DEPARTMENT OF TREASURY SUBMISSION

to the

LEGISLATIVE COUNCIL STANDING COMMITTEE ON LEGISLATION

Pilbara Port Assets (Disposal) Bill 2015

Prepared by the Department of Treasury

Locked Bag 11, Cloisters Square WA 6850 info@treasury.wa.gov.au

26 April 2016

FINAL REPORT – 26 April 2016

Contents

1 Introduction 1

1.1 Scope of Submission 1

1.2 Sources of Information 2

1.3 Overview of Submission 2

1.3.1 Background 2

1.3.2 Pilbara Port Assets Disposal Bill 2015 3

1.3.3 Access and Pricing 4

1.3.4 Utah Point BHF Pricing and Independent Pricing Reviews 4

1.3.5 Consultation with Junior Miners 5

1.3.6 Benefits Given to Junior Miners 5

1.3.7 Other Matters 5

2 Background 7

2.1 Introduction 8

2.2 Utah Point BHF 8

2.3 Overview of the Government Process to Date 9

2.4 Next Steps for the Transaction 11

2.5 Government Objectives 12

2.6 Western Australia’s Economy and State Budget Considerations 13

2.7 Rationale for the Privatisation 14

2.7.1 Monetisation of Past Capital Investment and Future Dividends 16

2.7.2 Retirement of Debt and Reduction in Interest Expense 16

2.7.3 Transfer of Future Capital Investment and Operating Risk 17

2.7.4 Redeploying Proceeds to Other Income Producing Infrastructure Assets 18

2.7.5 Balances Private Sector Innovation with Public Sector Regulatory Oversight 19

2.7.6 Capital Market Development 19

2.7.7 Facilitation of Trade and Continued Receipt of Royalty Payments 19

2.8 Attractiveness of Utah Point BHF to Bidders 20

2.9 State Policy Management Post Transaction Close 20

3 Pilbara Port Assets (Disposal) Bill 21

3.1 Introduction 21

3.2 Structure of the Bill 21

3.3 Precedent Legislation 22

3.4 Consultation 22

3.5 Definition of Assets Authorised for Disposal 23

3.6 Regulations for Purposes of Providing Access to Services 24

4 Access and Pricing 25

4.1 Introduction 25

4.2 Application of the Regime 26

4.3 Key Principles 26

4.4 Discrimination 27

4.4.1 Obligation not to Unreasonably Hinder Access 27

4.4.2 Obligation not to Discriminate amongst Port Users 28

4.5 Access Regime 28

4.5.1 Access Policy 30

4.5.2 Capacity Management Policy 31

4.5.3 Obligation to Negotiate in Good Faith 32

4.5.4 Negotiate / Arbitrate Regime 32

4.5.5 Preference to Allocate Capacity to Junior Miners 33

4.6 Price Monitoring 35

4.6.1 Pricing Instrument 37

4.7 Draft Regulations 38

4.8 State Oversight and Enforcement 38

4.8.1 Compliance and Reporting 38

4.8.2 TerminalCo Annual Compliance Report 38

4.8.3 Regulator Annual Compliance Report 39

4.8.4 Review and Amendment of the Regime 39

4.8.5 Enforcement 40

4.9 Comparison of Utah Point BHF Regulation with other Privatised Australian Bulk Terminals and

Ports 42

4.10 Safeguards and Benefits for Berth Users and the State 46

4.10.1 Users of Berth 46

4.10.2 State 47

4.11 Specific Protections for Junior Miners 47

5 Utah Point BHF pricing and Independent Pricing Reviews 49

5.1 Role of Utah Point BHF in the Value Chain for Junior Miners 50

5.2 Background to Facility Construction and Charges 50

5.3 Current Customer Contracts and Pricing Arrangements 51

5.4 Overview of Current Charges Paid by Junior Miners 51

5.5 Independent Review by Incenta (2015) 53

5.6 Independent Review by Houston Kemp (2016) 54

6 Consultation with Junior Miners During the Preparation for the Transaction 56

6.1 Overview of Consultation Process with Junior Miners 56

6.2 Involvement of Junior Miners in Market Sounding Process 57

7 Benefits Given to Junior Miners 58

7.1 Price Discount for Iron Ore Customers at Utah Point BHF 58

7.2 Deferral of Road Haulage Fee 59

7.3 Freeze on Escalation of Charges at Utah Point BHF 59

7.4 Royalty Relief 60

7.5 Policy Going Forward 60

8 Other Matters 61

8.1 Other Major Agreements 61

8.1.1 BHP Billiton State Agreements 61

8.1.2 Harriet Point Agreement 61

8.2 Conditions of Operations 61

8.2.1 Change of Use 61

8.2.2 Handback Conditions 62

8.2.3 Maintenance and Development 62

8.2.4 Environmental 62

8.2.5 Port Development 62

8.2.6 Utah Road 63

8.3 Transaction Documentation 63

8.4 Broader Community Safeguards 65

8.4.1 Establishes Maximum Lease Term 65

8.4.2 Express Requirement that Port Land be Maintained in State Ownership 65

8.4.3 Protects Employees 65

8.4.4 Greater Transparency of Roles and Responsibilities of the State and TerminalCo 65

8.4.5 TerminalCo's Statutory Obligations 66

8.4.6 Stewardship Requirements 66

Glossary 67

References 69

1

1 INTRODUCTION

This Submission is made by the Department of Treasury (“Treasury”) to the Legislative Council Standing Committee on Legislation (“Committee”), with respect to its inquiry into the Pilbara Port Assets (Disposal) Bill 2015 (“Bill”).

In making this Submission, Treasury responds to invitations extended by the Committee to:

a) the Under Treasurer;1 and

b) the Director General of the Department of Transport.2

The Under Treasurer and the Director General of the Department of Transport agreed that Treasury provides this single submission, reflecting their common views and the close working relationship between Treasury and the Department of Transport.

In accordance with the terms of the referral of the Bill to the Committee, this Submission outlines the policy rationale underlying the Bill as well as how the provisions of the Bill facilitate the attainment of the objectives of the Bill, and the policy underlying it.

1.1 Scope of Submission

The Submission provides:

1. an overview of the Utah Point Bulk Handling Facility (“Utah Point BHF”) and the

fiscal and economic context to the decision to commence due diligence on the

proposed divestment of the facility;

2. a summary of the structure and key features of the Bill, including reference to

precedent legislation and the safeguards provided for in the Bill;

3. a detailed explanation of the proposed access and pricing regime that will govern

the operation of the facility;

4. the history of the State’s broader consultation, engagement and support of the

Junior Miners currently using the facility, including the implementation of a price

discount on port charges and relief from royalty payments; and

5. responses to specific issues raised in the course of the second reading debate of

the Bill in the Legislative Council.

1 Letter to Mr Michael Barnes, Under Treasurer, from Hon Robyn McSweeney MLC, Chair of the Standing

Committee on Legislation, dated 24 March 2016. 2 Letter to Mr Reece Waldock, Director General Department of Transport, from Hon Robyn McSweeney

MLC, Chair of the Standing Committee on Legislation, dated 24 March 2016.

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1.2 Sources of Information

Much of the factual, and historical, information supporting this Submission has been provided by the Pilbara Ports Authority (“PPA”). The PPA is a statutory body corporate constituted under the Port Authorities Act 1999.

The Minister for Transport, as the Minister administering the Port Authorities Act 1999 has sought and obtained information in relation to Utah Point BHF and associated dealings in order to inform the State’s due diligence process for the proposed divestment.

This Submission is also informed by a suite of due diligence reports that have been prepared by the advisers engaged by the State to assist with the divestment process. However, in consideration of the users of Utah Point BHF, the submission does not disclose confidential or commercially sensitive information relating to key contract terms or other information.

The Submission is also informed by two separate independent reviews of pricing at Utah Point BHF commissioned by the Government (through the Department of Finance); the first by economic consultant Incenta in April 2015 and a subsequent review prepared for the Public Utilities Office by economic consultant HoustonKemp in April 2016. The conclusions of these reports are discussed in this Submission.

1.3 Overview of Submission

1.3.1 Background

Utah Point BHF was developed by the State to provide a multi-user export terminal enabling an export pathway principally for iron ore exporters. Before its development, it was anticipated that the Utah Point BHF may cater for both ‘junior miners’ and ‘non-junior miners’. The expression ‘junior miners’ (“Junior Miners”) is often used to describe certain miners. The definition for the purposes of this Submission is as follows: ‘an entity that is not a major miner (BHP Billiton, Rio Tinto, Fortescue Metals Group (“FMG”), Roy Hill, Vale, or a related entity of any of those or any associate of those)’. The term also refers to Junior Miners that are in existence now or will be in existence in the future. Features that are more commonly associated with Junior Miners (compared with other miners) include some or all of the following:

• higher costs of production and/or weaker balance sheets;

• lacking ownership or control of vertically integrated logistics and supply chain infrastructure (from the mine site to the port);

• produce smaller volumes of iron ore (as compared to major miners);

• use shared infrastructure with other miners; and

• not a party to a State Agreement.

When Utah Point BHF was proposed to be developed, it was acknowledged that the Junior Miners would not necessarily have the financial capacity to develop the facility

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using their own capital or by providing balance sheet support to underwrite their commitments to use the facility if it were commissioned.

Utah Point BHF has been successful over the past years in growing exported volumes and has benefited from the mining boom during this period. In the financial year ending 30 June 2015, Utah Point BHF facilitated the export of 19.5 million tonnes of ore, compared with 18.8 million tonnes in the year ending 30 June 2014. In dollar terms, this equated to $146 million in revenue in 2014–15 and $141 million in 2013–14.

The proposed divestment of Utah Point BHF was announced in August 2014 as part of the first tranche of the Government’s asset sales program.

The Government has progressed the due diligence phase of the asset and is now in a position to commence the Utah Point BHF lease transaction (the “Transaction”) once the Bill has been passed. A focus for the Government in implementing the Transaction is optimising the State’s overall long term economic outcome through capitalising on past investment to receive upfront payment of future dividends and reducing State risk and recycling capital. In order to ensure value is achieved, there are agreed steps to review the suitability of the Transaction at a number of specific junctions of the process to ensure the Transaction only proceeds where the State achieves outcomes above the agreed/determined retention value and where all State objectives have been achieved.

1.3.2 Pilbara Port Assets Disposal Bill 2015

In broad terms, the Bill provides legislative authority for the Transaction and provides, where appropriate, legislative support for certain Transaction objectives.

The Government considers that the Transaction provides an open and transparent process and is consistent with recent precedents for the divestment of government assets in Australia.

The Bill consists of 47 clauses that broadly provide for:

• authorising the disposal of all or part of the assets and liabilities of PPA and associated assets to the new long-term lessee under the Transaction (“TerminalCo”);

• controls and limitations on the parameters of the disposal; and

• post-sale transitional arrangements and regulatory matters.

The passing of the Bill will facilitate the provision of the following benefits for potential bidders which are important in order to maximise bidder interest and competitive tension for the Transaction:

• certainty – the Bill provides greater Transaction certainty for bidders, allows for more timely separation of Utah Point BHF and delivers an outcome for the State in a more comprehensive and transparent manner with a range of safeguards and protections for the Western Australian community; and

• timing – the Government’s objective that the Transaction is to proceed without further delay and take advantage of the significant amount of interest currently expressed by

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the investor market in the asset. Australian infrastructure assets are keenly sought by investors and the Government is seeking to take advantage of this interest.

1.3.3 Access and Pricing

As part of the preparation for the divestment process, an assessment has been undertaken of the risks of private sector operation and control of Utah Point BHF. This has included consideration of the potential market power that TerminalCo may hold (in particular in relation to users) and the risk that this power might be misused. The results of the assessment are summarised as follows:

• Utah Point BHF is considered to comprise essential infrastructure which was developed as a multi-user facility including satisfying export requirements of Junior Miners which may not have had the financial ability to develop the facility on their own;

• the State should ensure that the regulatory framework established creates an environment, following privatisation, in which economically efficient decisions on access and pricing and the ongoing development of the infrastructure are made;

• access and pricing regulation for Utah Point BHF will be implemented through a ‘negotiate and arbitrate’ model for access, and price monitoring to protect current and future users of the facility;

– the regime will be overseen by the Economic Regulation Authority (“ERA”);

• the access and pricing regime will not interfere with the terms of existing commercial agreements;

• there will be a preference for Junior Miners, in accordance with the following principles:

– TerminalCo can only initially negotiate with Junior Miners with respect to spare capacity and is obligated to negotiate for a period of six months which may be extended to nine months by either party (prior to negotiating with alternative users);

– should Junior Miners cease to use spare capacity in the short to medium term, the access and pricing regime allows the TerminalCo to seek alternative users; and

• there will be three bodies responsible for managing and implementing the regime: the regulator, self-regulation and the State through possible intervention.

1.3.4 Utah Point BHF Pricing and Independent Pricing Reviews

Since the planning stage for Utah Point BHF, the State has continuously worked with and alongside Junior Miners to establish terms of service and pricing in satisfaction of their requirements. As such, users have been a key part in setting the prices at Utah Point BHF. Prices were originally set in 2007, prior to construction of Utah Point BHF, and were subsequently renegotiated with users in the 2013 Multi-User Agreements once Utah Point BHF became operational.

The Government has commissioned two independent price reviews to confirm the appropriateness of charges in response to concerns expressed by Junior Miners with respect to prices at Utah Point BHF. Both independent reviews of pricing (in 2015 and 2016) have found that prices at Utah Point BHF have been set at an appropriate level based on the risk assumed by the PPA as the terminal owner.

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1.3.5 Consultation with Junior Miners

The Government has consulted with Junior Miners during the preparation for the divestment of Utah Point BHF, as well as in the ordinary course of business. The key issues discussed with Junior Miners include the decision to pursue the Transaction, access and pricing regime and preferential treatment of Junior Miners.

1.3.6 Benefits Given to Junior Miners

The State has been cognisant of the position of Junior Miners and has provided its longstanding support to Junior Miners, consistently delivering outcomes to the benefit of Junior Miners. In addition, the State has provided a number of short-term benefits to Junior Miners in order to facilitate the transition to a subdued outlook for commodity prices, including by adopting the following measures:

• Main Roads Western Australia has provided Junior Miners with a temporary deferral of the road haulage fees which is payable by the users of Utah Point BHF;

• PPA has provided a temporary discount of $2.50 per tonne until 30 June 2016 for Junior Miners exporting iron ore from Utah Point BHF;

• PPA has also provided for two years of ‘freezes’ on the escalation of charges at Utah Point BHF until 30 June 2017 (prices continue to remain at 2014/15 levels); and

• the Department of Mines and Petroleum has provided royalty relief for 50% of royalties for a 12-month period from October 2014 through to September 2015 quarter for qualifying Junior Miners.

The Government’s approved policy position going forward is that any future assistance given to the users of Utah Point BHF will be done so in a manner which does not adversely affect the revenue of Utah Point BHF.

1.3.7 Other Matters

There have been a number of other matters raised during the debate about the Bill in Parliament which are considered in Chapter 8. A brief overview is provided below.

• There are a number of protections for the State and users through existing legislation, the Bill and proposed contractual framework between the State and the successful bidder including:

– framework for ongoing State management / review of the asset;

– PPA will act as Lessor;

– PPA will continue to perform its usual role as the port authority responsible for the Port of Port Hedland. Utah Point BHF will operate and interact with PPA, in much the same way as existing private facilities at Port Hedland, such as BHP Billiton’s; and

– all relevant laws continue to apply to TerminalCo including with respect to Environmental, Safety and Planning and Development;

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• it is important that more broadly the interests of the State and other stakeholders are protected through any Transaction. It is intended that the Transaction Documentation (together with the application of the transfer of business provisions in the Fair Work Act 2009) will provide a number of protections to employees who agree to transfer their employment to TerminalCo. It is currently expected that these protections will include:

– the transfer of the enterprise agreement that applies to the employment of employees in their employment with PPA such that it will continue to apply to them in their employment with TerminalCo;

– a requirement that the employment terms of transferring employees must be no less favourable overall compared to the terms that applied to their employment with PPA;

– continuity of service and entitlements; and

– equivalent (no less favourable) existing superannuation entitlements being maintained.

• State Agreements with other proponents at Port Hedland will continue to be honoured and the contractual documents will be structured in such a way that they do not impinge on the rights of these other proponents.

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2 BACKGROUND

Key points:

• The Government has established a structured asset sales program – whilst the top priority is to reduce debt and improve the State’s credit rating, a detailed framework and a number of project objectives have been applied across all asset sales to balance the risk and return of how assets could be managed while providing benefits to stakeholders in the Western Australian community.

• The proposed divestment of Utah Point BHF was announced in August 2014 as part of the first tranche of asset sales and is an important part of the Government’s overall asset sales program.

• Detailed work and analysis has been undertaken by the Government and its advisors over the past 16 months to analyse Utah Point BHF, assess the benefits of its potential divestment and prepare it for divestment by way of a long term lease.

• The decision to divest will be reviewed at each stage of the process to ensure that any anticipated transfer to the private sector achieves better value than the State retaining the asset.

• One of the primary objectives of the Utah Point BHF project was to support Junior Miners through the development of a multi-user facility. This objective has been achieved and the Government now has the options to utilise divestment proceeds to manage debt levels and/or direct capital into other projects. However, Junior Miners will still have preferential access and protections.

• The State previously assumed the risk on the development of Utah Point BHF and continues to be exposed to a high level of commercial risk. The Government believes that the ongoing risk is best managed by private sector proponents.

• Transfer to the private sector can often result in more efficient management of the infrastructure; remove conflicts of interest where the State is both owner and Regulator; and transfer responsibility for future investment in upgrades and expansions.

• The long term lease of Utah Point BHF monetises capital invested by the State to date as well as future dividend streams – furthermore, the State will continue to receive royalty payments (from the users of Utah Point BHF) and PPA will continue to receive certain charges for volumes associated with Utah Point BHF.

• The Government has developed an access and pricing regime, which facilitates further utilisation of the asset while providing priority to Junior Miners.

• The access and pricing regime will not interfere with the terms of existing commercial agreements.

• The recent market sounding undertaken by the Lead Financial Advisor (“LFA”) in conjunction with Treasury has identified strong bidder appetite for the asset.

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2.1 Introduction

The Government introduced the Bill into the Legislative Assembly in November 2015. The Bill provides the legislative authority for the Transaction. The Legislative Assembly passed the Bill in February 2016. It was then debated in the Legislative Council in March 2016. During the debate, the Bill was requested to be referred to the Standing Committee on Legislation to perform a review of the Bill and its underlying policy. The Committee has been requested to report back to Parliament with an outcome of the review findings on 17 May 2016.

2.2 Utah Point BHF

Utah Point BHF is located in the world’s largest iron ore export port and the multi-user berth is one of four berths located in Port Hedland that are owned by the PPA. Constructed in 2010, the facility comprises a berth 272m in length, with a berth pocket of 14.7m, a ship loader with a peak load rate of 7,500 tonnes per hour, two stockyard product storage facilities and supporting infrastructure, roads and product transport, and reclaiming and conveying equipment. PPA owns and operates the berth and facilitates the export of bulk products, currently iron ore and manganese3. Figure 1 below provides an outline of the Utah Point BHF and key infrastructure.

Figure 1: Utah Point BHF berth (PHPA4) and adjacent stockyards

Source: PPA

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In the financial year ending 30 June 2015, Utah Point BHF facilitated the export of 19.5 million tonnes of ore, compared with 18.8 million tonnes in the year ending 30 June 2014. In dollar terms, this equated to $146 million in revenue in 2014–15 and $141 million in 2013–14.

2.3 Overview of the Government Process to Date

The Government announced fiscal reform initiatives in the 2014-15 Budget which included potential asset sales. The first tranche of asset sales announced on 28 August 2014 included the Utah Point BHF, Kwinana Bulk Terminal (“KBT”) and the Perth Market Authority (collectively “Tranche 1”).

On 23 December 2014, Rothschild and Deloitte were appointed as LFA for the scoping study of the potential divestment of KBT operated by Fremantle Port Authority (“FPA”), Utah Point BHF operated by PPA and any subsequent lease or sale.

Figure 2: Transaction Progress Timeline

Treasury, supported by the LFA and its legal advisers, Minter Ellison and the State Solicitor’s Office (“SSO”), has managed the detailed vendor due diligence on the Transaction with the support and advice of a range of other advisers (set out in Table 1 below), and has reviewed (in consultation with a broad range of stakeholders) a number of commercial and policy considerations for the Transaction. Key considerations included the definition of the exact scope of the asset package and the access and pricing parameters that would be applicable to the operation of the asset subsequent to divestment. This process has been and continues to be run in close consultation with the Department of Transport, Department of State Development, PPA and SSO.

The divestment of the Utah Point BHF incorporates a comprehensive analysis of the asset and options taking into account the approved project objectives (see section 2.5). A number of key milestones have been achieved including the submission of reports and recommendations to the Government as outlined in Table 1 below.

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Table 1: Transaction Milestones

Timing Key Milestone Detailed Work

February

2015

Submission of Phase 1

Report

The LFA submitted a report in February 2015 to Treasury outlining

the key Transaction issues, timelines, resource requirements and

budget. The Economic and Expenditure Reform Committee

(“EERC”) noted the report and also:

• endorsed the project plan for the lease of Utah Point BHF

incorporating:

- a scoping study, divided into two phases (Phase 2A and

Phase 2B); and

- a Transaction execution phase (Phase 3);

• approved the resource requirements and budgets outlined in

the report; and

• agreed the Transaction is to be delivered in a timely manner

and sought the proposed timeline be accelerated where

possible.

March to

August 2015

Appointment of Secondary

Advisors

A detailed process was undertaken to select the most appropriate

advisers to assist the State with the Transaction. Secondary

Advisors were engaged to undertake detailed due diligence for the

divestment of Utah Point BHF including:

• accounting — Deloitte;

• tax — Ernst & Young;

• business optimisation — Deloitte;

• technical — GHD;

• environmental — Jacobs;

• commodity — AME;

• insurance — Risk Advisory Services; and

• economic and regulatory – Deloitte Access Economics.

August 2015 Submission of Phase 2A

Report

The Phase 2A report was submitted to Treasury on 5 August 2015

and addressed:

• issues associated with the proposed Utah Point BHF lease

package;

• policy considerations to be resolved for the proposed lease

package and decisions required including to address risks

presented by the development of facilities that may reduce

Utah Point BHF trade volumes; and

• potential risks associated with progressing the proposed lease

package.

The Phase 2A Report was endorsed by the Government.

9 November

2015

Introduction of legislation The Bill was introduced to Parliament in November 2015 and went

through the first and second reading. The Bill provides the

legislative framework for the State to transition the Utah Point BHF

to the private sector through a long-term lease.

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January 2016 Submission of Phase 2B

Report (the Scoping Study)

The contents of the Phase 2B report were provided to the

Department of Transport, PPA, Department of State Development

and SSO for review and comment. The Phase 2B report was

submitted to Cabinet in January 2016. The report:

• identified the proposed lease package including the asset and

land packages associated with the Transaction;

• reviewed the current operations of Utah Point BHF and

identified current and likely future risks and opportunities;

• outlined the key market themes;

• outlined the key policy decisions required from Government to

effect the Transaction;

• set out the policy considerations to be resolved for the

proposed lease package and decisions required;

• outlined the potential risks associated with progressing the

proposed lease package;

• indicated interested parties of the Utah Point BHF lease

package;

• took into account matters raised by various public sector

agencies and advisers appointed by the State; and

• outlined the proposed timetable for the Transaction.

18 January

2016

Government approval to

proceed to Phase 3

The Cabinet submission including the Phase 2B report was

approved on 18 January 2016.

23-25

February

2016

Legislation in the Legislative

Assembly

The consideration in detail by the Legislative Assembly occurred

between 23 February 2016 and 25 February 2016. The Legislative

Assembly passed the Bill.

February and

March 2016

Market sounding Treasury and LFA undertook market sounding for the divestment of

Utah Point BHF, which included meeting with potential bidders to

confirm the depth of investor interest, which to date has been

strong.

March – May

2016

Finalisation of due diligence

reports

The Secondary Advisors as detailed above are currently in the

process of finalising their due diligence reports.

PPA has been assisting with this process through providing input

and reviewing the detailed due diligence reports.

2.4 Next Steps for the Transaction

The next key milestone of the Transaction process is the passing of the Bill. Once the Bill has passed, the Lease execution stage will commence.

It is important to note that there are agreed steps at a number of specific junctions of the process which review the suitability of the proposed divestment to ensure the Transaction only proceeds where the State achieves its targeted Project Objectives, including that the sale value exceeds the agreed/determined retention value. The retention value includes an analysis of returns foregone by Government as a result of the Transaction compared with the anticipated Transaction proceeds.

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Should a decision be made at each junction to proceed with the Transaction, then it is envisaged that a two-stage process will be run after the initial prequalification of interested parties as follows:

• Prequalification/Expression of Interest (“EOI”) (estimated 3 weeks): the pre-qualification phase allows well-credentialed potential purchasers to be identified and shortlisted for inclusion in the divestment process. A document inviting potential purchasers to register their interest in the process will be made available along with a confidentiality deed for potential purchasers to execute ahead of receiving confidential information in the Indicative Bid process.

• Stage One: Indicative Bids (estimated 5 weeks): during this stage, interested parties that were invited post pre-qualification (“Bidders”) will be required to prepare Indicative Bids. This will involve the issue of the Information Memorandum (“IM”) to these Bidders and the request for and lodgement of an Indicative Bid (inclusive of price). The IM is a detailed document with confidential information including historical financial reports, management forecasts, operational information and other key information. The Indicative Bid phase will be used to further refine the list of parties invited into the next phase. Indicative Bids will also be assessed against a retention value analysis to determine whether continuing with the process will meet the project objectives.

• Stage Two: Binding Bids (estimated 10 weeks): The Binding Bid Stage will involve the preparation of full, legally binding bids by Bidders shortlisted from Stage One. Bidders will be provided with sufficient information including due diligence reports to enable them to lodge an unconditional Binding Bid for the lease of Utah Point BHF.

Assuming the passing of the Bill by Parliament by the end of June 2016 and subject to market conditions, it is envisaged that the Transaction could be completed by the end of the 2016 calendar year.

2.5 Government Objectives

The Treasurer’s second reading speech for the Bill outlined the Government’s objectives for the Transaction which were:

• maximise Transaction proceeds and the financial return for the State, while minimising residual financial risks and liabilities;

• facilitate the continued efficient and reliable operation of the facility;

• facilitate private sector provision of infrastructure for the future and contribute to the State’s economic growth;

• drive efficiencies through the introduction of private sector disciplines; and

• ensure that the operating models for the remaining businesses of the Pilbara Ports Authority are financially sustainable.4

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These objectives are key guiding principles and will remain important considerations for Government when forming policy positions and making decisions. As outlined further in section 2.6, the Transaction is an important part of the Government’s broader asset sales program.

2.6 Western Australia’s Economy and State Budget Considerations

The State’s finances have been significantly weakened over the last two years from the combination of declining commodity prices, a contracting domestic economy and a record low share of GST (GST relativity). In the December 2015 Mid-Year Financial Projections Statement, a general government operating deficit of $3.1 billion was forecast for the 2015-16 financial year with forecast net debt of $29.6 billion at 30 June 2016. This was forecast to increase to $39.0 billion by 30 June 2019. Further operating deficits of $3.0 billion in the 2016-17 financial year and $820 million in the 2017-18 financial year were forecast before an expected return to surplus of $641 million in 2018-19 financial year5.

Table 2: Key budget aggregates

2014-15

Actual

2015-16

Budget

Estimate

2015-16

Mid-year

Revision

2016-17

Forward

Estimate

2017-18

Forward

Estimate

2018-19

Forward

Estimate

GENERAL GOVERNMENT SECTOR

Net Operating Balance ($m) -431 -2,708 -3,146 -2,961 -820 641

Revenue ($m) 27,400 26,325 25,617 26,477 29,002 31,554

Revenue Growth (%) -2.0 -2.7 -6.5 3.4 9.5 8.8

Expenses ($m) 27,831 29,033 28,764 29,438 29,822 30,913

Expenses Growth (%) 2.2 2.5 3.4 2.3 1.3 3.7

TOTAL PUBLIC SECTOR

Net Debt at 30 June ($m) 23,374 30,996 29,552 34,680 38,288 39,043

Asset Investment Program ($m) 5,777 6,284 5,929 6,056 6,089 5,517

Cash Position ($m) -2,500 -5,090 -5,653 -4,716 -2,906 -516

Gross Borrowings at 30 June ($m) 44,252 46,930 47,284 52,311 55,591 59,293

KEY FINANCIAL RATIOS(a)

Cash Operating Surplus as a Share of

Receipts (%)

5.1 -0.6 -1.9 -0.2 3.3 6.3

Net Debt to Revenue (%) 61.4 80.5 78.6 87.0 88.9 84.4

Note: (a) These ratios relate to the total non-financial public sector.

Source: The State of Western Australia 2015-16 Mid-Year Financial Projections Statement

5 http://static.treasury.wa.gov.au/2015-16-myr/2015-16-government_mid-year_projections-statements.pdf

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The net debt to revenue ratio is forecast to remain above the State’s 55% target limit across the entire forward estimates period, predominantly reflecting the unprecedented revenue write-down over the last 18 months or so.

The Government is continuing to drive wage restraint and other spending efficiencies across the public sector, as well as progressing its asset sales program, to ensure the State’s budget settings over the medium to longer term are sound.

2.7 Rationale for the Privatisation

Australian governments have historically been responsible for much of the infrastructure funding task and the transfer of state-owned assets to private ownership has been part of general microeconomic reform.

Infrastructure Australia6 observes that many publicly owned infrastructure assets now serve limited or no public policy objectives. Where there are ongoing policy objectives, these objectives can often be achieved more effectively through alternative means, such as a community service obligation contract with a privately owned and operated entity.

The emergence of specialist companies managing outsourced services, and delivering such services efficiently, has made the benefits of private sector ownership and operation of infrastructure assets more compelling. Relevantly, Infrastructure Australia notes that “it is now difficult to justify, for example, why a government needs to own a bulk coal port in the midst of a private sector coal supply chain”.6

When the right mix of ownership, competition and regulation is found, in the long-term, privatisation projects deliver efficiency and financial gains resulting in better outcomes for the community. Recognition of the benefits of port privatisations for state governments are evidenced by the recent trend of privatisations Australia-wide. There are a number of successful case studies of state governments transferring assets to the private sector and utilising the proceeds to invest in new infrastructure. For example:

• the Tasmanian government’s sale of Hobart Airport allowed new investments in hospitals, transport hubs and agriculture water storage and irrigation;

• the recent lease of Port Botany and Port Kembla contributed significantly to the funding of infrastructure in New South Wales (“NSW”) with $4.3 billion net proceeds from the lease transferred to the NSW government’s dedicated infrastructure fund, Restart NSW; and

• the NSW government invested $340 million of the proceeds from the Port of Newcastle transaction towards the revitalisation of central Newcastle and the remainder (of more than $1.2 billion) was invested in Restart NSW.

6

The current NSW Premier, the Hon Michael (Mike) Baird MP, commented at the time of the Port of Newcastle Port transaction that: “Transactions such as this bring enduring benefits to communities and the economy, and build on the NSW Government’s successful track record in recycling mature State-owned assets to deliver major

6 Infrastructure Australia, Part of the Answer to Removing the Infrastructure Deficit, October 2012

15

infrastructure projects that will unlock opportunities for growth, jobs and economic development”.7

The proceeds from the Victorian Government’s Port of Melbourne divestment have been identified to fund the removal of 50 of the worst level crossings in Victoria. The removal of these crossings will reduce road congestion and improve safety, with completion expected in 2017. The Victorian Premier recently stated that: “Leasing the port means we can create thousands of jobs, get Victorians home safer and sooner and still protect our AAA credit rating”.8

The success of such transactions is a strong indicator that the Government should act now to capture the strong market demand for port infrastructure assets.

Notwithstanding the current uncertainty in relation to iron ore, the Government is confident in the long-term outlook and that there is a pool of bidders interested in Utah Point BHF on a stand-alone basis or as part of a longer-term strategic supply chain integration strategy.

The main benefits to the State of the Transaction include the following:

• monetisation of past capital investment and future dividends;

• retirement of debt and consequent reduction in interest expense;

• removing State financial obligations and risks associated with the future:

– the State has facilitated the start-up of Junior Miners, taking on construction, demand and operating risk at a time when it was appropriate;

– all other iron ore berths at Port Hedland are privately owned;

– there is significant ongoing operating and commodity future risk which is better managed by the private sector; and

– the ongoing risk profile of Utah Point BHF needs to be considered against the returns to the State and alternative benefits to the State through use of Transaction proceeds;

• redeployment of proceeds to other income producing assets;

• capital market development;

• balancing private sector innovation with public sector regulatory oversight;

• facilitation of trade and continued receipt of royalty payments; and

• assisting the State in delivering its infrastructure priorities.

Details of the benefits outlined above are provided in the remainder of this section.

7 http://www.transport.nsw.gov.au/media-releases/transforming-newcastle-port-lease-secures-funds-revitalisation

8 http://www.premier.vic.gov.au/level-crossing-contract-awarded-with-works-to-start-within-weeks/

16

2.7.1 Monetisation of Past Capital Investment and Future Dividends

As outlined in section 5.2, the State invested substantial capital and accepted development risk in the construction of the Utah Point BHF as Junior Miners were unable to finance the development without assistance from the State. Now that the facility is operational and is facilitating trade, there is no longer the same impetus to tie up the State’s capital in the facility. Accordingly, the Transaction allows the State to unlock this capital, monetise future dividends and pass on operating risk.

The Government believes that potential bidders are likely to offer an amount to secure a long term lease of the facility which exceeds the value of Utah Point BHF if the State continues to hold the asset. In order to ensure value is achieved, retention value will be calculated prior to the receipt of indicative bids.

There is strong rationale to privatise Utah Point BHF, as the Government’s objectives of facilitating trade by Junior Miners has been achieved. The State has been rewarded for the risks it took on during construction and the initial ramp up phase, to ensure that Junior Miners have an avenue of export. The Government, given other competing priorities to invest in economic and social infrastructure, has considered the returns to date and the ability to monetise future dividends now. Further, the Government is also of the view that future risks associated with Utah Point BHF are best managed by the private sector.

There is a risk to future dividends from the continued ownership by the State. It makes economic sense to proceed with the divestment process while ensuring appropriate protections are in place to prevent abuse of market power by a monopoly owner which are discussed further in section 4.

2.7.2 Retirement of Debt and Reduction in Interest Expense

Infrastructure Australia notes that Australian governments are facing increasing pressure on their budgets as demographic changes are set to increase net expenditure pressures in future years. Given this outlook, governments are seeking to avoid increasing their borrowings and retire debt to protect their financial position and credit rating and thereby minimise borrowing costs.

State governments in particular have had limited capacity on their balance sheets to fund growing infrastructure demand. Infrastructure ownership has been seen by credit rating agencies as adding to balance sheet risk and often requires longer-term capital spending requirements. Infrastructure can therefore place particular pressures on balance sheets and the maintenance of credit ratings9.

The State is currently rated AA+ (negative outlook) by Standard and Poor's (“S&P”) and Aa2 (stable outlook) by Moody's Investors Service (“Moody’s”) and has been subject to downgrades from both credit rating agencies from the previous AAA ratings enjoyed in 2013.

9 Infrastructure Australia, Part of the Answer to Removing the Infrastructure Deficit, October 2012.

17

On April 14, 2015, S&P placed the State’s credit rating of AA+ on negative credit watch. However, it removed this negative credit watch in July 201510 (but kept the State on negative outlook), noting that in order for the State to retain its rating, it would need to implement the ‘significant corrective measures’ in its May 2015 Budget. S&P has explicitly noted that asset sales would ease Western Australia’s debt burden. For example, in November 2015, S&P expressed a view that Treasury’s forecast of a FY19 surplus “will be very difficult for the Government to achieve, and foresee further upward pressure on the State's debt level, exclusive of planned or any further asset sales”11.

In February 2016, Moody’s downgraded Western Australia’s credit rating from Aa1 to Aa2. Moody’s noted that the downgrade is reflective of the ongoing deterioration in Western Australia’s financial and debt metrics which were exacerbated by the impact of falling iron ore and oil prices on the State’s budget outcomes, and an increasing risk that the State's debt burden will be higher than indicated in its 2015-16 Mid-year Financial Projects Statement.12

The retirement of debt has a flow-on effect of reducing interest payments. The general government sector made interest payments of $543 million in the 2014-15 financial year. Across the total public sector (including public corporations), interest costs totalled $1.5 billion in 2014-15.

2.7.3 Transfer of Future Capital Investment and Operating Risk

The ongoing financial viability of Utah Point BHF is highly leveraged to the volatile global iron ore market, which poses a risk for the State. A continued severe downturn in the global iron ore market would threaten the solvency of its customers which may impact the ongoing viability of the facility and consequently contribute to the State’s budget deficit. Future volumes at Utah Point BHF are also contingent on its users continuing to invest in new projects. The recent Atlas Iron Limited (“Atlas Iron”) expert report by PPB Advisory on restructure of Atlas Iron noted a likely drop in production as Atlas Iron transitions away from the Abydos and Wodgina mines from the 2018 financial year, with additional capacity being provided by its Corunna and McPhee mines. The development of the additional mines is linked to the significant amount of capital expenditure required (~$40 million in the 2017 financial year for Corunna and ~$55 million in the 2018 financial year for McPhee)13. In this regard, it is important to note that PPA currently assumes volume risk in relation to throughput from the users of Utah Point BHF, further elevating the risks to the State and taxpayers.

By contrast, such risks may be acceptable to private-sector investors. Private investors often have higher risk appetites. Private sector operators have been better able to anticipate and respond to industry changes and would thus be better able to manage possible risks. Hence, there are likely to be private investors willing to pay up-front proceeds in order to secure a long term exposure to the asset.

10 Standard & Poor’s Ratings Services, ‘Ratings on the State of Western Australia Affirmed’, 14 July 2015.

11 Standard & Poor’s Ratings Services, ‘Supplementary Analysis: Western Australia (State of)’, 3 November 2015.

12 Moody’s Investors Service, ‘Rating Action: Moody’s downgrades Western Australia’s rating to Aa2 from Aa1;

changes outlook to stable’, 8 February 2016 13

AGO Announcement: Update on Debt Restructure: Creditors’ Scheme documentation and information for

shareholders, April 2016.

18

Furthermore, Utah Point BHF is currently partially funded by Western Australian Treasury Corporation (“WATC”) debt. Whilst the State is able to borrow at lower rates than private sector terminal operators, it is the taxpayers that are implicitly underwriting such debts and associated risks. Hence, Government bond rates do not fully account for the risks faced by Utah Point BHF and the taxpayers of Western Australia take on this risk. The use of WATC debt underwriting Utah Point BHF restricts available funds for investment by the State in other essential infrastructure.

In addition to the commercial risks, whilst Utah Point BHF is still a relatively new asset with only modest current capital requirements, as the asset ages it is likely to require further capital and maintenance expenditure. This capital expenditure will further affect the State’s financial position and affect the ability to direct these funds to more appropriate State financed assets. The private sector also has multiple sources of funding, such as fund investors and international infrastructure debt markets, providing greater opportunities to secure necessary finance.

2.7.4 Redeploying Proceeds to Other Income Producing Infrastructure Assets

Australia has a growing infrastructure deficit. Much of the deficit is the responsibility of state governments, which have only limited capacity to fund new infrastructure, given existing and likely future budgetary constraints.

The proceeds and transfer of capital obligations will allow the State to drive regeneration through greater private sector involvement in economic infrastructure that will allow the State, through increased balance sheet flexibility, to focus on key social investments, policy objectives and critical infrastructure required for future growth without burdening the State with additional debt. An example of a current infrastructure project announced in Western Australia is the Forrestfield-Airport Link. Transaction proceeds could offset the cost of infrastructure projects such as this. As noted in the 2015/16 Budget Speech by the Treasurer, “Sales proceeds will be significant, and will be recycled into already committed infrastructure projects such as the Forrestfield Airport Link”14.

This position is reflected in Infrastructure Australia’s paper prepared in October 2012 “Australia’s Public Infrastructure – Part of the Answer to Removing the Infrastructure Deficit”15. The paper advocates that Australian governments should look to transfer publicly owned infrastructure to the private sector and use the net proceeds to build the new infrastructure. Transferring existing infrastructure to the private sector would also likely achieve significant broader economic productivity benefits from introducing private sector discipline, improving the ability to finance the expansion of infrastructure as required, improved governance – where the State is no longer both the regulator and the owner, and greater transparency in the costs of community service obligations.

Privatisations may also provide the opportunity to receive an additional 15 per cent on proceeds from the Commonwealth Government through the Asset Recycling Initiative to

14 http://static.ourstatebudget.wa.gov.au/15-16/2015-16-wa-state-budget_bp1.pdf?

15 http://infrastructureaustralia.gov.au/policy-publications/publications/files/Australias_Public_Infrastructure-

Part_of_the_Answer_to_Removing_the_Infrastructure_deficit.pdf

19

be utilised by the State for other priorities and needs for the community. Further delays in the Transaction may see the State lose the opportunity to access these funds.

2.7.5 Balances Private Sector Innovation with Public Sector Regulatory Oversight

The divestment of Utah Point BHF is a strategy that reflects the view that governments can ensure fair access and pricing of infrastructure assets without owning and operating the assets. Historically, private sector operators have been more efficient and innovative. A transition to private sector ownership will incentivise the new owner to optimise the capability of the asset through unique investment and innovation, with a view to maximising its return on investment. Consequently, the divestment of Utah Point BHF has the potential to not only unlock capital and improve the State’s budget position, but also improve export potential for current and prospective users of the facility.

While access and pricing is often a subject of concern in privatisations, such issues can be resolved through regulatory regimes. As noted in the second reading speech for the Bill, the Government is mindful that the development of an access and pricing framework is important to provide comfort around the continued operation of the asset. This is important both from the perspective of existing consumers of Utah Point BHF to ensure appropriate protection from anti-competitive behaviours will be in place, and from the Government’s perspective to ensure the facility continues to optimise trade throughput, such that any spare capacity is utilised and not strategically hoarded by incumbents to the detriment of the State.

The access and pricing regime, outlined in Section 4, provides Junior Miners priority to access the facility and includes other protections to incentivise TerminalCo to ensure the asset continues to be utilised for productive purposes.

2.7.6 Capital Market Development

Privatisation has served as a vehicle for promoting capital market objectives such as broader share ownership, and increasing the depth and liquidity of equity and debt markets. Privatisation has sought to bring in foreign investors, in some cases for the first time, and thus help put the country on the international capital map. From a Western Australian perspective, privatisations will assist in the continued investment from important trade partners domestically and internationally. The Transaction forms an important part of the Government’s broader asset sales program.

2.7.7 Facilitation of Trade and Continued Receipt of Royalty Payments

TerminalCo is commercially incentivised to ensure that Utah Point BHF continues to facilitate trade and volumes (whether through current users or new users).

The State will continue to benefit from Utah Point BHF via royalty payments on the commodities exported through the facility without having exposure to the throughput risk. This is in addition to the upfront benefit of the divestment proceeds supporting the case for divesting the asset.

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2.8 Attractiveness of Utah Point BHF to Bidders

As noted in the second reading speech in November 2015, Utah Point BHF presents an attractive proposition to prospective bidders for several reasons including:

• it is a strategic asset situated in the world’s largest iron ore export port;

• it performs a valuable function as an export gateway for Junior Miners, noting that it offers capital efficiency as an existing operating facility that does not require the significant investment in channel dredging and berth construction that may otherwise be required to facilitate export for these miners;

• it is a relatively new facility, operating for only five years, with limited maintenance expenditure required in the short-term; and

• the Transaction package will include shipping capacity rights in an environment of increasing export volumes, noting that the vessels utilising Utah Point BHF are generally not tidally constrained, thereby offering increased flexibility for sailing times subject to compliance with the PPA’s vessel movement protocols.

The State conducted a marketing exercise in February and March 2016, which confirmed strong interest from potential bidders for the Transaction. This momentum is important in the context of achieving Government objectives in relation to the Transaction.

2.9 State Policy Management Post Transaction Close

The State will have a number of policy and governance levers to ensure TerminalCo manages Utah Point BHF in a manner consistent with the public interest, including:

• the Bill and the Transaction documents which provide transparency of the role of the State and TerminalCo and a comprehensive authorising environment for the Transaction, including a range of broader community safeguards which are described in section 8;

• the State interface and oversight will continue during the lease term through PPA (as Terminal Lessor), a number of public sector agencies and regulatory bodies (such as the Environment Protection Authority and the ERA);

• as Terminal Lessor, PPA remains responsible for port policy planning, enforcing planning and environmental performance and protections, controlling access to the harbour channel and channel access scheduling;

• Commonwealth and State laws continue to apply across the relevant portfolio areas such as ports, transport, environment and planning; and

• contractual provisions including State step-in for non-performance and ultimately, termination of the lease.

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3 PILBARA PORT ASSETS (DISPOSAL) BILL

Key points:

• The Bill best achieves Government’s Project Objectives and is consistent with market precedents.

• The legislation provides transparency, certainty, timeliness and optimal economic outcomes.

• In response to the consideration in detail in the Legislative Assembly, the definition of the port assets that could be disposed was amended by limiting the definition to the Utah Point BHF and assets associated with that facility.

• The legislation provides for a head of power to make regulations to "provide access to a service, or price regulation of a service, or both".

3.1 Introduction

This chapter addresses a number of key aspects of the overarching framework – in particular, the structure of the Bill, precedent legislation, consultation on the legislation and the proposed scope of the lease and regulation for providing access to services.

3.2 Structure of the Bill

The Bill has been drafted to provide for the disposal of Utah Point BHF, and for related purposes.

The Bill consists of 47 clauses that broadly provide for:

• authorising the disposal of all or part of the assets and liabilities of PPA and associated assets;

• controls and limitations on the parameters of the disposal; and

• post-sale transitional arrangements and regulatory matters.

The Bill is divided into six parts and one Schedule as outlined below.

• Part 1 relates to the usual preliminary matters and specifies that the Bill will come into operation on the day after it receives Royal Assent.

• Part 2 deals with the authorising powers and related limitations for the disposal (including the limitation that land can only be disposed of under the Act to a private entity if the interest is a licence or an interest in land no greater than a leasehold interest, in either case for a period not exceeding 99 years).

• Part 3 provides for the administrative mechanics of implementing the disposal, including (but not limited to) the making of transfer orders; access to records; registration of documents; disclosure of information; and the payment of proceeds.

22

• Part 4 relates to specific provisions for the use of corporate vehicles in a disposal, ensuring that relevant laws may, if prescribed by regulations, apply to the operation of the port assets while held in a corporate vehicle which is owned by the PPA or the State, prior to disposal.

• Part 5 contains provisions relating to leases and licences, including the designation of port asset leases and lease holders; and provisions relating to the effect of port assets leases.

• Part 6 covers a range of miscellaneous matters, including (but not limited to) the optional exemption of the disposal from State taxes; protection of existing leases; and regulations for the purposes of disposal of the assets and regulating access to and pricing of services.

• Schedule 1 contains a diagrammatic representation of the Utah Point BHF.

The Explanatory Memorandum for the Bill contains a detailed explanation of each clause in the Bill (and such explanation is therefore not replicated in this Submission).

3.3 Precedent Legislation

The form and content of the Bill is generally consistent with enabling legislation which has been enacted in previous years for other State-owned asset sales, including:

• the sale of the Dampier to Bunbury Natural Gas Pipeline, which was effected by the Dampier to Bunbury Pipeline Act 1997;

• the privatisation of AlintaGas, which was effected by the Gas Corporation (Business Disposal) Act 1999;

• the disposal of the State rail freight business, which was effected by the Rail Freight System Act 2000; and

• the sale of the assets and operations of the Perth Market Authority, which was effected by the Perth Market (Disposal) Act 2015.

It is also noted that, consistent with longstanding precedent, the states of NSW and Victoria, and the Northern Territory, have also recently adopted an approach whereby specific legislation has been enacted to enable sales of assets/classes of assets. Notably, Part 5 of the Bill is modelled on certain provisions from the Ports Assets (Authorised Transactions) Act 2012 (NSW).

3.4 Consultation

Treasury (supported by the LFA) worked closely with the SSO (supported by the State’s external legal adviser, Minter Ellison) in generating drafting instructions and responding to questions from the Parliamentary Counsel’s Office (“PCO”) to facilitate the development of the Bill. Treasury and the SSO also consulted with the PPA; the Department of Transport; the Department of State Development; the Western Australian Land Authority; and the Department of Lands at various stages in the drafting process. The feedback provided by these agencies was incorporated into the Bill where appropriate.

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3.5 Definition of Assets Authorised for Disposal

The original version of the Bill that was introduced into the Legislative Assembly contained a broad definition of "port asset" which potentially included any business, asset or liability owned or managed by PPA16. Under the original version of the Bill, the business, assets or liabilities that were to be the subject of a disposal would have been identified in an order made by the Minister under clause 10 of the Bill.

During consideration in detail by the Legislative Assembly, the definition of the port assets that could be the subject of a disposal was amended by limiting the definition to the Utah Point BHF and assets associated with that facility. This amendment was implemented by:

• an amendment to the definition of "port asset" in clause 4 of the Bill;

• the insertion of a new definition of "Utah Point Bulk Handling Facility"; and

• the insertion of a new Schedule 1 containing a diagrammatic representation of the Utah Point BHF.

Notably, the new definition of Utah Point BHF and Schedule 1 include the key components of the facility, being:

• the PPA berth known as Berth 4; and

• the PPA stockyards known as Stockyard 1 (“SY1”) and Stockyard 2 (“SY2”).

The new definition of Utah Point BHF and Schedule 1 do not include all components of the Utah Point BHF which are proposed for divestment. The reasons for this are:

• to continue to allow some flexibility to include or exclude assets from the divestment on the basis of continued scoping, rather than setting out the exact scope of the divested asset in the Bill; and

• due to the fact that some infrastructure owned by PPA is located above, below and intersects with, infrastructure held pursuant to the agreement ratified by the Iron Ore (Mount Newman) Agreement Act 1964, as varied (“Mt Newman State Agreement”) and the agreement ratified by the Iron Ore (Mount Goldsworthy) Agreement Act 1964, as varied (“Mt Goldsworthy State Agreement”). A three dimensional diagram would be required to distinguish between the infrastructure that is to be the subject of the divestment and the infrastructure that is leased to, or owned by, BHP Billiton and relevant joint venturers. This is not currently possible in Western Australian legislation.

16 The definition of "port asset" in clause 3 of the original version of the Bill is set out below:

port asset means –

(a) the whole or any part of a business carried on by, or any asset or liability owned or managed by, the Authority; or

(b) the whole or any part of a business carried on by, or any asset or liability owned by or managed on behalf of the Authority, an associated agency, a corporate vehicle or the State by, a corporate vehicle;

24

The definition of port asset has been retained to capture the additional physical components which form part of the Utah Point BHF (such as the conveyor from the stockyards to Berth 4) and other assets and liabilities (such as contractual rights and liabilities) which are proposed for divestment.

The amendments described above were made to provide clarity and transparency to Parliament of intended port assets to be divested and provide assurance that opportunity for Parliamentary debate would occur for any further PPA owned port assets considered for divestment in the future.

3.6 Regulations for Purposes of Providing Access to Services

Clause 46(2) of the Bill provides for a head of power to make regulations to "provide access to a service, or price regulation of a service, or both". Clause 46(3) includes a non-exhaustive list of matters which may be the subject of the regulations17. Clause 46(4) clarifies that access arrangements are not subsidiary legislation for the purposes of the Interpretation Act 1984.

The PCO will draft the Pilbara Port Assets (Access and Pricing) Regulations 2016 (“Regulations”). The primary purpose of the Regulations is to provide for the access and pricing regime to apply to Utah Point BHF following an entity acquiring the lease as contemplated by the Bill. The Regulations will contain the mechanics of the access and pricing regime and empower the ERA as the Regulator.

The access and pricing regime that will be the subject of the Regulations is described in Section 4 of this Submission.

17 The non-exhaustive list of matters includes lodgement of service access terms and conditions and/or price

regulation arrangements with the regulator; appropriate approval processes for approval of terms and

conditions and subsequent amendments by the regulator; provisions for the production of information; duties

and requirements for service providers; segregation of functions and business, services between related bodies

corporate; arbitration of disputes; provisions in relation to civil penalty provisions and fines; and review of

decisions made under the regulations and conferral of functions on the Minister, the Economic Regulation

Authority or any other person.

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4 ACCESS AND PRICING

Key points:

• Utah Point BHF will be governed by an access and pricing regime which is designed to protect current and future users of the facility.

• Key principles of the regime include:

– preference to Junior Miners;

– access and pricing regulation be implemented through a negotiate and arbitrate model for access, and price monitoring; and

– the regime will be overseen by the ERA.

• Existing contracts will not be subject to the access and pricing regime.

• Should Junior Miners cease exporting, the access and pricing regime allows the TerminalCo to seek alternative users to prevent Utah Point BHF from being idle.

4.1 Introduction

The main concern when a monopoly infrastructure asset passes from the public sector to the private sector is what impact this will have on access to services, including in relation to the prices levied for those services.

Utah Point BHF is not currently subject to a specific access and pricing regime. A summary of the existing customer contracts is set out in section 6 of this submission.

As part of the preparations for the Transaction, an assessment has been undertaken of the adequacy and suitability of the existing statutory and regulatory framework if Utah Point BHF is controlled and operated by a private operator (including one which may have an interest in another link in the import-export supply chain).

Utah Point BHF was developed by the State to provide a multi-user export terminal enabling, in part, an export pathway for Junior Miners in acknowledgement that Junior Miners did not have the financial ability to develop a facility on their own. Furthermore, it was considered that the Government should ensure that the regulatory framework established creates an environment, post privatisation, in which economically efficient decisions on access and pricing and the ongoing development of the infrastructure are made.

As such, the Government has proposed an economic regulatory framework for Utah Point BHF that aims to achieve two core objectives:

• facilitate Junior Miners, on a preferential opportunity basis, to negotiate access to regulated services on fair commercial terms at the Utah Point BHF; and

• promote the economically efficient use of, operation and investment in, the Utah Point BHF in order to promote effective competition in upstream or downstream markets.

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The access and pricing regime is proposed to be set out in regulations as opposed to the

Bill. The Bill provides for a broad power to make regulations establishing an access and

pricing regime. The Bill is otherwise silent on access and pricing. This model was

adopted to provide maximum flexibility for the State, via the relevant Minister, to amend the access and pricing regime quickly and efficiently if it was found to be deficient.

4.2 Application of the Regime

The regime will apply to prospective users of TerminalCo’s services and existing users of the TerminalCo’s services once their existing contracts with the TerminalCo have expired or have been terminated.

Existing contracts (“Foundation Contracts”) will not be subject to the regime, thereby preserving the arrangements that the users have put in place through commercial discussions in relation to Utah Point BHF. In addition, the regime does not apply to State Agreements, or to services which are excluded from the regime (services which are competitively provided).

4.3 Key Principles

Where an entity (either private or government) provides natural monopoly infrastructure services, economic regulation may be justified in order to address the potential for the entity to exercise market power and engage in anti-competitive behaviour. This behaviour may involve or be in relation to:

• discrimination: TerminalCo may prefer one access seeker or port user over another by imposing different terms and conditions, or may make decisions to invest in infrastructure which favours one access seeker over others;

• access: TerminalCo may prevent third parties from using the port or services at the port; and

• pricing: TerminalCo may impose prices which exceed prices required to achieve a reasonable rate of return on efficient investment.

Each of these issues is addressed by the proposed access and pricing regime, consistent with Western Australia's commitments under the Competition and Infrastructure Reform Agreement (“CIRA”). The key principles of the regime are set out below and described in detail later in this section.

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Figure 3: Access and pricing regime schematic

4.4 Discrimination

Subject to usual exceptions for efficient operation of the port, TerminalCo must not:

• engage in conduct which unreasonably prevents or hinders a party from accessing services provided by means of port facilities under TerminalCo’s ownership or control; or

• otherwise discriminate amongst users.

4.4.1 Obligation not to Unreasonably Hinder Access

Clause 6(4)(m) of the Competition Principles Agreement by the Council of Australian Governments provides that an access regime should incorporate the principle that "the owner or user of a service shall not engage in conduct for the purpose of hindering access to that service by another person".

There will be an overarching obligation on TerminalCo not to engage in conduct which unreasonably prevents or hinders a person from accessing services provided by means of terminal facilities under TerminalCo’s ownership or control.

Exclusions may apply if the conduct is constituted by:

Obligation not to unreasonably hinder

access

Obligation not to discriminate amongst

port users

Access regime Price monitoring

Access and pricing regime

The objects of the access and pricing regime are to: � promote the economically efficient use of, operation and investment in, the Utah Point Bulk

Handling Facility in order to promote effective competition in upstream or downstream markets; and

� facilitate junior miners negotiating access to regulated services on fair commercial terms at the Utah Point Bulk Handling Facility.

Pricing instrument

Access policy

Capacity management

policy

Obligation to negotiate

Negotiate / arbitrate

28

• a refusal to alter or add to terminal facilities if, the alteration or addition is not required for the provision of the requested regulated service;

• an act done in accordance with the access regime (including the capacity management policy); or

• a reasonable act done because of an emergency, in order to avert or minimise an imminent threat of death or serious injury to any person, loss of or serious damage to property, or material harm to the environment.

4.4.2 Obligation not to Discriminate amongst Port Users

Clause 6(5)(b)(iii) of the Competition Principles Agreement provides that regulated access prices should be set so as to "not allow a vertically integrated access provider to set terms and conditions that discriminate in favour of its downstream operations, except to the extent that the cost of providing access to other operators is higher".

With respect to negotiating or setting arrangements to provide access to services, there will be an overarching obligation on TerminalCo to not unfairly differentiate between users in a way that has a material adverse effect on the ability of one or more of the users to compete with other users, by TerminalCo imposing different terms and conditions (including in relation to price) upon users and potential users of Utah Point BHF, except where the different terms and conditions:

• reflect the cost or risk of providing access to the user or potential user which is higher than the cost or risk of providing access to other applicants or users; or

• are reasonably justified because of the different circumstances relating to access to the service which are applicable to the TerminalCo or the relevant port user(s) other than where those circumstances are that one port user is a downstream operation of the TerminalCo.

4.5 Access Regime

The proposed access regime is designed to reflect its preference to protect Junior Miners, while still providing certainty to TerminalCo. The access regime has five key features as outlined below:

• requirement for TerminalCo to have an access policy;

• requirement for TerminalCo to have a capacity management policy;

• obligation to negotiate in good faith;

• a negotiate / arbitrate regime; and

• preference to Junior Miners.

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Figure 4: Overview of the proposed Utah Point BHF access regime

Access seeker may raise the issue

with the State, although the State cannot intercede in the mechanics of

an access request.

The terminal operator must provide an unsuccessful access seeker with a statement

of reasons

Access seeker may require binding

arbitration for all terms other than price.

Access seeker makes access

request

The terminal operator may request further information and/or provide a preliminary indication of whether it is prepared to provide the service given access request (i.e. it may refuse requests that are not bona

fide).

The terminal operator's response to access request

Access seeker may engage the terminal operator's

internal dispute resolution process if it considers that the terminal operator is in breach

of its obligation.

Arbitrator

Binding arbitration for terms of access (other

than price).

Access Policy

The terminal operator must publish an Access Policy which includes information on: � the services Terminal Co will provide; � an access seeker's right to make access

requests; � an explanation of how access seekers may

make an access request; � the terminal operator's obligation to negotiate; � the financial and project information Terminal

Co requires; and � the negotiate / arbitrate regime.

Access agreement

Subject to specific exclusions, the

terminal operator has an obligation not to

unreasonably hinder access or discriminate

amongst port users.

Obligation to negotiate with access seekers

for a period of 6 months from the date

of access request.

Access agreement

The terminal operator negotiates with access seeker

The terminal operator must use best endeavours to provide regulated services to access seekers on fair commercial terms which: � meet the access seeker's

reasonable requirements; � are agreed between the terminal

operator and an access seeker by good faith negotiation; and

� are no less favourable than to comparable users.

This period will last for 6 months. If either party requests it, the period may be extended for a further 3 months for

Capacity Management Policy

The terminal operator must publish a Capacity Management Policy which at a minimum is required to include information on: � how the terminal operator will calculate berth

capacity; � the capacity register; � non confidential details of access requests; � notification arrangements for interested persons

when an access request is made; � the capacity relinquishment arrangements (as

outlined in the Regulations); and � details of how a party may trade capacity.

Access seeker may make a

complaint to the Regulator.

30

4.5.1 Access Policy

The access policy will provide a clear and transparent process for access seekers to seek access and provide a standard of conduct for TerminalCo. TerminalCo will be required to publish the access policy in a prominent location on its website. The access policy will set out the key documents and obligations on TerminalCo in respect of providing access to the Facility.

The key elements of the access policy – which are enforceable by the regulator – are as follows:

• The access policy must include:

– a list of services provided;

– a statement informing access seekers of their right to make access requests for regulated and non-regulated services;

– an explanation of how access seekers may apply for regulated services and the likely timeframes, processes and costs involved;

– TerminalCo's obligation to negotiate in good faith;

– the minimum financial and project information that TerminalCo reasonably requires to consider an access request; and

– details of an access seeker's right to engage the negotiate / arbitrate regime.

• TerminalCo will be required to provide an access seeker with information reasonably requested about:

– the extent to which the Facility is currently being utilised consistent with the capacity management policy;

– technical requirements that have to be complied with by persons for whom the operator provides regulated services of the kind requested; and any rules with which the access seeker would be required to comply.

• If an access seeker makes an access request for a regulated service, TerminalCo is required to respond to the access seeker in writing within a reasonable timeframe.

• The response may request further information from the access seeker in respect of the access seeker's financial and technical resources to utilise the capacity or service; and/or provide a preliminary indication about whether TerminalCo is prepared to provide the regulated service and if so, on what terms and conditions.

• TerminalCo will be required to provide an unsuccessful access seeker with a statement of reasons.

• If TerminalCo receives a complaint from any person, TerminalCo will be required to provide a copy of the complaint to the Regulator. This will assist the Regulator to enforce the regime including the obligations of no discrimination and no hindering.

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4.5.2 Capacity Management Policy

TerminalCo will be required to have and comply with a capacity management policy which will be published on its website. The capacity management policy must, as a minimum, include the following:

• set out how TerminalCo will calculate the berth capacity at the Utah Point BHF;

• set out a register of capacity which is available at the Utah Point BHF;

• set out non-confidential details of any access request received by TerminalCo;

• contain a function which notifies interested persons when an access request is made;

• set out the capacity resumption policy; and

• set out details of how a party may trade capacity.

The purpose of the capacity management policy is to provide transparency as to the berth capacity at the terminal so that, subject to confidentiality, all parties are aware of capacity rights and capacity allocation. This will also assist the Regulator in ensuring that the obligations of no discrimination are being complied with.

An important aspect of the capacity management policy is the capacity resumption policy. The purpose of the capacity resumption policy is to balance the Government’s objectives of preference for Junior Miners and facilitating trade through preventing non-Junior Miners hoarding capacity. The ability to resume capacity that is not being utilised prevents Utah Point BHF being idle and ensures facilitation of trade and economic growth. To ensure it is fair and balanced, the Regulations will provide that, as a minimum, the capacity relinquishment provisions will be:

• if, for a period of three months the Junior Miner is not shipping, TerminalCo may issue a "show cause" notice;

• the show cause notice will provide a minimum period of three months for the miner to commence shipping;

• if, after that time period, the miner has not commenced shipping then, unless otherwise agreed, TerminalCo may resume the capacity.

This provides a timeline of six months to allow the Junior Miner to resume shipping. Further, if the Junior Miner re-applies for the capacity which is resumed, then it will have the benefit of the Junior Miner preference policy (see below) which provides a further six to nine months to negotiate and secure capacity. As such, it seeks to protect and promote the facilitation of Junior Miner trade.

Any resumed capacity will be treated as new capacity and will be subject to the access and pricing regime.

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4.5.3 Obligation to Negotiate in Good Faith

A fundamental aspect of the access regime is the requirement for TerminalCo to negotiate in good faith with access seekers and use its best endeavours to provide regulated services to access seekers on fair commercial terms which:

• meet the access seeker's reasonable requirements;

• are agreed between TerminalCo and an access seeker by good faith negotiation; and

• are no less favourable than to comparable users.

TerminalCo must negotiate in good faith for a period of six months (if required). That period may be extended by a further period of three months if required by either party.

The obligation to negotiate in good faith requires that the parties act honestly, give genuine consideration to the legitimate interests and position of the other party and not act in a manner that is arbitrary, capricious or intended to cause harm to the other party.

If the parties cannot agree terms there is the ability for a party to enter into binding arbitration to determine the terms of access other than price (see below). It is also open for the access seeker to make a complaint to the Regulator, TerminalCo and / or the Minister if it considers TerminalCo is in breach of its obligation not to hinder, discriminate or negotiate in good faith.

TerminalCo is not required to negotiate access to regulated services where the access seeker cannot demonstrate that it has the necessary financial or technical resources to utilise the capacity requested. If TerminalCo considers the access seeker does not have the financial or technical resources then the access seeker can dispute this and engage the negotiate / arbitrate regime or make a complaint to the ERA that TerminalCo is not complying with its obligations to negotiate.

4.5.4 Negotiate / Arbitrate Regime

The access regime will be underpinned by a negotiate / arbitrate regime. This ensures that Junior Miners cannot be denied access. In the first instance, any disputes between the parties in respect of the access regime must be resolved within three business days of notification of the dispute, by negotiation between senior representatives (who must negotiate in good faith).

If the dispute is not resolved within five business days of the date of the dispute notice (unless otherwise extended by agreement), the parties:

• may elect to refer the matter to mediation; or

• either party may refer the dispute to arbitration.

If the dispute is referred to mediation, it will be conducted by a mediator agreed between the parties or chosen by the President of the WA chapter of the Resolution Institution.

33

If the dispute is referred to arbitration, a notice must be given by either party to the Regulator who will then decide whether it will arbitrate the dispute or whether to appoint a private arbitrator. The arbitration will be conducted in accordance with the provisions of the Commercial Arbitration Act 2012 (WA). The award will be binding on the parties other than in the case of fraud or manifest error. The arbitrator is empowered to determine all terms other than the price of the service.

4.5.5 Preference to Allocate Capacity to Junior Miners

Where TerminalCo has spare capacity at Utah Point BHF or will have spare capacity, it is required to notify the market of that spare capacity. The notice is required to include a period of no less than three months in which TerminalCo is seeking requests for access to the spare capacity. If Junior Miners make an access request within the period specified in the notice, then TerminalCo must negotiate for a period of six months with the Junior Miners that have made such an access request. The requirement to negotiate for six months may be extended for a further three months if negotiations are not concluded (or for a longer period if the access request is subject to arbitration).

At any time in the process a party may refer the matter for independent binding arbitration (although not during any extension period). There is a notional three month time limit for that arbitration. The effect of this is that negotiations should be concluded within six to nine months.

If no Junior Miner makes an access request within the specified period or TerminalCo is unable to agree terms with any Junior Miner access seeker, then TerminalCo may seek the Regulator's consent to negotiate with and enter into an access agreement with a non-Junior Miner for that capacity.

In considering whether to provide consent, the Regulator must consider whether it was reasonable for TerminalCo not to enter into an agreement with a Junior Miner. In making its decision, the Regulator may take into account the following matters in respect of the Junior Miner access seeker that was refused access:

• the price offered to the Junior Miner;

• the terms and conditions of the contract, including:

– the length of contract;

– the volumes contracted for;

– the commodity contracted (e.g. iron ore vs. manganese);

– the nature of contract (e.g. take or pay and abandonment);

– any funding required by the Junior Miner;

– the credit rating / financial capacity of the counterparty;

– any security offered (bonds / guarantees etc.); and

• any other matters the Regulator considers relevant.

The fact that TerminalCo may have secured a more commercially attractive agreement with a non-Junior Miner is not a relevant consideration for the Regulator in providing

34

consent to TerminalCo to negotiate. If the Regulator provides consent for TerminalCo to negotiate with a non-Junior Miner, then the Regulator must advise the Minister of its consent.

This mechanism is an important safeguard for Junior Miners as it allows them preferential access to the Facility. At the same time, it allows TerminalCo to utilise capacity efficiently if there are no Junior Miners that are in a position to use the Facility.

This ensures a strong right for Junior Miners to use Utah Point BHF while at the same time ensuring that capacity does not go unutilised (which is inefficient and also results in existing users paying a higher share of fixed costs of Utah Point BHF). [Note also that allowing the prospect of unutilised capacity at the facility may also be inconsistent with the facilitation of trade objective under PPA’s current mandate derived from the Port Authorities Act (1999).]

Figure 5: Negotiate / Arbitrate Regime

3 months

Spare capacity

The terminal operator will advertise the capacity

Parties negotiate terms

3 months

Access Regime

The terminal operator will negotiate with each junior

miner that submits an access request

Capacity obtained

6 months

3 months

Arbitration

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4.6 Price Monitoring

The price regulation for Utah Point BHF will be a price monitoring regime. This is consistent with other jurisdictions and Western Australia's obligations under the CIRA. Price monitoring offers a number of advantages for users, TerminalCo and the State including:

• it is a regulatory response commensurate with the potential pricing issues;

• it provides an appropriate means of tracking progress, minimising delay between recognition of market failure and implementation of a solution;

• it reassures stakeholders that there is a mechanism in place to increase transparency and actively prevents anti-competitive conduct;

• it is combined with the threat of regulation if market failure is found to occur;

• it is a flexible option which can be adapted to changing circumstances at Utah Point BHF.

The objective of the pricing regime is to ensure that any charge or increase in a regulated charge complies with the objects of the access and pricing regime and is not a consequence of a misuse of market power. Noting that certain elements of price regulation remain subject to refinement, the Regulations will provide that regulated charges are subject to a price monitoring regime. The specifics of the price monitoring will be set out in a "pricing instrument" with the first pricing instrument to be made by the Minister. The regime is diagrammatically set out below.

36

Figure 6: Overview of the proposed Utah Point BHF pricing regime

Regulator's recommendation

After conducting a review,

the Regulator may recommend to the

Minister that a different form of price regulation is

required.

Minister accepts Regulator's

recommendation

The Minister is not obligated to accept the

Regulator's recommendation.

Minister seeks to amend the regime

If the Minister accepts the

Regulator's recommendation, the Minister may seek to

amend the form of price regulation.

Pricing instrument

Regulator monitors regulated charges The first pricing instrument will require the Regulator to monitor a regulated charge against the charge that applied in 2016 as escalated by CPI.

Regulator conducts review

The Regulator

conducts a review of the pricing

regime and / or the pricing instrument.

Pricing principles

Regulated charge

The terminal operator must publish its prices

for each regulated charge each year.

Pricing regime

Is the regulated charge or increase in the regulated charge within the

benchmark?

Yes – the terminal

operator's regulated

charge complies with the pricing

instrument

No – the terminal operator must justify why the

charge is higher than the

benchmark

Charge not justified

If the terminal operator cannot justify why the charge

is higher than the benchmark, the Regulator

must conduct a review.

Regulator may change pricing instrument once the existing pricing instrument expires (maximum 5 years)

37

The Regulations will set out the pricing principles. These are principles which set out the framework for the pricing regime.

The pricing principles are that a pricing instrument must:

• use monitoring of the price levels of a regulated service as the form of price regulation; and

• specify the basis on which, or the standard against which, the Regulator must monitor price levels.

The Regulations will set out mandatory trigger events, which oblige the Regulator to conduct a review of the price monitoring regime or the particular regulated charge.

4.6.1 Pricing Instrument

A pricing instrument is the instrument which regulates prices of regulated services at the port for a set time. The Regulations will specify the matters which may be included in a pricing instrument and the requirements of the Regulator with respect to pricing instruments.

The Regulator must make a pricing instrument relating to a regulated service in accordance with the pricing principles (other than the first pricing instrument which will be made by the Minister).

The first pricing instrument will:

• use monitoring of regulated charges as the form of price regulation;

• specify the basis on which, or the standard against which, the Regulator must monitor regulated charges; and

• specify any requirements for TerminalCo to publish information.

As a pricing instrument must comply with the pricing principles, the first pricing instrument will be required to specify price monitoring as the form of price regulation. The Minister may amend the form of price regulation by amending the Regulations to change the pricing principles.

Subsequent pricing instruments made by the Regulator may specify a different standard or basis against which prices will be monitored. The Regulations will provide that subject to compliance with the pricing principles, a pricing instrument may regulate prices, conditions relating to prices or price-fixing factors in any manner the Regulator considers appropriate including fixing a price or the rate of increase; specifying pricing policies; or principles or monitoring the price levels of services.

The Regulator must provide TerminalCo, the Minister and any other person who it considers appropriate a copy of the draft instrument at least 30 days before the final instrument is to be published and invite submissions on it by a specified date. The Regulator must consider each submission received before making a pricing instrument.

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The Regulator must provide a copy of the final pricing instrument to TerminalCo, the Minister and any other person who it considers appropriate as soon as practicable after making the pricing instrument.

The Regulator is also required to publish a copy of the pricing instrument and a statement of reasons for making the instrument on its website.

A pricing instrument may also require TerminalCo to publish prices and proposed price changes in the manner determined by the Regulator (and set out in the pricing instrument).

A pricing instrument must specify an expiry date. The first pricing instrument will apply for no longer than three years and each subsequent pricing instrument must apply for no longer than five years.

4.7 Draft Regulations

Drafting instructions have been prepared for PCO to draft Regulations that are consistent with this submission.

4.8 State Oversight and Enforcement

4.8.1 Compliance and Reporting

The regime will require TerminalCo to provide the Regulator with an Annual Compliance Report for the previous year with respect to the matters specified in the Guidelines for Reporting published by the Regulator and as in force from time to time. The Regulator will also be required to complete an Annual Compliance Report.

4.8.2 TerminalCo Annual Compliance Report

The provisions of this compliance report will assist the Regulator to determine compliance with the regime and to compile its annual report to the Minister on TerminalCo’s compliance with the access and pricing regime.

The Annual Compliance Report will have two parts, an access part and a pricing part, and will include:

• a record of the number of access seekers who made an access request in the previous year;

• with respect to each access request:

39

– the regulated services the subject of the access request;

– the time that TerminalCo took to respond to the enquiry;

– which parties engaged in negotiations:

– a summary of the negotiation process which TerminalCo engaged in with the access seeker;

– the outcome of the negotiations; and

– the time that the parties took to reach an outcome;

• with respect to each access request which TerminalCo refused:

– a copy of the written reasons provided to the access seeker upon refusal;

– an explanation of why TerminalCo refused the access request; and

– an explanation of whether the access request was ultimately granted and if so, reasons for the decision;

• with respect to each show cause notice issued:

– why the show cause notice was issued;

– how much capacity was resumed and why;

– if capacity was not resumed, the reasons why not;

– a copy of the written reasons provided to the user for any capacity resumption or refusal to resume capacity;

• details of any charges, the costs the charge will recover, the amount of revenue, total number of units charged for each separate charge, and reasons for the charge;

• information on any negotiated price agreements; and

• any other relevant information which the Regulator has reasonably requested be included.

The Regulator also has powers to require relevant information from TerminalCo.

4.8.3 Regulator Annual Compliance Report

The Regulator’s report will be required to include the following:

• TerminalCo’s compliance with its obligations of no hindering and no discrimination;

• the provision of access at the Utah Point BHF by the TerminalCo; and

• whether TerminalCo has complied with the pricing instrument.

The annual report will be provided to the Minister then published on the Regulator's website within 30 days.

4.8.4 Review and Amendment of the Regime

The ERA will be the Regulator of the regime and will be required to conduct a review of the regime initially after three years and then periodically every five years.

40

The purpose of the review is to assess the regime against the objectives of the regime and in so doing to determine:

• whether there is a need for access regulation and if so, what form of access regulation is required;

• whether there is a need for ongoing price regulation;

• whether there is a need to change the form of regulatory oversight of pricing;

• whether there is a need to change the pricing principles;

• whether particular services should be included or excluded from the regime; and

• whether amendments should be made to the Act or Regulations, and make appropriate recommendations to the Minister.

Notwithstanding the periodic review requirements, the Regulator may conduct a review of the access regime and make recommendations to the Minister about whether the regime should be amended:

• at any time where the Regulator considers TerminalCo has engaged in conduct which unreasonably prevents or hinders a person from accessing services provided by means of terminal facilities under TerminalCo's ownership or control;

• where TerminalCo has charged a price for a service that the Regulator considers to be inconsistent with the pricing instrument;

• where the Regulator has granted approval for TerminalCo to negotiate with a non-Junior Miner;

• if a Junior Miner which used the Facility ceases to use Utah Point BHF; or

• where TerminalCo's lease with the State has been amended (other than non-material amendments).

In response to the Regulator's review, the Minister may choose to amend the regime to apply a different access or pricing regime to Utah Point BHF.

4.8.5 Enforcement

It is not intended that individual users or access seekers will have a right to enforce TerminalCo's obligations by themselves. The requirement for individuals to enforce obligations under the Western Australia Rail Access Regime has been criticised by potential access seekers on the basis that it provides no incentive for the Regulator to enforce the regime (and shifts the cost of enforcement to the access seekers). There are three broad avenues of compliance / enforcement: the Regulator, self-regulation and the State, as described below.

• The Regulator will be the primary enforcer of the regime and will have the ability to:

41

– seek an injunction to enforce the obligation to negotiate in good faith;

– levy a pecuniary penalty for contraventions of specified obligations of the regime (the obligations of no hindering and no discrimination); and

– issue a warning notice to incentivise TerminalCo to comply with the regime.

• There will be a number of mechanisms in the regime which provide for self-regulation / incentives in the regime for TerminalCo to comply. This will be by:

- the requirement for an access policy and the capacity management policy and the availability of disputes under either policy to be resolved via the arbitration mechanism; and

- the threat of more prescriptive regulation by amending the Regulations.

• Finally, the State will have a role in enforcement by:

- the ability to apply more prescriptive regulation by amending the Regulations to adopt a more prescriptive regime; and

- an obligation in the lease agreement / operating deed requiring TerminalCo to comply with the access and pricing regime. The ability to terminate the agreement / deed is considered a last resort or in response to particularly severe breaches of obligations to comply with the access and pricing regime.

42

4.9 Comparison of Utah Point BHF Regulation with other Privatised Australian Bulk Terminals and Ports

South Australian ports and Port of Darwin are subject to a price monitoring regime. In Queensland, there is no formal price oversight at Port of Brisbane or Abbott Point although, under certain circumstances, the relevant Minister is able to ‘declare’ services at the Port of Brisbane, effectively bringing them under access price regulation administered by the Queensland Competition Authority (QCA).

The historical trend of economic regulation of ports demonstrates a shift to a more ‘light-handed’ regulatory approach. However, compared to the approach taken in other Australian jurisdictions with privatised ports, such as the Port of Botany, Port Kembla and the Port of Brisbane, the proposed Utah Point BHF regime is more stringent, primarily due to the combination of price and access regulation, the mandated five year review and various trigger events which provide potential trigger for more heavy handed regulation.

Some Queensland coal exporting facilities, such as Dalrymple Bay, are also subject to particular forms of price control, either by contract or through access undertakings to the QCA. The table below compares current regulatory models applying to different Australian ports.

43

Table 3: Price Regime comparable between Various States

Feature of

the regime

Port of Melbourne regime Port of Darwin regime Proposed WA regime South Australia

New South Wales

Queensland Dalrymple Bay Coal Terminal

(DBCT)

Port Terminal Access (Bulk

Wheat) Code of Conduct

Type of

regulatory

regime

Price monitoring regime with

restrictions on price increases

Price monitoring regime.

Price monitoring regime Price monitoring regime Light-handed price monitoring

scheme

No formal price oversight

The DBCT access regime is

certified under Part IIIA of the

Competition and Consumer

Act 2010 (Cth). The access

regime is set out in Part 5 of

the QCA Act.

The Port Terminal Access

(Bulk Wheat) Code of Conduct

(Code) is contained in the Schedule to the Competition

and Consumer (Industry

Code—Port Terminal Access

(Bulk Wheat)) Regulation 2014

(Cth) (Regulation), made

under the Competition and

Consumer Act 2010 (Cth) (CCA).

Who

regulates?

Victorian Essential Services Commission (VESC) monitors

compliance with the Pricing

Order.

Utilities Commission of the Northern Territory

Economic Regulation Authority (ERA)

Essential Services Commission of South Australia

(ESCOSA)

Port operators give notices and provide information to the

NSW Minister for Roads and

Ports.

N/A Queensland Competition Authority

The Australian Competition and Consumer Commission

(ACCC)

What

services are

regulated?

The regime applies to services which are prescribed

The regime applies to services which are prescribed in

accordance with the

regulations.

The regime will apply to regulated services. These will

be services which are provided

by the terminal operator that

are not subject to competition

and services which are

prescribed by the Minister

Access regulation applies to a set of services known as

"Regulated Services" that are

proclaimed in accordance with

the Act.

Port operators are required to publish a list of all charges for

prescribed services and the

standard rate of other charges

charged for or in respect of

use of port facilities.

Prices for all port services provided by the Port of

Brisbane are set on a

commercial basis.

Pricing Principles are included

in the undertaking which the

Port must comply with.

Coal handling services at the DBCT are subject to access

regulation.

A port terminal service is any service provided by means of

a port terminal facility,

meaning any port-based ship

loader capable of handling

bulk wheat.

All services are regulated.

What

pricing

powers

does the

regulator

have under

the regime?

The leaseholder will be

responsible for setting tariffs for prescribed services in

accordance with the Pricing

Order and providing specified

information to the VESC to support compliance

monitoring.

A price determination must

use monitoring price levels, but the Regulator will be able

to determine the specific form

of price monitoring it will use.

The price determination must specify the basis on which, or

the standard against which,

the Regulator intends to monitor price levels.

The Minister will make the first

pricing instrument which will specify price monitoring as the

form of regulation and will set

out the basis on which, or the

standard against which, the ERA must monitor price levels.

The standard will be current

terminal prices as the benchmark. Increases in

those prices above a specified amount (CPI) will need to be

justified. Subsequent pricing

instruments will be made by

the Regulator. The Regulator may specify a different

standard against or basis on

which prices will be monitored subject to compliance with the

pricing principles.

The Commission’s price

monitoring regime involves an evaluation of price increases

as compared to changes in the

Consumer Price Index (CPI),

with the expectation of adequate justification for any

rise in charges above CPI.

The Minister does not have

any price-setting powers under the regime.

Investigating and monitoring

prices for ports declared for monopoly prices oversight.

The Code provides for no

formal oversight over prices. Instead, prices are based in

the first instance on the

operator's published reference

prices, subject to negotiations between the parties.

Can the port

operator

agree prices

with users

which are

inconsistent

with the

regulated or

published

price?

Yes Yes Yes Yes Yes N/A Yes Yes

44

Feature of

the regime

Port of Melbourne regime Port of Darwin regime Proposed WA regime South Australia

New South Wales

Queensland Dalrymple Bay Coal Terminal

(DBCT)

Port Terminal Access (Bulk

Wheat) Code of Conduct

What are

the

regulator's

functions

under the

regime?

• Monitoring and compliance

with the pricing order

• The VESC will conduct five

yearly reviews of the

leaseholder's compliance

with the Pricing Order

• The ESC Minister

(currently the Minister for

Finance) may give a show

cause notice to a non-

compliant

leaseholder/provider of

prescribed services

• The Regulator has the

power to make a price determination for

prescribed services in

accordance with the regulations and the 'access

and pricing principles'

specified in the Act.

• The Regulator must make

an annual report on compliance with the access

and pricing regime.

• Conduct periodic reviews

of the regime (after 3

years, then every 5 years)

to determine if regulation or

further regulation is

required

• The Regulator must give

written notice to the

Minister and port operator as soon as it becomes

aware that the port

operator has fixed, or

proposes to fix, a charge

that the Regulator

considers to be inconsistent with a price

determination.

The ERA must:

• monitor compliance with

the pricing regime;

• monitor compliance with a

pricing instrument;

• give written notice to the

Minister and the terminal

operator as soon as it

becomes aware that the

terminal operator has fixed,

or proposes to fix, a charge

that the ERA considers to be inconsistent with a

pricing instrument;

• conduct an initial periodic

review of the regime after 3

years, then every 5 years

thereafter or otherwise

when required (for

example, by a trigger event);

• make a recommendation to

the Minister as to whether

a service should be a

regulated service or non regulated service; and

• make an annual report on

the terminal operator's

compliance with the pricing

regime.

• Monitoring and compliance

with the pricing regime

• ESCOSA must keep

maritime industries under

review to determine if

regulation or further

regulation is required

• ESCOSA may issue

standards to be complied

with in the provision of

maritime services.

• ESCOSA may make a

determination regulating

prices for goods and services in a regulated

industry.

The Minister does not have any prescribed functions under

the regime other than

receiving the information.

N/A � Monitoring and compliance with the pricing regime

The ACCC's role under the Code is minimal. It can

exempt an operator from the

operation of the Code, but is (in respect of access

arrangements) otherwise

entitled only to be notified of a

party's intent to refer a matter

to arbitration and the

termination of a mediation.

The ACCC also has general

enforcement powers in relation

to industry codes, found in

Part IVB of the CCA.

45

Feature of the

regime

Utah Point Bulk Handling Facility South Australia Port of Darwin regime Queensland Dalrymple Bay Coal Terminal

(DBCT)

Port Terminal Access (Bulk

Wheat) Code of Conduct

Type of regulatory regime

A negotiate / arbitrate regime with a

requirement for access policy and a preference to allocate capacity to junior

minors.

Negotiate-arbitrate access regime

certified under Part IIIA of the

Competition and Consumer Act 2010

(Cth).

Light-handed access regime

Requirement for access policy that includes negotiate / arbitrate regime.

Port of Brisbane is not regulated. The

Port has adopted a voluntary access

undertaking.

The DBCT access regime is certified

under Part IIIA of the Competition and

Consumer Act 2010 (Cth). The access

regime is set out in Part 5 of the QCA

Act.

The Port Terminal Access (Bulk Wheat)

Code of Conduct (Code) is contained

in the Schedule to the Competition and

Consumer (Industry Code—Port

Terminal Access (Bulk Wheat))

Regulation 2014 (Cth) (Regulation),

made under the Competition and

Consumer Act 2010 (Cth) (CCA).

Who regulates Economic Regulation Authority Essential Services Commission of

South Australia

Utilities Commission of the Northern

Territory

N/A Queensland Competition Authority The Australian Competition and

Consumer Commission (ACCC)

What services are regulated

The regime will apply to regulated services. These will be services which

are provided by the terminal operator

that are not subject to competition and

services which are prescribed by the

Minister

Access regulation applies to a set of services known as "Regulated

Services" that are proclaimed in

accordance with the Act.

The regime applies to services which are prescribed in accordance with the

regulations.

N/A Coal handling services at the DBCT are subject to access regulation.

A port terminal service is any service provided by means of a port terminal

facility, meaning any port-based ship

loader capable of handling bulk wheat.

The Code does not appear to

discriminate between the different

services provided by an operator; all

services are regulated.

Basis of access • Prohibition on terminal operator

preventing or hindering access

• Prohibition on terminal operator

unfairly differentiating

• Requirement for access policy that

includes:

• the services Terminal Co will

provide and an access seeker's right to make access requests;

• set out a the negotiate / arbitrate

regime for the resolution of access

disputes

• Duty to negotiate in good faith

• Preference to allocate capacity to

junior miners where Terminal Co has or will have spare capacity

• Requirement for capacity

management policy that includes:

• how capacity will be calculates

• access requests notification

and publication

• the capacity resumption policy

• details of how a party may

trade capacity

• Access on fair commercial terms

• Duty to negotiate in good faith

• If agreement cannot be reached a

party may refer the dispute to the

Regulator.

• Prohibition on port operator

preventing or hindering access

• Prohibition on port operator unfairly

differentiating

• Private port operator must prepare

an access policy and provide it to

the Regulator for approval.

• Access policy must include:

• the terms on which access to a

prescribed service will be

provided;

• a process for the resolution of

access disputes that are not

frivolous or vexatious (which

includes a negotiate / arbitrate regime);

• a commitment that the operator

will provide access to a port user

to any prescribed service on

reasonable terms.

� Prohibition on port operator

preventing or hindering access

� Obligation to negotiate in good faith

• Prohibition on port operator unfairly

differentiating

� An access undertaking which sets

out the terms and conditions under

which DBCT Management will

provide access to the DBCT is

currently in place and will remain in

effect until 30 June 2016. The Regulator is currently considering

an access undertaking for the next

regulatory period (commencing on

1 July 2016).

� Prohibition on port service operator

discriminating or hindering access.

� Access to be provided under an

access arrangement.

� Port service provider must enter

into an access arrangement or

enter into negotiations.

� If agreement cannot be reached a

party may refer the dispute to

mediation or arbitration

� Standard terms (including dispute

resolution mechanism) and

reference prices available

� port loading protocol required for

each facility which includes capacity

allocation system.

� Expected capacity, performance

indicators and stock information.

What are the regulator's functions under the regime in respect of access?

• Monitoring and compliance with the

access regime

• Conduct periodic reviews of the

regime (after 3 years, then every 5 years) to determine if regulation or

further regulation is required

• The Regulator must make an

annual report on the terminal

operator's compliance with the

• Monitoring and compliance with the

access regime

• ESCOSA must keep maritime

industries under review to determine if regulation or further

regulation is required

• ESCOSA may issue standards to

be complied with in the provision of

maritime services

• The Regulator approves the port

operator's access policy and

receives reports from the port

operator about access.

• The Regulator must make an

annual report on compliance with

the access and pricing regime.

• Conduct periodic reviews of the

regime (after 3 years, then every 5

• The Regulator assesses and

approves access undertakings and

amendments to access

undertakings.

• The Regulator may mediate or

conduct arbitration to resolve

access disputes.

• Monitoring and compliance with

approved access undertakings.

� The ACCC's role under the Code is

minimal. It can exempt an operator

from the operation of the Code, but

is (in respect of access

arrangements) otherwise entitled

only to be notified of a party's intent

to refer a matter to arbitration and the termination of a mediation.

� The ACCC also has general

Table 4: Access Regime comparable between Various States

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4.10 Safeguards and Benefits for Berth Users and the State

There are a number of general features of the proposed economic regulatory regime designed to provide safeguards and assurance to berth users, consumers and the State, and provide confidence that the Utah Point BHF will continue to support long term Western Australian economic growth as efficiently as possible. The regime is tailored to meet the needs of the State and the industry, providing maximum benefit to berth users with appropriate oversight and ability to amend the regime should the regime be considered inappropriate.

4.10.1 Users of Berth

The access and pricing regime encourages openness and transparency and obligates TerminalCo to negotiate with Berth Users and provides a number of safeguards as follows:

• TerminalCo has an obligation not to unreasonably hinder access;

• TerminalCo has an obligation not to discriminate amongst port users;

• TerminalCo has an obligation to negotiate with access seekers. While this is not an obligation to reach an agreement, it sets a norm of conduct;

– The obligation is also backed by a binding negotiate / arbitrate regime which either party may trigger during the negotiations.

• TerminalCo is obligated to publish its access policy – this provides a transparent basis for the requirements of access to Utah Point BHF;

• TerminalCo cannot discriminate against access seekers other than on legitimate cost of service grounds which ensures that access seekers are treated fairly;

• The capacity management policy provides rights to resume capacity by TerminalCo from a user that is not using capacity. This is to prevent users hoarding capacity and preventing access for other bona fide users;

• Berth users may make a complaint about TerminalCo's conduct in respect of negotiation of access to services or the provision of those services. TerminalCo must provide a copy of that complaint to the Regulator. This will allow the Regulator to be aware of any potential contraventions of the no hindering / no discrimination obligations (and have the ability to investigate it) outside of the annual reporting regime;

• TerminalCo must provide an annual compliance report to the Regulator setting out details of access seeker requests including the timeframes involved, any requests it refused and the reasons why it refused the requests. This will provide the Regulator and the Minister with visibility as to whether there are access seekers who are being denied access or negotiations are taking an unreasonable amount of time. Likewise, if a Junior Miner has access to Utah Point BHF and subsequently cannot negotiate access then this is an event which will trigger a review of the regime;

• TerminalCo will be required by the pricing instrument to publish a standard charge for services. The parties may negotiate a different charge. TerminalCo has an obligation not to discriminate other than on cost to serve, risk or other legitimate grounds. Therefore, if it is vertically integrated, it cannot preference its own operations and if it

47

offers a price that is too high it must offer the same price to its own operations. Conversely, if it is not vertically integrated and seeks to charge a price that is too high then the capacity will not be contracted; and

• Berth users are protected from unjustified increases in prices through the price monitoring regime which is overseen by the Regulator.

4.10.2 State

• The charges for specified services will be subject to a price monitoring regime to ensure the economically efficient use of and operation and investment in Utah Point BHF in order to promote effective competition in upstream or downstream markets. Under the first pricing instrument, TerminalCo will be required to justify price increases above CPI levels taking into account volumes through Utah Point BHF.

• The State will have enforcement rights as a party to the lease agreement as TerminalCo will be obligated under the lease to act in accordance with the access and pricing regime. If TerminalCo is not behaving in such a way, it is in breach of the lease.

• The Bill contains a broad power for the Minister to prescribe access obligations.

• The ERA will oversee the access and pricing regime.

• The regime is set out in the Regulations and as such, if the regime is found to be ineffective, changes can be implemented quickly.

These general features are augmented by some specific protections for Junior Miners, as detailed in the following section.

4.11 Specific Protections for Junior Miners

In addition to the protections outlined above, there are specific protections for Junior Miners which are contained in the access and pricing regime.

It is a specific objective of the regime to facilitate Junior Miners negotiating access to regulated services on fair commercial terms. This is provided for in a number of ways including:

• TerminalCo may only initially negotiate with Junior Miners for capacity at the terminal. The Junior Miners have the backing of a negotiate / arbitrate regime to ensure that they cannot be denied access. They can then negotiate with TerminalCo on price;

• There is a requirement to negotiate for six months. However, this may be extended for a further three months if negotiations are not concluded, or for a longer period if the access request is subject to arbitration;

• In order to obtain permission from the Regulator to negotiate with a non-Junior Miner, TerminalCo must provide the Regulator with, among other things, the price offered and any funding required. If the Regulator considers that the price was unreasonable then the Regulator can deny permission to negotiate with the non-Junior Miner. This would mean that TerminalCo would have to engage with a Junior Miner or the capacity would be idle; and

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• If capacity is allocated to a non-Junior Miner then it will be because there was no Junior Miner in a position to contract that capacity. If the Junior Miner subsequently has the ability to contract for capacity then it will have priority for any spare capacity that becomes available when contracts end. As with all users, should any customer have taken capacity for strategic reasons (capacity hoarding) then there is a mechanism for TerminalCo to resume capacity that has been unused and to offer it to the market – with Junior Miners having a preference.

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5 UTAH POINT BHF PRICING AND INDEPENDENT PRICING REVIEWS

Key points:

• Utah Point BHF was constructed by the State as a multi-user terminal to facilitate the export of resources by Junior Miners which did not have the capital to construct the terminal on their own.

• The majority of initial capital was funded by the State, supplemented by prepayments by its foundation customers.

• PPA has invested in the expansion of Utah Point BHF and has facilitated terminal users shipping above their allocated capacities.

• The State has also invested in landside and marine-side infrastructure to facilitate trade from the current users of Utah Point BHF (including development of roads).

• Users have been a key part in setting the prices at Utah Point BHF – prices were originally set in consultation with the users in 2007, prior to construction of Utah Point BHF, and were then renegotiated with users in the 2013 Multi-User Agreements.

• Two independent reviews of pricing (in 2015 and 2016) have both found that prices at Utah Point BHF have been set at a fair level based on the risk assumed by the PPA.

Construction of Utah Point BHF commenced in March 2009 and was completed in 2010 with a construction cost of approximately $305 million. The majority of the funding for Utah Point BHF was provided by the State, supplemented by prepayments from its foundation customers. Junior Miners contributed $40 million of the construction cost by way of prepayments, all of which has now been either offset against charges at Utah Point BHF or otherwise repaid to the Junior Miners. As a multi-user facility, none of the Junior Miners (which had substantially smaller operations prior to the construction of Utah Point BHF) had balance sheets sufficient to fund the construction on their own without assistance.

Furthermore, the State has a number of agreements at Port Hedland which would make it difficult for a Junior Miner to utilise the chosen site for Utah Point BHF in its own right without making agreements with certain non-Junior Miner operators at Port Hedland. Most notably, BHP Billiton has facilities abutting Utah Point BHF to the north and south, as well as at points above and below land utilised by Utah Point BHF. As such, the State was in the best position to facilitate the construction of Utah Point BHF.

Additionally, significant indirect capital costs have recently been incurred by the State on infrastructure to assist in enabling product transport on access routes from the mines to Utah Point BHF. For example, the State recently expended an estimated $260 million on the Great Northern Highway (Port Hedland Upgrade) project.18

18 2015-16 Budget Paper No. 2.

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5.1 Role of Utah Point BHF in the Value Chain for Junior Miners

There are a number of costs that are paid by Junior Miners in order to extract iron ore from their mines and to sell these resources to the market. As noted below, port and terminal charges form only one component of the charges in the value chain.

• Mining costs – the cost to extract the iron ore (or other natural resources) from the ground which are incurred either by the miners directly or paid to mining contractors;

• Transport charges – as all access is via road, the Junior Miners pay for transportation of ore by truck from the mines through contracts directly with trucking companies;

• Stevedoring charges – Qube Bulk Pty Ltd has a non-exclusive licence to provide stevedoring services at Utah Point BHF. Stevedoring charges are based on contracts directly between the Junior Miners and Qube Bulk Pty Ltd;

• Port and terminal charges – which are currently levied by PPA;

• Shipping charges – paid directly to shipping agents; and

• Mineral Royalties – levied by the Department of Mines and Petroleum, which is responsible for administering the State’s mineral and petroleum royalties to ensure the State receives an appropriate return from the development of its mineral and petroleum resources.

The remainder of section 5 focuses on the port and terminal charges currently levied by PPA. Some of these charges will be retained by PPA while others will transfer to TerminalCo.

5.2 Background to Facility Construction and Charges

The figure below outlines a timeline of the charges at Utah Point BHF as well as an overview of independent pricing reviews on charges at Utah Point BHF.

Figure 5: Timeline of Utah Point BHF Charges

Utah Point BHF charges were initially set in 2007, prior to the facility’s construction. These initial charges were based on charges that applied at the PPA’s existing ‘East Side’ berths

51

at Port Hedland and charges that apply generally across the port. The initial pricing did not provide a return on the State’s investment and exposed PPA to considerable financial risk. Following the commissioning of the facility in 2010 and the ramp-up of its use, the users of Utah Point BHF were seeking to export more than their originally allocated capacities. Commercial negotiations then occurred in 2013 to allow users access to additional capacity and to enable PPA to achieve an economic return on its investment in Utah Point BHF.

Providers of bulk commodity port services, such as at Utah Point BHF, typically limit their exposure to throughput and default risk by long term agreements with users, substantial ’take or pay19’ components in pricing, and requirements for guarantees from users. Significantly, this is not the case at Utah Point BHF, which is subject to substantial volume and default risk from its users.

5.3 Current Customer Contracts and Pricing Arrangements

In the context of the pricing arrangements between the PPA with the current users of Utah Point BHF, the key agreements are the Multi-User Agreements as well as the original Facility Agreements and one or more leases (together the “Contracts”). The Contracts set out the commercial and legal terms on which the customers can access and use the terminal to ship their product, including their ‘contracted allocations’ and the charges that are payable.

The majority of the Multi-User Agreements were signed between April and May 2013. The Multi-User Agreements amend certain terms of and take precedence over the Facility Agreements (originally entered into by customers prior to the construction of Utah Point BHF). The Multi-User Agreements, Facility Agreements and leases outline the rights and obligations of PPA and the customers in using and maintaining the Utah Point BHF.

The Multi-User Agreements include a mechanism for adjusting, amongst other things, the Facility Charge. This method is referred to as the ‘rise and fall formula’. Other charges which are payable by customers are set by PPA and published on its website.

The terms and conditions for the Contracts will remain intact for the life of those Contracts. Following the expiry of these Contracts, the access and pricing regime will apply to any new contracts, as outlined in section 4.

5.4 Overview of Current Charges Paid by Junior Miners

As the current owner, PPA levies all relevant charges to users relating to Utah Point BHF and other port services as well as charges directly to vessels. As part of the separation

19 Involves a commitment by a buyer to pay for a particular level of goods or services, regardless of whether or not it

takes those goods or services and thereby reduces demand risk for the seller. It is important to note that a take-or-pay

obligation is only effective at mitigating demand risk to the extent that the buyer is able to make good on its financial

commitments, should the take-or-pay provision be enforced. By way of example, a take-or-pay commitment from a

buyer with a weak balance sheet increases the likelihood that, should market conditions deteriorate to the extent

where the take-or-pay obligation is invoked, the buyer will be unable to fulfil its obligation to pay the prescribed

amount to the seller.

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exercise, PPA will retain control of marine side operations and therefore will continue to be entitled to levy pilotage and tonnage (marine side) charges. TerminalCo will be responsible for the operations of the berth at Utah Point BHF as well as landside operations.

A summary of the charges (landside and marine side) that are payable to PPA and TerminalCo in relation to the use of the Utah Point BHF is provided below.

PPA

• Towage: a towage charge for the services provided by tug boats;

• Pilotage: a pilotage charge, which is a charge for the piloting of vessels, and is a per vessel charge that is higher for larger ships (this charge is only applied if the service is used);20

• Vessel security: PPA has responsibility for maintaining port security and has historically recovered these costs from port users by levying a rate based on gross registered tonnes (“ GRT”);20

• Tonnage: A charge per vessel based upon GRT20; and

• Port Improvement Rate: An amount allocated to a fund to finance future works at the port20.

Pilotage, vessel security and tonnage are levied on the vessels that utilise Utah Point BHF, rather than directly to the Junior Miners. The other charges are payable by the users of Utah Point BHF to PPA.

TerminalCo

• Berthage: A charge for the use of the berth, which is based upon time of use of the berth and length of ship (a general port charge) – the fee is determined by the length of the vessel (and levied on the vessel)20;

• Wharfage: A general charge that applies to all cargoes (albeit with different rates) based upon tonnes or units that pass over a port20;

• Shiploader: A charge, which is based on the tonnes loaded with the shiploader which was historically based on the shiploader charges on the eastern side of the Port20;

• Facility charge: A charge (that is also referred to as the road dump charge), which was set initially based upon benchmarks against other berths, and applies to tonnes that pass through the road dump21;

• Leases: the leases of areas of the stockyards by users provide for the payment of rent and outgoings; and

• Recovery for utilities: A recovery of utilities and similar costs20.

20 PPA website.

21 Atlas Iron 2015 Prospectus.

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These charges are payable by the users to TerminalCo.

5.5 Independent Review by Incenta (2015)

In April 2015, the Government (through the Department of Finance) commissioned an independent review of charges from Utah Point BHF, undertaken by economic consultant Incenta. This analysis concluded that “having regard to the manner in which charges have been determined and the risk borne by PPA under contractual arrangements, PPA has not been over-charging customers at Utah Point BHF to date.” A summary of the key findings is as follows:

• The cumulative return on assets between 2010-11 and 2013-14 is approximately 14 per cent, rising to a forecast 16 per cent in 2014-15 if the same price and throughput conditions were to continue. While higher than the target rate of return for PPA of 12 per cent, the excess rate of return is not unreasonable given that PPA bears substantial throughput risk and, hence, periods of ‘under’ and ‘over’ return on assets would be expected over the life of the assets and terms of contracts.

• With throughput likely to decrease in the near future (in view of the recently stated intent of Atlas Iron to suspend operations), the PPA is now at risk of not achieving its target 12 per cent return. A throughput of 15 million tonnes per annum would need to be maintained to achieve this target with current charges.

• If throughput were to meet previous forecasts of around 20 million tonnes a year or further increase, the PPA would recover its investment early in the life of the assets and would earn a substantial excess rate of return. In these circumstances a substantial reduction in charges could be warranted within the next few years.

• If the Government wishes to reduce charges to provide relief to users of Utah Point BHF, then this should only be undertaken together with a renegotiation of contracts to transfer risk from the PPA to the users through greater ‘take or pay’ provisions, and a rigorous determination of charges on the basis of actual and forecast costs and throughput.

• The Incenta report noted that whilst the pricing has been set at a fair level, there are some weaknesses in the structure of the charges as outlined below:

– initial charges were not determined by reference to costs and forecasts of demand;

– the structure of charges exposes the PPA (and consequently the State) to a very high level of investment risk;

– the structure of charges is unnecessarily complex; and

– no provisions are made in contracts for periodic review of charges, having regard to changes in cost and demand outcomes and projections.

• However, it was noted that Atlas Iron, Mineral Resources Limited (“MRL”) and Consolidated Minerals Limited (“ConsMin”) negotiated the Multi User Agreement with PPA and were involved in and agreed on the charges and nature of the charges.

• These contractual agreements with the current users of Utah Point BHF will not be subject to the access and pricing regime. However, the access and pricing regime, as outlined in section 4, will apply after the expiry of the current contracts to ensure fair and equitable access to Utah Point BHF.

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The report predates implementation of facility charge discounts applying from 1 July 2015 to 30 June 2016, which act to provide only a marginal return on investment and result in a rate of return significantly less than the target rate of 12 per cent. It should be noted that the State implemented the discount and other concessions to Junior Miners despite the independent finding that PPA has not been overcharging at Utah Point BHF. This highlights the commitment of the State to the Junior Miners.

5.6 Independent Review by Houston Kemp (2016)

The Government (through the Public Utilities Office) subsequently engaged economic consultant HoustonKemp to undertake a further independent review which was completed in April 2016. This report covers pricing at Utah Point BHF since its construction and also takes into account recent negotiations between Utah Point BHF and its users. Its findings are summarised as follows:

• the absence of any take-or-pay obligation in the facility agreements imposed an unusually high level of demand risk on the PPA, and this, in turn, increases the likelihood of the PPA deriving significant economic gains or losses. Indeed, the scope for such gains and losses is clear in the historical returns;

– PPA derived particularly low returns in the 2011 to 2013 years, before its returns improved from 2014 onwards;

– the improvement in returns following the initial years of operation reflect increased throughput at Utah Point, in response to peaks in the price of iron ore, and the amended terms of access stipulated in the multi-user agreements;

• given the high level of risk borne by the PPA, it is commensurately entitled to any gains that eventuate – just as it would have had to bear any losses. It is HoustonKemp’s opinion that the returns derived by the PPA are consistent with the material levels of risk it has already absorbed, and continues to bear;

• the temporary relief provided to the users has materially reduced the returns expected to be derived in the year ended 30 June 2016. Were it not for the temporary relief provided to the users, the PPA would be expected to derive a ROA of 31 per cent and an accumulated IRR of 16.4 per cent in the 2016 year;

• there is limited benefit in evaluating access prices at Utah Point using the building block approach22, as the prices derived under that approach reflect a risk profile far removed from the substantial risks faced by Utah Point BHF;

• the nature of the terms of access in the facility agreements gives weight to the proposition that the PPA did not possess a disproportionate level of bargaining power.

22 The building block approach is a cost-based approach to pricing that derives an annual estimate of revenue for an

infrastructure service provider equal to the sum of:

- a return on capital, which is in turn calculated by multiplying the asset value at the start of the year by an

estimate of the weighted average cost of capital (WACC);

- a return of capital, which is normally calculated using straight line depreciation of the residual asset value

such that assets are depreciated over their economic life;

- an operating and maintenance allowance, which is set to cover forecast operating and maintenance costs;

and

- depending on the form of financial modelling, an allowance for forecast company tax costs.

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In particular, the facility agreements impose on the PPA an unusually high level of demand risk due to their relatively short tenure and the absence of material take-or-pay obligations. Further, the facilities agreements place an obligation on the PPA to make a particular level of capacity available to each user, which restricts the PPA’s ability to contract unused capacity to other potential users; and

• it is in the interest of both the PPA and the users to ensure that the terms of access continue to facilitate the ongoing use of the facility. Further, it is appropriate for any amended terms of access to be determined by means of commercial negotiations between the parties.

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6 CONSULTATION WITH JUNIOR MINERS DURING THE PREPARATION FOR THE TRANSACTION

Key points:

• Ministers, Treasury and the State’s advisers have consulted with Junior Miners during the preparation for the divestment of Utah Point BHF as well as in the ordinary course of business.

• The Treasurer has met with Junior Miners and the Association of Mining & Exploration Companies (“AMEC”) on a number of occasions throughout the Transaction process to discuss their concerns. Their concerns have centred on the Transaction, access and pricing regime, exclusivity for Junior Miners and extension of the current discounts.

• An overview of the background to the current pricing arrangements with Junior Miners is outlined in section 5.

• Further details about benefits given to Junior Miners, and the enshrined policy going forward, are outlined in this section 6.

6.1 Overview of Consultation Process with Junior Miners

The Treasurer and Minister for Transport have interacted with Junior Miners throughout the Transaction process. In addition to ongoing consultation in the ordinary course of business, the table below outlines consultation with Junior Miners after the announcement of the Transaction.

Timeline Meeting Purpose

2-Dec-14

Treasurer meets with Atlas

Iron

• Discuss Utah Point BHF User charges

12-Feb-15 Treasurer meets with Atlas

Iron

• Discuss Utah Point BHF User charges

26-Feb-16

Treasury, LFA & AMEC

• To discuss concerns for Junior Miners relating to the asset sale

process, particularly in relation to access and pricing and

potential impact on the ongoing viability of Junior Miners

operations.

8-Mar-16

Treasurer meets with Junior

Miners including AMEC,

Atlas Iron, MRL and

ConsMin

• To discuss concerns with Utah Point BHF divestment including

access and pricing

1-Mar-16 Minister for Transport and

AMEC

• To discuss concerns for Junior Miners relating to the asset sale

process (with the same agenda as the meeting with Treasury

above)

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17-Mar-16

Treasurer meets with

National Party

representatives and Junior

Miners including AMEC,

Atlas Iron, MRL and

ConsMin

• To discuss concerns with Utah Point BHF divestment including

access and pricing

13-Apr-15

Treasurer meets with

representatives from Mineral

Resources

• To discuss Mining Related Issues

1-Jul-15

Treasurer meets with

representatives from Mineral

Resources

• To discuss Utah Point & KBT

6.2 Involvement of Junior Miners in Market Sounding Process

As outlined in section 2, Treasury and the LFA commenced the market sounding process in February to March 2016 with potential bidders for Utah Point BHF, which involved speaking to a significant number of potential bidders for the asset. Potentially interested parties were provided with a marketing document that contained non-confidential information about the opportunity. As part of this marketing process, the following engagement occured with Junior Miners:

• Atlas Iron: Atlas was contacted by email on 17 February 2016 and provided with a marketing document for Utah Point BHF and was invited to meet with the LFA and Treasury to discuss the divestment process further. No response was received from Atlas Iron.

• MRL: MRL was contacted by email on 23 February 2016 and provided with a marketing document for Utah Point BHF and was invited to meet with the LFA and Treasury to discuss the divestment process further. No response was received from Mineral Resources.

• Brockman Resources: The LFA and Treasury met with Brockman Resources on 1 March 2016 to discuss the divestment process and provided an overview of the proposed access and pricing regime and other relevant asset sale considerations. Brockman is not currently a user of Utah Point BHF. However, Brockman Resources has announced to the market on 23 March 2016 that it has signed a heads of agreement with Qube Bulk Pty Ltd to facilitate an infrastructure solution for an initial small scale (2.5 Mtpa) mining operation at Brockman’s 100% owned Marillana iron ore deposit with the intention to export through Utah Point BHF23

.

23 http://www.hkexnews.hk/listedco/listconews/sehk/2016/0323/LTN201603231199.pdf (Brockman announcement)

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7 BENEFITS GIVEN TO JUNIOR MINERS

Key points:

• The State has provided longstanding support to Junior Miners and in addition has provided a number of short-term benefits to Junior Miners in order to alleviate the transition to a subdued outlook for commodity prices.

• Main Roads Western Australia has provided Junior Miners with a temporary deferral of road haulage fees which are payable by the users of Utah Point BHF.

• PPA has provided a temporary discount of $2.50 per tonne for Junior Miners exporting iron ore from Utah Point BHF until 30 June 2016,

• PPA has also provided for two years of freezes on the escalation of charges at Utah Point BHF until 30 June 2017 (prices continue to remain at 2014/15 levels).

• The Department of Mines and Petroleum has provided royalty relief for 50% of royalties for a 12-month period from December 2014 to the September 2015 quarter for qualifying Junior Miners.

• The policy going forward is that any future assistance given to the users of Utah Point BHF will be undertaken in a manner, so as not to affect the revenue of Utah Point BHF.

The Government recognises the importance of the iron ore sector to the State economy, noting that the iron ore sector produces more than 70 per cent of Western Australia's mineral exports by value and employs almost 60,000 people.

Recognising challenging market conditions in the iron ore sector, in particular for Junior Miners, the Government has approved the provision of a number of short term benefits to Junior Miners in order to assist in them in reacting to structural changes in the commodity markets. As outlined further in this section, these benefits include the following:

• a price discount of $2.50 per tonne for iron ore customers at Utah Point BHF until 30 June 2016;

• deferral of road haulage fees until 30 June 2016;

• a freeze on escalation of Utah Point BHF charges until 30 June 2017; and

• relief of 50% of royalties to eligible Junior Miners for up to 12 months whilst the iron ore price remains below an average of A$90 per tonne (to be repaid by the miners by December 2017).

7.1 Price Discount for Iron Ore Customers at Utah Point BHF

On 15 May 2015, the Minister for Transport and Minister for Finance announced the provision of price relief for Utah Point BHF’s iron ore customers which included a discount of up to $2.50 per tonne for a period of 12 months, for PPA charges on iron ore shipped

59

between 1 July 2015 and 30 June 2016.24 Information provided by the PPA indicates that the forecast total value of the temporary relief is approximately $47 million.

The $2.50 per tonne discount applies only to volumes exported through Utah Point BHF SY1. Following a request from Atlas Iron, in December 2015 PPA implemented a $1.73 discount to be applied to volumes exported through Utah Point BHF SY2 (with the same end date of 30 June 2016). Given the lower facility fee at SY2 as compared to SY1, this $1.73 discount was designed to equalise the facility charges between the two stockyards.

The $2.50 port charge discount is conditional on the iron ore price staying below A$80 per tonne (on a ‘free on board’ (“FOB”) basis), and for any discount to cease while the price of iron ore is at or above A$90 (on a FOB basis) per tonne. While the price of iron ore remains between A$80 and A$90 per tonne the discount is to reduce to $1.25 per tonne, with no discount applying at prices at or above A$90 per tonne (on a FOB basis).

The Department of Finance review (as outlined in section 5.7) has highlighted the risk that is assumed by PPA on volumes shipped through Utah Point BHF. Notwithstanding the independent report supporting the validity of PPA’s pre-existing terminal pricing, the Government approved the temporary provision of pricing support to Junior Miners.

PPA (and in future, TerminalCo) accepts significant risk under the current Utah Point BHF contracts. For example, when Atlas Iron announced the suspension of its volumes in April 2015, Utah Point BHF did not achieve any revenues associated with the contracts it has in place with Atlas Iron. Similarly, when ConsMin recently announced the suspension of its manganese export operations, Utah Point BHF suffered a further decrease in revenue.

7.2 Deferral of Road Haulage Fee

In addition to the discounts in the facility fees at Utah Point BHF, the Government also approved the provision of a 12 month deferral of $12 million in haulage fees for the trucking of ore to the facility (which are levied by Main Roads Western Australia rather than PPA)24. As with the price discounts outlined in section 7.1, the deferral of the road haulage fee is to extend to 30 June 2016.

7.3 Freeze on Escalation of Charges at Utah Point BHF

The majority of charges at Utah Point BHF are subject to an annual escalation rate. In recognition of the short term financial pressures on the users of Utah Point BHF, as well as other public berths operated by PPA, the PPA has elected to freeze the escalation of shipping charges for the 2015-16 financial year resulting in prices remaining at 2014-15 levels. In December 2015, the PPA elected to extend this price freeze for an additional year resulting in prices remaining at the same level until the end of the 2016-17 financial year.

24 https://www.mediastatements.wa.gov.au/Pages/Barnett/2015/05/Pilbara-port-price-relief-backs-iron-ore-

jobs.aspx

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In addition to other benefits provided by the State, this has given users of Utah Point BHF relief from price escalation for two years, to which the PPA (and consequently the State) would otherwise have been entitled.

7.4 Royalty Relief

On 19 December 2014, the Government announced that it would provide financial assistance for eligible low-volume iron ore (hematite) miners. Under the program:

• assistance was provided as a rebate of 50% of royalty payments on eligible hematite iron ore projects. This assistance occurred through ex-gratia payments after the Department of Mines and Petroleum received actual quarterly royalty payments. The royalty continued to be paid under applicable legislation;

• the rebate was available for a period commencing with the royalty payment for the December 2014 quarter and concluding with the September 2015 quarter;

• the rebate must be repaid by 31 December 201725;and

• royalty payment deferrals amount to $30.5 million for approved hematite producers.

7.5 Policy Going Forward

The Government has assisted the Junior Miners through a number of policies as outlined above in sections 7.1 through to 7.4 which have been designed to be of a specific and limited timeframe to assist Junior Miners adapting to structural changes in the commodity markets.

Whilst a variety of methods have been used including direct discounts from terminal charges from Utah Point BHF, the Government endorsed policy in relation to ongoing assistance to Junior Miners is that any further measures will be implemented in a manner which does not affect the revenue of Utah Point BHF.

As outlined in Section 4, Utah Point BHF will also be governed by an access and pricing regime which has been carefully designed to balance protections afforded to Junior Miners while avoiding the prospect of a successful bidder being unable to contract capacity and effectively leasing a stranded asset.

25 http://static.ourstatebudget.wa.gov.au/15-16/factsheets/ironore.pdf

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8 OTHER MATTERS

The State has had regard to a number of other significant matters and considerations in relation to the Transaction including:

• other major agreements (including the BHP Billiton State Agreements and the Harriet Point Agreement);

• conditions of operations;

• Transaction documentation; and

• broader community safeguards.

Each of these is briefly discussed below.

8.1 Other Major Agreements

8.1.1 BHP Billiton State Agreements

BHP Billiton and relevant joint venturers hold tenure and rights pursuant to the Mt Newman State Agreement and Mt Goldsworthy State Agreement in relation to land overlapping the Utah Point conveyor, Utah Point access road, berth and berth pocket and more generally, land surrounding the Utah Point BHF.

Clause 44 of the Bill provides that "The Act does not prejudice or in any way affect any right or obligation of a party to a Government agreement". The proposed divestment of the Utah Point BHF will therefore be structured and implemented in a manner which is consistent with clause 44 of the Bill and will not prejudice or in any way affect any right of BHP Billiton as a party to the Mt Newman State Agreement and the Mt Goldsworthy State Agreement.

8.1.2 Harriet Point Agreement

The Harriet Point Agreement is a confidential agreement between PPA and BHP Billiton. The State is not a party to the Harriet Point Agreement. As for all other existing third party contracts, the Harriet Point Agreement will continue to be honoured during and after the divestment of Utah Point BHF. The Harriet Point Agreement does not require amendment as a result of the divestment of Utah Point BHF. At a defined stage in the process, the Harriet Point Agreement may be disclosed to a limited number of bidders in order to finalise their binding bids.

8.2 Conditions of Operations

8.2.1 Change of Use

The Lease will provide a requirement that TerminalCo is limited to the use of the core terminal land as a bulk handling terminal.

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8.2.2 Handback Conditions

The Transaction Documents will include provisions to ensure that the assets are ‘handed back’ to the PPA in a pre-determined, appropriate condition. The handback provisions will take a balanced and realistic approach between ensuring assets revert to the State in a properly maintained condition at the end of term and the commercial reality of the assets having aged. The handback conditions will require the assets to be maintained to appropriate standards and / or having a minimum useful residual life. Precedents used on other port privatisations in Australia are being used to inform the hand back conditions, supported by consultation with the Department of Transport and PPA.

8.2.3 Maintenance and Development

TerminalCo will be required to maintain, repair and replace all improvements and assets that are the subject of the Lease. There will be a contractual obligation on TerminalCo (at its own cost) to:

• undertake any required works to maintain, repair and replace the leased area, improvements and assets and otherwise ensure access to the leased area, improvements and assets; and

• develop the leased area, improvements and assets including to the extent development is required under the Terminal Lease.

This obligation will also apply to any roads that will transfer to TerminalCo as part of the Terminal Lease.

8.2.4 Environmental

TerminalCo will be obligated through contractual and legislative provisions to:

• comply with environmental laws and permits which are applicable to the leased area; and

• prepare and maintain an Environmental Management Plan, with independent certification review periods.

This is consistent with the existing environmental obligations in place and the treatment of other users.

8.2.5 Port Development

TerminalCo will be permitted to undertake development work during the lease term, consistent with the Terminal Development Plan. The Terminal Development Plan will be required to be submitted to PPA and the State, and TerminalCo must take into account any comments it receives. All new fixed developments and improvements created by TerminalCo will become vested in PPA at the time they are constructed and will form part of the leased area. TerminalCo will require PPA approval for any proposed development. It should also be noted due to the physical restrictions of the berth and its location with respect to the certain BHP Billiton berths, there are limited development opportunities.

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8.2.6 Utah Road

Utah Road will not be included in the Transaction package and will be retained by PPA. However, non-exclusive use will be provided to TerminalCo and the users of Utah Point BHF. The maintenance for the road will also remain the responsibility of PPA. It is proposed that the cost for the maintenance of Utah Road is to be recovered via the imposition of a levy that recovers PPA’s costs or funded by TerminalCo from other port charges that will be transferred to it as part of the Transaction.

8.3 Transaction Documentation

Key features of the proposed Transaction structure are:

• PPA will be the Terminal Lessor;

• the creation of TerminalCo (initially as a subsidiary of PPA for tax, accounting and governance convenience). Non-land assets of PPA will be vested / transferred to TerminalCo, and an interim lease of the Terminal land granted to TerminalCo, on "Day 1". The new (PPA subsidiary) TerminalCo will commence operating the Utah Point BHF divestment package business in lieu of PPA on "Day 1", before binding bids are lodged. For convenience and consistency of governance, it is assumed that TerminalCo's board would have the same composition as the board of PPA (or would comprise a subset of the PPA board);

• the sale of TerminalCo to the successful bidder (Buyer) at financial close ("Day 2");

• 50 year lease of the terminal land to TerminalCo, or another entity nominated by the Buyer, possibly another unit trust (in which case that nominee must sublease the Terminal Lease to TerminalCo). Any variation to this lease arrangement will require consequential amendments to the draft documents, and possibly reconsideration of the commercial approach to some Terminal development and "handback" obligations; and

• in addition to the Terminal Lease, other agreements will contain other contractual arrangements dealing with operational matters.

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The proposed Transaction steps are set out in an illustrative diagram below.

It is proposed that the following key documents will be entered into:

• Terminal Operating Deed;

• Transitional Services Agreement;

• Sale and Purchase Agreement;

• Financier Direct Deed; and

• Terminal Lease.

In addition to the above, a number of other (less significant) documents will be entered into to enable the Transaction to proceed such as vesting orders, unit trust deeds, tax and confidentiality documents.

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8.4 Broader Community Safeguards

The Transaction Documents also serve to ensure that a number of broader community safeguards are in place as outlined below.

8.4.1 Establishes Maximum Lease Term

The legislation limits the maximum term of any lease or licence of port land to the private sector to 99 years. The Government has endorsed a position that bidders should be approached on the basis that the lease term will be 50 years.

8.4.2 Express Requirement that Port Land be Maintained in State Ownership

Authorisation for the Transaction is subject to an express condition that the Transaction does not transfer ownership of the port land to the private sector. At the end of the lease term the land will be handed back to the State for continuing use as a port, or to be developed in a different way as the State determines at the time.

8.4.3 Protects Employees

It is intended that the Transaction Documentation (together with the application of the transfer of business provisions in the Fair Work Act 2009 (Cwth)) will provide a number of protections to employees who agree to transfer their employment to TerminalCo. It is currently expected that these protections will include:

• the transfer of the enterprise agreement that applies to the employment of employees in their employment with PPA such that it will continue to apply to them in their employment with TerminalCo;

• a requirement that the employment terms of transferring employees be no less favourable overall compared to the terms that applied to their employment with PPA to ensure continuity of service and entitlements; and

• equivalent (no less favourable) superannuation entitlements being maintained.

8.4.4 Greater Transparency of Roles and Responsibilities of the State and TerminalCo

The Transaction Documentation sets out the future role and responsibilities of both PPA (State retained assets and functions) and TerminalCo. For example:

• PPA's obligations and functions in respect of the Utah Point BHF are narrowed to align with its reduced post-Transaction role which is largely focused on waterside control and management, Harbour Master and safety functions, emergency management and its ongoing ownership and management of Berths 1-3 in the Port; and

• the Terminal Operating Deed will set out obligations in respect of management of the asset during the proposed lease term and on hand back of the asset.

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8.4.5 TerminalCo's Statutory Obligations

TerminalCo will be required to comply with all laws, including environmental, health and safety, maritime security and planning.

The State is not proposing to use the Bill to amend any State legislative requirements for the benefit of TerminalCo or the Transaction in general.

8.4.6 Stewardship Requirements

Stewardship requirements include obligations to use the land for port-related purposes only, to maintain the berth in good working order and hand the asset back in good working order. As is usual with long-term leases of infrastructure assets, the State will have a number of protections including the State retaining step-in rights and the ability to terminate the contractual arrangements if certain key obligations are breached.

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GLOSSARY

Term Definition

ACCC Australian Competition and Consumer Commission

AMEC Association of Mining & Exploration Companies

Atlas Iron Atlas Iron Limited

Bidders Interested parties that will be invited to submit a bid in respect of the Transaction post pre-qualification

Bill Pilbara Port Assets (Disposal) Bill 2015

CIRA Competition and Infrastructure Reform Agreement

Committee Legislative Council Standing Committee on Legislation, with respect to its inquiry into the Pilbara Port Assets (Disposal) Bill 2015

ConsMin Consolidated Minerals Pty Ltd

CPI Consumer Price Index

EERC Economic and Expenditure Reform Committee

EPA Environment Protection Authority

ERA Economic Regulatory Authority Western Australia

FOB Free on board, meaning that the price invoiced by a seller is inclusive of all charges up to placing the goods on board a ship designated by the buyer.

Government Government means the Western Australian State Government

Junior Miner An entity that is not a major miner (BHP Billiton, Rio Tinto, Fortescue, Roy Hill, Vale, a related entity of any of those or any associate of those).

KBT Kwinana Bulk Terminal

LFA Lead Financial Adviser, being Rothschild and Deloitte jointly

Moody's Ratings agency Moody's Investors Service

MRL Mineral Resources Limited

PCO Parliamentary Counsel’s Office

PMI Process Minerals International Pty Ltd

PPA Pilbara Ports Authority

QCA Queensland Competition Authority

Regulations Pilbara Port Assets (Access and Pricing) Regulations 2016

S&P Ratings agency Standard and Poor's

SSO State Solicitor’s Office

State The crown in right of the State of Western Australia

SY1 Utah Point Bulk Handling Facility Stockyard 1

SY2 Utah Point Bulk Handling Facility Stockyard 2

TerminalCo Post-Transaction entity to be which operates the Utah Point Bulk Handling Facility

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Terminal Lessor

Refers to the Pilbara Ports Authority

Transaction Refers to the divestment of the Utah Point Bulk Handling Facility

Treasury Department of Treasury

Utah Point BHF

Utah Point Bulk Handling Facility

WATC Western Australian Treasury Corporation

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• ABC News, Moody’s downgrades WA credit rating as commodities prices plunge; fears of debt blowout, 8 February 2016. http://www.abc.net.au/news/2016-02-08/moodys-downgrades-wa-credit-rating-aa1/7149196

• ABC News, WA Government announces asset sales including Kwinana Bulk Terminal, Utah Point to combat deb, 28 August 2014. http://www.abc.net.au/news/2014-08-28/wa-government-announces-asset-sales-to-fill-budget-black-hole/5703190

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• Government of Western Australia, media statement: Pilbara port price relief backs iron ore jobs, 15 May 2015. https://www.mediastatements.wa.gov.au/Pages/Barnett/2015/05/Pilbara-port-price-relief-backs-iron-ore-jobs.aspx

• Infrastructure Australia, Part of the Answer to Removing the Infrastructure Deficit, October 2012. http://infrastructureaustralia.gov.au/policy-publications/publications/files/Australias_Public_Infrastructure-Part_of_the_Answer_to_Removing_the_Infrastructure_deficit.pdf

• Moody’s Investors Service, ‘Rating Action: Moody’s downgrades Western Australia’s rating to Aa2 from Aa1; changes outlook to stable’, 8 February 2016

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