how they reached the view that it was financially feasible for shippers to ship their goods through Port Botany or the Port of Newcastle in the hypothesised circumstance.

549    Three, the same issue is the subject of detailed and considered evidence in this proceeding, both expert and lay, which must also be taken into account.

550    All of this said, however, the answer is an admission by NSW Ports that if the Port of Newcastle has a sufficiently functional container terminal there are 16 local government areas in which NSW Ports and the Port of Newcastle would be in a contest for customers for Container Port Services.

5.3.5    Oral and documentary evidence – NSW Ports

551    The ACCC and PON contended that various witnesses called by NSW Ports conceded that a container terminal at the Port of Newcastle would compete with Port Botany.

552    The same problem of the potential ambiguity of this evidence arises. The evidence undoubtedly confirms the uncontroversial fact that a substantial number of customers of Port Botany would switch to the Port of Newcastle if it had a sufficiently functional container terminal. However, this evidence does not necessarily defeat the case theory of NSW Ports and the State that such a container terminal would create two separate monopoly markets in circumstances where each monopolist would rationally wish to maximise use of its monopoly.

553    Accordingly, as the ACCC submitted, Mr Garcia gave evidence that:

(1)    early in 2012, he considered that a potential container terminal at Newcastle could be a competitive threat to Port Botany;

(2)    substitution by a container terminal at the Port of Newcastle was a perceived material risk for bidders in the Port Botany privatisation process;

(3)    while this became less of a concern during the privatisation process, he continues to hold the view that there is potential for competition for Port Botany from a container terminal at the Port of Newcastle at some time in the future;

(4)    the compensation provisions were directed at ameliorating the risk of competition from the Port of Newcastle if it were developed with a container terminal in the future (noting that by this stage in the privatisation process Mr Garcia did not consider the compensation provisions to be important but accepted they were favourable to bidders); and

(5)    NSW Ports agreed to the compensation provisions so as to enjoy the potential protection they gave from competition by a future container terminal at the Port of Newcastle (noting that Mr Garcia stressed that the provisions gave financial protection to NSW Ports if container volumes at the Port of Newcastle exceeded a certain threshold).

554    Mr Droga gave similar evidence to that of Mr Garcia as follows:

(1)    before the PCDs were executed, Mr Droga was conscious of the risk that a competing container terminal could be developed at the Port of Newcastle at some time in the future (noting, however that he considered the risk had been substantially ameliorated by the State announcing its port policy sequencing policy in July 2012 and including Port Kembla with Port Botany into the proposed privatisation. By the time these events had occurred, NSW Ports was comfortable with the risk profile presented by the Port of Newcastle);

(2)    if the Port of Newcastle was to be developed with a container terminal ahead of time it may then provide a competitive force to or could potentially compete with Port Botany;

(3)    under certain conditions being satisfied, specifically that a fully functioning container terminal was developed at the Port of Newcastle, it could compete with Port Botany for some of the addressable market being serviced by Port Botany or in certain areas currently or in the future;

(4)    if a container terminal was developed at the Port of Newcastle, it would not be good for Port Botany. It would be fair to describe that as in the top handful of long-term strategic risks for Port Botany (a risk which had become the subject of more focus as a result of this proceeding); and

(5)    the compensation provisions provided NSW Ports with protection if the State changed its mind about its port sequencing policy. NSW Ports was happy to receive that protection. It could provide economic compensation in the event that competitive capacity was developed and exercised over time at Newcastle. He appreciated at the time the compensation provisions were made that their effect was to provide compensation “in the event that there was proof that the terms of the indemnity were activated and within that involved a substitution of a box that otherwise would have gone to Botany going to Newcastle. He accepted that competition would very likely be a reason for that substitution.

555    The ACCC and/or PON relied on Ms Calfas’s evidence to the following effect:

(1)    NSW Ports considers that it competes for containers with the Port of Brisbane and Port Melbourne;

(2)    NSW Ports has a commercial and business development team, one objective of which is to gain and retain contestable cargo and to maintain Port Botany’s competitiveness against other ports (that is, Port Melbourne and the Port of Brisbane);

(3)    if a container terminal were developed at the Port of Newcastle, NSW Ports’ commercial and business development team is likely to implement plans to capture and retain export cargos that might otherwise go to the Port of Newcastle and to maintain Port Botany’s competitiveness versus the Port of Newcastle;

(4)    the only way for Port Botany to compete for exports in the Port of Newcastle’s Newcastle hinterland would be on service availability in terms of shipping service frequency and global reach. Otherwise the customers choice would be a result of land transport costs and the cost differential for the Port of Newcastle’s hinterland is equal to or more than what NSW Ports charges for its services;

(5)    ports compete – “there is [a] price for the shipper, which includes a component of ports, which is not a big component. But then there is service offering and efficiencies, and – and the like, which play into cost as well”. Port costs are relevant only to the extent that they make a difference to the overall cost that the shipper incurs;

(6)    the competition between ports includes non-price considerations – “[t]here may be ports that are cheaper, but they don’t provide the service: the global connectivity; the frequency of service that is required in order to meet the needs of the shipper. So it is more than just a price consideration”;

(7)    we [Port Botany] compete on service and connectivity as much as anything else” (that is, connectivity to and from ports by either road or rail and of ports in terms of frequency and global reach of shipping services);

(8)    you [a port] need to be able to have the frequency of service and the global connectivity if you’re going to be able to offer a product that’s competitive for exporters as well as for importers”. So for agricultural exports from northern NSW, if the Port of Newcastle can offer frequency of service (by shipping lines) and global connectivity (by shipping lines), those customers will switch from Port Botany to the Port of Newcastle because the train goes straight past the Port of Newcastle. If, however, the Port of Newcastle does not offer that frequency of service and global connectivity then the customers will not switch as it is only economic for a full train to go to one location. Some agricultural exports from northern NSW are also shipped through the Port of Brisbane;

(9)    the opportunity of gaining or conversely the risk of losing contestable cargo to competing ports should be a key consideration driving their performance, connectivity and service level;

(10)    in order to retain contestable cargo NSW Ports will take steps to ensure connectivity and performance is optimal;

(11)    contestability is not a black or white answer”. Areas where a port will compete will change with the different infrastructure delivered. A port would not sink money into infrastructure to compete at the margins. The current contestable areas with the Port of Melbourne and the Port of Brisbane involve exports which are a declining part of Port Botany’s volume, about 26% of the total; and

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556    Ms Calfas also gave evidence as follows:

(1)    she considered that a “contestable area” between ports was as an area where the “price or the cost to the shipper to go to one or more ports would be broadly comparable”. This had to be the “ultimate determining factor” of contestability as between ports because the price of services offered by a port is not a big component of a shipper’s costs. It is only if that port cost makes a difference to the overall cost that the importer/exporter incurs that it could be said there was any competition on price between ports for container volumes. This could occur in “some” or “small” circumstances;

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(3)    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX;

(4)    the Port of Newcastle, if developed as a container terminal, would be different from Port Melbourne and the Port of Brisbane. There is a catchment area that would flow preferentially to the Port of Newcastle if it is developed as a container terminal;

(5)    NSW Ports’ Contestable Cargo Capture Plan (CCCP) was not drafted with the Port of Newcastle in mind. Only some of the actions in the CCCP directed towards the Port of Melbourne and the Port of Brisbane would apply to the Port of Newcastle if it is developed as a container terminal. Port Botany could only compete with the Port of Newcastle for containers from within the Port of Newcastle’s hinterland on shipping service frequency and global connectivity as the cost differential in the overall transport cost to Port Botany (rather than the Port of Newcastle) would be equal to or greater than the amount of wharfage (that is, the price charged by the port). Accordingly, “in order to incentivise, in any form, of [sic – the] other way, be it commercial or otherwise, we would have to accept zero wharfage or subsidise the exports out of Port Botany, which we would not do”. In other words, there was no opportunity for the kind of commercial arrangements (including possible price discrimination to attract customers) as between Port Botany and the Port of Newcastle as suggested might be possible in the CCCP (discussed further below);

(6)    Ms Calfas did not consider that Port Botany would risk losing export container volumes to the Port of Newcastle if its prices were not competitive with those at Newcastle. The containers from northern NSW would flow preferentially to the Port of Newcastle in any event unless its “pricing was such or its service was such that it wasn’t able to offer the service that exporters needed from that region”. The Port of Newcastle has a distinct catchment area from which it would draw containers; and

(7)    Ms Calfas did not regard the Port of Newcastle as posing a risk of significant new competition to Port Botany. The predominant trade of Port Botany is import containers and the predominant market for those goods is the greater Sydney region. The majority of goods coming into the Port of Newcastle (if developed as a container terminal) would be destined for the greater Sydney region. Without substantial capacity on the northern Sydney freight line those goods would have to be trucked to Sydney which involves a significant cost and would be a deterrent to use of the Port of Newcastle. Distribution centres are also located in the Sydney region because it involves the shortest transport route to and from the customers and their outlets.

557    Ms Calfas used the export of aluminium from Tomago as an example of her understanding of the dynamics that would exist as between Port Botany and the Port of Newcastle if it has a container terminal. Aluminium from Tomago is exported via Port Botany to multiple ports globally. Ms Calfas said:

So you need to be able to have the frequency of service and the global connectivity if you’re going to be able to offer a product that’s competitive for exporters as well as for importers. Now, assuming Newcastle can – if Newcastle can’t do that, then a number of those products will still come to Botany because Botany has, you know, 23 services going through it with 137 ships connecting across the globe. Now, if Newcastle can offer that service, then those products go on a train and that train path literally goes right past Newcastle to get to Port Botany … this train goes straight past Newcastle – you wave at it as you go past – and then has to keep going to Port Botany. It makes no sense for that cargo to continue going to Port Botany on a line that is the northern freight line with the – the passenger – the passenger trains that are on that, and then risking delays, breakdowns, waiting to get into a stevedoring terminal at Botany, breaking up the trains and getting into the terminal. So it’s – it’s a switch. They’re either going to switch to Newcastle. Because they’re much closer to Newcastle, they would have to go past it to get to Botany, or they’re going to not go to Newcastle because Newcastle doesn’t have the connectivity and they can’t – they’re not likely to cherry-pick because once that train is full, it’s only economic for a full train and it’s only economic for the full train to go to one location. So that’s the reason I said “maybe some.”

What we try to do is have the most efficient system we can, not just within the ports but connecting to and from the ports, which is that connectivity. So we compete on service and connectivity as much as we do on anything else.

558    PON submitted that while Ms Calfas denied that NSW Ports was involved in advocacy against the development of a container terminal at the Port of Newcastle, it was apparent that this is the case. Amongst other things, NSW Ports retained a consultant (KPMG) to prepare the KPMG report in circumstances where, according to PON:

(a)    The express purpose of NSW Ports’ engagement of KPMG was, “To highlight the benefits to the New South Wales economy from retaining Port Kembla as the nominated second container port for New South Wales considering the whole of logistics chain impact in the context of alternative port facilities”: KPM.001.001.0633 at 0644; cf. T 506.1 – 507.37, T 518.14 (Calfas).

(b)    In an email to executive staff dated 27 August 2018, Ms Calfas said “NSWP’s KPMG study needs to appropriately debunk the Port of Newcastle analysis at the same time as supporting the KPMG analysis”: NSP.100.014.2036 at 2037; T 508.13 – 34 (Calfas).

(c)    In a report to the Board, Ms Calfas described the KPMG report as a “report on the benefits and opportunities of Port Kembla as New South Wales’ second container port”: NSP.100.106.0657 at 0673; T 509.24 – 43 (Calfas).

(d)    Ms Calfas asked her staff to “hold off making the key message changes” that had been suggested until “we can agree what the key messages should be internally”: NSP.100.003.1700. Although Ms Calfas said she was “not certain” that she wanted to agree internally within NSW Ports what the key messages in the KPMG report would be, and although Ms Calfas said she did not “believe” that was correct, the Court will infer that it is correct from the express terms of her contemporaneous email: cf. T 512.1 – 27 (Calfas).

(e)    The KPMG report was “launched” at an event at which Ms Calfas gave a speech and to which “industry stakeholders, government representatives and media” were invited: NSP.100.026.4802; T 518.16 – 21 (Calfas). The media release published by NSW Ports on the same day trumpeted that “Premature port investments will result in higher costs for NSW”, and said, “the current proposal for a container port at Newcastle had significant issues”: PXN.002.001.0118. Ms Calfas resisted the proposition that her principal purpose in commissioning the KPMG report and launching it publicly in this way was to counter a potential rival in Port of Newcastle, conceding only that this was “partially” why she did those things: T 520.11 – 32 (Calfas). However, the notion this was not principally an exercise in advocacy against “premature port investments” at Newcastle should not be accepted: cf. T 518.43 – 520.35, 587.7 – 12 (Calfas). NSW Ports hardly needed to warn the government or the media about premature investments at Port Kembla (which it owns). Further, Ms Calfas agreed that the KPMG report was not commissioned and launched publicly for the internal purposes of NSW Ports: T 520.24 (Calfas).

(f)    Although NSW Ports had filed an affidavit of Mr Ellis, an author of the KPMG report, it chose not to call him. The Court can therefore infer that Mr Ellis’s evidence would not have assisted NSW Ports’ case, and more comfortably infer that the purpose of KPMG’s engagement was to assist NSW Ports in advocating that a container terminal should not be developed at Port of Newcastle until after one had been developed at Port Kembla.

559    The ACCC submitted that:

Given Ms Calfas’ evidence that there would be competition between a container terminal at the Port of Newcastle and Port Botany at least in terms of service quality (i.e., global connectivity, frequency of shipping services, etc), the NSW Ports Respondents’ submission that a container terminal at the Port of Newcastle would operate in a separate market to Port Botany is untenable. The circumstance that the Port of Newcastle would compete with Port Botany on quality in respect of some container cargo is powerful evidence that the two ports would be competitors in at least one market.

560    The ACCC and/or PON also referred to NSW Ports’ CCCP dated January 2020. PON identified that the CCCP:

(a)    Reveals that NSW Ports has a “Commercial and Business Development Team” whose “core objectives” include “gain[ing] and retain[ing] contestable cargo”: at 5278; T 498.6 (Calfas).

(b)    Defines “contestable cargo” as “cargo which is contestable between different sea ports as well as cargo which is contestable between coastal shipping and overland rail”: at 5278; T 498.44 (Calfas).

(c)    Identifies certain import cargoes that “are contestable between NSW Ports’ facilities and other ports,” including “containerised products, such as panels for a solar farm or fertiliser, bound for regional New South Wales for which importation through Melbourne or Brisbane may be a viable alternative to Port Botany”: at 5279.

(d)    States that “exports from regional New South Wales may viably be exported through Melbourne, Brisbane or Newcastle as an alternative to Port Botany or Port Kembla”: at 5279; T 498.46 – 499.25 (Calfas). The CCCP goes on to say that “this category of contestable cargo provides the largest potential revenue benefit for NSW Ports and accordingly features most prominently in our marketing activities”: at 5280.

(e)    Includes, as examples of contestable export cargo, containerised agricultural exports from northern New South Wales and western New South Wales, which may be handled though Port Botany, Brisbane or Melbourne: at 5280; T 499.16 – 25 (Calfas).

(f)    Describes the methodology to be applied by the Commercial and Business Development Team in order to gain and retain contestable cargo: at 5282 – 5286; T 500.7 – 14 (Calfas). It includes the development of “marketing plans” to pursue or defend the relevant contestable cargo “opportunity”: at 5284 – 5285.

(g)    Identifies the northern New South Wales and southern Queensland region as a “next priority opportunity”, one rationale for which is that it would create volume to support rail services from the Hunter Valley to Port Botany: at 5289. The volume containers targeted are not enormous. For example, the northern New South Wales and southern Queensland opportunity was in the order of 10,000 – 30,000 TEUs per year: at 5289. And yet, NSW Ports plainly wishes to “capture” these volumes and to take steps to do so.

(h)    Identifies transhipment cargoes as contestable “inherently contestable between the mainline ports”: at 5281.

561    The CCCP includes amongst categories of action which “may feature in specific marketing plans” this statement:

XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

(Original emphasis).

562    The CCCP states that:

The vast majority of import cargo being handled through Port Botany and Port Kembla is not contestable by other ports given the proximity of those ports to the inland destination relative to that of the nearest competing ports.

563    As to export cargo, the CCCP says:

Approximately half of the containerised exports through Port Botany originate from regional NSW, as do the vast majority of bulk commodities exported through Port Kembla. Depending on the location of the point of origin, availability of road /rail transport and access to intermodal facilities, exports from regional NSW may viably be exported through Melbourne, Brisbane or Newcastle as an alternative to Port Botany or Port Kembla.

564    The CCCP identifies limited classes of products which are “contestable cargo” as between ports. These include primarily non-containerised cargo. Non-containerised cargo is not the pleaded product market. The relevant market is for Container Port Services which is confined to containerised cargo and empty containers. Accordingly, competition between any of the ports for non-container cargo is immaterial. The CCCP, however, and NSW Ports itself (including Ms Calfas) are not confined in their commercial considerations to containerised cargo and empty containers. NSW Ports must consider all aspects of its operations.

565    The CCCP also discloses that it considers some kinds of containerised cargo to be contestable as between Port Botany, Port Melbourne and the Port of Brisbane. This comprises import containers described as “containerised products, such as panels for a solar farm or fertiliser, bound for regional NSW for which importation through Melbourne or Brisbane may be a viable alternative to Port Botany” and export containers described as containerised agricultural products from (a) the Riverina region (contestable between Port Botany and the Port of Melbourne), (b) northern NSW or southern Queensland (contestable between Port Botany and the Port of Brisbane), and (c) on finalisation of the inland rail development scheduled for 2025, XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX. It otherwise identifies transhipment containers (which are to be shipped on in order to connect with a non-mainline port of origin or destination) as contestable cargo driven by the decisions of shipping lines. Transhipment contestability is said to be the subject of a separate analysis, to which no party referred.

566    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

567    I accept that Ms Calfas was unable to identify any equivalent customer as between Port Botany and the Port of Newcastle and that XXXX may be unique in terms of its location and container volumes, making price discrimination feasible for XXXX, when this might not be the case for any other customer. The concern is that the analyses of the economists called by NSW Ports and the State would not have identified the potential existence of a customer such as XXXX.

568    I consider that Ms Calfas’s evidence, understood in the context of the CCCP, supports the following conclusions:

(1)    while the vast majority of container volumes from the east coast of Australia are not contestable on price because of relative land transport cost advantages between ports, NSW Ports has a team dedicated to identifying opportunities for Port Botany to compete with the Port of Melbourne and the Port of Brisbane for contestable containers, which (unsurprisingly) involve those parts of Port Botany’s catchment near to each of the other ports;

(2)    although it only competes on price with the other existing ports in those parts of its catchment area near to the other ports, Port Botany’s prices for all export containers are set by reference to the prices of the Port of Melbourne and the Port of Brisbane;

(3)    Ms Calfas did not consider that there would be similar marginal catchment areas within which Port Botany could compete on price with the Port of Newcastle, if the latter port has a sufficiently functional container terminal. This evidence must be inferred to be inconsistent with NSW Ports’ answer to the s 155 notice;

(4)    although they have large separate catchment areas based on relative land transport cost advantages, Ms Calfas considers that Port Botany competes generally with the Port of Melbourne and the Port of Brisbane on non-price factors, particularly quality of service and shipping connectivity;

(5)    NSW Ports is focused on identifying contestable containers as between it, the Port of Melbourne and the Port of Brisbane, and is willing to engage in price discrimination if it can be profitably implemented to increase the container volumes shipped through Port Botany;

(6)    Ms Calfas considers that Port Botany would compete generally with the Port of Newcastle, if it has a sufficiently functional container terminal, on non-price factors, particularly quality of service and shipping connectivity;

(7)    NSW Ports considers it could take steps to optimise the quality of its Container Port Services and its connectivity (road, rail and shipping services) and would do so to retain contestable cargo with any other port, including the Port of Newcastle if it has a sufficiently functional container terminal; and

(8)    despite Ms Calfas’s contrary evidence, the unavoidable conclusion is that NSW Ports is advocating against the establishment of a container terminal at the Port of Newcastle. Its advocacy is focused on the NSW and Commonwealth governments and industry stakeholders. Given that a container terminal does not yet exist at the Port of Newcastle, NSW Ports’ actions are necessarily limited to advocacy. If, however, a container terminal was established at the Port of Newcastle, NSW Ports also considers that it could optimise a number of the port functionality factors in its favour (quality of Container Port Services, road and rail connections, and shipping connectivity) and would attempt to do so.

569    NSW Ports’ advocacy includes the KPMG report. The KPMG report, however, is no more and no less an advocacy document than the reports of PON’s consultants discussed below. It is relevant that NSW Ports commissioned and published the KPMG report in circumstances where the purpose of the report is expressed to be to “determine the relative competitiveness and the likely catchment areas of Port Botany, Port Kembla and Port of Newcastle as container ports”. In doing so, it is apparent that KPMG’s analysis assumes that any container terminal at the Port of Newcastle would be functionally equivalent to Port Botany.

570    These matters begin to disclose why the approach of the economists called by NSW Ports and the State to the market issue is not well-adapted to the circumstances. In particular:

(1)    a SSNIP as between Port Botany, the Port of Melbourne and the Port of Brisbane would necessarily result in the conclusion that they are in three separate markets (this conclusion is necessary given the results of applying the SSNIP to Port Botany discussed below);

(2)    despite the fact that economic analysis would show that they do not closely constrain each other on price for the vast majority of containers, the Port of Melbourne and the Port of Brisbane do in fact closely constrain Port Botany’s prices for all export containers because Port Botany sets a price for those containers no higher than the price of the other two ports in order to retain marginal contestable container volumes; and

(3)    NSW Ports considers that it can and does compete generally with the Port of Melbourne and the Port of Brisbane on non-price factors which it is able to optimise in its own interest including road, rail and shipping connectivity.

571    Given these matters, it is difficult to accept that the market identification process adopted by NSW Ports and the State is capable of identifying potential competition between the Port of Newcastle and Port Botany, even if Ms Calfas is right that there is currently no scope for price competition or price discrimination between them. Rather, identifying the market as anything other than the existing market for Container Port Services in NSW would seem to ensure the lack of any scope for any form of competition in a market between Port Botany and the Port of Newcastle.

572    PON submitted that the views of the economists called by NSW Ports and the State about the relevant market are not reconcilable with NSW Ports’ pricing strategy. Again, I agree. NSW Ports’ pricing strategy reflects three circumstances. The first is the existence of competition with the Port of Melbourne for some export containers from the southern regions of NSW. The second is the existence of competition with the Port of Brisbane for some export containers from the northern regions of NSW. The third is the existence of potential price regulation of NSW Ports. I accept that this third circumstance is relevant, but it does not negate the existence of the first two circumstances. Those two circumstances indicate that NSW Ports is motivated to set prices to capture all contestable containers even if the number of containers which are contestable is small compared to the total.

573    Given this evidence of its conduct to date, it must be inferred that if a container terminal at the Port of Newcastle entered the market, NSW Ports would do everything in its power to retain or capture containers from the Port of Newcastle. If that includes Port Botany setting its prices so as not to lose even small volumes of containers to the Port of Newcastle compared to the total volume which Port Botany handles, it must be inferred that NSW Ports would do so. If that includes price discrimination if NSW Ports could profitably do so for any customer which would otherwise use the Port of Newcastle, it must also be inferred that NSW Ports would do so.

574    Further, it must be inferred from the evidence that NSW Ports will do whatever it can to ensure that: (a) a container terminal is not established at the Port of Newcastle, and (b) if a container terminal is established at the Port of Newcastle, the functionality of that container terminal is not maximised. At the least, it is clear that NSW Ports considers it can materially influence a number of the port functionality factors including quality of Container Port Services (which include a port providing effective land and facilities for stevedoring services and road and land transport operators) and shipping connectivity.

575    Any likely effect of the impugned provisions on the dynamic described above will be considered later. The relevant point presently is that seeking to analyse the potential competitive effects of the impugned provision on the basis that each of Port Botany and the Port of Newcastle would be monopolists in their own separate markets necessarily involves specification of a market which negates any possibility of competition, on price or otherwise, being identified. It is only by recognising that any potential new market will be created out of (and thus transform) the existing market for Container Port Services in NSW that there is any capacity for analysis of potential competitive effects of the impugned provisions.

576    PON submitted that the evidence of Ms Calfas confirms that Port Botany will lose export volumes to Newcastle, and seems to posit that pricing will not make a difference to that outcome for the majority of exports”. This is a fair summary of this aspect of Ms Calfas’s evidence noting, however, that Ms Calfas’s evidence assumed a sufficiently functional container terminal at the Port of Newcastle. In a context where NSW Ports has set its wharfage charges for export containers by reference to and so as not to lose relatively minor volumes to the Port of Melbourne or the Port of Brisbane, the fact that Ms Calfas considers that wharfage charges will not make a difference for the majority of exports does not support the hypothesised existence of two separate markets for Container Port Services in NSW assuming a sufficiently functional container terminal at the port of Newcastle.

577    PON also submitted that Ms Calfas’s answers indicate that “Port Botany would be at risk of losing export container volumes to PON, if its prices were not competitive with those at Newcastle. If anything, the risk of losing export container volumes to PON due to uncompetitive pricing would be greater than that of losing volumes to Melbourne or Brisbane, given the relative proximity of Newcastle to Port Botany, and the relative proximity of Newcastle to the containerised export cargoes that originate in the north and north-west of NSW”.

578    I do not accept that Ms Calfas’s evidence supports this submission. Ms Calfas explained the dynamics of competition between Port Botany and the Port of Melbourne for export containers from the southern regions of NSW and between Port Botany and the Port of Brisbane for some export containers from northern and north-western NSW. This dynamic explains why NSW Ports is price sensitive on export containers to the Port of Melbourne and the Port of Brisbane. She also explained why she considered that the same dynamics would not generally apply as between Port Botany and the Port of Newcastle.

579    I accept, however, that Ms Calfas’s evidence to this effect cannot be determinative. Her evidence to this effect must be evaluated along with the following: (a) the answer of NSW Ports (as settled by Ms Calfas) to the s 155 notice which identified 16 local government areas as contestable between the two ports, which must be inferred to mean contestable on the level of wharfage charges, (b) the fact that NSW Ports is price sensitive to the loss/gain of small volumes of export containers, (c) the evidence of competition at the margins between Port Botany and each of the Port of Melbourne and the Port of Brisbane, and (d) the fact that Ms Calfas considered that NSW Ports could and would compete with the Port of Newcastle on non-price factors.

580    PON referred to Ms Calfas’s evidence that she did not know whether NSW Ports would ensure that its wharfage charges were competitive with the Port of Newcastle’s prices if it were developed with a container terminal. I accept Ms Calfas’s evidence to that effect. It is unlikely that Ms Calfas could give any other answer to this question given that there is no container terminal at the Port of Newcastle and thus NSW Ports cannot presently assess what, if any, containers might be in contest between the two. Ms Calfas’s evidence appropriately allows for the possibility that, consistent with NSW Ports’ pricing in response to the Port of Melbourne and the Port of Brisbane for export containers, the prices of the Port of Newcastle might or might not constrain wharfage charges for containers imported or exported through Port Botany.

581    PON submitted that the fact that NSW Ports perceives competition from Newcastle as a strategic risk and has engaged in advocacy against the development of a container terminal at Port of Newcastle is compelling evidence that Port Botany and a container terminal at the Port of Newcastle will operate in the same market: see Liquorland at [443]-[444] and Air New Zealand at [78].

582    I consider that this evidence compels the conclusions that: (a) industry participants correctly recognise that the effect of a container terminal at the Port of Newcastle will be on and in Port Botany’s existing market for Container Port Services in NSW, (b) NSW Ports considers that its advocacy is capable of influencing relevant government decision-makers about whether a container terminal should be permitted or supported at the Port of Newcastle, and (c) consistent with conclusions below, the impugned provisions have not caused NSW Ports to do nothing in response to the prospect of a container terminal at the Port of Newcastle. These conclusions indicate that a purposive approach to market identification involves a focus on the existing market for Container Port Services in NSW because that is the market best capable of enabling an assessment of the competitive effects, if any, of the impugned provisions.

5.3.6    Oral and documentary evidence – PON

583    The ACCC and/or PON relied on evidence from PON to support their case that if a container terminal was developed at the Port of Newcastle it would compete in the same market with Port Botany. This evidence is largely to the same effect as indicated above, except that the representatives of PON consider that there will be greater potential for it and Port Botany to compete on the price of Container Port Services than Ms Calfas would contemplate.

584    The PON PBC identifies Port Botany, Port Melbourne and the Port of Brisbane as “competitor ports” and that if developed with a container terminal the Port of Newcastle would also be a “competitor port” of these ports. While the identification of the Port of Melbourne as a competitor is overreach, Ms Calfas indicated that if there is a sufficiently functional container terminal at the Port of Newcastle then that part of Port Botany’s existing market which is contestable with the Port of Brisbane (for export containers from the northern regions of NSW) will instead be contestable as between the Port of Newcastle and the Port of Brisbane. This is consistent with PON’s perception as disclosed in the PBC.

585    The PON PBC says that competitive reactions from Port Botany and the Port of Brisbane to the development of a container terminal must be anticipated including “using contractual or market power to disincentivise use of Newcastle, price-cutting to reduce the Newcastle advantage, or marketing that seeks to downplay Newcastle’s benefits and attractiveness”. I consider this to be a realistic assessment, particularly in respect of Port Botany which stands to lose a material part of its existing market if there is a sufficiently functional container terminal at the Port of Newcastle.

586    While NSW Ports would ultimately need to assess whether it could and would profitably reduce wharfage charges to retain one or more customers that might otherwise choose to use the Port of Newcastle, there is no doubt that it would have a strong incentive to consider that potential closely. NSW Ports also would have a strong incentive to do everything it could to minimise the functionality and use of a container terminal at the Port of Newcastle in order to protect its existing market in NSW. The existence of these strong incentives further indicates that the existing market for Container Port Services in NSW is the best analytical tool for the assessment of any competitive effects of the impugned provisions.

587    These same considerations apply to the evidence of PON’s witnesses.

588    Mr Carmody said that the Port of Newcastle would compete with Port Botany as follows:

(1)    the Port of Newcastle would initially seek export container volumes from its catchment area that are currently shipped through Port Botany;

(2)    over about 10 to 15 years, if the inland rail project is built, the Port of Newcastle may be able to compete with Port Botany for export containers from outside its catchment area (that is, in my words, the geographical area of relative land transport cost advantage for the Port of Newcastle will increase at the expense of Port Botany if the inland rail project is built);

(3)    the Port of Newcastle could attempt to secure export volumes by convincing one or more large exporters to export goods through the Port of Newcastle instead of Port Botany. This would attract shipping lines who will want to capture this export business and, as those shipping lines will also need to unload import containers, it will assist in growing import volumes (that is, in my words, PON would analyse customers to see if it could identify a customer XXXX XXXX XXXX to use its services, by price discrimination if necessary, and if achieved this would enable the Port of Newcastle to benefit from the network externalities in respect of the use of a port as between cargo volumes handled by a port and shipping lines calling at the port);

(4)    the Port of Newcastle could attempt to convince one or more large importers of containers to switch from Port Botany to the Port of Newcastle. It could only achieve this switch if it could offer a better service or lower overall cost (including landside logistics costs) than Port Botany (in my words, another version of a potential XXXX XXXX XXXX XXXX);

(5)    the Port of Newcastle could attempt to convince one or more shipping lines to commit to regular weekly calls at the Port of Newcastle by offering guaranteed access to berth slots, better service, faster turnaround times and lower prices as compared to Port Botany (in my words, these are examples of what a port might do to influence the choices of shipping lines); and

(6)    the Port of Newcastle’s ability to compete with Port Botany should improve as existing supply chains (which currently depend on Port Botany) are further developed and supplemented. Avoiding the time and cost associated with freight being transported on services affected by road and rail congestion in the vicinity of Port Botany and the Sydney metropolitan area could prompt supply chains to be reconfigured and intermodal terminals and distribution centres to be built closer to, or at, the Port of Newcastle, as container volumes handled at the Port of Newcastle increase.

589    As noted, in a speech he gave in June 2018 to the Hunter Business Chamber Infrastructure Lunch Mr Carmody, in advocating the case for the development of a container terminal at the Port of Newcastle, said:

We don’t see Port of Newcastle Container Terminal as competition for Botany or Brisbane our container port is global-facing and its natural catchment is regional New South Wales.

590    This proposition may appear to be inconsistent with Mr Carmody’s evidence in this proceeding but, as should be apparent, the statement is partly correct. If a container terminal at the Port of Newcastle is sufficiently functionally equivalent to Port Botany, the Port of Newcastle will enjoy a monopoly over at least some customers in the geographical area where it has a relative land transport cost advantage over Port Botany.

591    Mr Kwiatowski effectively assumed that the Port of Newcastle, if developed with a container terminal, would compete with Port Botany and would have an advantage over Port Botany in terms of improved infrastructure, specifically the capacity to handle large vessels. He also said that in his experience shipping lines would switch ports over time depending on the nature of the port. Transhipment ports are volatile and shipping lines can switch quickly. Other ports which develop a new container terminal experience a more gradual shift to their services depending on benefits such as lower costs to the shipping lines. Shipping lines consider “the charges for handling services, the speed of turnaround, the frequency of vessel calls, having a seamless logistics chain between the different modes of transport, a low incidence of damage to containers and the availability of information about the location of the cargo and any delays”. I accept that this is Mr Kwiatowski’s experience and it is relevant evidence.

592    Mr Liu also assumed that the Port of Newcastle, if developed with a container terminal, would compete with Port Botany, saying that the competition would be in respect of the overall costs to shipping lines, service levels and service offerings including the capacity of the Port of Newcastle to accommodate larger vessels than Port Botany. I accept that this is Mr Lui’s expectation and it is relevant evidence.

593    Mr Dent considered that a container terminal at the Port of Newcastle would be a direct competitor to Port Botany and that it would need to capture some of the import containers into Port Botany to support the export trade from the Port of Newcastle’s catchment area. He expected shipping lines would support the development of a competing container terminal to Port Botany to put downward pressure on stevedoring costs and pressure stevedores to improve service levels.

594    I accept that competition between stevedores is not a part of Container Port Services. As discussed, however, to the extent that a port, in providing Container Port Services to a stevedore, can materially influence the quality and price of the stevedoring service to increase the use of Container Port Services then that is conduct by the port in the market for Container Port Services.

595    Mr Dent considered that for a container terminal at the Port of Newcastle to succeed it would need to attract a sufficient balance of import and export cargo and shipping services away from Port Botany. He explained that these two elements are interrelated. If shipping services are infrequent (for example, because there is insufficient berth capacity to accommodate additional ships, or because shipping lines cannot be confident they will be able to access berth space when they need it) then customers of the shipping lines (importers/exporters) will be less likely to switch to the Port of Newcastle. Similarly, if the Port of Newcastle is unable to attract a sufficient volume of cargo, then shipping lines will not be willing to switch services from Port Botany to the Port of Newcastle.

596    Mr Dent’s evidence to this effect is cogent and persuasive.

597    Mr Dent was also referred to in the email within PON concerning a meeting with ANL in June 2018 (see above). At that time Mr Dent was ANL’s general manager for operations and logistics. As noted, the email records Mr Dent as confirming that “ANL would be more likely to provide services to PON if there was the ability to XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX. Wharfage charges are the major component of charges by ports to shipping lines for Container Port Services. This is evidence that those two ports, Auckland and Tauranga, compete on wharfage charges to attract shipping lines.

5.3.7    Industry experts

598    The ACCC and PON also relied on the evidence of the industry experts, Mr van Duijn and Mr King. While they have expertise relating to the operation of ports, Mr van Duijn and Mr King are not economists. The primary relevance of the evidence of Mr van Duijn and Mr King concerned the viability of the development of a container terminal at the Port of Newcastle. Mr van Duijn considered that a form of development of a container terminal at the Port of Newcastle (not that proposed in the PON PCB) would be viable. Mr King considered that the development of a container terminal at the Port of Newcastle as proposed in the PON PBC would not be viable. This evidence is relevant to the assessment of the competitive effects of the impugned provisions. Mr van Duijn and Mr King otherwise dealt with the issue of competition between the two ports assuming the operation of a sufficiently functional container terminal at the Port of Newcastle. It is that part of their evidence which I consider as relevant to market identification.

599    According to Mr Van Duijn, ports generally have a captive hinterland and a contestable hinterland. The captive hinterland is where there is only one obvious choice of port for importers/exporters due to proximity, transport connections and other factors. The area where this choice is equivalent or marginally different for importers/exporters as between ports is the port’s contestable hinterland. Mr van Duijn said contestable hinterlands or catchment areas (terms he used interchangeably) are influenced by many factors, including land transport facilities, container supply chain and logistics, port facilities, shipping facilities and macro-economic conditions. The best way to accurately define a port’s captive and contestable hinterlands is to conduct a container origin and destination study. Mr Van Duijn has not done such a study for this matter. His opinions are based on such studies he conducted for the Port of Melbourne and the Port of Brisbane and his industry knowledge. On that basis, Mr van Duijn considers that Port Botany’s captive catchment area is most of NSW except for the southern region (contestable with the Port of Melbourne) and a small area in the northern region (contestable with the Port of Brisbane). These areas are shown in figure 10 below:

600    It will be apparent that this evidence is generally consistent with the evidence of Ms Calfas about Port Botany’s perception of competition between it and the Port of Melbourne and the Port of Brisbane.

601    Having regard to the studies he conducted for the Port of Melbourne and the Port of Brisbane, his industry knowledge, and another study he conducted for the Victoria University Institute of Supply Chain Logistics, Mr van Duijn considers that a container terminal at the Port of Newcastle (by which he must mean a sufficiently functional container terminal) would result in the catchment areas as depicted in figure 11 below:

602    Mr van Duijn gave this evidence

(1)    there is only one contestable area as between Port Botany and the Port of Melbourne – being an area around Wagga Wagga. Otherwise, the catchment areas of Port Botany and the Port of Melbourne do not overlap;

(2)    there is only one contestable area as between Port Botany and the Port of Brisbane – being an area around Moree. Otherwise, the catchment areas of Port Botany and the Port of Brisbane do not overlap;

(3)    if the Port of Newcastle is developed with a container terminal it also would have a catchment area mostly to its north and north west;

(4)    the Port of Newcastle’s catchment area would overlap with the Port of Brisbane in the same area around Moree that is currently contestable as between Port Botany and the Port of Brisbane;

(5)    the Port of Newcastle’s catchment area would also overlap with Port Botany in an area near the boundary of its catchment area with Port Botany, extending to the west. Otherwise Port Botany and the Port of Newcastle would have separate catchment areas;

(6)    the Port of Newcastle’s catchment area would not overlap with the catchment area of the Port of Melbourne (or any container terminal at Port Kembla – which I note is evidence undermining the cases of the ACCC and PON about Port Kembla);

(7)    the overlap in the catchment areas of Port Botany and the Port of Newcastle is “more difficult to determine” than that between the Port of Newcastle and the Port of Brisbane due to land transport cost differentials, the likelihood of logistics providers locating near the Port of Newcastle, and the rail connections to the Port of Newcastle from central west NSW;

(8)    to precisely determine the area of overlap between the catchments of Port Botany and the Port of Newcastle, a full container origin and destination study would need to be conducted, including a full economic analysis but Mr van Duijn is confident in his assessment as indicated on figure 11;

(9)    the Port of Newcastle is likely to take a significant share of containerised freight from Port Botany, mainly from the north-western and central regions of NSW, the Hunter and Central Coast and potentially from some of the northern suburbs of Sydney;

(10)    once the inland rail is constructed, particularly the part between Parkes and Narromine, there would be potential for the Port of Newcastle to attract container volumes from Parkes which currently are shipped through Port Botany;

(11)    the total population in the Port of Newcastle’s catchment area exceeds 1 million. On that basis, approximately 200,000 import TEUs per year could be more cost-effectively and expediently shipped through the Port of Newcastle, mostly involving customers of Port Botany;

(12)    pricing and service levels will become important factors in the decision about whether to use Port Botany or the Port of Newcastle;

(13)    ports can compete on costs and non-cost related items such as service levels, choice of stevedore, ease of doing business, and the size of ships able to enter the port. Service issues include making sufficient berths available and ensuring that road and rail infrastructure is sufficient to handle container volumes being transported. Port costs, in effect wharfage and perhaps navigation fees, are only a small component of the total cost of the container supply chain;

(14)    ports are able to compete on all components of their charges, such as wharfage alone (Port Botany) or wharfage and navigation charges (Brisbane Newcastle, Port Kembla and Melbourne) and port access charges (Brisbane), all of which are a relatively small component of the total supply chain cost;

(15)    ports also compete on service levels such as making berths available and ensuring infrastructure within their lease area is efficient and capable of handling road and rail transport efficiently;

(16)    port operators liaise closely with and enter into commercial arrangements with stakeholders to improve their services and capabilities. For example, NSW Ports made a funding contribution to Patrick Terminals to improve the on-dock rail facility at Port Botany;

(17)    port operators can encourage stevedores and others involved in the supply chain to keep their costs competitive by providing effective land and facilities for the provision of their services at a competitive price by the port;

(18)    port operators also liaise closely with the Commonwealth and State governments to enhance infrastructure funding to the port and infrastructure connections servicing the port;

(19)    having common ownership of different capacities (such as at the Port of Adelaide where the port operator also offers pilotage, mooring, channel maintenance, a container terminal and logistics services) enables ports to bundle services to provide lower costs and increased efficiencies;

(20)    PON proposes a similar structure to XXXX XXXX XXXX XXXX, XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX to attract cargo volumes and shipping lines;

(21)    once a container terminal is operational at the Port of Newcastle it can be anticipated that NSW Ports and the stevedoring companies at Port Botany will review their competitive position to minimise the loss of container volumes to the Port of Newcastle; and

(22)    it is likely that NSW Ports will react most aggressively to the start-up of a proposed container terminal at the Port of Newcastle on pricing and service levels, but to what extent cannot be identified.

603    Mr van Duijn agreed that if the Port of Newcastle could offer the same level of connectivity as Port Botany (in terms of shipping lines’ frequency of calling and coverage of export destinations) then, all other things being equal, exporters for whom transport costs to the Port of Newcastle are cheaper than to Port Botany would ship through the Port of Newcastle. If, however, the Port of Newcastle did not have the same degree of shipping connectivity, exporters whose destinations are not serviced by the shipping lines calling at the Port of Newcastle, would ship via Port Botany.

604    Other than the proposition that the Port of Newcastle’s catchment area would overlap with Port Botany’s catchment area near the common boundary of their catchment areas, Mr van Duijn’s evidence as summarised above is consistent with the other evidence.

605    In the joint report Mr King agreed with, amongst other things, Mr van Duijn’s propositions (14) and (15) above. Propositions (14) and (15) are consistent with my inference that NSW Ports would do what it could to prevent or hinder the functionality and use maximisation of a container terminal at the Port of Newcastle.

606    Apart from this, Mr King gave evidence that:

(1)    the port supply chain includes shipping lines, vessel handling services, stevedores, freight forwarders, land transport providers, logistic services providers and importers/exporters (also called customers);

(2)    the customer is ultimately responsible for the cost of the port supply chain;

(3)    the customer or freight forwarder (if the customer uses one) decides which port to use;

(4)    it is unusual for a shipping line to set the arrival or export port for the containerised cargo it carries unless the shipping line is also acting as the logistic service provider which can include freight forwarding services. Major shipping lines such as Maersk Shipping offer a range of logistic services including customs, inland transport and storage across Australia;

(5)    key factors in the efficiency of the port supply chain include quality, cost, timeliness and reliability of the total supply chain;

(6)    shipping lines frequently claim that the cost of port services is too high and a disincentive to call at a port, but in fact quayside costs (stevedoring and wharfage principally) are a minor component of the overall supply chain cost;

(7)    shipping lines decide which port to call at by reference to cargo moving through the port, cost efficient connectivity to distribution centres for container stuffing and unstuffing, and the shipping line’s existing series of port calls;

(8)    the majority of container shipping services that call at Australian port are made up of a number of shipping lines in a consortia or vessel sharing arrangements; and

(9)    a reduction in wharfage and stevedoring charges at a container terminal at the Port of Newcastle is likely to be the key incentive for ships to cease calling at Port Botany and to start calling at the Port of Newcastle (and is possible if, as proposed, the container terminal at the Port of Newcastle is XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX).

607    Mr King also gave evidence that:

(1)    there is a lot of qualitative evidence that ports use commercial arrangements to attract shipping lines to the port. At present, Port Botany does not do so as it is a monopolistic gateway to NSW and thus does not need to offer commercial arrangements to attract shipping lines to the port; and

(2)    all other things being equal, lower wharfage and stevedoring charges at the Port of Newcastle would be a factor in influencing shipping lines to call at the Port of Newcastle instead of Port Botany. However, the determinative issue is total supply chain costs. While shipping lines only pay the quayside costs part of that supply chain (wharfage, stevedoring and navigation charges) and not the landside costs (road or rail transport) they are sensitive to the total supply chain cost which the importer/exporter ultimately bears.

608    This evidence of Mr King is consistent with the evidence of Mr Carmody and the PON witnesses about wharfage charges being at least relevant to the choice of port by shipping lines, even if the determinative factor is the overall supply chain cost. His evidence about ports materially influencing the choice of port by shipping lines is also consistent with Ms Calfas’s evidence about ports competing in relation to shipping connectivity and the statement of Mr Dent that the negotiability of wharfage charges is relevant to the choice of port by shipping lines.

609    This evidence confirms my view that ports have a material influence over at least some (if not all of) the identified port functionality factors. It also indicates that PON’s expectation of an overlapping contestable catchment area with Port Botany (if a container terminal at the Port of Newcastle is sufficiently functionally equivalent to Port Botany) should not be dismissed as mere speculation.

5.3.8    Port of Tauranga and Port of Auckland

610    There is evidence concerning the consequences of the development of a container terminal at the Port of Tauranga.

611    The Port of Tauranga is the largest container terminal in New Zealand. It handles a large amount of container cargo from the Auckland area, in common with the Port of Auckland. It is located about 200 km south of the Port of Auckland. The container volumes at the Port of Tauranga have almost doubled between 2010 and 2017 from 511,343 TEU to 1,085,987 TEU.

612    In common with the Port of Tauranga, the posited container terminal at the Port of Newcastle involves a start-up, using state of the art automation and technologies.

613    PON submitted that the evidence established that various shipping lines switched from the Port of Auckland to the Port of Tauranga. The evidence is a little less clear than PON submitted. What is apparent, however, is that various shipping lines use the Port of Tauranga including lines that use it as their sole New Zealand port. Further, over time, additional shipping lines began to use the Port of Tauranga. Other evidence includes the following:

(1)    in November 2006, the Port of Tauranga announced that Maersk had decided to concentrate the bulk of its business at the Port of Auckland causing the loss of 4,600 containers per month from the Port of Tauranga;

(2)    in March 2008, the Port of Tauranga announced that Hamburg Sud and Maersk had consolidated their East Coast North American services resulting in the loss of 20,000 containers annually from the Port of Tauranga; and

(3)    in around 2014, the Port of Tauranga temporarily lost the business of the Maersk Southern Star service to the Port of Auckland as part of a consolidation by Maersk. This caused the loss of 10% of the Port of Tauranga’s container volumes. The Maersk Southern Star service, however, subsequently returned to the Port of Tauranga bringing with it an expected 70,000 additional TEUs per year.

614    We also know from the evidence of Mr Dent that ANL (the shipping line) considered that negotiability of wharfage charges by the Port of Tauranga and the Port of Auckland were relevant to the choice of port by shipping lines. This too is consistent with the evidence of Mr van Duijn, Mr King and the PON witnesses.

5.3.9    Consideration

615    The ACCC made a number of propositions that it submitted were supported by the evidence discussed above. I identify those propositions in italics below and my response to them on the basis of the evidence considered thus far.

616    All of the lay evidence on the issue of market definition is consistent and points to a singular conclusion: a container terminal at the Port of Newcastle would compete with the existing container terminal at Port Botany. That was the effect of the evidence given by both the ACCC’s lay witnesses and the lay witnesses called by the NSW Ports Respondents. It is also the position that emerges clearly from the documents produced during the Port Botany and Port Kembla privatisation process, and which is the ultimate conclusion to be drawn from the NSW Ports Respondents’ response to the s 155 Notice.

617    For the reasons given above, if it is assumed that there is a sufficiently functional container terminal at the Port of Newcastle, this is an accurate summary of the lay and industry evidence except to the extent Ms Calfas said that she did not accept that Port Botany could or would compete on price with a container terminal at the Port of Newcastle. I accept that the lay and industry evidence assumes that because a sufficiently functional container terminal at the Port of Newcastle would take customers away from Port Botany, the two are competing in the same market. I consider that assumption reflects the reality that a sufficiently functional container terminal at the Port of Newcastle would transform Port Botany’s existing market for Container Port Services in NSW. As a result, the likely effects of the impugned provisions should be considered in the context of that existing market.

618    To assess the potential competitive effects of the impugned provisions assuming the existence of two separate monopoly markets is ill-adapted for the required purpose because: (a) it assumes a steady state as between two functionality equivalent container terminals when, given the port functionality factors, the relative functionality of the container terminals would be dynamic, (b) as to the level of wharfage charges, it wrongly assumes that Port Botany is not sensitive to the potential loss or gain of marginal volumes of containers, (c) as to the level of wharfage charges, it wrongly assumes that Port Botany is incapable of profitable price discrimination, (d) it is inconsistent with the industry evidence that ports generally enjoy a captive, but also have a contestable, catchment area, and (e) it wrongly assumes, contrary to the evidence of Ms Calfas, the PON witnesses and the industry experts, that ports are incapable of materially influencing the port functionality factors.

619    As discussed above, cogent evidence would be required to support any inference that in providing Container Port Services ports are unable to materially influence port functionality factors. All of the industry witnesses assumed that ports can and do play a part in influencing the port functionality factors. Mr van Duijn and Mr King, for example, specifically identified that ports influence the decisions of shipping lines as to which port to use on the basis of both price and non-price considerations.

620    As to port functionality factor (a) (the container handling capacity of each port), it is apparent that a container port will have control over that factor to a significant extent. Subject to government approval, it is the port that will decide its container handling capacity and when that capacity becomes available.

621    As to port functionality factor (b) (the efficiency of stevedoring services offered by each port), it is difficult to imagine that, in providing Container Port Services by making land and facilities available to stevedores, ports do not use their bargaining power to ensure that the stevedores will provide the most efficient stevedoring services including by way of negotiations about work practices, plant, equipment and facilities. As I have said, the provision of stevedoring services is not a part of Container Port Services. But if, as must be the case, in providing Container Port Services to stevedores, ports materially influence the provision of stevedoring services to increase the use of the port, then that conduct is conduct in the market for Container Port Services.

622    As to port functionality factor (c) (the road and rail connectivity of each port, including land and facilities made available to land transport companies), the same considerations apply as for stevedoring services. Ports make land and facilities available to land transport entities as part of Container Port Services. It is obvious that a port will exercise its bargaining power in doing so to maximise its use by importers/exporters. That also is conduct in the market for Container Port Services.

623    As to port functionality factor (d) (the shipping connectivity of each port), the evidence is clear. Ports can and do materially influence their shipping connectivity on price and non-price factors which the ports control or materially influence.

624    As to port functionality factor (e) (the convenient location of distribution and storage centres), there is also scope for material influence by a port. A port can make port land available for such a facility. A port can maximise the efficiency of any facility by making land and other facilities available to effectively integrate the facility with road and rail and land transport facilities.

625    Apart from the exercise of their bargaining power by being the provider of the land and facilities identified as comprising Container Port Services, it cannot be doubted that Port Botany and the Port of Newcastle are and will be lobbying, advocating and marketing in their own competing interests (the Port of Newcastle to enable development of a container terminal and Port Botany to ensure that the State policy does not change). Further, they are and will be advocating, lobbying and marketing to the same people – the NSW government, NSW public agencies, the Commonwealth government, shipping lines, importers/exporters in NSW, land transport entities, and distribution and logistics entities. The purpose of their advocating, lobbying and marketing is and will be to opposing ends – for PON to facilitate the development and functionality of a container terminal at the Port of Newcastle and for NSW Ports to maintain the State policy under which there is to be no such container terminal until Port Botany and Port Kembla have reached their capacity. If this does not indicate that the appropriate analytical tool for any competition analysis is the existing market for Container Port Services in NSW, then it is difficult to know what would lead to that conclusion.

626    This body of evidence supports the ACCC’s case that there is a market for the supply of container port services in New South Wales and that, at all material times, Port Botany and the Port of Newcastle were suppliers or potential suppliers of Container Port Services in that market. It is also consistent with the ACCC’s allegation that, at all relevant times, the prospect of an increased supply of Container Port Services in that market operated as a competitive constraint on the operator of Port Botany.

627    For the reasons given above, I agree that Port Botany supplies the existing market for Container Port Services in NSW. Otherwise, these propositions are more appropriately dealt with as part of the competition analysis. In particular, it remains to be seen if PON as at May 2013/May 2014 or today’s date presented or presents a credible threat of entering the existing market for Container Port Services in NSW.

628    Given the consistency of views amongst the lay witnesses and the objective contemporaneous documentary record, the Court would not lightly prefer the views of professional expert economists to those of the actual participants in the relevant industry. To the contrary, in evaluating the expert evidence, the Court should accept that expert evidence only to the extent that it is consistent with the lay evidence.

629    Apart from what I have said above, I prefer to evaluate the economic evidence about market identification before drawing any firm conclusions in this regard.

630    PON also made a number of propositions that it submitted were supported by the evidence discussed above. I identify those propositions in italics below and my response to them on the basis of the evidence considered thus far.

631    Port Botany has since well before 2012 serviced substantially all of the containers destined for or originating from destinations in New South Wales.

632    I agree that the evidence indicates that the vast majority of containers destined for or originating from destinations in NSW are handled through Port Botany.

633    NSW Ports has a team, a core responsibility of which is to design and implement plans to capture and retain contestable cargo.

634    I agree, but the CCCP did not consider the Port of Newcastle in the context of contestable container volumes.

635    The volumes of containers that are presently contestable are a small proportion of Port Botany’s total volumes.

636    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

637    Nevertheless, in order to capture and retain cargo that is contestable as between Port Botany and the Port of Melbourne or Port of Brisbane, NSW Ports has implemented a number of marketing and pricing strategies.

638    I agree.

639    XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX XXXX.

640    I agree, subject to the fact that the prices at the Port of Brisbane are also relevant to Port Botany’s price of export containers.

641    If a container terminal were constructed at Port of Newcastle, it would handle a significant number of containers that would otherwise have been handled at Port Botany.

642    This is not in dispute provided the hypothesised container terminal at the Port of Newcastle is sufficiently functional.

643    For the shippers of those containers, using Port of Newcastle will be preferable, either on the basis of price or non-price factors, to using Port Botany.

644    I agree that if there is a sufficiently functional container terminal at the Port of Newcastle, it will have its own captive catchment area. This is not in dispute. If there is a sufficiently functional container terminal at the Port of Newcastle, the dispute is whether there will be a contestable catchment area between Port Botany and the Port of Newcastle.

645    The number and identity of shippers [importers/exporters] of containers that use Port of Newcastle instead of Port Botany will not be constant over time.

646    I agree.

647    There would be shippers [importers/exporters] of a non-trivial volume of containers for whom the land transport costs of using Port Botany were roughly similar to those of using Port of Newcastle.

648    The industry evidence does not establish this proposition. Mr van Duijn identified one area of overlap in his catchment areas for Port Botany and the Port of Newcastle based on the cost differential between land transport to and from those ports from the area in question. However, Mr van Duijn did not identify the estimated volume of containers being shipped to or from that contestable area. Ms Calfas could not identify any area which would be contestable as between Port Botany and the Port of Newcastle based on what she considered to be the determinative factor of the total supply chain cost, which is dominated by land transport cost. As noted, this is inconsistent with the evidence of NSW Ports’ response to the s 155 notice which supports the conclusion that there will be importers/exporters of a non-trivial volume of containers for which the land transport costs of using Port Botany would be roughly similar to those of using Port of Newcastle.

649    In a world without the Compensation Provisions, in order to reduce the loss of custom from Port Botany to Port of Newcastle, NSW Ports would engage in a competitive response, at least aiming to retain or recapture the containers shipped by those shippers described in the sub-paragraph above.

650    This proposition involves some suppressed premises. One, that there is a sufficiently functional container terminal at the Port of Newcastle. Two, that in a world with the compensation provisions, NSW Ports would not engage in the same competitive response. As explained further below, what can be safely said on the evidence is that, with or without the compensation provisions, if there is a sufficiently functional container terminal at the Port of Newcastle it is likely that NSW Ports would do whatever it could to retain or recapture containers which would have been handled through Port Botany and instead are handled through the Port of Newcastle.

651    Each of the State, NSW Ports and PON consider that a container terminal at Port of Newcastle would compete with that at Port Botany.

652    Leaving aside the positions of the State and NSW Ports in this proceeding, this accurately reflects the internal deliberations of the State and NSW Ports assuming that a sufficiently functional container terminal is operating at the Port of Newcastle.

5.4    Economists

653    I summarise below the key propositions of each of the economists relevant to the issue of market definition. The summary below includes quotes and extracts from the reports of the economists. I deal separately with the economists’ joint report and oral evidence, which was given in concurrent session. The summary below does not represent my findings.

5.4.1    Summary of Mr Smith’s evidence about the market

5.4.1.1    General

654    Consideration of the relevant market involves the assessment of the substitutability between different products or services. Market definition is focused on marginal customers that are most likely to switch between two alternative service providers in response to a relative price change.

655    Market definition should only be a first step, and is a tool to be used to assist in the ultimate assessment of the likely effect of the conduct in question on competition. Competition is a dynamic process of rivalry, whereby firms attempt to win business from one another by constantly improving their offerings to customers – such as by offering lower prices, better quality, or more convenient services.

656    The process of defining a relevant market begins by considering one or more narrow candidate markets, typically centred around one or more of the products/services and the geographic areas of operation of the parties and asking whether, if a hypothetical monopolist controlled all of the products/services in the candidate market, it would be able to impose a small, but significant, non-transitory (i.e. permanent) increase in price of the order of 5% to 10% (a SSNIP). If such a hypothetical price increase were unprofitable, then this would indicate that the market should be widened to include products or geographic areas previously outside of the candidate market and to which the switching was occurring. The test is then repeated iteratively until a price increase would actually be profitable, at which point the products and geographic areas within the candidate market will have been found to be a relevant market.

657    Demand side substitution refers to the willingness and ability of buyers to switch to alternative products from those in candidate market in response to a change in relative prices.

658    Supply side substitution refers to the ability of suppliers of products outside of the candidate market to quickly and easily begin supplying products that compete with those in the candidate market in response to a price increase.

5.4.1.2    Ports

659    Container port operations comprise only one element of a broader container freight supply chain. There are many other participants in this process that help transport imports and exports in and out of Australia. These include shipping lines, cargo owners (i.e. importers and exporters), container stevedores, road and rail transport operators, related infrastructure operators such as intermodal terminal or empty container parks, as well as governments.

660    Port operators can and, in some cases, do supply stevedoring services themselves.

661    The catchment areas served by ports are determined not only by the location of exporters and the end-destination of imports, but also by the willingness of shipping vessels to call at a port. A port will only attract shipping vessels if there is a suitable quantity of imports and exports that can be served by the port. Conversely, importers and exporters will only be willing to use a port if there is a regular service of suitably sized vessels at a price that makes it worthwhile for those importers and exporters to use the port.

662    The container terminal operator can influence the size of the catchment area served by the port. Given the comparatively large size of fixed costs (loading and unloading vessels) and the small size of incremental costs (transport by truck or train), if a container terminal operator were to cut the charges for loading and unloading vessels, this could greatly expand the port’s catchment area, and thereby ensure that it attracts importers, exporters and shipping lines.

663    Ports in different States have been unable or unwilling to compete for substantial volumes of containers outside the State in which the port is located.

664    Port services for cargo other than containers is not a good substitute for container port services.

665    Container ports are likely to compete with one another on the basis of their location, as well as the price and quality of their services, where quality may include considerations of the speed of loading and unloading container ships, and the landside connections for the transport of containers.

666    The compensation provisions only reimburse NSW Ports for wharfage charges not stevedoring service charges.

5.4.1.3    Stevedores

667    Container stevedores are responsible for lifting containers on and off ships at ports, as well as receiving containers from and delivering containers to land transport operators.

668    Stevedores are customers of port operators: they pay fees to port operators in return for the use of land and facilities at these ports. Stevedoring can therefore be said to be “downstream” of container port services provided by the ports.

669    There are five major container stevedoring companies currently active in Australia: DP World, Flinders Adelaide Container Terminal, Hutchison, Patrick and Victoria International Container Terminal.

670    NSW Ports operates as a port landlord and therefore does not supply its own stevedoring services, but instead charges fees to three third-party stevedore companies, DP World, Hutchison and Patrick, who are responsible for equipment, securing customers, and loading and unloading containers within their terminal at Port Botany.

5.4.1.4    Port Botany and the Port of Newcastle

671    The relevant geographic market in which Port Botany competes is NSW.

672    The Port of Newcastle’s natural catchment area comprises those geographic areas where the road or rail freight cost associated with transporting containers between it and each of these areas is lower than the total cost of transporting containers between those areas and any other container port.

673    Two consultants to PON (Deloitte Access Economics and AlphaBeta) have identified the Port of Newcastle’s natural catchment area for container volumes as encompassing northern and western parts of NSW which are currently serviced by Port Botany. As a result, there would be competition between Port Botany and the Port of Newcastle for container volumes to and from these areas.

674    While capacity constraints are not often considered at the stage of market definition, the geographic area the Port of Newcastle could realistically serve would be constrained by its available capacity which would be likely to grow over time.

675    The Port of Newcastle’s natural catchment area does not include areas for which it could compete by cutting freight or other costs incurred by customers. For example, it is proposed that the Port of Newcastle will accommodate 1,500 m long trains in stage 1 (and 1,800 m long in stage 2) while Port Botany can only accept 640 m long trains. As a result, there is opportunity for lower rail freight costs at the Port of Newcastle compared to Port Botany.

676    The fact that the incremental cost of land transport is a small percentage of the total fixed fees set at a container port (wharfage and stevedoring fees) implies that the geographic area that the Port of Newcastle could contest would be sensitive to changes in these fixed fees. The more the Port of Newcastle reduces its fixed fees, the greater the area for which it will become the lower-cost port for importers/exporters (in terms of truck travel time). A 50% fee reduction would see the Port of Newcastle become the lower-cost port for importers/exporters for certain areas of northern and western Sydney.

677    Figure 4 below shows the areas where the Port of Newcastle will become the lower-cost port for importers/exporters depending on the reduction in its fixed fees.

678    SA3, as referred to in the title to this figure, means Statistical Area Level 3 (SA3) zones, which are geographical areas used by the Australian Bureau of Statistics (ABS) and other agencies that typically have a population of between 30,000 and 200,000 people.

679    As the Port of Newcastle gains efficiencies it will be better able to compete for marginal volumes located further away from it.

680    Further rail infrastructure could also impact the likely geographic scope of customers for which the Port of Newcastle could compete. The inland rail is likely to reduce the cost of transporting containers between some areas and the Port of Newcastle including imports destined for northern and western Sydney.

5.4.1.5    Reply report

681    Dr Pleatsikas claims to have conducted a SSNIP test and determined that Port Botany could profitably increase prices by 10%. However, he has assumed that demand is inelastic as a result of which a monopolist can profitably raise prices. He contends that demand is inelastic because the value of the cargo is likely to be higher than the total container transport cost. Specifically, Mr Smith said:

while that assumption might be correct in regard to demand for container transportation via any port (i.e. demand elasticity at a “market” level), that assumption might not be correct for shippers that are faced with a price rise for container transportation that goes via a specific port, if there were other, cheaper, ports available to take the same container to the same ultimate destination (i.e. demand elasticity at a “firm” level). If PON were to develop a container terminal, then the choice facing shippers would not be whether or not to continue transporting containers at all, if all wharfage fees were to increase by 5 or 10% (this demand might well be inelastic), but rather whether to transport containers via PB [Port Botany], or to transport containers via PON, if PON were to increase wharfage fees by 5 or 10% relative to the wharfage fees charged by PB (this demand is less likely to be inelastic). In particular shippers that face this choice across large, repeat volumes of containers are likely to switch between alternative ports in response to small relative price changes, even though they would not be willing to switch entirely away from using container transportation if prices at all ports were to rise.

682    Further, according to Mr Smith:

Dr Pleatsikas concludes that PB is a monopolist over the volumes that it currently serves. That appears to be the case currently, in that PB handles 96% of containers that derive from, or are destined to, any location throughout NSW – accordingly PB is a (near) monopolist over all containers derived from or destined to NSW. But that does not mean that it is sensible to conclude that PB would remain a monopolist, if PON were to enter and develop a container terminal, and take away containers that are currently served by PB.

683    Assuming that the Port of Newcastle has entered the market, Dr Pleatsikas asserts that both the Port of Newcastle and Port Botany could profitably increase prices. This approach does not cover all scenarios or all elements of competition. As to all scenarios:

(1)    development of a container terminal at the Port of Newcastle would occur over time, in stages;

(2)    this staged development would change the size and location of the geographic area from within which an importer/exporter could feasibly switch from Port Botany to the Port of Newcastle in response to small changes in wharfage fees by either port;

(3)    developments in infrastructure outside of the ports and resulting changes in the incremental costs of land transport to each port may change the size and location of the geographic area from within which an importer/exporter could feasibly switch between Port Botany and the Port of Newcastle in response to small changes in wharfage fees by either port; and

(4)    if the stevedores at one of the ports reduced fees that may change the size and location of the geographic area from within which an importer/exporter could feasibly switch between Port Botany and the Port of Newcastle.

684    In contrast, Dr Pleatsikas’s approach involves continually redefining separate geographic markets to cover all containers that would actually be served by Port Botany and the Port of Newcastle at each point in time, excluding an assessment of the continuous switching that is likely to take place between the two ports over a long period of time.

685    As to all elements of competition:

(1)    Dr Pleatsikas’s analysis excludes consideration of entry, expansion or improvement in quality by the Port of Newcastle. For example:

(a)    if the Port of Newcastle enters as a high cost, lower quality container terminal, customers from its catchment area may not be attracted to use it or Port Botany might be able to entice such customers who do switch to the Port of Newcastle to switch back again; and

(b)    if the Port of Newcastle enters as a low cost, high quality container terminal then customers from its catchment area may engage in a one off switch but it is illogical to include (a) as part of the competitive process and to exclude (b) from that process; and

(2)    ignoring competitive acts of entry and expansion, merely because they might cause a substantial “one-way” shift in demand towards the new entrant would risk excluding some of the most important, and most valuable elements of competition.

5.4.2    Summary of Dr Pleatsikas’s evidence about the market

5.4.2.1    General

686    For competition purposes, the market definition task delineates an area of close competition relevant to the firms, products and conduct at issue. Substitution (specifically, close substitutes), in either demand and/or supply, is what defines that area of close competition.

687    Many competition authorities (including the ACCC) utilise the “hypothetical monopolist test” that employs the so-called SSNIP method (as noted, the small but significant non-transitory increase in price) to identify close substitutes.

688    In this test it is not sufficient that some customers might switch in response to a SSNIP. The issue is whether a sufficient number of customers would switch to make the SSNIP unprofitable. In terms of geographic markets, accordingly:

if a hypothetical monopolist of Product A at some defined geographic location (location X) attempted to implement a SSNIP, but a sufficient number of consumers, in response, would switch to purchasing the same product from suppliers at a different geographic location (location Y) that the SSNIP by the hypothetical monopolist at location X would be unprofitable to that hypothetical monopolist, then the producers locations X and Y likely compete in the same relevant geographic market. If such a price increase by a hypothetical monopolist at location X would be profitable (because an insufficient number of buyers would switch to suppliers located at other geographic locations), then the producers at locations X and Y would compete in separate relevant geographic markets.

5.4.2.2    Port Botany, Port Kembla and the Port of Newcastle

689    In terms of the product dimension of the market, Port Botany, Port Kembla and the Port of Newcastle provide or hope to provide significant import/export services for a variety of cargo types, not just container cargos.

690    Port operators are incentivised to invest in port infrastructure to increase the efficiency and attractiveness of the port because of economies of scope. Economies of scope refer to the situation where unit costs decline when the production of different goods and/or services are produced in combination. That is, the existence of economies of scope indicates that it is more efficient to produce the combination of goods and/or services than to produce them separately.

691    The existence of significant economies of scope across several products, as in this case, often requires that relevant product markets be defined broadly to include many or all of those products.

692    For the ports relevant to this case, there are likely significant economies of scope in providing ports’ operator/landlord services to a variety of cargo operations at a port.

693    The relevant functional dimension of the market is the port/operator landlord function.

694    Whether the relevant product market is that identified by the ACCC (Container Port Services) or more broadly (port services for all cargo, as noted above), once one properly considers the relevant test for defining the relevant geographic market, according to economic theory, principles and practice, the sound conclusion is that Ports Kembla/Botany do not compete in the same market as the Port of Newcastle. This is confirmed by the hypothetical monopolist test and other economic indicators.

695    A SSNIP imposed by a monopolist at Ports Kembla/Botany would not be rendered unprofitable by substitution that increased the demand for the port operator/landlord function at the Port of Newcastle (or any other port). By way of context:

(1)    according to economic theory, the derived demand for an intermediate product that is a small fraction of the total cost of the product for which that intermediate product is an input is likely to be inelastic and probably highly inelastic. The reason for inelastic demand in such a case is the fact that buyers of the end product (such as the transportation of a container from origin to destination) are unlikely to react to very small changes in prices. When an input (such as a wharfage charge) accounts for a small fraction of the costs to provide an end product, a price increase in that input will cause only a very small increase in the price of the end product; and

(2)    the port operator/landlord per container wharfage charge is a small fraction of the cost of the applicable downstream product (either a small fraction of the end-to-end transport and related processing cost of a container or an even smaller fraction of the value of the products contained in that container). Consequently, the elasticity of demand for wharfage charges is very likely to be inelastic and probably highly inelastic (and the elasticity of demand for the end-to-end costs for moving a container is likely inelastic as well, as the end-to-end costs are a relatively small fraction of the value of the products in the container).

696    In terms of the application of the SSNIP:

(1)    currently, Port Botany assesses a per TEU wharfage charge of $141.50 for an imported full container, a per TEU charge of $96.23 for an exported full container, a per TEU charge of $55.24 for a trans-shipped container and a per TEU charge of $14.72 for an empty container (whether imported or exported). The blended rate for all containers is thus about $100 per TEU;

(2)    a 5%-10% SSNIP would be $5-$10 per TEU;

(3)    assume the total cost of moving a loaded container from or to China is $2000. This figure is derived from Mr Balchin’s assessment and, if anything, is an underestimate of the total cost as it excludes the land transport costs to transport the container from its foreign origin to the foreign port and port costs at the foreign port. A SSNIP by a (hypothetical or actual) monopolist of port operator/landlord services at Port Botany would represent a fraction of one percent of total container transport/processing costs (i.e, $5-$10 out of approximately $2000 or about 0.25 to 0.5 percent);

(4)    a SSNIP by the port operator/landlord at Ports Botany/Kembla would be profitable on this basis:

(a)    assume only moderately inelastic demand for container shipping services (or port operator/landlord wharfage charges) (e.g., -0.5);

(b)    further assume that Port Botany handles about 2.64 million TEUs;

(c)    a SSNIP of 10% would increase port operator/landlord charges by about $10 (from $100 to $110) and reduce container traffic at Port Botany by 0.25% (a 0.5 % price increase of the overall transport cost of $2000 multiplied by 0.5, the assumed elasticity);

(d)    this would result in containers handled by Port Botany being reduced by 6,600 (i.e. a reduction from 2.64 million to 2,633,400);

(e)    consequently, the lost revenue on the 6,600 containers that no longer are handled would be $660,000 (6,600 containers multiplied by $100); and

(f)    by contrast, the revenue increase on the remaining containers is more than $26 million (i.e., 2,633,400 containers multiplied by an additional $10 per container as a result of the SSNIP); and

(5)    in economic terms there is thus a relevant geographic market for port operator/landlord services at Port Botany and a separate relevant geographic market for port operator/landlord services at the Port of Newcastle.

697    In respect of the assumptions identified in (4) above Dr Pleatsikas noted:

(1)    assumption (a) involves only moderate inelasticity and is therefore a conservative assumption in favour of the ACCC and PON as it results in a more expansive geographic market;

(2)    assumption (b) is consistent with the evidence of Ms Calfas and Mr van Duijn concerning the TEUs per year handled by Port Botany;

(3)    as noted, the port operator/landlord charges of $100 per TEU in (c) represent the blended rate for all containers handled by Port Botany; and

(4)    the calculation giving 6,600 in (d) is 2.64 million containers multiplied by the reduction in container traffic of 0.25%.

698    Further, the same analysis would result in the same outcomes even if it is assumed that the demand was highly elastic, which provides further economic support for the view that Ports Botany/Kembla exist in a separate geographic market from the Port of Newcastle. I note in this regard that in his other evidence Dr Pleatsikas assumed a moderately high elasticity of demand of 4 and a high elasticity of demand of 8. I consider it useful to illustrate the same calculations using these different assumptions of elasticity of demand as they show the SSNIP test consistently results in a conclusion of separate markets.

699    Assumed elasticity of demand of 4:

(a)    assume only moderately high elastic demand for container shipping services (or port operator/landlord wharfage charges) (e.g. 4);

(b)    further assume that Port Botany handles about 2.64 million TEUs;

(c)    a SSNIP of 10% would increase port operator/landlord charges by about $10 (from $100 to $110) and reduce container traffic at Port Botany by 2% (a 0.5 % price increase of the overall transport cost of $2000 multiplied by 4, the assumed elasticity);

(d)    this would result in containers handled by Port Botany being reduced by 52,800 (i.e. a reduction from 2.64 million to 2,587,200);

(e)    consequently, the lost revenue on the 52,800 containers that no longer are handled would be $5,280,000 (52,800 containers multiplied by $100); and

(f)    by contrast, the revenue increase on the remaining containers is more than $25.5 million (i.e., 2,587,200 containers multiplied by an additional $10 per container as a result of the SSNIP).

700    Assumed elasticity of demand of 8:

(a)    assume highly elastic demand for container shipping services (or port operator/landlord wharfage charges) (e.g. 8);

(b)    further assume that Port Botany handles about 2.64 million TEUs;

(c)    a SSNIP of 10% would increase port operator/landlord charges by about $10 (from $100 to $110) and reduce container traffic at Port Botany by 4% (a 0.5 % price increase of the overall transport cost of $2000 multiplied by 8, the assumed elasticity);

(d)    this would result in containers handled by Port Botany being reduced by 105,600 (i.e. a reduction from 2.64 million to 2,534,400);

(e)    consequently, the lost revenue on the 105,600 containers that no longer are handled would be $10,560,000 (105,600 containers multiplied by $100); and

(f)    by contrast, the revenue increase on the remaining containers is more than $25 million (i.e., 2,534,400 containers multiplied by an additional $10 per container as a result of the SSNIP).

701    I note here that Dr Pleatsikas’s reference in (a) of each calculation to “(or port operator/landlord wharfage charges)” may mislead the reader. The SSNIP is applied to the port operator/landlord wharfage charges. The inelasticity or elasticity of demand, however, concerns the demand for container shipping services at the overall cost of $2000 of which port operator/landlord wharfage charges are one component.

702    To return to the summary of Dr Pleatsikas’s evidence, while the “catchment area” analysis is not the appropriate tool for defining the geographic market boundaries of each port that analysis provides insight as to why the hypothetical monopolist test provides such strong results. In summary:

(1)    the analyses used to generate “catchment areas” bear no necessary resemblance to the methods used to define relevant geographic market boundaries. Relevant market boundaries are defined with respect to substitution in response to price changes, whereas “catchment areas are defined according to cost minimisation (in this case cost minimisation of transportation charges);

(2)    the boundaries of the catchment areas proposed by the ACCC and PON also depend on transport services which are outside of the product and functional market of Container Port Services;

(3)    however, the concept of a “natural catchment area” tends to validate the view that, for the relevant product and functional markets in this case, the Port of Newcastle and Ports Botany/Kembla compete in separate markets;

(4)    analysis shows that a posited SSNIP in wharfage charge would have no significant influence for port users (importers or exporters) over which port to use given the magnitude of the asserted transportation cost advantages in the natural catchment analysis (that is, the transportation cost advantages as asserted by PON as part of its analysis of its business case, specifically in the Lycopodium report of August 2018);

(5)    further, on the “natural catchment” analysis, neither port could influence substitution through competition because of the small magnitude of the charges for Container Port Services in relation to the large asserted transport cost differentials;

(6)    on this approach subsequent switching would not occur unless there was a significant change in transport costs – a cost over which the port operators/landlords have (and would have) no significant influence; and

(7)    the inevitable conclusion from this “natural catchment area” theory is that the operator/landlord at Ports Botany/Kembla, on the one hand, and the operator/landlord at the Port of Newcastle, on the other hand, do not compete in the same relevant geographic market.

703    Further, the lack of competition for Port Botany in its geographic market of NSW is the economic rationale for the regulatory regime that the State has imposed on NSW Ports. In summary: