Recent developments at the Port of Newcastle and Port of Melbourne may hold important lessons for the regulatory strategies of port owners, users and potential investors in privatised Australian ports
What has happened?
- Two recent outcomes associated with the access regime in Part IIIA of the Competition and Consumer Act (CCA) have the potential to influence the regulatory risks leading up to port privatisations – including at the Port of Melbourne.
- On 30 July, the National Competition Council (NCC) issued a draft decision recommending that the Commonwealth Treasurer not declare certain channel navigational services at the recently privatised Port of Newcastle. It is the first time that the NCC has interpreted a number of the relevant statutory criteria since the High Court refused to grant Fortescue Metals Group access to the Pilbara iron ore railways of Rio Tinto and BHP Billiton, in a judgment in 2012 that recast elements of the law.1
- Separately, press reports on 3 August suggest that commercial negotiations between the terminal operator and stevedore DP World and the Port of Melbourne Corporation (PoMC) may be reaching a resolution. This follows a dispute arising from a reported proposal by PoMC for a terminal rent increase of over 750%. DP World had made clear that, had an agreement not been reached, it was likely to seek to have the Port of Melbourne declared under Part IIIA. Part IIIA declaration and potential arbitration has always been seen as a playing an important role, as a backstop, to provide incentives for parties to reach commercial agreements. In this sense, while no application was lodged, in this case Part IIIA can be seen to be working effectively.
- The different outcomes at Newcastle and Melbourne reflect key differences in the potential application of Part IIIA to domestic freight ports and export-orientated commodity ports.
- In its draft recommendation, the NCC found that the cost of navigational and port services that were sought to be regulated at the Port of Newcastle did not have a sufficient impact on related markets to justify intervention (because the primary market impacted was the large and highly competitive global coal market). A declaration application at Port of Melbourne would potentially face a very different set of factors – given that terminal leases and other port costs comprise a much larger proportion of total supply chain costs and the Port supports import as well as export participants. An application may therefore be able to point to a larger and more complex set of supporting services and markets as likely to be impacted.
What does it mean?
- The Newcastle decision: The NCC decision not to recommend declaration of the channel service at the Port of Newcastle:
- highlights the high threshold that faces any applicant seeking declaration of export commodity ports where port costs form only a small fraction of the delivered cost of the commodity and the only market likely to be meaningfully impacted is the global export market; and
- at the same time, the approach adopted by the NCC to certain other statutory criteria will give heart to port users or other potential applicants for declaration of privatised freight and other ports that support a larger or more easily identified eco-system of domestic markets and suppliers.
- The DP World / Port of Melbourne deal: The outcome at Port of Melbourne clears the way for the privatisation process to continue and, in the process, should provide greater clarity for users and bidders around the operation of terminal leases. However key questions and risks still remain, including questions about whether this approach will flow through to terminal rent reviews for other terminal operators, such as Patrick Ports. Beyond the prospect of Part IIIA declaration, the scope and application of the newly introduced regulatory regime for the Port of Melbourne, forming part of the privatisation legislative package which is still before the Victorian Parliament, is also very uncertain.
- The NCC decision in brief
The Port of Newcastle was privatised in 2014 in one of the most significant privatisation deals of the year under a long term lease valued at approximately $1.75 billion.
On 13 May 2015, Glencore lodged an application with the NCC seeking declaration of the right to access and use the shipping channels provided by the Port of Newcastle (the shipping channel service) under Part IIIA. The application was narrowly cast and sought only access to and use of the shipping channels. This reflected the scope of a commercial dispute between users of the port and the new private operator over a proposed increase in navigational charges of approximately 60%.
On 30 July 2015, the NCC released its draft recommendation that the shipping channel service not be declared.
Some key points of interest from the NCC decision are:
- The NCC was firm in its view that mere ‘monopoly pricing’ or price gouging by the operator of a facility, of itself, is not something that supports declaration under Part IIIA. More is needed. An applicant needs to demonstrate that the control of a bottleneck facility – which may be reflected in pricing as well as other discriminatory behaviour is restricting competition in a dependent market.
- This test – that declaration was needed in order to promote a material increase in competition in related markets – was the threshold that the application was found not to satisfy. The primary reason for this was that the navigational charges levied by the new operator represented only a very small component of the overall delivered cost of coal exported from the Hunter Valley. In fact, the NCC referred to the charges being of “negligible significance” given that they accounted for less than 1% of the total delivered cost of coal at the Port of Newcastle.
- The NCC was however, prepared to accept that the Port of Newcastle was a monopoly asset, and that the service was not able to be economically duplicated. This was the first time that it has applied the new ‘private profitability’ test under the declaration process since the High Court’s judgment in Pilbara Infrastructure, which changed the test to one that focussed on commercial viability (rather than an economic test of natural monopoly). The NCC found that there were no other port sites that could viably be used to support the Hunter Valley coal region.
- In relation to the ‘public interest’ test in criterion (f) of the statutory framework, the NCC found that the costs and risks of regulation were not such that it would be contrary to the public interest to regulate the navigational service. Similarly, the fact that there was already a State based regime for price regulation of those services that, it was argued, might be undermined by a parallel access process under Part IIIA should also not prevent declaration. Both will be relevant considerations at other Australian ports – which mostly have price monitoring arrangements rather than fully developed access regimes.
- The NCC formed the view that where operation of a port has been privatised under a long-term lease, the relevant Minister for the purpose of making any declaration decision is the relevant Commonwealth Minister and not the State Minister – even though the State may retain legal ownership of the facility.
The NCC has now called for submissions in response to its draft recommendation. While the NCC has in the past changed its recommendation between the draft stage and final stage (for example, in the Virgin Blue matter 2), such a change in position is uncommon. A final recommendation must be given to the Minister by mid-November.
Unless Glencore withdraws its application, the Minister is then required to make a final decision responding to the NCC recommendation within 60 days or the application is deemed to be rejected.
Comparing the two experiences
The NCC draft recommendation highlights that the key challenge facing any declaration applicant in relation to non-vertically integrated facilities (such as ports or airports) will be establishing a sufficiently material impact on dependent markets. Monopoly pricing alone will usually not be enough – it is necessary to demonstrate a material impact of that pricing on the competitive dynamic in related markets.
The service sought to be declared at Newcastle was narrowly framed (meaning that any tariffs would comprise a relatively small proportion of delivered cost) and would principally benefit only commodity exporters.
An application at the Port of Melbourne arising from the recent negotiations would be likely to face a very different set of factors that would improve the likelihood of satisfying the test. For example, an applicant may adopt a broader service description (given that terminal rents would have to be included). This would mean that the access-related costs will necessarily comprise a larger proportion of total supply chain costs – as has been argued in public submissions by stevedores, shippers, exporters and others in response to the recent rent proposal (and other past fee increases at the port, such as the introduction of the Port Licence Fee in 2012). As the country’s largest container port, the Port of Melbourne also supports a more complex ecosystem of localised service providers and markets, including container storage, distribution, transport and logistics.
There are also a number of findings in the NCC’s draft report that update our understanding of its approach to key issues at a privatised port, including:
- the relevance of any existing price monitoring/tariff setting arrangements;
- the decision maker in relation to privatised assets;
- the private profitability test; and
- the operation of the public interest test (and how any costs of regulation may be taken into account).
In relation to all of these matters, the draft recommendation might be said to favour declaration.
Given the apparent success of DP World in leveraging a threat of potential declaration to achieve a commercial outcome, the NCC draft decision and its implications for other ports will therefore be keenly considered by bidders and their advisers in the Port of Melbourne process.