Introduction

In June 2013, the State Government of New South Wales (NSW Government) announced as part of its state budget that it would privatise the Port of Newcastle (Port Newcastle). Port Newcastle is the economic and trade centre for the resource rich Hunter Valley and for much of the north and northwest of New South Wales.

Port Newcastle is the world’s largest coal export port and Australia’s third largest port by total throughput in mass tonnes. Australia is the world’s largest coal exporter and Port Newcastle is responsible for some 70% of Australia’s total coal exports. During the 2011/12 financial year, Port Newcastle achieved an annual coal export volume of some 121.9 million tonnes. Port Newcastle also currently handles grain, alumina, fuel, mineral concentrate, fertiliser and steel, although coal exports represent around 95% of the total port throughput in mass tonnes.

Political context

The privatisation of Port Newcastle was announced as part of the NSW Government’s 2013-2014 state budget. The privatisation of Port Newcastle is the next part of the Liberal-National coalition State Government’s multi-million dollar privatisation programme in New South Wales. It follows the successful privatisations of Port Botany and Port Kembla in April 2013.

 

 

As with many previous NSW privatisations, the privatisation of the Port is controversial and has generated significant media comment. Half of the sale proceeds are intended to be allocated to a range of infrastructure projects for the city of Newcastle, potentially including a light rail project.

Timetable

As at July 2013, the proposed transaction timetable has not yet been announced. The first public step is expected to involve the release of a Request for Expressions of Interest by the NSW Government. No Information Memorandum has yet been released.

The NSW Government will commission a scoping study before the transaction process begins. A financial adviser has yet to be appointed. Morgan Stanley was previously appointed as financial advisor for the Port Botany and Port Kembla privatisations.

Transaction Structure

Port Newcastle is currently operated by Newcastle Port Corporation (NPC), a State-owned statutory corporation and a major land owner in the port. The privatisation is most likely to follow the privatisation structures recently applied to similar infrastructure privatisations in NSW and throughout Australia.

In relation to the Port Botany and Port Kembla privatisations in 2013, the NSW Government enacted implementing legislation in the form of the Ports Assets (Authorised Transactions) Act 2012. On 1 July 2013, the Ports Assets (Authorised Transactions) Amendment Act 2013 received assent and extended this Act to include Port Newcastle.
The effect of this legislation is that the same transaction structure that applied to the Port Botany and Port Kembla privatisations will likely also apply to the Port Newcastle privatisation:

  • First, the relevant State assets to be privatised will be transferred by the NSW Government into the Port Assets Ministerial Holding Corporation (PAMHC), a State entity established by that Act to hold NSW port assets to be leased to the private sector.
  • Second, a Project Company will be created to enter into a 99 year lease with PAMHC. The lease will provide for the lease of the port, associated port land and other port assets. Freehold title will remain with PAMHC. Some employees of NPC will transfer to the new Project Company, supported by various Government commitments intended to preserve employee entitlements. The NSW Government will retain step-in rights and the ability to terminate the lease if the Project Company is in breach of key obligations
  • Third, the lease will be supplemented by a concession agreement giving the Project Company the right to operate and receive the economic benefit of the relevant Port Newcastle assets, but imposing a range of performance obligations. Existing key contracts will be assigned from NPC to the Project Company

The privatisation would subsequently occur via the sale of 100 per cent of the shares in the Project Company by the NSW Government to an investor consortium. In this manner, investors will be offered a pre-packaged deal without any involvement in the negotiation of the 99 year lease.

This transaction structure is illustrated in the following simplified diagram:

Click here to see diagram

Sale price

The NSW Government is budgeting to receive at least AUD 700 million from the sale of the shares in the Project Company. The privatisations of Port Botany and Port Kembla by the NSW Government achieved sale revenue of AUD 5.07 billion, which the NSW Government indicated was some 25 times the annual earnings from those ports. The budgeted sales revenue for those privatisations was AUD 3 billion.

Preliminary issues

A number of issues raised by the proposed privatisation are briefly summarised below, including:

  • the extent to which any regulatory clearances may be required by bidders;
  • the manner in which NSW regulation of port charges will be maintained;
  • the extent of any Commonwealth regulation of port charges; and
  • the impact of the Hunter Valley Coal Chain operations on the operations of the port; and
  • a number of unique features of Port Newcastle that will need to be considered in due diligence.

Regulatory clearances for bidders

Key regulatory clearances required by bidders may include foreign investment approvals and competition clearances. Foreign investment approvals are straightforward and rarely withheld, but are a necessary formality. Competition clearances may be important if one of the consortium parties has existing port operations in Australia, is a potential or actual user of Port Newcastle, or has a relevant ownership association with any such person.

The Australian Competition and Consumer Commission (ACCC) may be concerned if the acquisition of shares in the Project Company could result in a substantial lessening of competition in any market in Australia. Concerns could arise, for example, if one of the consortium parties was a potential or actual acquirer of services at the port. In such circumstances, the ACCC may be concerned at the potential for a vertically integrated port controller to discriminate in favour of its own downstream port operations.

However, the inclusion of a Port Newcastle user or associate in a bidding consortium is not necessarily fatal to any ACCC clearance. The ACCC’s reaction would turn on the circumstances of the case. The Port Newcastle user or associate could have an immaterial shareholding or role that gave it no practical influence. It may also be possible to provide a voluntary undertaking to the ACCC to seek to address any competition concerns. For example, an undertaking could be provided that competitors to the relevant Port Newcastle user or associate would be given access to the Port Newcastle on a non-discriminatory basis.

If competition issues were identified, the strategy and timing for any approach to the ACCC would need to be carefully considered. Generally, the ACCC is not willing to provide clearance without undertaking public market inquiries. If confidentiality issues precluded inquiries prior to bid submission, the bid may need to be made conditional on any ACCC clearance.

Importantly, as far as we are aware, no parties bidding for the Port Botany and Port Kembla assets considered it necessary to seek informal clearance from the ACCC for their respective proposed acquisitions.

State-based regulation of port charges

Based on the experience with Port Botany and Port Kembla, the NSW Government will wish to retain price oversight powers and monitor prices charged at Port Newcastle by the private sector lessee. Consistent with principles adopted by the Council of Australian Governments, commercial outcomes will be promoted where markets are competitive, but price monitoring will be implemented where regulatory oversight is required.

Historically, under the Ports and Maritime Administration Act 1995 (NSW) (PMAA), the NPC (as major land owner and operator of Port Newcastle) was required to obtain NSW Ministerial approval to set certain port charges. The regulated charges included navigation services, pilotage, port cargo access, site occupation and wharfage. The unregulated charges included charges for such matters as rail access, ship utilities, port security, and ancillary services. In this manner, most of the key port charges were regulated.
As part of the Port Botany and Port Kembla privatisations, the PMAA was amended to implement a price monitoring regime for the key NSW ports, including Port Newcastle. The new regime applies to both port corporations and private lessees. As part of the amendments, the requirement for Ministerial consent for certain charges was removed, hence the Minister now retains direct price setting powers only for the port cargo access charge. A new port infrastructure charge was also permitted to be levied in order to fund investment in port infrastructure projects.

Under the new regime, the private lessee will need to give notice of any proposed changes to service charges and provide the rationale for how the increase is calculated and why the increase is needed. The port lessee will also need to provide an annual report of charges to the NSW Minister. The NSW Minister will have the power to require information to be supplied to the NSW Government relating to port charges. If necessary, the NSW Minister would have the ability to refer any inappropriate pricing behaviour by the port lessee to the NSW Government’s independent pricing watchdog, the Independent Pricing and Regulatory Tribunal (IPART).

The Minister also has the ability under the PMAA to promulgate regulations to promote the economically efficient operation of, use of and investment in land-based port facilities and port-related supply chain facilities, including Port Newcastle. However, the Minister must not use those regulations to regulate the fixing or collection of port charges at Port Newcastle

Commonwealth-based regulation of port charges

It remains open for any third party to seek declaration by the Commonwealth Treasurer of aspects of Port Newcastle operations under the national infrastructure access regime in Part IIIA of the Competition and Consumer Act 2010 (Cth). Given Port Newcastle is of national significance, the key issue would be whether increased access would increase competition in at least one market. This may be relatively straightforward to establish in some circumstances.

If declaration occurred, the relevant terms and conditions of access (including pricing) could become subject to ACCC arbitration. Essentially, if a dispute over prices occurred, the access seeker could seek a binding determination from the ACCC. In this matter, port charges would become subject to regulation by the ACCC.

To date, Part IIIA has been rarely applied and has been accompanied by significant delays and extensive litigation where it has been applied. However, the Productivity Commission has recently released a draft report that recommends the streamlining of aspects of Part IIIA. Recent amendments to Part IIIA may also make it easier to apply in practice than has historically been the case. As yet, Part IIIA has not been applied to port assets in Australia, although State-based access regimes do exist in Queensland and South Australia.

To avoid the application of Part IIIA, it is possible for the NSW Government to similarly develop a State-based access regime and then seek to have this formally “certified”. Two examples of such an approach in relation to ports in Australia include the Dalrymple Bay Coal Terminal in Queensland, and the South Australian Ports Access regime. Both regimes provide for oversight by the relevant State regulator. However, development of a regime for Port Newcastle and subsequent certification may take significant time, hence this approach was not adopted by the NSW Government in the context of the privatisation of Port Botany and Port Kembla.

Hunter Valley Coal Chain

The Hunter Valley ‘coal chain’ (HVCC) is recognised as the largest coal export operation in the world. The logistics supply chain consists of some 35 coal mines owned by 11 coal producers. The coal is loaded onto trains at more than 31 load points and is hauled for distances of up to 380 kilometres to three port coal export terminals located at Port Newcastle. It was estimated in 2010 that the coal passing through the coal chain equated to around $9 billion of Australian export earnings per annum.

The operator of Port Newcastle will be required to work with the coal producers and service providers through the Hunter Valley Coal Chain Co-ordinator (HVCCC) in relation to the transport of coal from mine to ship. The HVCCC is tasked with day-to-day planning and scheduling of the logistics chain to maximise throughput volumes, minimise costs, and to ensure long-term capacity alignment.

At the Port itself, the HVCC operations result in the management and loading of some 1400 vessels per annum. Capacity Framework Arrangements (CFA) at the export coal loading terminals at the Port of Newcastle were formally authorised by the ACCC in December 2009, with the aim of improving overall supply chain performance and reducing ship queues forming off the coast of Newcastle. The CFA are a complex set of arrangements that require a number of parties to work together to ensure the HVCC operates efficiently and effectively.

The CFA provide, for example, for:

  • nomination and allocation procedures for coal loading capacity at Port Newcastle;
  • expansion arrangements at Port Newcastle to facilitate usage of terminal capacity, including circumstances in which terminal operators may impose an industry levy to fund capacity expansions
  • the ‘compression’ and ‘decompression’ of certain capacity allocations in circumstances where there is a delay or shortfall in any expansion of the terminals at Port Newcastle; and
  • principles to facilitate the alignment of commercial contracts between service providers across the coal chain.

Unique opportunities and risks

Any investor into Port Newcastle will need an understanding of the upside and downside risks associated with the various cash flows generated by the Port. Port Newcastle does have some unique features relative to other ports.

We understand that some of the most significant revenue cash flows for Port Newcastle are those arising from:

  • navigational services;
  • pilotage services and the harbourmaster function; and
  • wharfage/berth occupancy charges, although some wharfs are privately operated.

These revenue cash flows are affected by port volumes and hence are constrained by the capacity of the Port. Capacity expansions at the Port will increase cash flows. A number of current and proposed developments at the Port therefore provide potential revenue upside. Conversely, events that reduce the efficiency of Port operations will reduce cash flows, including shipping accidents or industrial action, creating inherent operational risks.

Coal is currently by far the Port Newcastle’s largest trade commodity, representing around 95% of the total port throughput in mass tonnes. Roughly half of this coal is currently exported to Japan. A relevant consideration for potential investors will be the coal sector’s long-term outlook and the extent to which this may affect shipping movements over the proposed long-term lease of the Port. The heavy weighting of the Port to coal export may give rise to unique diversification risks.

A range of other issues will need to be considered during due diligence, including other features unique to Port Newcastle. For example, land at the Port has historically had heavy industrial use, hence an environmental audit may be required.