23 July, 2021 | Transport
Earlier this week, Justice Jagot published her reasons for dismissing the ACCC’s action against NSW Ports in connection with the Ports Commitment Deeds that accompanied the privatisation process. Her Honour found that, in its capacity as operator of a business, the State is subject to the provisions of the Competition and Consumer Act 2010 (Cth); but in its broader roles of policy formulation and implementation in particular, it is not. She also found that the Port Commitment Deeds had no effect on competition, as there was no real prospect of the development of a container terminal in Newcastle. We discuss the Federal Court decision in more detail below.
In December 2018, the ACCC instituted proceedings in the Federal Court against NSW Ports Operations Hold Co Pty Ltd and its subsidiaries Port Botany Operations Pty Ltd and Port Kembla Operations Pty Ltd for making agreements with the State of New South Wales that the ACCC alleged had an anti-competitive purpose and effect.
The NSW Government privatised Port Botany and Port Kembla in May 2013 and agreements, known as Port Commitment Deeds, were entered into as part of the privatisation process, for a term of 50 years.
The Botany and Kembla Port Commitment Deeds oblige the State of NSW to compensate the operators of Port Botany and Port Kembla if container traffic at the Port of Newcastle is above a minimal specified cap (the compensation provisions). A separate Deed, signed in May 2014 when the Port of Newcastle was privatised, requires the Port of Newcastle to reimburse the State of NSW for any compensation paid to NSW Ports under the Botany and Kembla Port Commitment Deeds (the reimbursement provisions). The ACCC had also argued that the reimbursement provisions were a consequence of the Port Commitment Deeds.
The ACCC had alleged that the compensation provisions were likely to prevent or hinder the development of a container terminal at the Port of Newcastle, and had the purpose, or likely to have the effect of, substantially lessening competition.
In a judgment handed down on 29 June 2021, the court dismissed the ACCC action. In her detailed reasoning, released publicly on 20 July, Justice Jagot sets out two main grounds for this ruling – one that is purely a matter of law, and one that involves both legal considerations and an evaluation of the economic arguments in the case.
First, the judgment finds that NSW Ports has the benefit of ‘derivative crown immunity’ with respect to the compensation provisions. By virtue of this immunity, the agreement was not subject to s45 of the CCA.
Secondly, the judgment finds that, even if this were not the case, the making of the compensation provisions did not have the purpose or the likely effect of lessening competition; and that this would not change even if the provisions came into effect (S9).
The direct consequences of Justice Jagot’s decision are important, but limited and local. The judgment confirms the status quo. It leaves the roles of the major ports in NSW unchanged and consistent with the plans articulated in the State’s 2013 Freight and Ports Strategy. The decision also requires no change to contractual arrangements made between the State and port lessees at the time of privatisation.
The status that is given to State policy in the judgment is of more general interest. There are three elements of the judgment (and the reasoning supporting it) that are worth pointing out.
The recognition accorded to State policy in the judgment is a welcome development.
Competitive neutrality considerations argue strongly that, in its capacity as operator of a business, the State should be subject to the provisions of the CCA. Considerations of democratic governance and good public policy — and of good transport policy in particular — argue equally strongly that, in its capacity as the formulator and implementer of policy, it should not.
Guiding the development of an efficient and effective transport system is a complex balancing act. It requires coordination and the encouragement of cooperation as well as the promotion of competition. It cannot be achieved simply by ensuring that each element of the system is internally efficient; it must also ensure that the parts fit together well. It will inevitably require limits to be placed on the actions of individual actors within the system, including decisions on what type of facilities will be built where. This cannot be done without placing some restrictions on competition.
It is the role of government, acting as the formulator and implementer of public policy, to get this balance right; to decide when it is appropriate to allow the free play of competitive forces to shape elements of the system, and when the benefits of coordination require the scope for competition to be constrained. It is in the public interest that ACCC, as an engaged and informed observer, has and expresses an opinion on whether the balance struck by government is likely to serve the interests of the public. But it is not in the public interest for the competition regulator to be able to overturn or trammel the policy decisions that are the rightful province of an elected government.
The ACCC has made no secret of its dissatisfaction with the way in which infrastructure facilities — and ports in particular — have been privatised. Its core criticism, levelled at State governments, has been that privatisation frameworks have been designed to obtain the greatest returns from asset sales. In doing so, they have failed to foster economic efficiency by maximising competition and, where effective competition is not feasible, to effectively constrain market power.
One feature of the privatisation of the ports of New South Wales has been the subject of particular disquiet. NSW privatised its major commercial ports in two transactions: the first involved the leasing to NSW Ports of Port Botany and Port Kembla; in the second, the port of Newcastle was to Port of Newcastle Ltd (PON).
Each port transaction included an agreement referred to as a Port Commitment Deed (PCD). Each PCD contained provisions specifying what would happen if, at some time in the future, a sizeable container terminal was developed in the port of Newcastle. The PCDs for Port Botany and Port Kembla were made between the NSW government and NSW Ports in May 2013. These provided that, if container volumes through Newcastle exceeded a specified (low) level, and NSW Ports could demonstrate that this had led to a reduction in volumes at Port Botany and/or Port Kembla, the government would reimburse NSW Ports for lost wharfage revenue. These provisions are referred to as the ‘compensation provisions’.
The second agreement, made between the government and PON in May 2014, provides that, if the government becomes liable for payments to NSW Ports under the compensation provisions, PON will make a corresponding payment to the government. This aspect of the Newcastle PCD is referred to as the ‘reimbursement provisions’. NSW Ports was not a party to this agreement.
The ACCC took the view that the compensation provisions of the Port Commitment Deeds ‘the purpose and/or effect or likely effect of substantially lessening competition’ (S1); and that NSW Ports, by agreeing to them, was therefore in breach of s45 of the Competition and Consumer Act 2010 (Cth) (CCA). Accordingly, it initiated an action against NSW Ports in the Federal Court, seeking 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 (S1).
The reasoning behind the derived crown immunity finding proceeds in two steps: first, to establish whether the State enjoyed crown immunity; and second, whether, if it did, that immunity extended to NSW Ports.
Jagot J’s judgment on the first of these issues draws a clear distinction between the State as a business operator and the State’s role as the party formulating and implementing public policy.
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… It necessarily follows that, otherwise, the State is not bound by Pt IV of the CCA…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. (ss 337-339).
Justice Jagot’s reasoning on the conditions under which the immunity of the State, acting as the formulator and implementer of policy, from s45 of the Act extends to private parties (such as NSW Ports) is complex and nuanced. There is no general presumption that immunity would extend to private counterparties. But Justice Jagot concludes that extension of the immunity applies in particular circumstances — specifically, when applying the proscriptions of s45 to the private party would ‘adversely affect some proprietary right or interest of the Crown, legal equitable or statutory’ (s114). Her Honour further concludes that these circumstances apply in the case of the compensation provisions.
Jagot J rejected the proposition that the purpose of compensation proposition was to bring about a substantial reduction in competition. Her Honour characterised the compensation provisions as a means of insuring the purchaser of the port against a sovereign risk (s363). This risk was that a future State government may modify its transport policy in such a way as to favour the development of a container terminal at the port of Newcastle ahead of the full utilisation of the Port Botany and/or the development and full utilisation of container facilities at Port Kembla.
Jagot J concluded that the purpose of the compensation provision was to insure NSW Ports against the financial consequences of possible future entry into the container market by PON. She holds that purpose to be quite different from the purpose of protecting NSW Ports from possible future competition:
… The subjective understanding of the compensation provisions by the State and NSW Ports is clear – they did not intend that NSW Ports would be inoculated against the threat of entry into the market for Container Port Services by the Port of Newcastle. They intended that if that threat materialised NSW Ports would be compensated for the loss of containers over and above a specified natural growth rate of container volumes at the Port of Newcastle if it had continued without a container terminal. (s939).
This conclusion as to the purpose of the agreement stands even if an effect of the agreement is to substantially lessen competition. But, as we shall see, Her Honour does not accept that this is the case.
Critical to the reasoning of the judgment is an assessment of whether there was (or is) a genuine possibility that, in the absence of the compensation and reimbursement provisions, PON would develop a container terminal. If this is not the case, then it necessarily follows that the provisions of the PCDs cannot have the effect of substantially lessening competition (s1226).
Jagot J gives considerable weight to State policy in making this assessment. Her Honour explicitly adopts the position that ‘unless and until the NSW government can be persuaded to change the State policy neither PON nor any third party would be willing to commit to the development of a container terminal at the Port of Newcastle’ (s1219;s1246). She therefore identifies two conditions that would be essential for there to be a ‘real chance’ of a container terminal being constructed in Newcastle while Port Botany has capacity:
The second condition is necessitated, in part, because PON would require planning approvals to proceed with any plans, and it is not plausible that these approvals would be issued unless PON’s plans aligned with government policy (s1461). But it is also required because material infrastructure investments would be required to support the viability of the terminal (e.g. s1469).
After reviewing evidence including the PON’s Preliminary Business Case, Her Honour concluded that there was no sound basis for believing that either of these two conditions could be met while Port Botany had excess capacity. This conclusion held with or without the compensation and reimbursement provisions. Her Honour expressed this view rather forcefully in her introduction:
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…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. (s10)
The conclusion that, for as long as Port Botany has spare capacity, the PCDs could not have the effect of substantially lessening competition necessarily follows.
Her Honour expresses the view that ‘one objective of PON must be for its container terminal to take precedence over Port Kembla’ (s1359). She therefore considers the possibility that, when Port Botany approaches capacity, but no container terminal has yet been constructed at Port Kembla, a window of opportunity may open up in which the development of a container terminal at Newcastle may be a real prospect. It is clear that she is not persuaded that this is likely:
If a container terminal at Port Kembla is currently a mere “vision”, then a container terminal at the Port of Newcastle while Port Botany has capacity (or before a container terminal is developed at Port Kembla) is a mere mirage (s1560).
But even if this mirage became a reality, it would do so at a time when not be spare capacity at either Port Botany or Port Kembla. The existence of such spare capacity is one of the conditions required to trigger the compensation provisions (and hence the reimbursement provisions). So, once again, the provisions would have no effect on the competitive landscape (s1603).
No doubt the ACCC will be continuing to closely scrutinise this week’s judgment, having lost on both legal and economic matters. But the recognition of State policy in competition matters and drawing a much needed balance is a welcome development.
23 July, 2021 | Transport