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

1. Privatisation of
Port Botany, Australia
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Briefing Introduction
July 2012 In September 2011, the State Government of New South Wales (NSW)
announced that it would privatise Port Botany.
Summary Port Botany is Australia’s second-largest container port with annual volumes
of around two million twenty-foot equivalent units (TEU). The Port of Melbourne,
This briefing note identifies some of the Australia’s largest container port, has comparable volumes of 2.4 million TEU.
key issues in the proposed privatisation of Port Botany accounts for roughly one third of Australia’s annual containerised
Port Botany and Port Kembla in New South export and import freight.
Wales, Australia.
In June 2012, the State Government also announced that it would privatise
Port Kembla, Australia’s ninth largest port. The Port currently handles coal,
grain, motor vehicles and cement, but will be used as an overflow container
port when Port Botany reaches capacity.
Political context
The privatisation of Port Botany and Port Kembla follows the recent election
of a new Liberal-National coalition Government in NSW following some 14
years of Labour Government rule.
The new Government is seeking to raise funds to support major infrastructure
investments in NSW and to maintain its current “AAA” credit rating. The Port
Botany and Port Kembla privatisations are part of an A$10 billion privatisation
programme undertaken by the new Government.
Timetable
The proposed transaction timetable will involve the sale process occurring
between October 2012 and March 2013, with completion by mid-2013.
Morgan Stanley was appointed by the NSW Government as the financial
advisor in December 2011. Morgan Stanley is currently undertaking a
scoping study.
No Information Memorandum has yet been released. The first public step in
the proposed transaction timetable will most likely involve the release of a
Request for Expressions of Interest.

2. Privatisation of Port Botany, Australia
Transaction structure
Port Botany is currently owned and operated by the Sydney Ports Corporation
(SPC), a State-owned statutory corporation. The privatisation is most likely to
follow the privatisation structures recently applied to the Port of Brisbane in
Queensland (2010) and the Sydney Desalination Plant in NSW (2012).
A Project Company is likely to be created that will enter into a 99 year lease
with SPC. The lease may be bundled with a concession agreement giving
the Project Company the right to operate and receive the economic benefit
of the relevant Port Botany assets, but imposing a range of performance
obligations. Existing key contracts would likely be assigned to the Project
Company, including SPC’s key terminal leases at Port Botany with DP World,
Patricks and Hutchinson.
The privatisation would subsequently occur via the sale of 100 per cent
of the shares in the Project Company by the NSW Government to an
investor consortium.
The likely transaction structure is illustrated in the following diagram:
Payment for
Investor NSW State
shares
Consortium Government
Transfer of State ownership
shares and concession
100% of shares in
Project Company
99 Year Lease
Project Sydney Ports
Company Corporation
Assigned Assignment
contracts of contracts to
Project Company
Third Party
Contracts
In this manner, investors will be offered a pre-packaged deal without any
involvement in the negotiation of the 99 year lease. The NSW Government
has currently budgeted to receive between A$1.6 billion and A$2.2 billion
from the sale of the shares in the Project Company.
The scoping study will determine whether Port Kembla will be bundled with
Port Botany or sold individually. The NSW Government is budgeting to receive
a further A$500 million for a 99 year Port Kembla lease.
02 Norton Rose Australia July 2012

3. Privatisation of Port Botany, Australia
Preliminary issues
A number of issues are raised by the proposed privatisation, including:
• the extent to which regulatory clearances may be required by bidders
• the extent to which NSW regulation of Port charges will be maintained
• the extent of any Commonwealth regulation of Port charges
• the impact of bottlenecks in road and rail access on Port cash flows.
Each of these issues are addressed in turn below.
Regulatory clearances for bidders
Key regulatory clearances required by bidders may include foreign
investment approvals and competition clearances. Foreign investment
approvals are straightforward and rarely withheld, but are a necessary
formality. Competition clearances may be important if one of the consortium
parties has port operations in Australia, is a potential or actual user of Port
Botany, or has a relevant ownership association with any such person.
The Australian Competition and Consumer Commission (ACCC) may be
concerned if the acquisition of shares in the Project Company could result in
a substantial lessening of competition in any market in Australia. Concerns
could arise, for example, if one of the consortium parties was a potential
or actual acquirer of services at the port, such as a stevedore. In such
circumstances, the ACCC may be concerned at the potential for a vertically-
integrated Port controller to discriminate in favour of its own downstream
Port operations.
However, the inclusion of a Port user or associate in a consortium is not
necessarily fatal to any ACCC clearance. The ACCC’s reaction would turn
on the circumstances of the case. The Port user or associate could have an
immaterial shareholding or role that gave it no practical influence. It may
also be possible to provide a voluntary undertaking to the ACCC to seek to
address any competition concerns. For example, an undertaking could be
provided that competitors to the relevant Port user or associate would be
given access to the Port on a non-discriminatory basis.
The strategy and timing for any approach to the ACCC would need to be
carefully considered. Generally, the ACCC is not willing to provide clearance
without undertaking public market inquiries. If confidentiality issues
precluded inquiries prior to bid submission, the bid may need to be made
conditional on any ACCC clearance.
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4. Privatisation of Port Botany, Australia
Cross-ownership restrictions
In the context of the privatisation of the Port of Brisbane, the Queensland
Government pre-empted competition concerns by imposing cross-ownership
restrictions. Port users and their associates were limited to a 20 per cent
interest in the Project Company. It is unclear at this stage whether the NSW
Government will include a similar condition.
State-based regulation of Port charges
Under the Ports and Maritime Administration Act 1995 (NSW) (PMAA), the
SPC (as owner and operator of Port Botany) must obtain NSW Ministerial
approval to set certain Port charges. Likewise for the Port Kembla Ports
Corporation (PKPC) (as owner and operator of Port Kembla). The regulated
charges are for navigation services, pilotage, port cargo access, site
occupation and wharfage, and berthing. The unregulated charges are for rail
access, ship utilities, port security, and ancillary services. In this manner,
most of the key Port charges are regulated.
The Commonwealth and Infrastructure Reform Agreement (CIRA) encourages
the various Australian States and Territories to ensure that price oversight is
undertaken by an independent body. In NSW, this would be the Independent
Pricing & Regulatory Tribunal (IPART) rather than the relevant NSW Minister.
However, in a review of Port regulation in 2007, NSW was not recommended to
amend its current price oversight approach, largely because Port access prices
in NSW were low relative to other Australian ports at that time.
The PMAA is silent on the appropriate Port charges; hence the NSW Minister
has significant discretion. In practice, the NSW Government has approved
charges with reference to the cost of capital, cost of services, levels of
investment required, the competitive environment, and the need for an
appropriate commercial return. SPC has been required to prepare a business
case justifying any increases to charges.
In the absence of legislative amendment, the existing pricing regime would
continue to apply to SPC and PKPC in the context of any 99 year lease. We
would therefore expect the 99 year lease to contain a pass through mechanism
so that SPC and PKPC could continue to meet their statutory obligations under
the PMAA (ie, the Project Company would require SPC approval to amend
regulated charges, SPC would then obtain Ministerial approval).
However, if the NSW Government were seeking to improve asset valuation,
it may seek to remove the oversight regime entirely or replace it with an
alternative oversight mechanism. An oversight regime could be made more
consistent with CIRA by requiring port charges to be approved by IPART,
rather than the NSW Minister, in accordance with key regulatory principles.
This could occur by legislative amendment to the PMAA or could occur within
the context of the contractual arrangements between SPC or PKPC and the
Project Company.
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5. Privatisation of Port Botany, Australia
Commonwealth-based regulation of Port charges
It remains open for any third party to seek declaration by the Commonwealth
Treasurer of aspects of Port Botany and/or Port Kembla operations under
the national infrastructure access regime in Part IIIA of the Competition and
Consumer Act 2010 (Cth). Given both Ports are of national significance, the
key issue would be whether increased access would increase competition in
at least one market. This may be relatively straightforward to establish in some
circumstances.
If declaration occurred, the relevant terms and conditions of access
(including pricing) could become subject to ACCC arbitration. Essentially,
if a dispute over prices occurred, the access seeker could seek a binding
determination from the ACCC. In this matter, Port charges would become
subject to regulation by the ACCC.
As yet, Part IIIA has not been applied to port assets in Australia. In general,
Part IIIA has been rarely applied and has been accompanied by significant
delays and extensive litigation where it has been applied (eg, access by
Fortescue Mining to private railway lines owned by BHP Billiton and Rio Tinto;
access to Sydney Airport facilities by Virgin Airlines). However, the ACCC is
currently advocating the streamlining of the Part IIIA access regime to ensure
it’s more timely and effective application.
To avoid the application of Part IIIA, it is possible for the NSW Government
to develop a State-based access regime and then seek to have this formally
“certified”. There are two examples of such an approach in relation to ports
in Australia: the Dalrymple Bay Coal Terminal in Queensland, and the South
Australian Ports Access regime. Both regimes provide for oversight by the
relevant State regulator. However, development of a regime for the port and
subsequent certification may take significant time, hence seems unlikely in
the context of the current privatisation.
Impact of land access bottlenecks on Port Botany cash flows
There is potential for port usage and cash flows to materially increase over
time. A recent A$1 billion investment to create a third terminal at Port Botany
has created infrastructure that can handle significantly higher volumes of
container throughput at Port Botany. SPC has forecast that container volumes
could more than triple to 7.5 million TEU by 2030. However, there is a current
3.2 million TEU planning restriction on the Port and hence planning approval
amendments would be required to realise this potential.
Amended planning approvals will, in turn, require resolution of critical land
access bottlenecks. In a November 2011 submission to Infrastructure Australia,
the NSW Government highlighted that the current ability of the Port to tranship
containers already exceeds the ability of the rail and road land transport system
to clear the cargo from terminals and adjacent container depots.
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6. Privatisation of Port Botany, Australia
Rail access to the Port has historically been problematic. The rail proportion of
container movements has declined in recent years (from 22 per cent in 2002
to 14 per cent in 2011). Historic issues identified by the NSW Government
have included poorly co-ordinated rail supply, inefficient port/rail interfaces,
lack of performance standards, unsuitable rail windows, lack of intermodal
terminal capability, and prioritisation of passenger rail on shared rail lines. In
its November 2011 submission, the NSW Government’s proposed to increase
the rail proportion of container movements to 28 per cent by 2020, including
by the opening of new Intermodal Terminals at Enfield and Moorebank and by
completion of a dedicated South Sydney Freight Line.
Road access has also faced significant historic issues. Road volumes are
expected to double by 2020 and treble by 2030. Following a review by
IPART in 2008, the NSW Government implemented a “Port Botany Landside
Improve Strategy” that imposes regulatory incentives for stevedores and
transport carriers to improve turnaround times and reduce late arrivals.
The NSW Government also recognises that significant road investment is
required and has proposed a widening of the critical “M5” road link as well
as implementing advanced motorway traffic management technologies.
This list of issues is by no means exhaustive. Other key issues, for example,
are likely to include political risk, labour and union risk, health and safety
issues, environmental liabilities, and planning consents and restrictions.
Outer Harbour development of Port Kembla
Historically, Port Kembla has served the needs of regional industries in the
Illawara region of NSW, predominantly the exporting of coal, importing of raw
materials for steel production, and exporting of steel product. The Port is also
the principal grain export port for producers in southern and south-western NSW.
Expansion of the Inner Harbour at Port Kembla was completed in November
2008. As a result, Port Kembla became the major port for all car imports into
NSW. However, while the Inner Harbour still has the potential to cater for the
growth of existing cargoes, it is now fully leased. Demand continues to exist
for additional port facilities, particularly for new industry and future trade
growth.
In March 2011, the NSW Minister for Planning granted planning approval
for the expansion of Port Kembla’s Outer Harbour. The Outer Harbour
development includes the reclamation of approximately 42 hectares of land
and the construction of seven new berths. The development is proceeding in
three major project stages and is anticipated to take 25-30 years to complete
at a cost of some A$600 million. The staging is based on anticipated
customer demand over that period.
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7. Privatisation of Port Botany, Australia
The privatisation scoping study will recommend which parts of Port Kembla
will be subject to the proposed 99 year lease and which parts, if any, would
be excluded. We would anticipate that the Outer Harbour development will
proceed as intended. Given the extent of private sector interest in the Outer
Harbour, we anticipate that such areas may be included.
Our relevant experience
“The commerciality We have an exceptional global ports practice and we have long been
of their advice is recognised markets leaders in port developments and privatisations. We are
outstanding” ranked Band 1 in Transport by Chambers and Partners 2011. Our continued
Chambers and Partners expertise in shipping and infrastructure places us in an ideal position to give
2011 clients accurate legal advice and market advice on port projects.
Our team of experts throughout our global network act on ports and associated
regulatory issues. We have gained invaluable knowledge of the types of
unique challenges faced by our clients on each projects, providing unrivalled
versatility and know-how in the sector. Our clients include government
proponents, investors and infrastructure funds, developers, financiers,
government agencies, rail and port operators and port authorities.
• We have historically acted in a range of matters involving Port Botany,
including for Patrick Corporation and Sydney Ports Corporation. We have
also acted in relation to the Moorebank Inland Terminal.
• In Australia, we acted in the privatisations of the Port of Geelong and the Port
of Hastings, arrangements for the Port of Brisbane, concession agreements
for the Ports of Albany and Port of Newcastle, and the development of LNG
facilities at the Port of Gladstone. We have also acted in relation to Bunbury
Port, Koorangang Port, and the Port of Hedland (Australia’s largest export
Port). We have acted for various infrastructure funds in Australian port
investments.
• Internationally, we have extensive experience advising on port infrastructure
issues, including a number of port privatisations across Europe, Asia, Africa
and India. Our work on the project financing of the Port Dakar Container
Terminal in Senegal, Africa, was awarded the Transport Infrastructure Deal of
the year recently by Project Finance International.
We have also acted in the privatisation of the Sydney Desalination Plant in
NSW on which the Port Botany and Port Kembla privatisations are likely to be
modelled.
Norton Rose Australia July 2012 07

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