privatisation of port botany and port kembla, australia

BriefingJuly 2012

Summary

This briefing note identifies some of the key issues in the proposed privatisation of Port Botany and Port Kembla in New South Wales, Australia.

Privatisation of Port Botany, Australia

Introduction

In September 2011, the State Government of New South Wales (NSW) announced that it would privatise Port Botany.

Port Botany is Australia’s second-largest container port with annual volumes of around two million twenty-foot equivalent units (TEU). The Port of Melbourne, Australia’s largest container port, has comparable volumes of 2.4 million TEU. Port Botany accounts for roughly one third of Australia’s annual containerised export and import freight.

In June 2012, the State Government also announced that it would privatise Port Kembla, Australia’s ninth largest port. The Port currently handles coal, grain, motor vehicles and cement, but will be used as an overflow container port when Port Botany reaches capacity.

Political context

The privatisation of Port Botany and Port Kembla follows the recent election of a new Liberal-National coalition Government in NSW following some 14 years of Labour Government rule.

The new Government is seeking to raise funds to support major infrastructure investments in NSW and to maintain its current “AAA” credit rating. The Port Botany and Port Kembla privatisations are part of an A$10 billion privatisation programme undertaken by the new Government.

Timetable

The proposed transaction timetable will involve the sale process occurring between October 2012 and March 2013, with completion by mid-2013.

Morgan Stanley was appointed by the NSW Government as the financial advisor in December 2011. Morgan Stanley is currently undertaking a scoping study.

No Information Memorandum has yet been released. The first public step in the proposed transaction timetable will most likely involve the release of a Request for Expressions of Interest.

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02 Norton Rose Australia July 2012


Transaction structure

Port Botany is currently owned and operated by the Sydney Ports Corporation (SPC), a State-owned statutory corporation. The privatisation is most likely to follow the privatisation structures recently applied to the Port of Brisbane in Queensland (2010) and the Sydney Desalination Plant in NSW (2012).

A Project Company is likely to be created that will enter into a 99 year lease with SPC. The lease may be bundled with a concession agreement giving the Project Company the right to operate and receive the economic benefit of the relevant Port Botany assets, but imposing a range of performance obligations. Existing key contracts would likely be assigned to the Project Company, including SPC’s key terminal leases at Port Botany with DP World, Patricks and Hutchinson.

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.

The likely transaction structure is illustrated in the following diagram:

In this manner, investors will be offered a pre-packaged deal without any involvement in the negotiation of the 99 year lease. The NSW Government has currently budgeted to receive between A$1.6 billion and A$2.2 billion from the sale of the shares in the Project Company.

The scoping study will determine whether Port Kembla will be bundled with Port Botany or sold individually. The NSW Government is budgeting to receive a further A$500 million for a 99 year Port Kembla lease.

Investor Consortium

Sydney Ports Corporation

NSW State Government

Project Company

Third Party Contracts

Payment for shares

State ownership and concession

Assignment of contracts to Project Company

Assigned contracts

Transfer of shares100% of shares in

Project Company

99 Year Lease

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Preliminary issues

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

• the extent to which regulatory clearances may be required by bidders

• the extent to which NSW regulation of Port charges will be maintained

• the extent of any Commonwealth regulation of Port charges

• the impact of bottlenecks in road and rail access on Port cash flows.

Each of these issues are addressed in turn below.

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 port operations in Australia, is a potential or actual user of Port Botany, 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, such as a stevedore. 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 user or associate in a consortium is not necessarily fatal to any ACCC clearance. The ACCC’s reaction would turn on the circumstances of the case. The Port 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 user or associate would be given access to the Port on a non-discriminatory basis.

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.



Cross-ownership restrictions

In the context of the privatisation of the Port of Brisbane, the Queensland Government pre-empted competition concerns by imposing cross-ownership restrictions. Port users and their associates were limited to a 20 per cent interest in the Project Company. It is unclear at this stage whether the NSW Government will include a similar condition.

State-based regulation of Port charges

Under the Ports and Maritime Administration Act 1995 (NSW) (PMAA), the SPC (as owner and operator of Port Botany) must obtain NSW Ministerial approval to set certain Port charges. Likewise for the Port Kembla Ports Corporation (PKPC) (as owner and operator of Port Kembla). The regulated charges are for navigation services, pilotage, port cargo access, site occupation and wharfage, and berthing. The unregulated charges are for rail access, ship utilities, port security, and ancillary services. In this manner, most of the key Port charges are regulated.

The Commonwealth and Infrastructure Reform Agreement (CIRA) encourages the various Australian States and Territories to ensure that price oversight is undertaken by an independent body. In NSW, this would be the Independent Pricing & Regulatory Tribunal (IPART) rather than the relevant NSW Minister. However, in a review of Port regulation in 2007, NSW was not recommended to amend its current price oversight approach, largely because Port access prices in NSW were low relative to other Australian ports at that time.

The PMAA is silent on the appropriate Port charges; hence the NSW Minister has significant discretion. In practice, the NSW Government has approved charges with reference to the cost of capital, cost of services, levels of investment required, the competitive environment, and the need for an appropriate commercial return. SPC has been required to prepare a business case justifying any increases to charges.

In the absence of legislative amendment, the existing pricing regime would continue to apply to SPC and PKPC in the context of any 99 year lease. We would therefore expect the 99 year lease to contain a pass through mechanism so that SPC and PKPC could continue to meet their statutory obligations under the PMAA (ie, the Project Company would require SPC approval to amend regulated charges, SPC would then obtain Ministerial approval).

However, if the NSW Government were seeking to improve asset valuation, it may seek to remove the oversight regime entirely or replace it with an alternative oversight mechanism. An oversight regime could be made more consistent with CIRA by requiring port charges to be approved by IPART, rather than the NSW Minister, in accordance with key regulatory principles. This could occur by legislative amendment to the PMAA or could occur within the context of the contractual arrangements between SPC or PKPC and the Project Company.



Commonwealth-based regulation of Port charges

It remains open for any third party to seek declaration by the Commonwealth Treasurer of aspects of Port Botany and/or Port Kembla operations under the national infrastructure access regime in Part IIIA of the Competition and Consumer Act 2010 (Cth). Given both Ports are 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.

As yet, Part IIIA has not been applied to port assets in Australia. In general, Part IIIA has been rarely applied and has been accompanied by significant delays and extensive litigation where it has been applied (eg, access by Fortescue Mining to private railway lines owned by BHP Billiton and Rio Tinto; access to Sydney Airport facilities by Virgin Airlines). However, the ACCC is currently advocating the streamlining of the Part IIIA access regime to ensure it’s more timely and effective application.

To avoid the application of Part IIIA, it is possible for the NSW Government to develop a State-based access regime and then seek to have this formally “certified”. There are two examples of such an approach in relation to ports in Australia: 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 the port and subsequent certification may take significant time, hence seems unlikely in the context of the current privatisation.

Impact of land access bottlenecks on Port Botany cash flows

There is potential for port usage and cash flows to materially increase over time. A recent A$1 billion investment to create a third terminal at Port Botany has created infrastructure that can handle significantly higher volumes of container throughput at Port Botany. SPC has forecast that container volumes could more than triple to 7.5 million TEU by 2030. However, there is a current 3.2 million TEU planning restriction on the Port and hence planning approval amendments would be required to realise this potential.

Amended planning approvals will, in turn, require resolution of critical land access bottlenecks. In a November 2011 submission to Infrastructure Australia, the NSW Government highlighted that the current ability of the Port to tranship containers already exceeds the ability of the rail and road land transport system to clear the cargo from terminals and adjacent container depots.



Rail access to the Port has historically been problematic. The rail proportion of container movements has declined in recent years (from 22 per cent in 2002 to 14 per cent in 2011). Historic issues identified by the NSW Government have included poorly co-ordinated rail supply, inefficient port/rail interfaces, lack of performance standards, unsuitable rail windows, lack of intermodal terminal capability, and prioritisation of passenger rail on shared rail lines. In its November 2011 submission, the NSW Government’s proposed to increase the rail proportion of container movements to 28 per cent by 2020, including by the opening of new Intermodal Terminals at Enfield and Moorebank and by completion of a dedicated South Sydney Freight Line.

Road access has also faced significant historic issues. Road volumes are expected to double by 2020 and treble by 2030. Following a review by IPART in 2008, the NSW Government implemented a “Port Botany Landside Improve Strategy” that imposes regulatory incentives for stevedores and transport carriers to improve turnaround times and reduce late arrivals. The NSW Government also recognises that significant road investment is required and has proposed a widening of the critical “M5” road link as well as implementing advanced motorway traffic management technologies.

This list of issues is by no means exhaustive. Other key issues, for example, are likely to include political risk, labour and union risk, health and safety issues, environmental liabilities, and planning consents and restrictions.

Outer Harbour development of Port Kembla

Historically, Port Kembla has served the needs of regional industries in the Illawara region of NSW, predominantly the exporting of coal, importing of raw materials for steel production, and exporting of steel product. The Port is also the principal grain export port for producers in southern and south-western NSW.

Expansion of the Inner Harbour at Port Kembla was completed in November 2008. As a result, Port Kembla became the major port for all car imports into NSW. However, while the Inner Harbour still has the potential to cater for the growth of existing cargoes, it is now fully leased. Demand continues to exist for additional port facilities, particularly for new industry and future trade growth.

In March 2011, the NSW Minister for Planning granted planning approval for the expansion of Port Kembla’s Outer Harbour. The Outer Harbour development includes the reclamation of approximately 42 hectares of land and the construction of seven new berths. The development is proceeding in three major project stages and is anticipated to take 25-30 years to complete at a cost of some A$600 million. The staging is based on anticipated customer demand over that period.



The privatisation scoping study will recommend which parts of Port Kembla will be subject to the proposed 99 year lease and which parts, if any, would be excluded. We would anticipate that the Outer Harbour development will proceed as intended. Given the extent of private sector interest in the Outer Harbour, we anticipate that such areas may be included.

Our relevant experience

We have an exceptional global ports practice and we have long been recognised markets leaders in port developments and privatisations. We are ranked Band 1 in Transport by Chambers and Partners 2011. Our continued expertise in shipping and infrastructure places us in an ideal position to give clients accurate legal advice and market advice on port projects.

Our team of experts throughout our global network act on ports and associated regulatory issues. We have gained invaluable knowledge of the types of unique challenges faced by our clients on each projects, providing unrivalled versatility and know-how in the sector. Our clients include government proponents, investors and infrastructure funds, developers, financiers, government agencies, rail and port operators and port authorities.

• We have historically acted in a range of matters involving Port Botany, including for Patrick Corporation and Sydney Ports Corporation. We have also acted in relation to the Moorebank Inland Terminal.

• In Australia, we acted in the privatisations of the Port of Geelong and the Port of Hastings, arrangements for the Port of Brisbane, concession agreements for the Ports of Albany and Port of Newcastle, and the development of LNG facilities at the Port of Gladstone. We have also acted in relation to Bunbury Port, Koorangang Port, and the Port of Hedland (Australia’s largest export Port). We have acted for various infrastructure funds in Australian port investments.

• Internationally, we have extensive experience advising on port infrastructure issues, including a number of port privatisations across Europe, Asia, Africa and India. Our work on the project financing of the Port Dakar Container Terminal in Senegal, Africa, was awarded the Transport Infrastructure Deal of the year recently by Project Finance International.

We have also acted in the privatisation of the Sydney Desalination Plant in NSW on which the Port Botany and Port Kembla privatisations are likely to be modelled.

“The commerciality of their advice is outstanding” Chambers and Partners 2011

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Contacts

For further information, please contact the partner at Norton Rose Group who sent you this briefing note or any of the following partners:

Australia Vincent DwyerPartner/Head of corporateNorton Rose AustraliaTel +61 (0)2 9330 [email protected]

Dr Martyn TaylorPartner/Author of this noteNorton Rose AustraliaTel +61 (0)2 9330 [email protected]

Adrian AhernPartnerNorton Rose AustraliaTel +61 (0)2 9330 [email protected]

InternationalMichael WiltonPartner, BeijingNorton Rose LLPTel +86 10 6535 [email protected]

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privatisation of port botany and port kembla, australia

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