Privatisation of Port of Newcastle, Australia

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This briefing note identifies some of the potential issues in the proposed privatisation of the Port of Newcastle in New South Wales, Australia.

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Privatisation of Port of Newcastle, Australia

  1. 1. Privatisation of Port Newcastle, Australia Introduction In June 2013, the State Government of New South Wales (NSW Government) announced as part of its state budget plans that it would privatise the Port of Newcastle (Port Newcastle). Port Newcastle is the economic and trade centre for the resource rich Hunter Valley and for much of the north and northwest of New South Wales. Port Newcastle is the world’s largest coal export port and Australia’s third largest port by total throughput in mass tonnes. Australia is the world’s largest coal exporter and Port Newcastle is responsible for some 70% of Australia’s total coal exports. During the 2011/12 financial year, Port Newcastle achieved an annual coal export volume of some 121.9 million tonnes. Port Newcastle also currently handles grain, alumina, fuel, mineral concentrate, fertiliser and steel, although coal exports represent around 95% of the total port throughput in mass tonnes. Political context The privatisation of Port Newcastle was announced as part of the NSW Government’s 2013-2014 state budget. The privatisation of Port Newcastle is the next part of the Liberal-National coalition State Government’s multi-million dollar privatisation programme in New South Wales. It follows the successful privatisations of Port Botany and Port Kembla in April 2013. As with many previous NSW privatisations, the privatisation of the Port is controversial and has generated significant media comment. Half of the sale proceeds are intended to be allocated to a range of infrastructure projects for the city of Newcastle, potentially including a light rail project. Timetable As at June 2013, the proposed transaction timetable has not yet been announced. The first public step is expected to involve the release of a Request for Expressions of Interest by the NSW Government. No Information Memorandum has yet been released. The NSW Government will commission a scoping study before the transaction process begins. A financial adviser has yet to be appointed. Morgan Stanley was previously appointed as financial advisor for the Port Botany and Port Kembla privatisations. Briefing June 2013
  2. 2. Norton Rose FulbrightNorton Rose FulbrightNorton Rose FulbrightNorton Rose Fulbright 02 Transaction Structure and Sale Price Port Newcastle is currently operated by Newcastle Port Corporation (NPC), a State-owned statutory corporation and a major land owner in the port. The privatisation is most likely to follow the privatisation structures recently applied to similar infrastructure privatisations in NSW and throughout Australia. In relation to the Port Botany and Port Kembla privatisations in 2013, the NSW Government enacted implementing legislation in the form of the Ports Assets (Authorised Transactions) Act 2012. It is likely that this legislation will now be extended to apply to Port Newcastle as well. If this legislation were applied, the relevant State assets to be privatised would be transferred by the NSW Government into to the Port Assets Ministerial Holding Corporation (PAMHC), a State entity established by that Act to hold NSW port assets to be leased to the private sector. It is expected that a Project Company would then be created to enter into a 99 year lease with PAMHC. The lease will provide for the lease of the port, associated port land and other port assets. Freehold title would remain with PAMHC. Some employees of NPC would transfer to the new Project Company, supported by various Government commitments intended to preserve employee entitlements. The NSW Government would retain step-in rights and would have the ability to terminate the lease if the Project Company is in breach of key obligations. The lease may be bundled with a concession agreement giving the Project Company the right to operate and receive the economic benefit of the relevant Port Newcastle assets, but imposing a range of performance obligations. Existing key contracts would likely be assigned from NPC to the Project Company. The privatisation would subsequently occur via the sale of 100 per cent of the shares in the Project Company by the NSW Government to an investor consortium. In this manner, investors will most likely be offered a pre- packaged deal without any involvement in the negotiation of the 99 year lease. The likely transaction structure is illustrated in the following diagram: The NSW Government is budgeting to receive at least $700 million from the sale of the shares in the Project Company. This budgeted figure appears conservative. The privatisations of Port Botany and Port Kembla by the NSW Government achieved sale revenue of $5.07 billion which the NSW Government indicated was some 25 times the annual earnings from those ports. The budgeted sales revenue for those privatisations was $3 billion. Investor Consortium Project Company NSW State Government Port Assets Ministerial Holding Co Third Party Contracts 99 Year Lease State ownership and concession Assignment of contracts to Project Company Assigned contracts Transfer of shares Payment for shares 100% of shares in Project Company Newcastle Port Corporation
  3. 3. Credentials NNNNoooorrrrttttoooonnnn RRRRoooosssseeee FFFFuuuullllbbbbrrrriiiigggghhhhtttt 03 Preliminary issues A number of issues are raised by the proposed privatisation, including: • the extent to which regulatory clearances may be required by bidders; • the extent to which NSW regulation of port charges will be maintained; • the extent of any Commonwealth regulation of port charges; and • insufficient diversification risk associated with the heavy weighting of Port Newcastle to coal export. Regulatory clearances for bidders Key regulatory clearances required by bidders may include foreign investment approvals and competition clearances. Foreign investment approvals are straightforward and rarely withheld, but are a necessary formality. Competition clearances may be important if one of the consortium parties has existing port operations in Australia, is a potential or actual user of Port Newcastle, or has a relevant ownership association with any such person. The Australian Competition and Consumer Commission (ACCC) may be concerned if the acquisition of shares in the Project Company could result in a substantial lessening of competition in any market in Australia. Concerns could arise, for example, if one of the consortium parties was a potential or actual acquirer of services at the port. In such circumstances, the ACCC may be concerned at the potential for a vertically integrated port controller to discriminate in favour of its own downstream port operations. However, the inclusion of a Port Newcastle user or associate in a bidding consortium is not necessarily fatal to any ACCC clearance. The ACCC’s reaction would turn on the circumstances of the case. The Port Newcastle user or associate could have an immaterial shareholding or role that gave it no practical influence. It may also be possible to provide a voluntary undertaking to the ACCC to seek to address any competition concerns. For example, an undertaking could be provided that competitors to the relevant Port Newcastle user or associate would be given access to the Port Newcastle on a non-discriminatory basis. If competition issues were identified, the strategy and timing for any approach to the ACCC would need to be carefully considered. Generally, the ACCC is not willing to provide clearance without undertaking public market inquiries. If confidentiality issues precluded inquiries prior to bid submission, the bid may need to be made conditional on any ACCC clearance. As far as we are aware, no parties bidding for the Port Botany and Port Kembla assets considered it necessary to seek informal clearance from the ACCC for their respective proposed acquisitions. State-based regulation of port charges Based on the experience with Port Botany and Port Kembla, the NSW Government will wish to retain price oversight powers and monitor prices charged at Port Newcastle by the private sector lessee. Consistent with principles adopted by the Council of Australian Governments, commercial outcomes will be promoted where markets are competitive, but price monitoring will be implemented where regulatory oversight is required. Historically, under the Ports and Maritime Administration Act 1995 (NSW) (PMAA), the NPC (as major land owner and operator of Port Newcastle) was required to obtain NSW Ministerial approval to set certain port charges. The regulated charges included navigation services, pilotage, port cargo access, site occupation and wharfage. The
  4. 4. Privatisation of Port Newcastle, Australia Norton Rose FulbrightNorton Rose FulbrightNorton Rose FulbrightNorton Rose Fulbright 04 unregulated charges included charges for such matters as rail access, ship utilities, port security, and ancillary services. In this manner, most of the key port charges were regulated. As part of the Port Botany and Port Kembla privatisations, the PMAA was amended to implement a price monitoring regime for the key NSW ports, including Port Newcastle. The new regime applies to both port corporations and private lessees. As part of the amendments, the requirement for Ministerial consent for certain charges was removed, hence the Minister now retains direct price setting powers only for the port cargo access charge. A new port infrastructure charge was also permitted to be levied in order to fund investment in port infrastructure projects. Under the new regime, the private lessee will need to give notice of any proposed changes to service charges and provide the rationale for how the increase is calculated and why the increase is needed. The port lessee will also need to provide an annual report of charges to the NSW Minister. The NSW Minister will have the power to require information to be supplied to the NSW Government relating to port charges. If necessary, the NSW Minister would have the ability to refer any inappropriate pricing behaviour by the port lessee to the NSW Government’s independent pricing watchdog, the Independent Pricing and Regulatory Tribunal (IPART). The Minister also has the ability under the PMAA to promulgate regulations to promote the economically efficient operation of, use of and investment in land-based port facilities and port-related supply chain facilities, including Port Newcastle. However, the Minister must not use those regulations to regulate the fixing or collection of port charges at Port Newcastle. Commonwealth-based regulation of port charges It remains open for any third party to seek declaration by the Commonwealth Treasurer of aspects of Port Newcastle operations under the national infrastructure access regime in Part IIIA of the Competition and Consumer Act 2010 (Cth). Given Newcastle Port is of national significance, the key issue would be whether increased access would increase competition in at least one market. This may be relatively straightforward to establish in some circumstances. If declaration occurred, the relevant terms and conditions of access (including pricing) could become subject to ACCC arbitration. Essentially, if a dispute over prices occurred, the access seeker could seek a binding determination from the ACCC. In this matter, port charges would become subject to regulation by the ACCC. As yet, Part IIIA has not been applied to port assets in Australia. In general, Part IIIA has been rarely applied and has been accompanied by significant delays and extensive litigation where it has been applied. However, the Productivity Commission has recently released a draft report that recommends the streamlining of aspects of Part IIIA. Moreover, recent amendments to Part IIIA may make it easier to apply in practice than has historically been the case. To avoid the application of Part IIIA, it is possible for the NSW Government to develop a State-based access regime and then seek to have this formally “certified”. Two examples of such an approach in relation to ports in Australia include the Dalrymple Bay Coal Terminal in Queensland, and the South Australian Ports Access regime. Both regimes provide for oversight by the relevant State regulator. However, development of a regime for Port Newcastle and subsequent certification may take significant time, hence this approach was not adopted by the NSW Government in the context of the privatisation of Port Botany and Port Kembla.
  5. 5. Norton Rose FulbrightNorton Rose FulbrightNorton Rose FulbrightNorton Rose Fulbright References to "Norton Rose Fulbright", "the law firm", and "legal practice" are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together "Norton Rose Fulbright entity/entities"). In respect of this bid, advice and services will be provided by Norton Rose Fulbright Australia (the "Contracting Party") in accordance with its terms of engagement. No other Norton Rose Fulbright entity nor any individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose entity other than the Contracting Party accepts or assumes responsibility, or has any liability, to you or any third party for advice or services provided. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity. nortonrosefulbright.com Diversification and expansion of Port Newcastle Coal is currently by far the Port Newcastle’s largest trade commodity, representing around 95% of the total port throughput in mass tonnes. NPC currently works with all of the coal producers and service providers through the Hunter Valley Coal Chain Co-ordinator to plan and co-ordinate the transport of coal from mine to ship. The Hunter Valley ‘coal chain’ is recognised as the largest coal export operation in the world. The chain consists of some 35 coal mines owned by 13 coal producers. The coal is loaded onto trains at more than 27 points and is hauled for distances of up to 380 kilometres to three port coal export terminals located at Port Newcastle. An important consideration for all potential investors will be the coal sector’s outlook and to a significant extent China’s economic forecast (the primary destination of the coal exported from Port Newcastle). The current economic climate has seen stalling demand and falling global coal prices. Potential investors may also wish to investigate the growth, expansion and diversification of the port’s current trade output. Contacts For more information on this project, please contact: Adrian Ahern Global Chairman / Partner Norton Rose Fulbright Australia +61 2 9330 8216 adrian.ahern@nortonrosefulbright.com Vincent Dwyer Australian Head of Corporate / Partner Norton Rose Fulbright Australia +61 2 9330 8238 vincent.dwyer@nortonrosefulbright.com Dr Martyn Taylor Partner / Author of this Briefing Norton Rose Fulbright Australia +61 2 9330 8056 martyn.taylor@nortonrosefulbright.com Nigel Deed Senior Associate / Author of this Briefing Norton Rose Fulbright Australia +61 2 9330 8915 nigel.deed@nortonrosefulbright.com

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