The NSW government's secret deal to compensate the owners of Port Botany and Port Kembla if Newcastle developed a rival container terminal was "brazenly anti-competitive", the Federal Court was told on Monday.
On the first day of the Australian Competition and Consumer Commission's action against the NSW Ports consortium and the government, Michael Borsky, QC, said the ACCC case would demonstrate that the $5 billion Botany and Kembla lease "had the purpose or likely effect of substantially lessening competition".
In so-called "port commitment deeds" contained in the 2013 NSW Ports lease, revealed by the Newcastle Herald in 2016, the government agreed to compensate the new Botany and Kembla private operator for every container handled in Newcastle above a cap.
Port of Newcastle agreed to pay the fee on the state's behalf when it leased Newcastle for $1.7 billion in 2014.
The ACCC case could have a significant impact on the state's port privatisation deals and the future of a container terminal in Newcastle.
Mr Borsky told the court that the content of the commitment deeds was not in dispute and amounted to a "simple competition case".
"We say the anti-competitive nature of the provision is really apparent from its terms," the barrister said.
The court would see "candid acknowledgements" from the state that the compensation provisions sought to give private sector investors "comfort or protection against the prospect of competing with a container development at the then state-owned port of Newcastle".
"Another significant feature of this case, in our submission, is that the state, well advised, has made a forensic decision not to call evidence from any witness to try to contradict or even contextualise any of those acknowledgements ... ," he said.
"The vendor of a business which owned and controlled another business in the same industry and the same state promised to compensate the purchaser if the other business won material volumes from the acquirers subsequent to the sale.
"We will submit that, when one steps back from some of the detail and complexity, the compensation provisions can be seen plainly as brazenly anti-competitive provisions."
Port of Newcastle has said publicly that the container fees restrain it from developing a large-scale freight terminal, compromising its and the city's ability to diversify beyond coal.
Mr Borsky laid out a timeline for Federal Court judge Jayne Jagot which he said demonstrated that the former Labor government had promoted the development of a large container terminal on the former BHP steelworks site at Mayfield from 2003 to 2011.
The government's Newcastle Port Corporation had reached a deal in 2011 with Newcastle Stevedores Consortium to develop a terminal, but the state had blocked the sale after potential Botany and Kembla operators said it would make those two ports less attractive.
Mr Borsky referred to a series of emails and briefings involving, among others, consultants Morgan Stanley, port bidders, then treasurer Mike Baird, senior bureaucrats and Newcastle Port Corporation which he said showed the government had scuppered the Mayfield deal out of concern it would affect the Botany and Kembla price tag.
The documents, some of which remain confidential, showed the government had been briefed on how a Newcastle terminal would cut the Botany and Kembla lease value by a "substantial sum which I'm not at liberty to read", he said.
The state had included the 50-year compensation provisions in the deals to assure the private sector of the long-term value of the port leases regardless of any changes in future government policy regarding a Newcastle container terminal.
"Precisely because governments couldn't bind decisions of future governments, particularly over a term of, say, 50 years, this sort of regime was proposed to be included in the transaction documents that were being prepared on behalf of the state," Mr Borsky said in relation to email advice from Morgan Stanley to NSW Treasury.
Morgan Stanley, which was advising the government on the sale process, had suggested a Newcastle reimbursement fee kick in at 200,000 containers a year, but the state had eventually settled on a far less generous cap of 30,000.
Mr Borsky said Treasury documents showed Mr Baird had signed off on the compensation provisions in 2013 after being briefed on the port commitment deeds.
Mr Borsky foreshadowed a NSW Ports defence that a Newcastle container terminal was not commercially viable, regardless of whether the compensation conditions were in place, and that Port of Newcastle had written its business case for a terminal only for the purposes of the Federal Court case.
"That submission, with great respect, has an air of unreality to it," he said.
"If the Port of Newcastle had no genuine desire to develop a container terminal that might compete with Botany or Kembla, why, we ask rhetorically, would it bother to contrive a non-genuine business case for the purposes of this litigation.
"It would be irrational for the Port of Newcastle to support the ACCC's case if the Port of Newcastle had no genuine commercial desire itself to develop a container terminal in a world without the compensation provisions."
He also questioned why NSW Ports would "so jealously" defend the compensation provisions if a Newcastle terminal was not viable.
NSW Ports and the government are expected to outline their cases on Tuesday.
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