We wrote about it just last month (Are monopolies passé?), but monopolistic positions, a classic tenet of infrastructure investment, seem to be increasingly under fire. A case in point: the upcoming privatisations of Australia's Port of Melbourne and Port of Fremantle.
The latest warning shot was fired by Rod Sims, chairman of watchdog Australian Competition and Consumer Commission (ACCC), who said in a recent speech that plans to give a successful bidder monopolistic rights for Port of Fremantle would hurt competition, adding “governments should use privatisation processes as an opportunity to put in place pro-competitive market structures”
Sims was particularly concerned about how agricultural supply chains could be hurt if the port's future owner is also given rights to develop a second port to the south. “This is an area of concern to the ACCC because natural monopoly infrastructure can act as a bottleneck, hindering competition and efficient investment in upstream and downstream markets along the value chain,” he argued.
Port of Fremantle handles most of Western Australia's livestock and grain exports and was responsible for A$28 billion ($21 billion; €19 billion) in trade last year. Its potential lease is valued at more than A$2 billion. But while the timeline for selling Port of Fremantle remains uncertain, a very similar discussion is taking place around the more advanced privatisation process for Port of Melbourne, the country's busiest port.
After six months of discussion, a legislative breakthrough has now been achieved, with the Victorian government striking a deal with the opposition for the port privatisation. Underpinned by legislation instead of commercial in confidence agreements, the lease of the port is offered for a 50-year term, with an option for the government to extend it for a further 20 years.
But the meat of the agreement centres on the compensation to be paid to the winning concessionaire should capacity constraints prompt the government to build a second port further down the line. The deadlock was finally resolved by an amendment that restricts compensation to 15 years from the lease commencement.
Victoria Treasurer Tim Pallas said the amendment will “ensure a level playing field to allow ports to compete head to head without the distortion of state subsidies and will provide investors with confidence on likely outcomes”.
With the legislation now passed, the lease transaction's joint financial advisors, Morgan Stanley and Flagstaff, will soon call for expressions of interest from the market on behalf of the government. The sale is expected to net “at least” the A$5.3 billion forecasted by the previous government. Pallas has denied the price would be compromised by the delay and argued that changes around compensation and port licence fees would not detract from the sale price given the strong interest in the asset. The sale proceeds, to be paid up front, will go into the Victorian Transport Fund (VTF). The VTF will support key infrastructure initiatives throughout Victoria, such as a A$5 billion election promise to remove 50 railway level crossings, according to Pallas.
In our recent annual Australia report, Hastings Funds Management executive director for global investments Andrew Faber was cautiously optimistic on the port sale: “Port of Melbourne is a fantastic asset and is exactly what we look for as a business. But there's a big debate about whether a second port is required and if so when and how do you deliver it. You don't want to make a substantial investment in an asset and find out the government can build a competing asset down the road in a short period of time.”
Despite the political uncertainty, Australian firms have expressed strong interest in the port leases. IFM Investors , QIC , Macquarie Infrastructure and Real Assets and Hastings are all reportedly considering investing in both Port of Fremantle and Port of Melbourne. Global Infrastructure Partners is also said to be in the mix.
Time will tell just how important the loss of a true monopolistic position will be for the port sales and whether this second round of Australian privatisations signals the end of a much-cherished infrastructure “get out of jail free card”.