A Private Port – The outlook for Australian logistics

Port

This article first appeared in the February/March 2017 issue of Logistics & Materials Handling

The privatisation of the Port of Melbourne in late 2016 will have major economic and infrastructural implications for the city, Victoria and the country for the next half-century. For the region’s logistics industry, it will be anything but business as usual.

Australia’s largest container and general cargo port, the Port of Melbourne, was recently leased for 50 years to a private syndicate, the Lonsdale Consortium. Victoria’s logistics industry is set to benefit from massive investment by the new owners to improve the Port’s efficiency and increase its capacity.

The deal follows the privatisation of the east coast’s other major marine transport hubs, the ports of Brisbane, Botany Bay, Kembla and Newcastle, in recent years. The Victorian gateway handles the bulk of Australia’s freight task and, as such, the agreement will impact the region’s logistics industry at every level, in the region and across the country.

The successful bidders secured the lease in September 2016 in a deal worth $9.7 billion, and promptly took control of the Port of Melbourne on 31 October. Having expected to settle around the $7 billion mark, the Victorian Government was pleased with the result, vowing to invest the money on improving the region’s transportation links. Along with an additional, expected-though-disputed 15 per cent top up from the Federal Government under the asset recycling agreement, Victoria’s $11 billion windfall will have massive implications for its trade, transport and infrastructure ambitions.

Several projects have already been earmarked for investment with the proceeds of the sale, each aimed at relieving transport woes around the region. Lease proceeds going to the Victorian Transport Fund will be allocated to improved rail and vehicular access to the Port and the removal of 50 of the area’s worst level crossings to ease urban traffic congestion. Also to receive funds is a major urban rail project, Melbourne Metro, designed to ease commuter congestion on highways, and the ‘Western Distributor’, a five-kilometre toll road to link the West Gate Freeway at Yarraville in Melbourne with CityLink at Docklands, allegedly taking 6,000 trucks per day off the West Gate Bridge.

At the time of the sale, ALC Managing Director Michael Kilgariff voiced his support for major investment in logistics infrastructure. “Infrastructure Australia has predicted the volume of containerised trade going through our ports and airports will increase by 165 per cent from 2011 to 2031,” he said. “This significant growth underscores a need for all governments, including Victoria, to invest in appropriate national infrastructure to ensure our landside infrastructure can keep pace with waterside growth.

“Now is the time to get Victoria’s supply chains right by investing in the State’s logistics infrastructure to maximise the Port’s future potential.”

Tim Pallas MP, Treasurer of Victoria, has given assurances that the money obtained from the lease sale will directly benefit road users, and commercial vehicles in particular. “The Victorian Government is already working to take thousands of trucks off the West Gate Bridge and to the Port of Melbourne by a new dedicated road link, easing congestion for city-bound traffic,” he wrote in an official release. He has, however, already expressed concerns over funding and the politics of progress after the Federal Government refused to offer the full 15 per-cent asset recycling scheme top-up payment. Nonetheless, it would appear that, at least for the near future and the current government, the coffers are full and investment is possible.

On the other side of the transaction, the Lonsdale Consortium, comprising the Future Fund, QIC, Global Infrastructure Partners and OMERS, has secured a valuable deal. For their money, they have gained control over Australia’s largest and busiest container, automotive and general cargo port, and the 3,000 vessels that visit each year handling 36 per cent of the country’s container trade.

In addition, the deal specifies that the State will be required to pay compensation if a second container port in the region is constructed within the 15 years of the lease’s commencement.

Some observers worry that in order to recoup their cash, the Consortium will hike up fees and rents as soon as an agreed 15-year fee freeze period has expired, resulting in a loss for the Port’s users and, indirectly, consumers. ANL Container Line Managing Director John Lines warned at the time of the sale that port users and the broader Victorian community would soon feel the squeeze. “Port and other State asset privatisations are a tax by stealth which will be paid over decades to come,” he told Lloyd’s List Australia. “If we look at the numbers for Melbourne and do some very simple calculations, the Port made EBIT in 2014–15 of $121 million which at the sale price of $9.7 billion for a 50-year lease, is $195 million per year just to get their money back, let alone make a good investment return. So the only way is up for prices. There is some comfort in the 15-year price cap in the lease agreement but after that, for another 35 years, it will be open slather…and we will all be paying dearly for it.”

The Victorian Transport Association (VTA), meanwhile, has advocated the private lease, welcoming the infrastructure improvements to come as a result. “The VTA played a significant role in the process behind leasing the Port of Melbourne, through numerous submissions, appearances before the Upper House lease inquiry and advocating for transport projects lease proceeds,” said VTA CEO, Peter Anderson. “The windfall from the lease will fund projects through the Victorian Transport Fund, such as strengthening roads and bridges to accommodate high productivity freight vehicles.

“It was also notable that through our efforts, the legislation was modified to address the major concerns we had about protections at the port, giving operators certainty against excessive price hikes.”

As the Lonsdale Consortium and Victorian Government congratulate themselves on a job well done, thoughts must move to the realities of a privatised Port for the thousands who pass through it each day.

In return for the anticipated rise in fees, port users will ideally benefit from the spoils of a transition from state ownership to private management, including increased efficiency, faster decision- and change-making powers thanks to a less bureaucratic system and investment in facilities.

In reaction to a once-popular opinion favouring government intervention, Harvard Professor of Economics, Andrei Schleifer, stated in his much-cited 1998 paper State Versus Private Ownership that capitalism limited by government regulation – not socialism – should be the answer. “Private ownership should generally be preferred to public ownership when the incentives to innovate and to contain costs must be strong,” he wrote. “Many of the concerns that private firms fail to address ‘social goals’ can be addressed through government contracting and regulation, without resort to government ownership.” Schleifer’s vision, however, relies on the absence of monopoly, a fact that the Lonsdale Consortium’s contenders for the lease will now be keenly aware of, though the Victorian Government will retain responsibility for some aspects of port business – notably safety and environmental regulation.

According to former ports boss Michal Frydrych, while privatisation or leasing of terminals and port operations can be beneficial, selling or leasing entire ports can lead to serious abuse of power. “I have always operated on the premise that ports are vital to development of countries and should play a supporting role to the rest of the economy,” he wrote. “We cannot have expensive ports with limiting power over other port developments. We need ports in correct places, practical and managed by port people.

“Ports are far too important to be used for quick cash to be used to build bridges that should have been built anyway.”

The privatisation of the Port may lead to an increased cost of business for its users, with owners pursuing profitability and shareholder interests. Already it seems likely that a levy introduced by the Victorian Government in 2012 to improve infrastructure around the port and increase supply chain efficiency, the ‘Port Licence Fee’, will continue to be collected beyond its original projected end date of 2022. Peter Van Duyn, Maritime Logistics Expert at the Institute for Supply Chain and Logistics at Victoria University, warned in late 2016 that the ‘temporary’ charge is likely to be collected until the end of the lease agreement. “The Port Licence Fee, which currently contributes approximately $80 million per year to the Port’s coffers and is CPI indexed…was originally meant to be levied for a duration of about 10 years, or until it had raised $1 billion,” he wrote. “It looks like importers and exporters are now stuck with this fee for the next 50 years.”

There are big changes ahead for the Port of Melbourne. Over the next 50 years, the Lonsdale Consortium will be responsible for the success, or failure, of Australia’s most important port and its many dependents. So far, many promises have been made, but it shall soon become clear whether the Lonsdale Consortium will deliver, or if the people of Victoria are being taken for a ride.

Air logistics – outlook

The Port of Melbourne lease is not likely to have a dramatic, direct impact on the region’s air logistics industry. Indirectly, though, it is sure to benefit from the upgrade projects and investment in other parts of the region, with shorter Port-to-airport times thanks to reduced road congestion, the construction of dedicated freight routes and the reduction of commuter traffic if a metro system is developed. Additionally, with members of the Lonsdale Consortium holding stakes in Melbourne Airport, the region’s air cargo hub may well figure in the group’s long-term vision for Victorian logistics.

Marine logistics – outlook

Set to benefit most from improved efficiencies in processes in the Port of Melbourne, marine logistics is also positioned to take the brunt of added fees. With no second container port in the area to help deal with the projected doubling of freight volume in the next decade, and with a 15-year block on the construction of a new one, the Port of Melbourne will continue to face the massive task alone, with some operators worrying they will be at the mercy of the owners’ management, rules and fees. ANL Container Line Managing Director, John Lines, expressed serious concerns about the privatisation, for example: “Ports are big, lumpy bits of vital infrastructure for each region and, being a natural monopoly, are best owned by the state. The prices paid to cash-strapped governments are no doubt attractive but these prices can only be recouped by the purchaser by increased flows or increased prices and only one of these, prices, is under their control,” he says. “These extra costs will flow through the whole economy.”

Rail logistics – outlook

Rail logistics are set to benefit from the privatisation of the Port of Melbourne, both directly and indirectly. Russell Smith, Partner at Global Infrastructure Partners (GIP), part of the winning Lonsdale Consortium, advised at the time of purchase that the group has plans to use its experience in managing port and rail assets to make the rail logistics chain from regional NSW and Victoria into the Port more efficient and pricing more competitive with other ports. “GIP looks forward to bringing to bear our strong port and rail industry expertise to drive forward the efficiency and capacity of the Port of Melbourne and focus on the necessary transformational change in the road/rail mix servicing the freight task,” he commented.

Some proceeds from the sale are to be directed towards developing better rail infrastructure in anticipation of growing freight volume. At the time of the purchase, ALC Managing Director, Michael Kilgariff, commented on the importance of investment in road and rail infrastructure linking the port to the wider transport network, including the development of an inter-modal terminal. “This includes an appropriate investment of the $58 million set aside for the port rail shuttle, which has been on hold while the port lease transaction was finalised,” he said. “Investment must incorporate all modes of transport, including short-haul rail, which needs to play a greater role into the future as our ports continue to move greater numbers of containers each year.”

Road logistics – outlook

If planned infrastructure developments come to fruition, fleets will benefit from better port access and traffic conditions, avoiding the overloaded West Gate Bridge thanks to the ‘Western Distributor’ project. “An appropriately regulated port, supported by efficient road and rail links, is vital to sustaining the Victorian economy and driving productivity improvement across the supply chain,” said ALC Managing Director Michael Kilgariff. Beyond the port, improved infrastructure in the region funded by the sale will contribute to more efficient journeys, directly through the removal of level crossings, and indirectly by getting cars off the road and people onto a city-wide metro system.
Sources: Lloyd’s List Australia, Shleifer, A. (1998) ‘State Versus Private Ownership’. Ferrier Hodgson (2014) Transport and Logistics Insights: The road ahead. AFR (2016) Record $11b Port of Melbourne sale rides infrastructure boom. Infrastructure Victoria (2016) Advice…on options to secure Victoria’s future ports capacity.