Financial penalties used to prop up the eye-watering sale price for the state's ports were "trivial", the Federal Court heard on Tuesday.
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The NSW government kept the container fees secret from Parliament and the public after privatising Botany and Kembla ports for $5 billion in 2013 and Newcastle port for $1.7 billion in 2014.
The 99-year leases for Botany and Kembla contained so-called port commitment deeds which included compensation payments if Newcastle developed a rival freight terminal. The payments were revealed by the Newcastle Herald in 2016.
The 99-year lease for Newcastle locked the buyer, Port of Newcastle, into reimbursing the government for these compensation payments if it developed a container terminal.
The port deeds are now the subject of an Australian Competition and Consumer Commission restrictive trade practices case against NSW Ports, the owner of Botany and Kembla, and the NSW government.
Barrister Stephen Free, SC, acting for the NSW government, said during an outline of the state's defence that the container fees, placed in the context of the port deeds and the transactions, were "really trivial provisions in the scheme of things".
He said the compensation provisions had arisen "at the end of the transaction process" to manage "perceived sovereign risks" and not to lessen the prospect of competition.
The ACCC argued on Monday that NSW Ports and the state government acted with the intent and likely effect of lessening competition by giving NSW Ports "comfort" from the prospect of a Newcastle terminal, thus contravening the Competition and Consumer Act.
Noel Hutley, SC, acting for NSW Ports, told the court that the development of a Newcastle container terminal would, in effect, "cleave" the state's container market in two, resulting in the two ports not competing against each other but operating in separate, distinct markets.
"Whether or not such a [Newcastle] project came to fruition affected how big a monopoly they were buying and thus how much they should pay," Mr Hutley said.
"In this way it wasn't an end to impede competition ... it was merely to get what we paid for."
He said there would be no competition between a realised container port in Newcastle and the ports at Botany and Kembla "save perhaps ... an insignificant overlap in the port's hinterlands".
Mr Hutley agreed with the ACCC argument that bidders for Botany and Kembla and the state thought the prospect of a Newcastle terminal "material to the price payable for those assets".
"But the reasons for this were not that they feared competition ... but rather because they recognised that the advent of a Newcastle container terminal could redraw the boundaries of their monopoly," he said.
Mr Hutley and Mr Free said the compensation provisions were "effectuating state policy" that Newcastle would be developed as a container terminal only after Botany and Kembla reached capacity.
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Newcastle was the state's preferred second container port from 2003 until about 2011, during which time the government's Newcastle Port Corporation called for tenders and was poised to complete a deal with a private consortium to develop a freight terminal on the former BHP steelworks site at Mayfield.
But the newly elected Liberal government intervened in late 2011 after the private sector had warned that the sale price for Botany and Kembla would be affected by the prospect of a Newcastle rival.
The government then altered its ports policy to promote Kembla above Newcastle in the hierarchy of future container terminals.
Mr Free said the government had "quite explicitly and openly" changed its ports policy to promote Kembla in the pecking order and remove a cap on container traffic through Botany.
He said this change in policy had made a Newcastle container terminal less realistic "in a radical way and in a way completely unconnected to these compensation provisions".
Mr Hutley told the court that the ACCC's case did not "raise a real chance" that a Newcastle container terminal would be built within the 50-year life of the port deeds.
"The evidence goes no further than establishing that PoN, as it's called, and two precursors have aspired to build a container terminal at Mayfield but failed singularly to articulate any business case for the venture.
"The history of the aspiration to build the terminal at Newcastle is one of accumulating failures to find a viable way forward."
He said Port of Newcastle's preliminary business case for a terminal contained no evidence from a shipping line or distribution centre developers "as to what they might or might not do".
The ACCC case rests, in part, on a complex legal argument about whether the state can claim Crown immunity under the Act and, if so, whether NSW Ports can claim derivative immunity, a doctrine under which parties dealing with governments enjoy the same protection as the Crown if the application of legislation would interfere with the proprietary, contractual or other legal interests of the Crown.
Mr Hutley said allowing the ACCC to prosecute its case against NSW Ports would affect the state's ability to maximise profits from the disposal of its assets.
He said that, if there was an impediment to a Newcastle container terminal, it was the port deed between the government and Port of Newcastle, and not the deeds between the government and NSW Ports.
Mr Free is scheduled to continue outlining the state's defence on Wednesday.
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Michael Parris
Michael Parris reports on politics for the Newcastle Herald. He started at the Herald in 1994 after working in the ABC Newcastle newsroom. Michael spent much of his career as a sub-editor before moving into political reporting in 2017. He was a finalist in the Sports Australia national media awards for his stories about a male-only tennis club in Newcastle. He has covered NSW and federal elections, state and federal budgets and local politics. He has also written extensively about the COVID-19 pandemic with a special focus on data analysis and the effects of lockdowns on the Hunter community.
Michael Parris reports on politics for the Newcastle Herald. He started at the Herald in 1994 after working in the ABC Newcastle newsroom. Michael spent much of his career as a sub-editor before moving into political reporting in 2017. He was a finalist in the Sports Australia national media awards for his stories about a male-only tennis club in Newcastle. He has covered NSW and federal elections, state and federal budgets and local politics. He has also written extensively about the COVID-19 pandemic with a special focus on data analysis and the effects of lockdowns on the Hunter community.
