standing committee on finance and public … · 5 june 2008 standing committee on finance and...

5 June 2008 Standing Committee on Finance and Public Administration 1

C O R R E C T E D V E R S I O N

STANDING COMMITTEE ON FINANCE AND PUBLIC ADMINISTRATION

Inquiry into Port Phillip Bay: channel deepening

Melbourne — 5 June 2008

Members

Mr G. Barber Mr P. Kavanagh Ms C. Broad Mr G. Rich-Phillips Mr M. Guy Mr M. Viney Mr P. Hall

Chair: Mr G. Rich-Phillips

Deputy Chair: Mr M. Viney

Substituted members

Mr B. Tee for Ms C. Broad

Staff

Secretary: Mr R. Willis Research Assistant: Mr A. Walsh

Witnesses

Mr W. Kayler-Thomson, chief executive, and

Mr C. James, senior manager, public affairs, Victorian Employers Chamber of Commerce and Industry.


The CHAIR — I declare open the Legislative Council Standing Committee on Finance and Public Administration public hearing. Today’s hearing is in relation to the inquiry into the Port Phillip Bay channel deepening project — specifically the business case for the Port Phillip Bay channel deepening project as presented by the Port of Melbourne Corporation and the Victorian government, and the legal and financial arrangements between the Port of Melbourne and Boskalis Australia Pty Ltd and/or its parent company, Royal Boskalis Westminster. I welcome Mr Wayne Kayler-Thomson, the chief executive of VECCI, and Mr Chris James, senior manager, public affairs, VECCI. All evidence taken at this hearing is protected by parliamentary privilege as provided by the Constitution Act 1975 and further subject to the provisions of Legislative Council standing orders. Any comments made outside the precincts of the hearing are not afforded parliamentary privilege. All evidence is being recorded by Hansard. Witnesses will be provided with a proof version of the transcript in the next couple of days. In accordance with sessional orders 22(4) and (5), Mr Brian Tee is substituted for Ms Candy Broad for the purpose of this inquiry. I now invite you to make an opening statement, then we will proceed to questions.

Mr KAYLER-THOMSON — The Victorian Employers Chamber of Commerce and Industry has been a longstanding supporter of the ongoing Port Phillip Bay channel deepening project for a range of reasons. Apart from the fact that the port itself provides a competitive economic advantage for Victoria, the project has a number of key features.

It is economically necessary and, as such, has broad support across the community and a range of community groups, with substantial economic benefits spread across the entire Victorian community; it is consistent with other aspects of government policy — for example, both state and federal governments have set ambitious export targets and also want to build infrastructure productivity to fight inflation; the costs of not proceeding are high; the alternatives are too expensive and too risky; the project is environmentally sound — the environmental effects of channel deepening will be short term and limited in impact.

There is broad support for this project, despite the level of public debate. It has the support of Victorian business groups and unions representing thousands of employers and employees. Apart from VECCI, prominent supporters who have been in regular contact with us include: federal and state governments and oppositions; the Victorian Trades Hall Council, and a host of trade unions; the Committee for Melbourne; the Australian Industry Group; the Master Builders Association; the Victorian Transport Association; the Victorian Freight and Logistics Council; the Victorian Farmers Federation; Infrastructure Partnerships Australia; and Shipping Australia.

Turning to the economic benefits, why would such a diverse range of rival business groups and unions come together like this? The project is economically important because, firstly, it will enable Melbourne businesses, employees and consumers to benefit from the economies of scale offered by larger ships, and, secondly, it is important for the broader investment reputation and status of Victoria and the position of Melbourne as Australia’s major transport, distribution and manufacturing hub.

Channel deepening is an urgent project and has been delayed for too long. Because of inadequate channel depth, the percentage of containers unable to enter or leave Port Phillip Bay fully laden has increased to 44 per cent during the March quarter 2008, from 27 per cent over 2005–06. There has been at least one instance of which we are aware of a ship being turned back at the Heads in recent years. In 2004 the MSC Corinna was refused entry at the Heads by the harbourmaster because it had a depth of 12.3 metres, and it had to sail back and unload some cargo in Adelaide and then come back. Others have had to wait at the Heads to sail at a high tide.

The inability to achieve economies of scale from the use of larger ships that are increasingly being introduced on major trading routes around the globe and are cascading to secondary trading routes that include Melbourne as a destination will have major downstream impacts on port users and the wider Victorian economy. It is estimated by Drewry Shipping Consultants that the cost of each container falls by 15 per cent when shipped on a 4100 TEU ship rather than a 2450 TEU ship. The fact that Melbourne does not have 14-metre draught, like Brisbane and Sydney, is adding costs to shipping lines — so much so that Shipping Australia has commented on the possibility of a special Melbourne charge for containers if channel deepening did not proceed.

With the indulgence of the committee, perhaps we will leave it to the government and the port to discuss the government’s economic impact work in detail during their evidence. It might be more productive if we focus on firm-level impacts, the real investment decisions firms make on the ground. However, we do note that the SEES


and the accompanying economic studies presented a strong economic case for the project. The benefit-cost ratio stands at 2.7, with $2 billion worth of net economic benefit. Most infrastructure projects require a BCR of 1 to proceed, sometimes less if the piece of infrastructure is strategic. This SEES not only highlighted the long-term economic advantages of proceeding but also the long-term damaging economic outcomes of not proceeding, finding that not only would the Victorian economy and community miss unlocking the value the project would create, but would also suffer a net loss if the project did not proceed. The community would experience this loss in terms of lower competitiveness, fewer jobs and a reduced standard of living. This is what occurred in Portland, Oregon, in the United States, when the port was forced to stand down 10 per cent of its workforce after two major shipping lines stopped calling. Judging by our consultations with our members, similar things would probably occur here.

Some specifics: in 2007 VECCI consulted our trade-affected members to get beyond the macro numbers and understand the likely impacts at the level of individual firms. They have all asked to remain anonymous for various reasons, but with the committee’s indulgence I can provide some general descriptions. In short the research covered six firms, three of which were largely exporters and three of which were largely importers. They range from food processing to chemicals, textile, clothing and footwear, and outdoor leisure equipment. Their trade throughput in terms of containers is roughly around $3 billion per annum, with around 15 000 port-related jobs.

In short our work concluded that two firms would move their headquarters-operations base from Victoria if channel deepening did not go ahead; two would make no further plant investments in Victoria; and two would have to remain in Victoria for a range of reasons but would have to absorb increased costs affecting their bottom-line margins. The details of all this are in appendices in the handout that I have provided to the committee. But I will leave you with one disturbing quote from a major food processor that exports per annum over 21 000 containers worth about $1.3 billion through the port of Melbourne:

The port of Melbourne is an essential part of our competitiveness in a very tough international market. It will wring our neck if shipping infrastructure falls behind and lowers efficiencies. Without channel deepening Melbourne would become a backwater over time. With channel deepening we will continue to grow our international markets.

Our data echoes a similar study by PricewaterhouseCoopers which analysed 11 national and global companies with operations in Victoria. Although they only generated around 6 per cent of Melbourne’s total container throughput, they reported annual turnover of $9 billion per annum, employed 13 000 persons in Victoria and exported around $4 billion worth of commodities each year. One firm, Simplot, indicated that it saves 10 to 20 per cent in logistics costs using Melbourne rather than Sydney. All mentioned the importance of regular and reliable shipping services to meet customer needs.

In terms of broader reputational issues for Melbourne, the fact that nearly 40 per cent of Australia’s containers pass through our port underpins and reinforces our status as the nation’s transport, distribution and manufacturing capital. In many ways we are the Chicago of Australia. Competitor ports such as Adelaide and Auckland have completed their channel deepening projects. Portland in Oregon, USA, has commenced its long-delayed project, and the Panama Canal deepening has been approved. Other channel deepening projects recently completed, under way or on the drawing board include New York, Shanghai, Antwerp, Long Beach in Los Angeles, Charleston, Hamburg, Felixstowe and New Orleans. We speak regularly to overseas chambers of commerce and ports, and the problems we have been having with our port project are widely noted — the eyes of the world are truly upon us.

In terms of channel deepening alternatives, a number of alternatives to channel deepening have been proposed in recent years. None would provide a short to medium-term solution to the problem of fully laden container ships not being able to enter or exit the bay. All proposals are flawed in one way or another, and in the interests of time I will refer members to our handout and suggest we perhaps save this discussion for question time.

In terms of the environment the SEES concluded that although some ecological effects will arise from the project, ‘no long-term effects on the health of the bay have been identified’; and that of the ecological effects that will arise, specifically on habitat within the deep canyon and on some seagrass in the south of the bay, these will be confined in scale and will recover in the short term. The panel inquiry into the SEES confirmed that the project ‘can be delivered with low to medium risk, and moderate impact’. Subsequently, two Federal Court decisions have upheld the project against legal challenge, and it was able to commence on 8 February 2008. So far, with well over 15 per cent of the project complete, none of the predictions of environmental disaster or damage have come to pass. Both the port and the environmental monitor have reported no non-conformances, as has a team from the Herald Sun newspaper. Water surging into Port Phillip Bay as a result of storms has caused higher turbidity readings than the


dredging. VECCI also notes the SEES concluded that the project’s effects on social values and business uses, mainly tourism, would only be temporary. Despite some disruption to recreational diving and associated businesses during the period of dredging, these are expected to recover soon after project completion.

In conclusion I would urge the committee to note that the project has already been underpinned by an SEES, an independent panel inquiry into the SEES, a trial dredge, a separate Treasury economic assessment and two favourable Federal Court hearings. Secondly, industry, not the taxpayer, is paying for most of the project — 85 per cent on current estimates. Thirdly, government-owned corporations such as the port need to invest in capital expenditures as a matter of course to underpin economic growth, sustainability and competitiveness. These expenditures need to be encouraged in the current climate, where intense competition is occurring between states wishing to complete infrastructure projects for engineering and project expertise. Stakeholders should be wary of frightening away footloose capital. Inflation has emerged as a significant economic problem over the past year; clearing infrastructure bottlenecks is a priority in this respect. In short this project is necessary for the ongoing economic efficiency of our members and the economic development of Melbourne and Victoria, and this is the reason for our support. Thank you for your time. We are happy to answer any questions.

The CHAIR — Thank you, Mr Kayler-Thomson. The committee appreciates the written submission that VECCI has also made to this inquiry. I would like to ask you about one of the points you raised in your statement, on page 4, which was the reference to benefit-cost ratios. You indicate:

Most infrastructure projects require a BCR of 1 to proceed, sometimes less if the piece of infrastructure is strategic.

Could you expand on that point, particularly if you have any examples of projects proceeding that have BCRs lower than the channel deepening project?

Mr KAYLER-THOMSON — I think what we are talking about here is projects of significant scale that are really described by the commonly used term of ‘nation building’ projects — projects that have long-term impacts and long-term benefits to the economy. Therefore the reference is to the fact that sometimes if the infrastructure is more strategic, as is port infrastructure, then the normal sorts of ratios one might use in assessing capital expenditure projects need to take that into account. The sorts of projects that have proceeded in recent times, without knowing or recalling the specifics of what the cost-benefit ratios might be — but typically other transport infrastructure, for example, road and rail infrastructure — are the sorts of projects that have long tails of economic benefit, as opposed to shorter-term projects. Perhaps the easiest example I can give is those that businesses use regularly in assessing their own capital expenditure, where they are looking for much shorter return-on-investment ratios than would otherwise be the case for public infrastructure. So although this infrastructure is being funded primarily privately, the recognition that there is a piece of public infrastructure that has longer-term benefits needs to be taken into account.

The CHAIR — So it is VECCI’s view that within the portfolio of infrastructure projects channel deepening, with a BCR of 2.7, is at the higher end?

Mr KAYLER-THOMSON — Yes. We would see it as quite or very acceptable.

The CHAIR — You gave examples of case studies of firms — your members — that will benefit from this project, and there is more detail in the appendices to your opening statement. Do you believe those benefits as outlined are adequately reflected in the business case published by the Port of Melbourne?

Mr KAYLER-THOMSON — We suspect that perhaps they are not. The impact statement takes into account direct impacts — direct costs. It does not take into account opportunity costs to a full extent; it does not take into account indirect benefits. So in many respects you could judge that it is actually an underestimate of what might be the real benefit. It is quite appropriate for it to deal with just direct benefits, but we do need to take into account that there are much broader benefits from a project such as this. Some of the examples that we have outlined give you some insight into what those impacts might be. It is difficult in undertaking an assessment project like that to be able to assess all of those rifts, if I can call them that, but these would be some of the downside impacts. There are also the upside impacts if the port does expand the opportunity for Victoria to retain its position, as the amount of throughput through the port will have the sorts of impacts that we have identified there. But in general terms the financial reports have pretty much only dealt with direct impacts.


Mr JAMES — Just to add to that, the reports assume that the channel deepening project will not promote or add to trade.

The CHAIR — Yes.

Mr JAMES — Whereas we believe it will.

The CHAIR — Does VECCI have a view as to the quantity of that impact? Can you quantify the — —

Mr JAMES — It is extremely difficult to measure. There was a report a number of years ago, the well-known Australian Council for Infrastructure Development report conducted by NIEIR, which suggested benefits of almost $15 billion. That had a fairly wide definition of indirect economic benefits, and that was going out to 2030. That adopted a very wide scope in terms of counting economic benefits. As far as we can tell, this particular work that has been done is extremely conservative, because it does not talk about the promotion of trade but also does not include analysis of trades going off to Adelaide, Sydney, Brisbane or wherever; it does not take that into account either.

The CHAIR — The NIEIR report you referred to, what was the time frame for that? How long ago was that completed and how contemporary is it?

Mr JAMES — I would probably have to take that on notice, but I think it was around 2001–02, around that particular time frame.

Mr VINEY — I just wanted to pursue, if I might, the matters just raised by the Chair in relation to your assessment, I take it, of the PricewaterhouseCoopers analysis. Just to clarify, it is your view that that is a conservative assessment of the economic benefits?

Mr KAYLER-THOMSON — That is correct.

Mr VINEY — So where that says, for example, that the total employment impact of this project is a gain of 13 748 jobs, it is your view that is an underestimate?

Mr JAMES — Yes, that is correct.

Mr VINEY — It is an underestimate of direct jobs created as a result of the project — in other words, of the growth of employment as a result of channel deepening?

Mr KAYLER-THOMSON — Yes.

Mr VINEY — What about your assessment of the loss of jobs if it did not proceed? Have you done any thinking about that as a result of those case studies?

Mr KAYLER-THOMSON — We have not done any calculation of what it might be, but simply by raising these examples that we have given it gives you a pretty clear indication of what could be the impact. Given that government policies, federal and state, are about increasing exports, that gives us further comfort that there will be more jobs created by opening up trade opportunities. But similarly, using those examples that we have from our direct members on clear impacts that they would see, again that is probably an underestimate of where they would see the impacts when you expand it out to all the other businesses that rely upon them as major exporters or importers.

Mr JAMES — For example, one of the members that we spoke to employs 90 people in Melbourne, and they said that 72 of those jobs would be at risk if channel deepening did not go ahead, because they would look at relocating their headquarters to Brisbane. That is just one example of many.

Mr VINEY — You mentioned in your evidence an example of, I think it was, Portland in Oregon. You said that the port had started to decline. What were the reasons the port was being bypassed? What was the background to that?

Mr JAMES — They had a channel deepening project on the books, a bit like Melbourne, and it was delayed for some years by the relevant state governments and also the federal authorities in the face of strong


environmental opposition, with the result that two shipping lines stopped making direct calls there and it had an immediate impact on the port workforce. They had to stand down employees at a fairly rapid rate with the result that the trades went off to Seattle and Vancouver. As I understand it the trades are starting to come back to Portland now they have commenced their channel deepening project.

Mr HALL — Just a quick one; given the fact that the users largely will be those who bear the cost of this particular project, have any of your members from VECCI drilled down to the cost projections that will be imposed upon them as individual users of the port services?

Mr KAYLER-THOMSON — Part of the announcement by the government does increase the container charge. Our view has consistently been that the public good from this project deserves a greater government contribution than has actually been committed thus far, because it is an opportunity to grow exports with further encouragement. The extra costs that have been imposed in order to fund the project, our members are telling us that is acceptable. They would prefer it, obviously, to be less so that we retain our competitiveness, particularly with Adelaide and Sydney, so it reduces that competitiveness gap. Obviously anyone in business would always want to maintain the best competitive position they can. But nevertheless they see that the value of this project is of such importance that they will wear those costs as a means of growing their business. I guess the positive aspect of that is that the port has a very strong reputation of working very well with its importers and exporters. The relationship is very robust and very strong, the port infrastructure is strong and therefore the track record would give the encouragement for businesses to wear that cost on the basis of increased activity.

Mr BARBER — I think you said at the beginning that you surveyed your export-oriented members; is that right?

Mr KAYLER-THOMSON — Export and import.

Mr BARBER — How many was that?

Mr KAYLER-THOMSON — As indicated in our evidence, we specifically spoke with six, three of each.

Mr BARBER — So you picked six. How many of your members are export oriented?

Mr KAYLER-THOMSON — I will have to take that on notice, but it is a difficult question to answer in terms of where the direct businesses are. What we chose was those who are the obvious importers and exporters, and the scale, as we mentioned in our evidence, gives a very clear indication of effectively applying the 80:20 rule, if you like.

Mr BARBER — And you surveyed them, what, with a written questionnaire or you just went and spoke to them?

Mr JAMES — Yes, we had a set range of questions, and we went and spoke to them. We tried to choose a range of businesses, importers and exporters, across a range of industries. In our view it was qualitative research rather than quantitative.

Mr BARBER — Sure.

Mr JAMES — But it did actually give us some very good on-the-ground insights.

Mr BARBER — I do not know if this would be useful, but would you be willing to send us a copy of the questions that you asked?

Mr JAMES — Yes.

Mr BARBER — In your submission you say that 44 per cent of the ships coming in are draught constrained. I will read you what it says:

Because of inadequate channel depth, the percentage of containers able to enter or leave Port Phillip Bay fully laden has increased to 44 per cent (December quarter 2007) from 27 per cent over 2005–06.


That figure is not referenced the way a number of your other statements are. Can you tell me where you got that 44 figure from?

Mr JAMES — The Port of Melbourne Corporation.

Mr BARBER — Did they just give you the number 44 or did they give you data on that?

Mr JAMES — I am not sure what you are driving at, but we got it from their website, and we believe it indicates that the ships coming into Melbourne are getting bigger.

Mr BARBER — I think I read the same statement. Is it from one of their press releases or something? Where do I go to get the original 44 is what I am asking you?

Mr JAMES — I can help you with that on notice, if you like. Otherwise you can go to their website, their channel deepening section, or telephone the port or question them during their evidence.

Mr BARBER — Okay. So they literally gave you the number 44; they did not give you the raw data on ships, sizes, depths and so forth?

Mr JAMES — We did not seek that.

Mr BARBER — You did not seek it, okay. But that is actually the crux of the case, is it not, and the reason for channel deepening is that there is a high degree of constraint associated with ships?

Mr JAMES — To effectively answer your question I will quote from that journal of record, the Age — —

Mr BARBER — Yes, I read it in the paper too. I do not know whether you got it off the website or in the paper. I am just asking VECCI if VECCI has ever examined themselves the degree of constraint of ships entering the port?

Mr JAMES — I am not quite sure what you are driving at with that question.

Mr BARBER — It is just a question. Have you ever done it?

Mr VINEY — I think he wants to know whether you have gone out and measured the ships, and put the tape measure up, put the snorkel on and ducked underneath.

Mr JAMES — We are not equipped to go out and do that sort of work. We have to rely on experts.

Mr KAYLER-THOMSON — We take in good faith the experts of the Port of Melbourne Corporation who measure these things as part of their business.

Mr BARBER — That is fine. I am just trying to get extra information for the benefit of the community, but if you are just effectively quoting the port, I will go to the port on that. I suppose when you say 27 per cent over 2005–06, that is also from the same data source.

Mr JAMES — Yes; that is correct.

Mr BARBER — The 05–06 document that originally said 27 per cent, you do not know what document that is either?

Mr JAMES — It is from the port’s website. I am not sure if the information is still up there, but that is where I obtained it from.

Mr BARBER — That is cool; we will move on. Does VECCI support national competition policy? You can give me a real quick answer if you like.

Mr JAMES — If you want the full answer, yes.

Mr BARBER — Okay. Good.

Mr JAMES — I am wondering if it still exists or not, but we were strong supporters at the time.


Mr GUY — So do we sometimes.

Mr BARBER — So you support the port operating as a commercial entity under its current act and under its current framework?

Mr JAMES — Yes.

Mr BARBER — So it should achieve a commercial return and it should pay a dividend, and that commercial return should be a certain hurdle rate?

Mr KAYLER-THOMSON — Yes; that would make sense.

Mr BARBER — And that hurdle rate should be better than just like the risk-free rate; it should be a commercial return that any private or public port would return?

Mr KAYLER-THOMSON — Yes; the principle is certainly sound.

Mr BARBER — In your submission you spend a considerable amount of time talking about why the taxpayer should contribute a much larger proportion of this cost, and you say:

The CDP is based on the proposition of attracting larger ships, leading to reduced per unit costs for importers and exporters, and subsequent benefits to the wider economy. This must not be compromised by a cost recovery regime that imposes user charges that erode these benefits or the competitive advantage of the port …

Do you believe this cost-recovery regime that the government is using to finance this report is going to compromise the benefits of the project?

Mr KAYLER-THOMSON — It is relevant to the answer I gave before. It is achievable under the current regime, but we believe that the economic benefits are so broad to the public good that there is a justifiable case for an increased investment from the public purse.

Mr BARBER — So you want us to subsidise the operations of the port to make it easier for business?

Mr JAMES — No; what we are saying is there are public good elements to the project, including the studies that have been done, the environmental work, public safety benefits, and so on an so forth.

Mr BARBER — Speed limits are a public good. Should we subsidise truckies for having to obey them?

The CHAIR — That is a bit wide of the terms of reference, Mr Barber.

Mr JAMES — We build roads.

Mr BARBER — Yes; let’s get to that. You note here that the port pays a significant dividend each year to its major shareholder, the state of Victoria. Do you have a problem with the port’s dividend policy?

Mr KAYLER-THOMSON — No; that is an appropriate process.

Mr BARBER — So I guess what you are arguing, then, is that dividend, having been paid by the port to the taxpayer, who are the shareholders, from achieving a commercial return, that actually that should really be recycled back in to benefiting again port users.

Mr KAYLER-THOMSON — Benefiting the broader Victorian community.

Mr BARBER — Would that not defeat the purpose of the port running at a commercial level and paying a dividend? If the dividend is not really a dividend, it just goes to propping up the same — —

Mr KAYLER-THOMSON — I cannot speak for the government. It is up for them to determine what sort of level of rate of return that they require to match that, and taking into account the costs that they impose on the port, for example, through this process, the extra costs that have been incurred and how they invest their dividend income.


Mr BARBER — Let’s speak for the government. In the Port of Melbourne’s pricing policy statement they note that when the Port Services Act was set up in 2003 the second-reading speech from the minister states:

… the new corporation will be subject to similar financial and accountability mechanisms applying to other government-owned corporations, including adherence to tax equivalents and dividend frameworks …

So you think that is appropriate the port should do that? You are not seeking to change the port and turn it back into a government department or anything like that?

Mr KAYLER-THOMSON — No, we do not have a specific view about that. I think you need to address that to the government and to the port.

Mr BARBER — You do not have a specific view on that?

Mr KAYLER-THOMSON — I have already answered before to say that it is appropriate for it to operate with a commercial rate or return. As to what that acceptable rate of return is, it needs to take into account what additional costs are being applied by the government to the port as opposed to coming out of the core public purse.

Mr BARBER — Let us say what is appropriate. Again in the same document it says that the:

POMC will earn a return on capital employed in the provision of prescribed services that is at a minimum equal to its weighted average cost of capital. In doing so, POMC will provide a return on capital that is appropriate for the risk profile of the government’s investment.

Do you support that?

The CHAIR — Mr Barber, you are getting a bit wide of the terms of reference here.

Mr JAMES — Look, what the government does with its dividend is up to it. It is the same as dividends from water authorities. What the government does with its dividend is up to it.

Mr BARBER — Chair, I will tell you why I am not getting off the terms of reference. They are coming in here saying that the taxpayer should fund this project, whereas every other setting that we have got from national competition policy, the act itself, the Essential Services Commission, the regime by which this port is regulated all say the opposite. They actually say user charges should cover it.

Mr KAYLER-THOMSON — Chair, I think the evidence is being used for an alternative purpose here. That is not what we said. We have said in our submission it is quite appropriate for the taxpayer to fund a proportion. It is primarily being funded by industry. Our view is that the value of public good should be a further increase in it. We are not saying it should be totally funded by the taxpayer at all. It is really a question of the margin as to what is an appropriate level of government subsidy for the actual capital expenditure in the dredging process, which is a piece of public infrastructure. I am not saying that it should not be funded by the taxpayer entirely.

The CHAIR — Thank you, Mr Barber. We are going to have to rotate, so if you have another question we will move to Mr Tee.

Mr BARBER — Yes. Good on you. Thanks.

Mr JAMES — I will just make one point, that in terms of national competition policy I would challenge Mr Barber to produce any documentation from the original national competition policy that indicates public investment in infrastructure is somehow contrary to the principles of national competition policy.

Mr BARBER — There is the 1993 Industry Commission report Port Authority Services and Activities. Some of the recommendation were:

ports should be constituted as statutory bodies, which are separate from the departmental structure of government;

ports should be exposed to a tax-equivalent regime, be reimbursed for any community service obligations … and pay dividends from after-tax profits …


Are you going to argue that this is a community service obligation which the port should be paid, or, alternatively, do you want to go back to the old regime where the channels were run by a separate entity and the port was the port?

Mr JAMES — With due respect, you have not answered my question.

Mr BARBER — That is because you do not get to ask questions, mate. You are a witness.

The CHAIR — Thank you, Mr Barber. We will move to Mr Tee.

Mr TEE — I want to turn to your evidence in relation to, I think it was, the 2001 report, which talked about the additional benefit to trade of $15 billion. Is VECCI’s view that that is an accurate reflection of the type of benefit that we are looking at?

Mr JAMES — In short, yes. We would not necessarily quibble with those figures.

Mr TEE — Within the ballpark, is what you are saying?

Mr JAMES — Yes, probably within the ballpark.

Mr TEE — Thank you. I am just having a look at page 6 of your submission, where you talk about your job data echoing the study by PricewaterhouseCoopers. I want to talk a bit about the PricewaterhouseCoopers study. We have got a submission before us today from the Blue Wedges group, and they say that that PricewaterhouseCoopers examination or analysis was perfunctory. Would you agree with that description?

Mr JAMES — Here it is here; I would not call that perfunctory.

Mr TEE — It is quite detailed?

Mr JAMES — Quite detailed.

Mr TEE — I just want to turn to some of the issues that Mr Barber raised. Firstly, in relation to the study or the survey of the six members, in case there is any suggestion that that is somehow not representative. I know you have focused on the six, but are their views in any way inconsistent with anything else that you have heard from your members in relation to the impact that not proceeding with the dredging will have?

Mr KAYLER-THOMSON — I guess what I would say in response to that is we have had ongoing forums and members meetings and policy task groups on a whole range of topics over the whole period of this process, and without question there is virtually unanimous support for the project and the downstream benefits of it. We are happy to take on notice and provide you with some further detail around those six in terms of what is the quantity of their trade relevant to others, but we have nothing but unilateral support.

Mr TEE — Similarly, I think you were asked questions in relation to the 44 per cent of ships and whether there was a high degree of constraint. I think implicit in that was a suggestion that that evidence came from the port website, in essence. My question is: is that figure within the ballpark in terms of any discussions that you have had with the importers and exporters that you represent? Does that figure seem about right to you, based on your discussions with your members who are involved in the import and export business?

Mr KAYLER-THOMSON — We have no reason to doubt it, and we take it on expert evidence of the port, that is actually managing this day to day.

Mr TEE — You have indicated today that we are now 15 per cent of the way in terms of where we are up to with the dredging; we have done more than 15 per cent of the dredging. You have indicated, not in your statement today but in your written submission on 24 April, that there would be some disruption to recreational diving and associated businesses during the period of dredging, but that these are expected to recover soon after project completion. Can you give us a sense of the disruption that has occurred to industry as a result of the dredging?

Mr KAYLER-THOMSON — We have mixed reports that have come to us from some of our members who are active in the tourism and recreational area. Some have indicated to us that the level of inquiry is actually


higher than what it had been previously, the level of business was actually higher. Some have indicated that, yes, there has been some downturn in inquiries and bookings, and there have been some that have also expressed concern to us that the actual debate that has been going on around the project has been of more detrimental impact on attracting people to the bay than what would otherwise have been the case. So we have mixed reports either way.

Mr TEE — And I take it that that debate is not assisted by, I suppose, the work of committees like this, which are going to add to the controversy?

Mr KAYLER-THOMSON — We have long had the view that the project needs to be got on with and completed.

Mr GUY — Thanks for your submission; it is fairly thorough. In relation to page 7 under alternatives you state:

A number of alternatives to channel deepening have been proposed in recent years. None would provide a short-to-medium term solution to the problem …

Could I ask: what do you see as other options that may provide a longer term solution to the situation of the congestion at the port of Melbourne?

Mr KAYLER-THOMSON — We have long had the view as part of our broader advocacy into transport infrastructure that we do need a long-term plan for Melbourne’s infrastructure. We do need a plan that includes the ongoing development of the port. We need a plan that considers Hastings as an alternative, but that brings with it a whole range of additional transport infrastructure requirements that can only be dealt with in a long-term view. But our view is that there needs to be a total integrated, long-term plan that takes those things into account. Also the reality that the port is constrained within a broader CBD activity, which will have limitations if you look in that longer term. We need an efficient port at the centre, but we also need to be considering those other alternatives in a long-term plan.

Mr GUY — Is there any feedback you have received either from government or private feedback in relation to the long-term time frame even with the expansion in the markets territory that the Port of Melbourne might have in its current location?

Mr KAYLER-THOMSON — No, not specifically.

Mr JAMES — I suppose it is fair to say that container growth is proceeding pretty rapidly — probably at the moment faster than expected. This is probably the key reason why we say that planning for Hastings should commence, not as a substitute for the port of Melbourne but as a supplementary port. Probably some time in the middle of the next decade Webb Dock will have to be made open to containers. I could not give you an exact estimate as to when, but that will have to occur and then Hastings will probably have to come on-stream as a supplementary port some time in the next couple of decades.

Mr GUY — Fair enough. I just asked that in the thought of an overarching transport logistics strategy, if you like. Is VECCI involved in the production of a freight transport logistic strategy for Melbourne?

Mr KAYLER-THOMSON — We have been encouraging that to occur. We have been talking with both sides of politics about the need for that. This is again a very important aspect of dealing with short-term congestion, but long-term congestion, long-term population growth, long-term trade growth. We are at a point that Melbourne and Victoria are performing well economically, but we need to look over the horizon to see where those constraints might be and plan for that so that we do not lose that competitive advantage long term. We have indicated our active willingness to participate in that process. We currently have active policy task groups that are commencing work on our thoughts and ideas into that process. It is one that we think needs a collective input if we are really going to ensure that we are competitive in the longer term and we provide the lifestyle that people want in the long term.

Mr GUY — How much feedback has the government asked VECCI for its freight logistics strategy?

Mr KAYLER-THOMSON — We are actively in discussions regularly about that. I could not give you a specific about what specific things that it has asked for. We probably tend to be leading the debate at this point to


encourage that direction. We have participated in a number of forums the government has organised to provide our input into it. We are encouraged by that. But we continue to advocate a longer term approach than perhaps had been previously considered.

Mr GUY — I guess I asked in the terms that I note there was budget allocation made in 2002. It is now six years down the track. Is there any feedback as to when you think it might be finalised or there might be something formal that might come from where we are at now?

Mr KAYLER-THOMSON — I cannot speak for the government, obviously, but the indications it gives to us in considering things like the Eddington report, that it will propose later on this year to release a broader strategy.

Mr BARBER — Do you support the ESC continuing to regulate prices at the port under the model they do it, which is price supervision?

Mr JAMES — We do not have any particular problems with that model at this stage.

Mr BARBER — Because the port itself again in its pricing policy statement in May 2005, which was published when this project was well under way — it had already signed the contract with Boskalis — and certainly where it envisaged investment in this project, states:

Inevitably, the benefit of POMC’s investment program will be shared by non-Victorians. Allocative efficiency and the interests of Victorians will be served best by POMC funding most of this program on its balance sheet and recovering its costs, including a commercial return, over the long term through its prices. Competitive forces invariably lead to the efficiency benefits associated with improved port facilities being passed on to ultimate users. Thus, while users such as cargo owners may bear immediate price changes, efficiency and volume effects should lead to lower long term costs for those users.

Do you agree with that as the basis of the port’s operating policy.

Mr KAYLER-THOMSON — Yes, we agree with that. We have also made the point, however, that the public good for Victoria and indeed the commonwealth is a worthwhile process for those governments to consider making a contribution.

Mr BARBER — You cannot agree with this statement and then subsequently contradict it by saying it is a public good.

Mr KAYLER-THOMSON — It is not a contradiction.

Mr VINEY — It says most; it does not say every single cent.

Mr BARBER — Except for the SEES, which was paid for by the government.

Mr VINEY — It does not say every single cent, though, does it?

The CHAIR — Mr Barber?

Mr BARBER — I do not think I have got anything further.

Mr VINEY — You said in your evidence, I think, that if the channel deepening were not to proceed, there could be a need for additional charges in any case on containers; is that correct?

Mr JAMES — Yes, Shipping Australia did indicate last year that shippers might look at a Melbourne charge if channel deepening did not proceed. As far as we understand, that has not been modelled in the PricewaterhouseCoopers work, but it was certainly something that we took seriously and we viewed with some level of alarm.

Mr VINEY — What would be the basis of the additional charge?

Mr JAMES — It would cost shippers extra to come to Melbourne in terms of not being able to get through the heads fully laden and having to wait for high tide, so on and so forth.


Mr TEE — You have given evidence in relation to what occurred at Portland, Oregon, where you indicated that two shipping lines refused to come into the port, and I think there were significant job losses. Is that the scenario that is facing the Port of Melbourne if the channel deepening did not proceed, essentially ships not coming and job losses?

Mr JAMES — Potentially, whether that be ships not coming or ships that would have otherwise come not coming. I will just read you some comments from the Mediterranean Shipping Company, published in the Age of 3 February 2006. Kevin Clarke, the Australia and New Zealand managing director, said:

While most of its ships in Australia carry 3000–3200 containers, Mr Clarke said he envisaged the company would soon need many vessels with 5000-container capacity to get the correct economies of scale.

These size vessels already have problems with the channel in Melbourne … We have had several vessels take off cargo in Adelaide because they couldn’t get into Melbourne fully loaded.

MSC brought here the largest container ship to enter Australia — the MSC Fabienne, which visited Sydney in April 2004.

Another big ship, the Matilda, could only berth at daylight and at high tide in Melbourne. It was so long, there were also problems with the turning circle …

That is the sort of information we are getting from the shipping companies.

Mr VINEY — Just very briefly, Mr Barber was asking you questions about the Port of Melbourne’s advice in relation to the number of ships that are not coming in fully laden. Can I ask you a couple of questions: is VECCI aware whether new ships that are being built are much bigger and need a deeper draught; is that true?

Mr JAMES — Yes, that is the trend worldwide.

Mr VINEY — Can I ask you, are those ships also more fuel efficient per container?

Mr JAMES — Yes.

Mr VINEY — So there contribution to greenhouse gas is significantly less?

Mr JAMES — Yes; potentially, yes.

The CHAIR — Thank you, Mr Viney. One of the issues that has been raised with the committee about the business case is the exclusion of sunk costs in calculating the BCR. Does VECCI have a view on whether it is appropriate that sunk costs be excluded from the cost side of the BCR?

Mr JAMES — Yes, we do understand that some of the costs associated with the study have been excluded from the BCR. It is in the order of between $100 million and $200 million, from what I understand. It is probably a matter of debate as to whether that is appropriate or not, but it will not alter the fact that the BCR remains positive.

Mr BARBER — What are those sunk costs? What do they consist of, to your knowledge?

Mr JAMES — You might want to clarify this with the port, but I believe the bulk of it was to do with the studies that had taken place up until last year.

Mr BARBER — That is $100 million; what about the other $100 million?

The CHAIR — That is probably better asked of the port tomorrow. If there are no further questions, we thank you for your evidence here this morning and also your written submission to the committee. We will have a draft version of the transcript to you, hopefully, in the next couple of days for any corrections that you may wish to make. Thank you very much.

Witnesses withdrew.






Members




Substituted members


Staff


Witnesses

Mr J. Begley, chair,

Ms R. Elphick, chief executive officer, and

Dr R. Noakes, consultant economist, Victorian Freight and Logistics Council.


The CHAIR — I welcome Mr John Begley, chairman of the Victorian Freight and Logistics Council; Ms Rose Elphick, chief executive; and Dr Robert Noakes, consultant economist. All evidence taken at this hearing is protected by parliamentary privilege and provided by the Constitution Act 1975 and further subject to the provisions of the Legislative Council standing orders. Any comments made outside the precincts of the hearing are not protected by parliamentary privilege. All evidence is being recorded by Hansard, and witnesses will be provided with a proof version of the transcript within the next couple of days. I now invite you to make an opening statement if you wish, or we can proceed to questions.

Mr BEGLEY — Thank you, Chair. Just a few words, if I may. The Victorian Freight and Logistics Council has been interested from the inception with regard to channel deepening relative to the fact that our responsibility, or our interest, is in the supply chain, and as far as channel deepening is concerned and the port it is a very important part of the supply chain process.

Five years ago we were approached by Shipping Australia relevant to the fact that larger vessels would be coming on board. We had started to see those a number of years ago and the incidence has crept up quite considerably. In fact only in the last month ANL has replaced three of its existing vessels with three brand-new vessels of 4250 TEU capacity, which started to replace existing vessels of much smaller capacity on the north-south route to Asia, and that has been of increasing significance for a period of time. With the number of vessels that are coming here, and we are reliant on that percentage from the Port of Melbourne, there is significantly more cargo coming on the larger vessels than what there are on the lesser trades on the smaller vessels. VFLC was interested, going back a number of years, to look at the economic case relevant to channel deepening, but we decided that on the basis of looking at it we were interested to establish what the situation would be if channel deepening did not eventuate, because we thought there was plenty of other economic activity around justifying it the other way. We were concerned about if channel deepening did not proceed — keeping in mind that I think it is clear on an international basis that ports are the lifelines of countries and of cities and of states — and we were particularly concerned about as far as Victoria was concerned with the loss of investment that would come about by the fact that we had an inability to take ships of deeper draught. We were concerned that it would be lost from Victoria and go to other states, which would mean a significant loss of employment in terms of this state. As such we proceeded to look at the analysis, on the basis of channel deepening not of proceeding over a 20-year period. The concept of estimating the economic cost to Victoria of not proceeding is a similar concept to that applied more recently by Nicholas Stern in estimating the economic cost of not addressing climate change. We asked Dr Robert Noakes, here on my right, to undertake that activity for us.

In December 2005 the VFLC assumed the total cost of channel deepening was $800 million, which was the figure available at that point in time. The economic costs of not proceeding were estimated at $8.5 billion, and I want to stress that we take that as a very conservative figure because the details that we have expressed in the table that we have presented to you were conservative and were figures that were known to us at that particular period of time. The project was estimated then at an economic loss of $8.1 billion, giving us a benefit-cost ratio of 10.5. As of 4 June this year we have updated those figures using the new figure of 969 million. The economic costs of not proceeding were estimated at 8.5 billion — we have maintained that figure — and the figure then came down to a benefit-cost ratio of 8.5, which well and truly justified channel deepening proceeding. The VFLC’s position is quite clear that without the project the economic penalty of not proceeding would be substantial. The Victorian — and not just the Victorian, because the port of Melbourne is an essential artery not just for Victoria but also for Tasmania and other parts of Australia — economy just could not afford for the project not to be undertaken. That is where we stand.

The CHAIR — I note from your submission that you refer to, and I quote:

It is the view of council members and the independent reviewer of this work that the benefits and avoided costs associated with the channel deepening project exceed those credited in the SEES documentation and within our own conservative assessment.

By that paragraph are you referring to the costs of not proceeding with the project that you have just referred to?

Mr BEGLEY — I will refer those economic costs to Dr Noakes.

The CHAIR — Certainly. Dr Noakes?


Dr NOAKES — Can you rephrase that question and be more specific, please?

The CHAIR — My question relates to the paragraph in your submission that I have referred to and the reference to benefits and avoided costs exceeding those credited in the SEES. Are you referring to the costs that Mr Begley has just spoken about of not proceeding with the project?

Dr NOAKES — Yes, we are. Basically what I started off on as a consultant was to work with a proposed project cost of 800 million. I then looked at what would be the range of cost penalties starting from in the port right across to the reduction in the levels of economic activity around the port. The NPV I estimated, back in December 2005, at 8.5 billion over a 20-year period. Subsequently I have gone back and looked at the revised project cost of 969 million and recalculated the NPV figures based on a new set of costs which we believe to be appropriate, so actually we have two sets of results, one of 2005 and more recently one as of 4 June. Basically we have revisited the project costs and I revisited the project benefits, and as Mr Begley pointed out, because of the uncertainty of future investment we have not looked at particular forms of direct new investment in port-related activity or cargo equipment handling that might or might not take place with or without the project. That range of data was too uncertain, so we did not include that. There is a chunk of benefits out there from investors, such as automated straddle containers in the port et cetera. Those investment decisions have not been taken and are unlikely to be taken until there is more certainty about the future of the port. To that extent avoided investment costs have not been included as an economic penalty.

The CHAIR — Can you tell the committee what is the breadth of matters included in your NPV estimate of 7.5 billion?

Dr NOAKES — I am not quite sure whether the committee at this stage has a copy of the tables.

The CHAIR — We have.

Dr NOAKES — There is a table 1 and a table 1A. If you look at table 1A, which is a later figure, and if you look across the spreadsheet, you will see there are a range of private-sector-related cost penalties and there are also a range of public-sector-related cost penalties. In the far column there is a total of the cost penalties which could be avoided with channel deepening, and they are summarised there on an annual basis. Then there is an NPV at a discount rate of 7 per cent, which is the state government discount rate. Back in 2005 interest rates were not as high, and the discount rate I used then was only 6 per cent. Basically we are looking at a range of economic penalties based on experience internationally where we have seen what happens if port upgrading does not take place and what happens in terms of the shrinkage of economy over time. Basically what we have got here are a range of what we would consider direct economic penalties. There are no multiplier effects, and there are no additional impacts associated with the forms of investment that we just spoke about.

The CHAIR — How appropriate would it be to include these cost penalties in the BCR prepared by the port?

Dr NOAKES — I have done that. There is a subsequent set of tables, tables 2 and 2a.

Ms ELPHICK — This is the one prepared by the port.

The CHAIR — I am asking, in your professional opinion, should these costs have been included in the port’s BCR assessment?

Dr NOAKES — I am not sure what the Port of Melbourne has done or has not done. I am simply saying from our perspective, for the economic analysis I prepared for VFLC, I looked at it in terms of the capital costs, the likely operating costs and the economic benefits of the project being the penalties that would be avoided. We have calculated, way back in December 2005, a benefit-cost ratio of 10.5, and an economic rate of return of 37 per cent. I have since revisited those figures and the benefit-cost ratio has come down to 8.5, although the economic rate of return has gone up and that is a statistical anomaly in terms of the time period taken. Basically what we are saying is that, yes, if you look at the economic benefits as being avoided costs, and you match those against the capital investment, it would appear to be a very sound investment for the state of Victoria to make, based on conventional project cost-benefit techniques, based on the methodologies that are quite proven; World Bank and Asian Development Bank techniques, which I am familiar with having worked for the World Bank and the Asian Development Bank for 10 years. That is the basic methodology.


The CHAIR — You have done your calculations based on a discount rate of 7 per cent.

Dr NOAKES — More recently 7 per cent. By December 2005 the discount rate was 6 per cent then.

The CHAIR — Yes, which is the same as the port has used in its calculations.

Dr NOAKES — It may well have done, I cannot speak for the port. I have not looked in detail, but currently the discount rate is 7 per cent, as I understand it.

The CHAIR — Can I ask you, in your professional view, should the current figures that are being used by the port be adjusted to a 7 per cent discount rate rather than 6 per cent?

Dr NOAKES — I think the opinion would be from Department of Treasury and Finance I presume if the figure is 7 per cent. I have not checked recently I am now living in Queensland; the discount rate might be slightly higher now, I do not know.

The CHAIR — It has been used based on 6 per cent and continues to be based on 6 per cent.

Dr NOAKES — As I understand it, it is now 7 per cent here in Victoria, but I stand to be corrected.

The CHAIR — The channel deepening work is all based on 6 per cent.

Dr NOAKES — As far as I know DTF here in Melbourne uses currently a discount rate of 7 per cent. That is my advice from what I understand recently.

Mr VINEY — I completed my postgraduate studies in business administration now about 15 years ago, so for my benefit and for others can you take us through what a net present value calculation actually is.

Dr NOAKES — Okay. We all know that over time with inflation the value of money depreciates. If you have $100 today and you receive $100 in five years time it will not be worth as much. Basically what we have got is, we take what we believe to be the current discount rate, which is a combination of a return on capital and an inflation factor — in this case 7 per cent — and you run, from a discounting point initially, a process on a simple spreadsheet basis. You used to do it with calculators once upon a time, you now use a computer. You are basically saying over a 20-year period a benefit that is $100 now, what is it in 20 years time? It is probably something like $40. You add them up each year and you end up with a total figure. If you would add up all the benefit without discounting you would overvalue the impact.

Mr VINEY — The discount is at 7 per cent, so what you are saying is that the total benefit over that time period, taking into account a discount of 7 per cent, is $8 billion. The investment now delivers $8 billion worth of benefit in 20 years time, including the discount?

Dr NOAKES — What we are saying is if you did not undertake the project, the economic penalties would amount to $8.5 billion. In order to avoid those penalties you have to undertake the project and the project we started out at $800 million has now got to $969 million, so that is the basic logic. Without the investment those economic penalties would kick in and they would be fairly significant. If you waited 20 years you would find, we believe, that the port would shrink and the economic-related activity would shrink and you would find that the state of Victoria would be penalised to the extent of about $8.5 billion, or in this case slightly less now with a higher discount rate.

Mr VINEY — I take it that you believe there may be additional investments that flow through, from your evidence, to this project, because they are decisions for the future and may or may not be taken and are not part of this calculation.

Dr NOAKES — That is correct. I have spoken to a number of the companies associated with the port, including freight forwarders and stevedores. The comment was made to me, ‘We can’t decide on new investments because we do not know the future of the port’. The issue of whether in fact new equipment, new facilities, new warehouses should be put in, whether in fact they should invest in Melbourne at all or whether they should in fact move to another port such as the port of Brisbane. These were the issues that were put to me. It would have been is quite speculative for me to have included those investment figures, because simply I could not source them. As Mr Begley has pointed we are aware, through the members of the council, that there is a range of investments that are pending and that will take place if the future of the port is more clear.


Mr VINEY — Where you have a column that says ‘Total private sector cost penalties’ — —

Dr NOAKES — Yes.

Mr VINEY — That is the total of the preceding columns one to six.

Dr NOAKES — One to six, that is right.

Mr VINEY — I am just trying to understand. Does this relate at all to the economic activity generated and jobs and so on? Where does that factor into this analysis?

Dr NOAKES — We have a range of interests that are directly affected by the future of the port. We have stevedoring activities, we have exporters, we have various users of the port that have an interest in seeing cost structures change. They all relate to the private sector. Then we have a range of what would call public sector benefits, which are related to whether the port grows or does not grow or the rate at which the port grows. So we have got the private sector activity on one side and we have tried to encapsulate the public sector benefits on the other. If you put them both together, that is the total economic benefit.

Mr VINEY — And there is a ‘Reduced employment levels’ column under the public sector-related activity.

Dr NOAKES — That is right. We looked there at the public sector employment in terms of saying, regardless of where they are from, the level of payroll tax and the level of income that is available for expenditure in the local community is related to that. In other words, if the workforce shrinks, take out tax, the income for groceries, food, living, rental, whatever, that will drop off.

Mr HALL — Just to set the scene as to where you come from, John, could you just give us a quick background on the freight and logistics council, who you are, what your purpose is, how your membership is arrived at?

Mr BEGLEY — The Victorian Freight and Logistics Council is actually four years old on 1 July. It came about by the fact that previous to that, back in about 1998, there were separate councils formed by the government at that point in time to handle the affairs relevant to the various modes of transport. We had a sea freight industry council, a road freight advisory council, a rail freight advisory council and an airfreight council. The government decided in early 2004 to bring together the road freight council, the rail freight council and the sea freight council and formed the Victorian Freight and Logistics Council. The Victorian Airfreight Council still stands as a single council. Members of the council, at full strength, are around about 26 people. They are mostly from industry. There are union members and two government people usually sit there from the departments appropriate to the area of activity that we are involved in. In addition we have working groups covering various areas of activity. We have a channel deepening working group; we have an infrastructure working group; we have a freight intermodal efficiency working group. We only recently did an assessment of the number of people from industry who participate in the Victorian Freight and Logistics Council, and the contributions came from 140 different people from various parts of the industry. They come together to make recommendations and finally form the decisions that the Victorian Freight and Logistics Council makes.

Mr HALL — How does one get to be a member of the council?

Mr BEGLEY — They are invited by the minister concerned to participate to be a part of that organisation, usually in consultation with the council and usually on the basis that it is trying to ensure there is a balance across the council covering all the modes we are interested in. It is not just a city-centric council; we have representatives from areas such as Mildura, Portland, Geelong and Hastings; areas of activity where freight and logistics are. For example, we are currently reviewing the membership of the council because it is a rotating situation. People are appointed for three years; 50 per cent retire every 18 months, and we are looking to introduce new people from time to time, some city, some from the rural areas.

Mr HALL — Ultimately upon invitation your various sector groups in the transport area submit names to the government?

Mr BEGLEY — No.


Mr HALL — And the government therefore appoints members ultimately?

Mr BEGLEY — It is usually the executive of the council that do that. We make some recommendations to the minister. It is up to the minister to either accept those recommendations or not.

Mr HALL — Which minister do you report to do?

Mr BEGLEY — Minister Pallas.

Mr HALL — Do you receive any government funding for the work undertaken by the council?

Mr BEGLEY — Yes, we do. We are dependent on both commonwealth and state government funding.

Mr HALL — Any industry funding?

Mr BEGLEY — There is industry funding, yes, usually for specific projects that we are undertaking. Where we clearly see a need for activity for some particular project we may wish to undertake we then canvass. We have a fairly tight budget but we do canvass industry for support.

Mr HALL — I note in your submission, and I can understand why, that the council is focused on the economic costs associated if we do not proceed with channel deepening. Do you have a view on the government business case for proceeding with channel deepening, and do you think it contains the necessary rigour and veracity required by the people that you look after?

Mr BEGLEY — I will ask my CEO to respond to that because she has been very much involved in it.

Ms ELPHICK — I think our considered view on analysing the material that is in the public domain is that perhaps some of the benefit streams are extremely conservative and in fact underestimate the benefits. There are some costs such as the cost of bunker fuel. In the work that was done by the port and that was used in the benefit-cost analysis, bunker fuel was $250 per tonne. We can tell you that it is now double that and does not look as if it is going to get any less. That is a very important input to the benefit streams of being able to cater for larger vessels; so there is one example there. We also believe some of the other estimates such as the benefits to marine safety, which in many ways is a public benefit, have been underestimated and not perhaps drawn out as clearly as has been the case. There is ample material in the public domain on the types of benefits, the avoided costs of accidents and so on that we felt could have been used. We also believe that the container forecasts used by the port in its economic analysis are perhaps on the low side, particularly over the next decade. Already they are being outstripped. The growth over the last 10 years has been well over 8 per cent per annum. The figures used in the BCR were, I think, 6 or 6.5. I do not know that any of us expected Victoria’s population to rebound with the speed that it has, and where there are people there is trade, so we believe their forecasts in terms of volumes may in fact be low.

Mr HALL — Do you have a view on the current estimated cost of the channel deepening project of $969 million? Do you believe that is going to be a final figure, given that there has already been one change in terms of — —

Mr BEGLEY — I do not have any expertise to make a comment on that. I think we have to rely on the Port of Melbourne Corporation. They are the people who are responsible for that activity.

Mr BARBER — Do you have any other staff apart from those who are represented here?

Mr BEGLEY — We have two members of staff. Rose is our CEO and we do have an administrative assistant.

Mr BARBER — And I presume your budget allows you to consult with various people to deliver your work?

Mr BEGLEY — Our areas of consultation are fairly limited, but I must say that after much discussion around the council table channel deepening was a significant thing on which we felt that we had an important role to make a contribution, and in that instance that is why we have sought the services of Dr Noakes.


Mr BARBER — So your budget allows you to bring in consultant expertise at various times?

Mr BEGLEY — On a very limited basis. In fact some of the consulting we do on project work is because we have the resources from industry to be able to do that.

Mr BARBER — So your members have to do the actual work. It becomes the output?

Mr BEGLEY — We have lots of working groups and we also involve the industry in much of what we do, through seminars, meetings or whatever, to obtain that information.

Mr BARBER — And where are you physically based?

Mr BEGLEY — We are based in Nauru House.

Mr BARBER — Sort of in the DOI area.

Mr BEGLEY — We have our own offices in Nauru House.

Mr BARBER — Just maybe for Dr Noakes, this table 1 — can I just ask you about some of the assumptions behind it?

Dr NOAKES — There is table 1 and there is a table 1a in this one.

Mr BARBER — Table 1 will do me, I think, since that is the one I looked at. Given that a lot of these things are based on per TEU costs, I presume as we run down through the years there is some assumption there about the growth in the number of TEU?

Dr NOAKES — That is correct. I think there should be somewhere a set of footnotes — table 1 notes, footnotes 1 to 14 — which try to provide some exposition of the — —

Mr BARBER — But note 1 does not tell me whether you have got assumptions, or what your assumptions are, on growth in TEU.

The CHAIR — Note 2 does.

Mr BARBER — No.

Dr NOAKES — In the growth figures there are assumptions associated with trade. I think I used a figure of 8 per cent; I think that was the overall underlying port container growth trend, although, as I said, it would now be considered to be a conservative figure.

Mr BARBER — So 8 per cent growth in TEU through to 2027?

Dr NOAKES — That was the basic trend that I took.

Mr BARBER — ‘In-port container delay costs’ and its footnote ‘Assumes 300 TEUs per week, growing to 900 per week in 10 years, not handled, at an average delay in terminal cost of $130 per TEU’. What does that mean exactly — not handled?

Dr NOAKES — Not being able to be picked up, not being able to go out in that particular ship; those containers left behind for the next ship.

Mr BARBER — So it is the load factor?

Dr NOAKES — That is right, load factor. These figures came from interviews when I spoke to the shipping company, through the members of the council, and reflected basically discussions I had as to how the port constraints were affecting individual shipping operations.

Mr BARBER — Is that not just another way of talking about shipping costs overall?

Dr NOAKES — I think it is trying to get to the industry perspective in terms of what it really means on a day-to-day basis if a port is constrained. In other words, the issue is now if in fact a container shipment is


available — Murray Goulburn, for example, or some of the rural exporters, have a product or a range of products to go out, and they find that on that particular day that the particular shipping line cannot take all the boxes out and they are left behind, that is the penalty. How it — —

Mr BARBER — But loading factors are built into shipping prices, right?

Ms ELPHICK — There is a finite physical capacity within a vessel. It is in some ways related to demand and supply, yes, but it is simply a physical limitation on what can be loaded.

Mr BARBER — Is it true that 20 per cent of all containers going through the port are empty, import-export?

Ms ELPHICK — That is correct, yes.

Mr BARBER — Forty per cent of those on the export side are actually empty containers?

Ms ELPHICK — Yes, under current conditions where there is strong demand out of China, particularly for 40-foot containers. You think of it this way: for around $200 you can reposition an empty container; if you are a shipping line, it is your equipment. You can take that up into Asia, load it up and achieve maybe $1800 for shipping across to the US or to Europe, or you can take an export out of Victoria and perhaps receive less than that waiting for a heavy 20-foot box coming down from the country. That is the reason China needs those containers — to fill them and get them out. So it is a matter of profit.

Mr BARBER — At the end of the day the real reason is that we import a hell of a lot more than we export through this port.

Mr BEGLEY — I think there is something that we should qualify here too. The average person in the street sees a 20 and a 40-foot container and they simply see them as a 20-foot container and a 40-foot container. Within each of those sizes there is a variety of different types of boxes. Some are insulated, some are purely dry, some are food-grade containers, and there are restrictions as to what you can put in certain containers. There are high-bulk containers. So you have got this complexity of containers — —

Mr BARBER — You have got to get them all in the right place at the right time.

Mr BEGLEY — That is exactly right. So that is why this movement of containers, of empty boxes, is there — simply because of the need to get the flat-rack or the open-top or whatever it might be to its destination, back to where it is going to be used effectively.

Mr BARBER — So Victoria’s single biggest export in containerised terms at the moment is air.

Ms ELPHICK — No.

Mr BEGLEY — No, it is not air; it is the shipping companies.

Mr BARBER — Not in dollar terms, but certainly in volume terms. I am just wondering how that relates to this issue of inefficiency in terms of ‘we cannot load containers’. It is not a function of ships or weight or depth or anything, it is just a function of not having enough containers in the right places. But just going on to ‘Additional container shipping costs’, footnote no. 3 says, ‘Assumes an annual economic loss of shipping revenue from less than optimal voyage loadings, increasing as the number of ship calls are affected, with less than full berth slots utilised’. Is that effectively the same issue we have just been talking about?

Dr NOAKES — No, it is a slightly different reflection. We are then talking about grain ships and bulk fuel ships, which are something that in most of the discussion has not been given perhaps enough attention, and so we are talking about, in this case, bulk products, as distinct from containers.

Mr BARBER — Fair enough. On to ‘Avoided container handling savings in terminal’, which is footnote no. 6, it says, ‘Assumes a reduction in investment in advanced container handling equipment in the terminals and losses of productivity savings of $15 per TEU’. How do you derive a figure of lost productivity of $15 per TEU?


Dr NOAKES — This gets back to the issue of whether in fact the port will encourage new investment. We are talking about basically stevedoring operations. If in fact there is uncertainty as to the future of the port, the logical commercial behaviour is for the stevedoring companies to defer their investment, and so the forms of container equipment are not as modern, they are not as productive, they are not as time-saving as you would find, for example, in the port of Singapore or in some of the other Asian ports.

Mr BARBER — I do not think we can be compared with Singapore.

Dr NOAKES — I just suggest to you that the productivity of 25 boxes per hour versus 55 in Singapore is not just about labour productivity; it is about how modern the equipment is. Those decisions about investing in new equipment relate to whether people have a perception about the security and the future of the port.

Mr BARBER — On ‘Empty container access costs’ you say, at footnote 7, that is ‘Based on a reduction cost of $500 per TEU from Adelaide when exporters are limited in the peak availability of empty containers’. What does that mean, in simple terms?

Dr NOAKES — That means we had some examples that were in fact as a result of ships being not able to leave the port and containers having to come from out of those by rail. This is the economic penalty of the land bridging — when in fact containers cannot be handled out of Melbourne.

Mr BARBER — Quite a number of our containers do go — given that certain shipping lines do not stop in Adelaide — they come to Melbourne and then go over to Adelaide.

Dr NOAKES — If in fact cargo is left behind in Melbourne, there have been examples where they have in fact gone to Adelaide. It is a question of what is the least cost. Does the container that cannot be taken out stay in the port or does it get out in the next best option, which in some cases is going to Adelaide?

Mr BARBER — You are talking about empty containers now?

Dr NOAKES — Yes, empties as well as full. As I understand it, there is an increase in the shortage worldwide of containers. So containers themselves are valuable products.

Mr BARBER — And redirected container costs, put in that no. 8 based on a repositioning of containers from Adelaide of $800 per TEU.

Dr NOAKES — That is what I was referring to earlier. I found that in the port of Melbourne it really is about what is the best use of port space, and in some cases if cargo cannot be handled in Melbourne, it is more appropriate to send it to Adelaide than trying to send to Sydney.

Mr BARBER — Sure. So all of these numbers that you have just told us — these per TEUs — behind them in a spreadsheet there are actual numbers of TEUs multiplied by dollars?

Dr NOAKES — That is right.

Mr BARBER — Do you think maybe you could send us the raw spreadsheet?

Mr BEGLEY — Yes.

The CHAIR — Mr Barber, we will need to move on to Mr Tee. We could come back if you have further questions.

Mr BARBER — Yes, that will do us.

Mr TEE — Thank you very much. I just want to have a look at table 1a, the revised economic cost penalties. I am just trying to get a handle on really what it all means. Starting at the end, I think what you are saying is that the total cost penalty is some — when I say at the end; your total is $8.1 billion in terms of the cost of not proceeding.

Dr NOAKES — What we have done with 1a under revision — back in 2005 we had the presumption that the project would start earlier, so in fact we thought that the project would start to deliver benefits after 2008. Quite clearly the best hope is that the channel deepening project will deliver benefits after 2010. So the start point of the


benefits instead of being 2008 is now 2010. The actual quantity of container volumes I have not revised. I believe they are conservative, but I have not adjusted the individual growth rates. I think they are basically the same. Why the numbers differ is that the discount rate, instead of being 6 per cent, is now 7 per cent. So we have got a different time period, and you have got a different discount rate, so we end up with a different NPV.

Mr TEE — Tell me — the column 9 there, which talks about employment levels — —

Dr NOAKES — Yes.

Mr TEE — Am I reading it right if I say that by 2027 — you are saying that if we do not proceed there would be a cost of some 25 800 jobs?

Dr NOAKES — That is right.

Mr TEE — So the cost of not proceeding is 25 800 jobs, and that will — —

Dr NOAKES — The economy would shrink by that level of employment.

Mr TEE — Then in table 2, the additional container shipping costs of not proceeding — you are saying if we do not proceed, each container will cost $17.11 more.

Dr NOAKES — Sorry, table 2, did you say?

Mr TEE — Yes, running additional container shipping costs.

The CHAIR — Column (ii).

Mr TEE — Sorry, table 1a, column (ii), the ‘Additional Container Shipping Costs’.

Dr NOAKES — Yes, that is correct.

Mr BEGLEY — Could I just make a point relevant to the previous question with regard to employment. I think we should put that in context, because people might think that 25 800 is a lot. It is estimated on the figures we have at the moment the total trade and logistics industry here in Victoria represents 14.5 per cent of gross state product. It is a significant contribution to the economy of this state. There are 340 000 people employed in the transport and logistics industry currently in Victoria. So people might think that that is a significant figure and probably question it, but it is relevant when you think that the total current employment is at 340 000 people.

Mr TEE — That is a significant shrinkage — 25 800 jobs.

Mr BEGLEY — It is, but keeping in mind we are thinking here of not having channel deepening. It is a different scenario altogether.

Dr NOAKES — It is the reverse of not having growth. You lose the growth and you decline, so you have a cumulative impact.

Mr TEE — And just coming back to the additional container shipping costs of $17.11, what is the current cost just to get a sense of what proportion of increase that would be? What is the current cost just roughly of container shipping?

Ms ELPHICK — Where would you like to go to?

Mr BEGLEY — Sorry, when you say what is the current cost, are you talking about what is the port service charge or the Port of Melbourne charge or what is it you are referring to?

Mr TEE — Okay. So the additional $17 is irrespective really of where you are going and the size of the container is what you are saying — the $17.11? So this is table 1a.

Ms ELPHICK — Because it is a port restraint, yes. So it affects all.

Mr TEE — All right. Thank you.


The CHAIR — Can I just clarify with that table, the column with the reduction in employment numbers is the only column that is cumulative? All the other columns are single year effects?

Dr NOAKES — Yes, in terms of employment. I looked at it in terms of over a 10-year period and said while after that I could not be more definitive. So yes, they plateau at the year 2020.

The CHAIR — But every other column is an individual year impact?

Dr NOAKES — Yes, that is right.

Mr GUY — Can I just ask do you think there needs to be federal financial assistance to this project?

Mr BEGLEY — I suppose it would be fair to say that we would like it, but I think the federal government made their decision and that is where it sits.

Mr GUY — So if the state government cap of $150 million costs begin to blow out, are you comfortable that your members, the people that you represent, will be able to absorb any increased costs if there is no federal funding?

Mr BEGLEY — I think it is fair to say that nobody likes paying additional costs. It is also fair to say that the Port of Melbourne has the lowest port service charges of any port in Australia, and I can say that with authority because part of my business is in that area of activity. Even with the current surcharge that is being imposed to pay for channel deepening, it is still cheaper in Melbourne than some other states charge for a single 20 foot container. So that in terms of costs, I think you will always find people that are unhappy about paying any extra dollar, but generally speaking when you talk about a container of product it can range from anything from perhaps $10 000 retail to up to $500 000 retail, the amount of extra charge is fairly insignificant when you get up to the high figures. From my clients at this point in time I have not had any backlash or criticism of it. They are more concerned about having access for their product to come into the port of Melbourne because other than that it poses enormous problems for them about the uncertainty. If it is going to be diverted to another port to be discharged, there will be additional costs involved and there will be the uncertainty as to when they are getting the product because the infrastructure is simply not there to bring the product to Melbourne. Can I just make this point too, which is important. The sum total of the containers that go through the three ports of Brisbane, Adelaide and Fremantle, Melbourne is greater than those three ports and when people make comments about just moving the boxes to Queensland or Brisbane and coming down here, there is really no understanding of what problems that would create in terms that we do not have the infrastructure to handle that in any case.

Mr GUY — Just on the infrastructure side, in the council’s support of bay dredging, did the business case presented to you involve a freight and logistics strategy?

Mr BEGLEY — From the Port of Melbourne, are you referring to?

Mr GUY — A freight and logistics strategy for Melbourne, including the port of Melbourne as part of it. I would have thought a freight and logistics strategy for this city is central to everything we do, obviously including the expansion of the port of Melbourne.

Mr BEGLEY — We would agree with you, and there is a freight and logistics strategy coming forward now from the government.

Ms ELPHICK — There was a policy statement put out by the Victorian government in 2004, which was a port strategic framework, which articulated the government’s intention in relation to the role that the commercial ports in the state would play. We do not make government policy.

Mr GUY — I understand that.

Ms ELPHICK — Our focus is on how to deliver goods in and around Victoria and in and out of Victoria in the most efficient way possible.

Mr GUY — So if there is not a freight and logistics strategy now, would you not say that it certainly would have been more favourable to have had a freight and logistics strategy produced before we looked at either


expanding the current port or looking at other options for 20, 30, 40 or 50 years in the future as well as the current project?

Ms ELPHICK — We have been advocating for some years the need for a broad freight strategy and even at the national level a broad transport plan. In the meantime you get on with what you can do best, and there has been a framework for the ports.

The CHAIR — Mr Hall has some further questions, but before he asks those I would like to ask, Mr Begley, can you give the committee an idea of what someone pays to ship a 20-foot container through the port of Melbourne? Hypothetically, if you have got a container coming from Singapore to Melbourne, what will be the charging structure that is imposed on — —

Mr BEGLEY — Within the port of Melbourne?

The CHAIR — Overall, obviously the actual shipping charge — —

Mr BEGLEY — I would not like to make a comment. Simply, it varies between — —

The CHAIR — I am thinking more in terms of the actual structure. You pay the shipping company a fee?

Mr BEGLEY — It depends upon which trade you are in. In some trades you pay certain charges incorporated in the ocean freight rate. In other situations you simply pay the pure freight, and then when the cargo hits here, you pay a series of charges, whether it be terminal handling, port service charge, shipping company charges as such. But there is no single fee that I could say regardless of — you have to look at every different trade to see what those charges are.

The CHAIR — What about when the container reaches the heads; is it then consistent in the structure within — —

Mr BEGLEY — You would have to speak to the shipping industry as far as that is concerned.

Ms ELPHICK — There are a range of port costs associated with visiting the port of Melbourne that are published each quarter or six months in the Bureau of Infrastructure, Transport and Regional Economics — it has a new name this week — Waterline publication, and Australia’s container port charges are compared, ship arrivals, the whole turnaround time in the terminals, et cetera, are all compared. So that data is publicly available on their website. It is called Waterline.

Mr BEGLEY — What the importer pays, basically, here is a combination of shipping company charges, port charges and stevedore charges, and they can be expressed in a whole range of different ways.

Mr HALL — Just two more quick questions. I note in your submission that the council has the task of advising federal, I presume, and state government on matters associated with freight in Australia.

Mr BEGLEY — Yes.

Mr HALL — Before the current Victorian government announced it was going to proceed with channel deepening, was your advice sought on this particular project?

Mr BEGLEY — It was sought, but we also gave it voluntarily. We were very up-front with where we stood with regard to channel deepening and were very affirmative in our action towards it.

Ms ELPHICK — In 2002 the former Sea Freight Industry Council published a document called Future Directions in which channel deepening was identified as the no. 1 infrastructure project for sea freight in Victoria. So as early as 2002 the former council was articulating the need for channel deepening.

Mr HALL — The other question that has just crossed my mind is: do rapidly increasing fuel costs have any impact on the assumptions that you have used to determine cost penalties, or indeed any consultant might use, in working out cost benefits?

Dr NOAKES — If I could just comment on that. What it means, I would think, without having had a look at the spreadsheet in detail, is that again the economic impacts are conservative. I go to the spreadsheet: there are


two items that I think that would reflect on. One would be certainly the freight rate saving associated with bulk fuel, and more importantly reduced greenhouse gas emissions. I think they would be two areas where that would be picked up. In both cases I am saying the economic penalties I have here are conservative — they would be underestimated.

Mr HALL — So the level of fuel prices worldwide, would that have an impact on the number of containers shipped around the world?

Mr BEGLEY — That is something that people in the trade determine. If you are a person reliant on a product that is only able to be sourced from one area, whether it be minerals or whatever, you will still go ahead for the sake of your business and it will probably be reflected in the world price of that product or the competitive product price of those products. I am sure that it can have an influence, at the end of the day, but I think it would be determined upon commercial needs.

Mr BARBER — Greenhouse gas emissions savings: what is the quantum of savings?

Dr NOAKES — That was basically associated with my discussions with shipping companies associated with modernisation of vessels and it was really about the replacement of vessels. If in fact some of the older 2300 TEU vessels were going to be replaced with 4300 TEU vessels, there would be more modern engines, less emissions and in fact we would have a cleaner operating environment associated with marine propulsion.

Mr BARBER — What is the quantum?

Dr NOAKES — Quantum? I would have to take that on notice to calculate it. What I looked at were the number of ships that switched from being 2700 up to 4300.

Mr BARBER — So TEU?

Dr NOAKES — TEU.

Mr BARBER — Size? Okay.

Dr NOAKES — TEU size and the rate at which vessels were being shipped. It was interesting, as Mr Begley pointed out when he came in, that when I did the numbers ANL had not made any decisions to modernise its fleet. Since then it has made that decision.

Mr BARBER — A question for Mr Begley. You said words to the effect, and you can correct me if you like, that people are not going to ship stuff up to Sydney and Brisbane to send them out through the port.

Mr BEGLEY — I do not think I made that comment, that people would not ship things up to Sydney and Brisbane.

Mr BARBER — Overland, I mean.

Mr BEGLEY — No. What I was really referring to was in terms of the fact that if Melbourne is going to be restricted in terms of vessels coming here — because we have to keep in mind that shipping schedules are on a worldwide or on a regional basis, they do not just come to Melbourne particularly; they come to Sydney and/or Brisbane and Adelaide, perhaps, even Fremantle; they are on a particular schedule — if vessels have to exclude Melbourne and off-load those containers at another port, that is basically what I was referring to.

Mr BARBER — The Australian Rail Track Corporation, which is a member of yours, have you read its discussion paper about how it is going to fix up the rail line between Melbourne and Sydney and Brisbane and create a new market for shipping stuff around?

Ms ELPHICK — Yes.

Mr BARBER — No, I am asking Mr Begley. Have you read it?

Mr BEGLEY — I have not read it through. I know some of the things it is talking about, but that is also a long way off. If you are looking at the Melbourne–Brisbane, that is still in the investigation stage because the federal government has just put some more money into that.


Mr BARBER — Yes, but I am asking the point of its exercise. Are you saying that it will not relate to movement of things within Australia that are import or export orientated or inputs to those? It will be purely domestic production for domestic consumption?

Mr BEGLEY — I think it should be for the majority of it, because there is a pan rate for shipping whether it comes off in Brisbane, Sydney or Melbourne. The one ocean freight applies simply because coming from, say, Shanghai to Sydney. Melbourne is a longer distance than Sydney. The same rate applies Melbourne, Sydney or Brisbane, so why would you then take cargo off in Brisbane and have to transport it down at an additional cost? I would have thought, too, there would be concern about the additional greenhouse emissions that would be required to transport the containers down to Melbourne.

Mr BARBER — That is what I am asking you. What is the point of its exercise if it is not about import and export-related materials being moved?

Mr BEGLEY — I would imagine it is on a more domestic issue.

Mr BARBER — Domestic consumption, domestic production?

Mr BEGLEY — That is right. Or domestic distribution.

The CHAIR — Mr Viney has a couple of questions before we finish off, so we have to move on.

Mr VINEY — Just in relation to the comment that Mr Barber made about Melbourne’s export being of air — Victoria’s export being of air — are you able to confirm to me that the port of Melbourne actually handles around $75 billion worth of trade every year?

Mr BEGLEY — That is my understanding.

Mr VINEY — And that there are a considerable range of goods and parts, both imported and exported, out of that port? From my information the main commodity exports in containers include manufactures, beverages, dairy products, cereal grains, meat pulp and wastepaper, fruits and vegetables, stockfeed, paper and newsprint, paperboards and fibreboards. Are they the sorts of things that you are aware of?

Mr BEGLEY — That is a broad spectrum, yes, and wine. It is quite broad.

Mr VINEY — Alongside all of those raw materials there are about 700 motor vehicles, over 500 tonnes of tea and coffee, 750 tonnes of wood and timber, 1300 tonnes of chemicals, over 2000 tonnes of fruit and vegetables and nuts, 5000 tonnes of cereals, 10 800 tonnes of petroleum. They are the sorts of figures that are consistent with your knowledge?

Mr BEGLEY — I have no knowledge of the individuals. I know they all get exported from here, but I would have to refer back to the trade statistics to get that information.

Mr VINEY — There is a lot more than air going in and out of Victoria?

Mr BEGLEY — Absolutely. In fact my understanding is that, speaking to the chief executive of the Port of Melbourne, April was one of the strongest export months — in fact it was the strongest export month on record — and it was quite surprising keeping in mind the cost of the Australian dollar, the value of the Australian dollar, and the time of year that it was. It was an extremely strong export month. We cannot stress strongly enough — there have been comments made in various places over a period of time that channel deepening is only there for Chinese imports, cheap ones, whether they be T-shirts or whatever — that is so totally wrong, because the channel deepening is so important to our export market. I have not got the figures in front of me, but talking to Shipping Australia there is an average of somewhere in the vicinity of between 8 and 10 tonnes difference between the average weight of an import container compared to an export container. Export containers are 8 to 10 tonnes heavier because of the type of commodities that we export out of Australia; the deepening of the channel is so important to our rural communities for the export of the products that we do. I mean, one of our significant dairy producers, one of them alone, exports around 25 000 containers per year out of the port of Melbourne, and a lot of that product is very price sensitive and it needs to be out very quickly. A failure of goods to be shipped can mean a cancellation to the product even when it is in transit. They are the sorts of things that we do not want to occur that have a disastrous effect on the employers and producers here in Victoria.


The CHAIR — Thank you, Mr Begley. We are going to have to leave it there. The committee appreciates your attendance. We have your notes from this morning and your written submission. We will have a draft transcript to you for any correction in the next couple of days.

Witnesses withdrew.






Members




Substituted members


Staff


Witness

Mr R. McEncroe.


The CHAIR — I welcome Mr Richard McEncroe. All evidence taken at this hearing is protected by parliamentary privilege, as provided by the Constitution Act 1975 and is further subject to the provisions of the Legislative Council standing orders. Any comments made outside the precincts of the hearing are not protected by parliamentary privilege. All evidence is being recorded by Hansard. Witnesses will be provided with a proof version of the transcript in the next couple of days. I now ask you if you would like to make an opening statement or proceed to questions.

Mr McENCROE — I have not got a prepared presentation or opening statement. I did not make a submission to this inquiry, which you might want to note, but I was invited to participate here today anyway. I am happy to answer any questions that you have, so maybe we should just start there, Chair.

The CHAIR — Mr McEncroe, as a matter of public record, you have had a background with the Department of Treasury and Finance here in Victoria. Did you have an involvement with the preparation of the business case for the channel deepening project?

Mr McENCROE — No. I suppose one of my concerns about the project was that no robust business case, I did not think, was produced at all until after a government decision had been made that this project was one that was going to progress.

The CHAIR — Can I ask you about that: you foreshadowed a number of concerns ahead of the panel process around this project. The committee’s role is effectively to look at the robustness of the business case that was presented by the Port of Melbourne. Can you comment on any concern you have about the scope of the business case, either what has been included or excluded, either cost or benefit; and also the estimations, either overestimated or underestimated, in respect of the matters included in that business case?

Mr McENCROE — I would prefer to confine my comments to the former part of that question rather than the second part, primarily because since I have been involved in doing any sort of hard number-crunching on this issue the world economy has changed a lot, and trying to forecast or make an observation about whether forecasts contained in the analysis done in 2004 or 2005 or whenever it was — I do not think it is particularly helpful to be commenting on those particular numbers.

In terms of what was included or excluded from the analysis, a point I would like to make today is that to the extent that I had, shall we say, issues with the project, they stemmed primarily from a point of view of process, in that it was fairly apparent to those involved within my area of Treasury at the time — and this is my own judgement, I guess, and I am speaking today just as a citizen, not representing any group or department or any other organisation; I should just make that clear — but it seemed to me that given the timing of the arrangements with Boskalis to enter into an alliance contract with them and to essentially make the decision — and it was referred to by the previous minister, the statement, which I think was called Leading the Way, which was the government’s infrastructure statement of about 2004, of which the channel deepening project was the key feature, I guess, and from memory adorned the front page of the statement — those decisions were made prior to any rigorous cost-benefit analysis being prepared or any environmental assessments being made.

So I guess I had a fundamental problem early on with statements like ‘The benefits of this project will outweigh the costs’, when nobody knew the value of either, and in reality I think we still do not. Yet there are still strong statements around that the benefits outweigh the costs, when one side of that equation has always been very much guesswork to some extent. The reason I say that is because of some of the things that were excluded from the cost side of the business cost equation. They are things that have been documented in various submissions and in various places over the last few years. They include things like the compensation that may or may not be payable, the environmental damage, and an assessment of the bay’s value as an environmental asset to the state. Those sorts of considerations did not weigh on the cost side of the equation, and it was my view, and still is my view, that any assessment of whether or not there was a net benefit or a net cost from doing this work needed to include all the real costs. And I do not think they have been included.

The CHAIR — You referred to the Leading the Way statement 2004 — —

Mr McENCROE — I think that is what it was called, yes.


The CHAIR — Promoting the project before there was a cost benefit — —

Mr McENCROE — We were still doing SEESs in 2007, and that was in 2004. It seemed to me a little odd that a proponent, in this case the port, can propose a project which will cost anywhere up to — you know, anyone’s comments are as valued as anyone else’s because it is a little bit of guesswork because it is still ongoing — let us say a billion dollars, or three-quarters of a billion, or one-and-a-half billion, or whichever it might end up being, and that I suppose the nub of that decision that this was a worthwhile thing to be doing was based on information provided by the port about shipping forecasts and what the proponent of the project thought might be required. Those figures were taken on face value, and to my knowledge there was no other shipping analysis to assess whether or not the Port of Melbourne’s shipping analysis was right. It was forecasted to 2035, which struck me as odd, given that even the World Bank will not forecast in the current climate to anything beyond about five years, given the volatility of the world economy. It went into these fairly detailed forecasts about what the nature of the Victorian economy might look like, what the make-up of the export-import set-up will be in Victoria in 2035, to the point where it even estimated what our share of the national grain harvest is going to be in 2035. It is a brave person who can predict that. I just thought, ‘This is not very robust and let us really have a look at exactly what the costs of doing this project are’. That is where I was coming from.

The CHAIR — At that point though, had not Meyrick and Associates and PWC undertaken their work?

Mr McENCROE — Yes, based on the data provided by the port — at least the PWC work was — and I guess my basic position was, ‘That is all right. That is based on information provided by the project proponent’. In any other situation, if a proponent comes along and says, ‘I want to build a shopping centre out here and I want to build it because I reckon that in 2030 we are going to have X number of people living in that area and this is what their requirements are going to be’, the government is not just going to say, ‘Okay’. It is going to say, ‘Well, we might do our own analysis of whether that is right and work out what the broader community concerns might be about that, and do our own independent analysis of whether the forecasts as provided by the proponent are in fact rigorous’. So I saw that as a failing in the process — that that analysis was not scrutinised and has not been scrutinised.

I guess I found the other elements of the process in terms of the timing a little bit unsavoury, in that the government was taking the position quite early on that it was in favour of the project; I do not think that the then Treasurer made any secret of the fact that he was a supporter of the project, and it seemed to me that the subsequent environmental assessments and cost-benefit analyses — all of those processes that have been going on for the last few years at great cost in money and time to everybody — were structured in such a way as to, I suppose, manage the environmental outcomes of a project that was going ahead, as opposed to considering whether or not the project should go ahead. I think there was a difference there that needed to be clearly understood by the public, because I thought that was what the decision should be. My experience in government was that you have a range of projects on offer that the government may or may not consider doing, and you say, ‘Let us assess them all on their merits, do the analysis and then decide which ones we support or do not support’, as opposed to deciding to support one and then looking to retrofit analysis to make that outcome what you want.

The CHAIR — Thank you.

Mr VINEY — What was your involvement in the analysis of this when you were in Treasury and Finance?

Mr McENCROE — Very little. I was only involved in it for a short time. I was in the budget group in Treasury, and the group I was working in was involved in an interdepartmental committee arrangement considering the project itself. In terms of the analysis, no, I was not involved in the analysis, primarily because there was none.

Mr VINEY — When did you leave the public service?

Mr McENCROE — In 2004.

Mr VINEY — When in 2004?

Mr McENCROE — I am not exactly sure; late 2004. I could not remember the date.


Mr VINEY — Is it fair to say that you would not be aware of any work that took place in government after your departure from the department?

Mr McENCROE — That would be fair.

Mr VINEY — So any of the analytical work about the business case that had been put to the government that you would normally expect would be done in the department did not come across your desk when you were there and certainly after you left it was not for you?

Mr McENCROE — No. I mean, it was not present at the time, and subsequent to leaving the Treasury I have only had the benefit of being able to review material that is in the public domain, namely — —

Mr VINEY — Review materials — I am sorry?

Mr McENCROE — Materials in the public domain — for example, the PWC analysis, the Meyrick stuff, and other submissions to inquiries and so on.

Mr VINEY — But from that review of the materials in the public domain you have been able to apparently come to the conclusion, I think you suggested, that the government did not scrutinise the analysis?

Mr McENCROE — No, I said that at the time there was no analysis to scrutinise, really, in 2004.

Mr VINEY — Up to 2004?

Mr McENCROE — Yes. My point was that — —

Mr VINEY — So your comments really precede 2004; you do not have comment beyond that in terms of the government scrutiny of any analysis? Your evidence then is restricted to what you knew up to when you left in 2004 in relation to the government’s scrutiny of any analysis of the channel deepening project?

Mr McENCROE — Yes, subject to what I have been able to glean from the public debate since then and any other material — there has been no other material put in the public domain. The government has not come out and said, ‘We have done a whole lot of internal analysis that means that any criticisms of PWC are not valid anymore’, so I suppose I am not sure what I could have been privy to had I stayed.

Mr VINEY — So really your views about any scrutiny that might have taken place for the project’s business case, post your departure in 2004, are really your opinion?

Mr McENCROE — Correct.

Mr VINEY — So is not based on any evidence that has been put before you. You are assuming that analysis did not take place because you have not seen any analysis that took place?

Mr McENCROE — I would have thought that if there was a great government document around that made the business case compelling for the project, it would have been in the public domain, and it is not there.

Mr VINEY — And you do not think that the PricewaterhouseCoopers analysis — —

Mr McENCROE — Is compelling, no.

Mr VINEY — Why is it not compelling?

Mr McENCROE — For the reasons I began to outline a minute ago, in terms of what is not contained in the cost side of that equation, and — —

Mr VINEY — Have you looked at and heard the evidence that has already been given to the committee by both VECCI — —

Mr McENCROE — I have not been privy to that this morning, no.

Mr VINEY — And the people just a short while ago about the costs of not doing the project?


Mr McENCROE — I heard a little of the last witness.

Mr VINEY — Did you make any considerations of the cost of not doing the project in any of your newspaper commentary?

Mr McENCROE — I suppose I took one aspect of PWC’s work at face value, which said that actually there will not be one more container through the port if we deepen than if we do not. That is an appendix to their work; I am not sure if you have noticed that. But it seemed to me that the costs of not doing it cannot be that big if there is not even going to be one container missing out here.

Mr VINEY — It seems to you, but you have not done the analysis, like the previous witness, Dr Noakes, who has done analysis for the World Bank and other international agencies— —

Mr McENCROE — No, I do not work for the World Bank. I have not done analysis for the World Bank.

Mr VINEY — So you have not done any of that analysis, right. So you have not done an MPV on the project and established the cost to the Victorian economy if the project does not proceed?

Mr McENCROE — No.

Mr VINEY — Okay.

Mr McENCROE — On the other hand though, it might be worth considering some of the benefits to the economy if it does not proceed. Did the previous witness comment on those? I am not sure, I was not privy to it, but I suppose if you are going to look at the cost of not doing it you also have to look at the benefits of not doing it, and they may accrue to some substantial amount also, particularly if you asked some of the recreational users of the bay or the diving industry — —

Mr VINEY — Have you done that analysis?

Mr McENCROE — Have I?

Mr VINEY — Yes.

Mr McENCROE — No.

Mr VINEY — Have you done an MPV analysis on that basis?

Mr McENCROE — No. I had no cause to do that.

Mr VINEY — So really you have not actually done any economic analysis of the project — —

Mr McENCROE — I have done analysis of the extent to which the cost-benefit analyses that have been done were thorough in terms of what they considered. I was never proposing to put an alternative piece of economic analysis.

Mr VINEY — With respect, I have actually read your articles, and I do not see — there is a commentary but there is not an analysis. I mean none of that is an economic analysis.

Mr McENCROE — No, I did not say I did that for the purpose of the articles.

Mr VINEY — Okay. You did not make a submission to the committee?

Mr McENCROE — No.

Mr VINEY — And you did not have an oral submission that you wanted to deliver, so I am just trying to understand why you are here. What actually happened to bring you here?

Mr McENCROE — I was invited.

The CHAIR — Mr McEncroe was invited by the committee.


Mr VINEY — I understand. We know, as a committee, how that occurred, but I am interested in how that occurred, from your perspective?

Mr McENCROE — I really do not know.

Mr VINEY — Were you asked, ‘Would you like to come and present to the committee?’ by — —

Mr McENCROE — Yes. I was asked if I wanted to come here as a witness by the secretary or — —

Mr VINEY — And was there a prior discussion to that, with any of the groups, that suggested it might be a good idea?

Mr McENCROE — No.

Mr VINEY — Thanks.

Mr HALL — First of all, thanks, Richard, for coming in and talking to us. I have been listening to your comments today and I suppose I am concluding that this is your view in respect to channel deepening: that the government made a decision first to proceed, and then to structure a business case to fit that decision. Is that essentially what you are saying to us today?

Mr McENCROE — I think that is a fair analysis of what I am saying.

Mr HALL — Okay. And in your experience, having worked in Treasury and Finance, do you have knowledge of any other process that has been employed for major projects developments in Victoria that actually has a better model to lead us through to that process in decision-making in the end?

Mr McENCROE — I am aware of some of those types of processes, the gateway process, for example, on public-private partnerships, but I am not well enough versed on exactly which projects go through that gateway process and what the thresholds are for putting them through and so on. There may even be a different model for a project assessment since I was involved. I do not really know enough about that to comment, except to say, I suppose, to get down to the nub of where I was coming from, on the one hand it was being championed by the government as the biggest project in Victoria: it had to happen, it involved digging up great swathes of arguably Melbourne’s most valuable natural asset, and it surprised me it appeared that it was subject to less scrutiny in terms of the costs and benefits — this was back in 2004 — than perhaps other projects which were much smaller in scale and much less significant in terms of their potential environmental and social impacts. Faced with that scenario I had to draw the conclusion that the analysis was a kind of a fait accompli situation. Hence my comments.

The CHAIR — Do you have any examples of the projects you were referring to?

Mr McENCROE — No, but I think just about any project that was a significant project that the Treasury or the department was overseeing would require a significant cost-benefit and robust cost-benefit analysis to be done. I think the analysis that has been done on the channel deepening is — picking up Mr Viney’s point before, notwithstanding the fact that there may have been some other analysis done that I am not aware of, and of course that is always a possibility — however, it appeared very light given the magnitude of the project, and it surprised me. To be honest, it was the key reason that I ended up leaving the Treasury because I thought this is not a genuine process.

Mr BARBER — Maybe it did not look as if it was so big a project at the time when they first committed themselves to it. The budget at that stage was a few hundred million dollars.

Mr McENCROE — Yes, but even a few hundred million dollars — that is still a pretty significant project. You would think it would be subject to some genuine rigour around some alternatives. You think, ‘All right, here we have this problem, or a perceived problem; here is one way. The proponents are telling us we have a problem with ships not being able to get in and out fully loaded — that is the problem — there may be some alternatives to that, some ways of addressing that problem, be they through other ports, other rail links, other freight means’. Those alternatives were not documented and analysed in any depth: it was that channel deepening is the way to fix it and this is how we are going to do it.


Mr BARBER — When we are here discussing the business case there are a number of bits of information in the public domain. There is Drewry from 2001, there is Meyrick from 2003 and another document from 2004. Then there is Meyrick from 2007 and then there is PricewaterhouseCoopers. You said right at the beginning you do not want to comment on shipping forecasts, particularly out to 30 years, but in all those documents that have been published they all rely on 5, 6 per cent compound growth in container movements out through the years.

Mr McENCROE — It is rear casting; that is what they do. I know with the PWC one they said, ‘Here is the basic trend over the last 20 years since about the 1980s in terms of growth, and here is some sort of notional growth forecast over here; let us just extrapolate that to the next 30’. That is what I term rear casting. That is just saying it is going to be more of the same. I do not think it is likely to be same type of economy in 2020 as it was in 1980, so I do not know how valid those assumptions are.

Mr BARBER — But the simple financial effect of doing that, of relying on compound growth at a fairly high percentage rate out to 30 years, is that most of the benefits have to be in the second half of that, don’t they?

McENCROE — Yes, where it gets pretty murky.

Mr BARBER — Yes. I think you sort of alluded to the World Bank only doing a 10-year thing. Are you saying that when you sat down to do a cost-benefit analysis of the project, you kind of ignore anything outside 10 years for a financial analysis purpose?

McENCROE — Not necessarily, but I suppose I prefer to invoke the World Bank’s process than mine and that is what they consider. My concern was more what was included and excluded from the analysis. I just think if it was a genuine attempt to list and quantify all what were genuine costs of this project — potential, real, all of them — and what the benefits are, we would have had some analysis to talk about. It is possible, I guess, having done that, the benefits do outweigh the costs. That is possible. The fact is we did not know, we still do not know, because it is not all inclusive of what should be in it.

Mr BARBER — What are the main benefits that Meyrick uses when it creates the benefit side of the equation? Are they mainly lower shipping costs?

McENCROE — Yes, that is one element which is interesting and leads me to the other point I wanted to make about this. It is all so surprising; we still do not really know who is going to foot the bill for this project. We do not know how much of it is going to be recouped via the proposed levy. We do not know whether the feds are going to tip in money. VECCI is calling — or at least last I read — on the state government to make a contribution of X number of hundred million dollars. We are in a situation where we are halfway through a project that is environmentally very sensitive and we do not even know who is paying for it.

Mr BARBER — But in these various public documents that we have here, is there much analysis of the disbenefits potential? Or is it all on the shipping costs multiplied by the volume we expect of extra container traffic?

McENCROE — The disbenefits are notionally addressed at best.

Mr BARBER — Are the costs largely the project costs?

McENCROE — The direct costs of the project.

Mr BARBER — We have been using the words ‘business case’, but is not really the business case from where the port sits the direct project costs and the direct revenues they expect to get as a result of them doing the project?

McENCROE — Yes, I guess.

Mr BARBER — The port as proponent.

McENCROE — Yes, that is why it is important to understand where the port stops and the government begins. The port is a proponent; perhaps you could argue that it is not necessary their job to be assessing the other social impacts of this and so on. The government is not the proponent, the government is the government, and it is their job to consider what those other costs and benefits are and make a decision rather than just saying, ‘Here are


the project costs that the proponent reckons it is going to incur and here are the benefits that we think might accrue if this assumption happens and that assumption happens and the world economy stays as it is and we continue to get imports at this rate and exports at that rate’. Those other considerations are not in the picture.

Mr BARBER — If the port was a business it would just do that as a matter of course?

McENCROE — Possibly.

Mr BARBER — If, as far as we know, the project costs are all going to end up with the port and the port has to recoup those from charges, where does that leave the port if their assumptions turn out to be wrong about the rate of growth and what they can therefore levy?

Mr McENCROE — I guess they will be levying more or recouping their costs via another means. I do not know. Or the government will step in and bail them out. I do not know. You have to ask the port what their contingency is.

Mr TEE — I just want to return to the evidence you gave. As I understand it, what you are saying is that in 2004 the government made a decision, publicly announced the decision, then almost retrofitted and then went through the process of doing the environmental and economic analysis.

Mr McENCROE — I am trying to make a subtle distinction between the rhetoric and the reality of the situation. The rhetoric and the public commentary from government was around, ‘Yes, we approve this subject to all of these environmental hoops being jumped through and everyone being satisfied’. I think the reality of that was something different and is something different where the line between proponent and government became hard to distinguish, and that I think is one of the key issues here that people need to understand.

Mr TEE — The reality — and we have had some evidence of it here today — is that in fact considerable amount of work had been done prior to the announcement in 2004. I am just trying to get your sense of why is it that you say there was not that rigorous work when we have had evidence from the freight group already that they had been advocating for this since 2001. We had since 2001 — for 12 months the Victorian Channel Authority had done a considerable amount of work on the economic and environmental statements. By 2004 we had a well-thought-through proposal essentially.

Mr McENCROE — I do not know that I agree that it was a well-thought-through proposal. Perhaps it was a well-thought-through proposal in terms of a very limited analysis of shipping traffic in and out. Going back to my earlier point, that is an analysis for the proponent to make because that is all they are interested in and all they are obliged to be interested in. The broader analysis that I am referring to is, ‘Is this a good idea; what about the other indirect costs of the project, the environmental costs. and so on?’, which I do not think were given enough weight in that early analysis. When I say the analysis that had been done to date was not rigorous, sure, the numbers on the shipping traffic we can argue about those that Meyrick and PWC and others had looked at, but if you do not look at the other broader issues associated with the project, is it a considered decision or not?’. That was my question.

Mr TEE — In terms of the broader issues, certainly the federal opposition has been very critical of the green tape, as it calls it.

Mr McENCROE — Green tape, yes.

Mr TEE — There has been criticism of us from The Nationals federally at least, although some other parts of The Nationals have other views and the Liberal Party certainly has a number of views going both ways — —

The CHAIR — Your question, Mr Tee?

Mr TEE — My question, going to the broader processes, is you have a concern then, I think, that goes to the PricewaterhouseCoopers report, which you say is not compelling; yet, again, the evidence today has been that it is conservative. From the Victorian Freight and Logistics Council the cost for not proceeding is $8.5 billion; VECCI says the indirect benefits which have not been included are $15 billion. I am wondering about your criticism of PricewaterhouseCoopers and how that fits in with the evidence that we have today which says it is very conservative.


Mr McENCROE — In a sense it is not inconsistent in that they are making the same point as me, just from a different perspective. They are also saying that the assumptions in the cost-benefit analysis were not right because they have got the benefits side wrong. Equally conservative were the cost estimates. Are they trying to argue that they had it wrong on the benefit side but we have got it absolutely right on the cost side?

Mr TEE — To be fair to them, they are saying PricewaterhouseCoopers used very conservative estimates so they were not taking any risks with their analysis and said they were too conservative and that if you are not that conservative what you get is this multiple $15 billion benefit of proceeding or $8 billion cost of not proceeding and a cost of 25 000 jobs.

Mr McENCROE — That is their view and if an independent third party came along and properly assessed the costs and the benefits and came out with a net position that was considerably in favour of benefits to the point where the government thought it was a good idea, then great. The point is that the flaws on the benefits side could be equal to, less than or greater than the flaws that might exist on the costs side. Until we get them both down on the page and say, ‘All right, let us have a review of these benefits’, as the previous witness was saying, ‘But let us at the same time have a review of the costs’ and then look at the net situation.

Mr TEE — I saw an article somewhere in which you talked about the benefit, which I think is 2.7 per cent, and you suggested in your article that that was not a sufficiently high benefit to proceed.

Mr McENCROE — Yes, the difference in the gap between the costs and the benefits. There are lots of folks who work in project assessment.

Mr TEE — These are the BCR benefits.

Mr McENCROE — You get an argument about whether a three to one ratio is good enough, whether it should be four to one in terms of costs and benefits. I do not know that there are any real hard and fast rules around that, but I suppose if it is at the margin, at around 2.7.

Mr TEE — Yes, 2.7.

Mr McENCROE — Around there. I suppose my concern was that given the inadequate nature — what I consider to be the inadequate nature — of the cost side of that equation, if the costs were calculated in a thorough way as I would propose they should be and that ratio came down as a result of that to something else — 1.5 — is it then still viable? It is more posing the question: where is that cut-off where the government says it is not viable any more? What if that got down to 0.5? And given that we do not know that.

Mr TEE — The evidence VECCI gave is that most infrastructure projects require a BCR of 1 to proceed and here we have 2.7. Are you aware of any infrastructure projects with a higher BCR than 2.7 that should have been proceeded with?

Mr McENCROE — And that will not?

Mr TEE — Yes.

Mr McENCROE — No, I cannot think of a specific example. I cannot give you an example of that, I am sorry.

The CHAIR — I would like to pick up on the same point, the quote Mr Tee gave, of VECCI essentially saying that anything better than 1 is something you would proceed with. Do you have a comment on that?

Mr McENCROE — On what basis do they say that, do you know? Generally speaking that seems a reasonable position because the benefits outweigh the costs. My argument is not so much that 2.7 is right or wrong; it is that 2.7 is the figure that comes out of a cost-benefit analysis that is not thorough. My argument is if you actually calculate the real costs, that is probably getting down closer to 1, and maybe even under 1, and if it gets under 1 you have really got to ask the question whether it is worthwhile doing.

The CHAIR — Are you familiar with the Handbook of Cost-Benefit Analysis, that is published by the commonwealth?


Mr McENCROE — Yes.

The CHAIR — It is prepared by the commonwealth as a template, as a guide to good practice for commonwealth agencies in preparing cost-benefit analyses. Is there a similar model used by Treasury, or indeed is that model used by Treasury here in Victoria?

Mr McENCROE — I really could not say at the moment. You would have to ask a current executive person from Treasury that question. I am not familiar enough; I have not done any work in Victoria for a while, so the handbooks and other things that are being used by Victoria I do not know.

The CHAIR — When you were in Treasury was there a model or — —

Mr McENCROE — When I was there, there was a range of guidance material. I just am a bit reluctant to say that what was being used in 2003 or 2004 is similar to that because I just am not exactly sure what is in that and what is in the current one. But there was guidance material around, if that helps with the question, about what should be included and excluded.

The CHAIR — And in your view is the approach of the analysis of the dredging project that was contained in the supplement EES, in the appendix — of those public documents — consistent with your experience of the guidance material at DTF when you were there?

Mr McENCROE — I think I would rather comment on whether it was consistent with what is in that document, because I am reasonably familiar with that because I have referenced it quite recently. I would say probably no. Some of those indirect costs which that document refers to obviously were not considered adequately.

The CHAIR — And on the benefit side does it depart from that guideline?

Mr McENCROE — I could not say that I have probably ever been as focused on that.

The CHAIR — In your notes that you put up for the panel hearing you noted:

The basic shortcoming of the process for reviewing the costs and benefits of the CDP is that it is based on assumptions about how the economy of Victoria will be structured and its size and nature in the coming 30 years.

Is that not inevitable?

Mr McENCROE — Sort of standard, yes, what else could you do?

The CHAIR — What else can you do? You will have to have assumptions for the life of the entity.

Mr McENCROE — Yes, I guess so. If you are talking about a project that is going to be costed over 30 years, you have to make some assumptions like that. My concern about it was that those assumptions were being made and the inherent unreliability of such assumptions was not made transparent, and it was not very clear in the discussions from the government and the port about that. I think that is a fair point. I do not know what else you do — break it up into five-year chunks? It is pretty hard.

The CHAIR — On that question, what would you see as a more reasonable time frame? You mentioned the World Bank’s 10 years. If it is the inherent nature of any given project that the benefits will be longer term, longer than a 10-year time frame, surely you still need to assess them and account for them in a benefit-cost analysis?

Mr McENCROE — I do not know. I would be just sort of guessing there, I think, so I would rather just not answer that. I do not have a really good answer for that question.

Mr BARBER — So the PricewaterhouseCoopers analysis uses as its jumping off point the outputs of the Meyrick report; is that your testimony?

Mr McENCROE — Yes.

Mr BARBER — And the Meyrick report used as its base, and did not question the assumptions, the data given to it by the port.


Mr McENCROE — Exactly.

Mr BARBER — Is that your testimony?

Mr McENCROE — Exactly.

Mr BARBER — At the time when the PricewaterhouseCoopers report was written — I think it was published in March 2007 — do you know what the estimate of the cost of the project was at that time in project costs, and, if you know, do you know what estimate they were using?

Mr McENCROE — I cannot actually remember the figure; it is in there, I guess. Was it 650?

Mr BARBER — I think that might have been the published figure at the time. I am just wondering if subsequently it turned out that they were using a different number.

Mr McENCROE — No, I think they were using 650 for that, but I need to double-check that.

Mr BARBER — Thanks very much.

The CHAIR — Mr McEncroe, the committee appreciates your making yourself available this morning for the hearing. We will have a draft transcript to you in the next couple of days for any corrections you wish to make.

Witness withdrew.






Members




Substituted members


Staff


Witnesses

Ms J. Warfe, president,

Mr B. Robinson,

Mr G. Howard, and

Ms J. Muir, Blue Wedges Coalition.


The CHAIR — I reopen the select committee on the finance and public administration hearing into Port Phillip Bay channel deepening project. I welcome representatives from the Blue Wedges Coalition: Ms Jenny Warfe, president; Mr Barry Robinson; Mr Gary Howard; and Ms Judith Muir.

All evidence taken this afternoon is being take under the provisions of the Parliamentary Committees Act and the standing orders of the Legislative Council and is protected by parliamentary privilege. Any comments made outside the precincts of the hearing are not so protected. All evidence is being recorded, and you will receive a proof version of the Hansard transcript in the next couple of days. I now invite you to make an opening statement of no more than 5 to 10 minutes, or we could proceed straight to questions.

Ms WARFE — I do have an opening statement of a few minutes. I also have a PowerPoint presentation, which might stimulate more questions, but we will see how we go with our opening comments.

The CHAIR — The committee has received the written submission, so we are keen to proceed to questions. So if you could keep it to no more than 10 minutes, please.

Ms WARFE — Okay. We welcome the opportunity of analysing the numerous issues which were specifically excluded from the SEES process, possibly by design. The purported project benefits are based on modelling over a 27-year period, whereas all the costs incurred over that period are not included in the benefit-cost analysis, and the benefits are based purely on assumptions over the life of the project. Barry can speak more about that. The major costs that are excluded are the maintenance of the channels and the rock surveys in the entrance that have come to light very late in the SEES process; adequate monitoring of the toxic dump, we would say; some infrastructure work; and certainly business impacts, which Judy will be able to speak about.

The project benefits are totally reliant on perfect competition — if you want to call it that — and the absence of changes in competition from any other port or any other state, to predict this 97 per cent pass-through of any savings derived from using larger vessels, which is what the project is predicated on. Meyrick in the SEES, however, admits reasonable competition. Reasonable competition to us does not deliver a 97 per cent pass-through of savings. Indeed there is not any evidence that any amount of competition does deliver that unrealistic figure, which is what the project is entirely predicated on — a 97 per cent pass-through of benefits. We would ask where is the evidence that we can expect any of those savings to be passed through, let alone the 97 per cent that is claimed.

The port in its 2004 submission to the ESC review admits that the Victorian public will not be the major beneficiary of channel deepening. It states: … in the light of such significant private benefits and given the large proportion of these benefits that flow to non-Victorians, it is not appropriate for the POMC’s investment program to be funded by Victorian taxpayers.

Gary can speak more about that. But we would note that to date it has been funded by the taxpayer really to about $300 million, if you add in the costs of the assessment process as well as the $150 million allocated in the last budget.

In terms of the discount rate, that is very relevant in terms of an alliance being used for this project, and Barry and Gary can talk more about that. Alliances are generally used in complex or high-risk projects, but this economic analysis used a discount rate appropriate to low-risk investments. Even the panel discussed using an 8 per cent rate rather than a 6 per cent rate as dictated to Meyrick by the Department of Treasury and Finance. If the 8 per cent discount rate is applied instead, this reduces the benefits to $1.4 billion. It certainly knocks a hole in the purported benefits, and there is considerable informed opinion that even 8 per cent is inappropriately low for this project, which Barry can speak about more. Boskalis’s record and their corporate behaviour is pertinent, I think, as outlined in our submissions. That history suggests that high risks are involved and further underscores that a 6 per cent discount rate is inappropriate.

Furthermore, we note that costs are already being increased for shippers by way of the levy for channel deepening in spite of the project justification being to reduce the costs, and already these costs are being passed on to consumers, as is evident in an appendix to our submission. Furthermore, opinions that benefits are substantial are now being revisited, even by people whose work was used to justify the project, and I cite Dr Brain from NIEIR, who said in January of this year that the costs should be revisited. So we would say that if this committee is looking at the real economic impact of this project, it should not rely on artificially low rates dictated by the Department of Treasury and Finance; nor is it appropriate for government to dictate to an independent consultant which discount rates should be used to assess a higher risk project, and Gary can speak more about that. We would say Meyrick


was doing the bidding of the Department of Treasury and Finance and he has not provided independent analysis, at least in relation to the use of an appropriate discount rate. In his response to our written questions at the SEES inquiry in July 2007, he stated in writing that the 6 per cent discount rate was mandated by the Department of Treasury and Finance.

Lastly, I refer to currency fluctuations. Meyrick used the long-term average of 70 cents in his analysis, and it has not been that now for three years or so. His sensitivity analysis using 80 cents reduced the benefits by $176 million. We now have an exchange rate of around 95 cents, and it is heading past parity, so it looks like this project is already under water. Those are our opening comments.

The CHAIR — Thank you. I take you to the issue of discount rates and the reference you made to 6 per cent. Is it not the case, though, that the cases published by the Port of Melbourne in the supplementary EES model 8 per cent and that even at 8 per cent they still suppose a net benefit?

Mr ROBINSON — Chair, it is true that in the sensitivity analysis by Meyrick in the SEES documentation he used a 4 per cent, a 6 per cent and an 8 per cent rate. The point that we are making here is that nowhere in any of the documentation at any stage that I certainly can recollect did he state that the Treasury had mandated that he use the 6 per cent rate. We have heard here earlier today that the lower the rate, the greater the benefit for any particular project. Looking at the figures provided in the table — this is in appendix 4 of the SEES report of Meyrick — on page 53, if we use the rate that is being used here in the left-hand column under revised results, the net present value benefit is $1.936 billion. However, if you use an 8 per cent rate, what we are looking at here is that we come down to a net benefit of $1.4 billion, which is a drop of nearly half a billion dollars. If we go back to the SEES inquiry report on the economics of the project — pages 201 and 202 — on page 201 it states that:

Mr Meyrick has used 6 per cent, the long-term Treasury bond rate, as his discount rate. The Department of Treasury and Finance support this as appropriate to government. In theory, there may be some merit in considering a higher discount rate …

On the next page, it states:

If environmental and social impacts are … tested in the sensitivity analysis, could cover the cost of all likely adverse effects without serious damage to the BCR.

The discount rate they are stating under those conditions is appropriate, but nowhere in this SEES inquiry report — although it has made that statement about an 8 per cent rate — does it state that if you use an 8 per cent rate, all of a sudden you decimate the net present value benefits from $1.9 billion to $1.4 billion. But they do go on to say that they consider that the net present value basis is robust enough ‘to absorb the effects of adverse deviations from key assumptions’. We state that that is not true. It cannot be true where you can take half a billion dollars off and you still say that you have a good net present value basis when you are starting from $1.9 billion. We heard this morning from other advocates that a 7 per cent rate or perhaps an 8 per cent rate could be applicable. I have no doubt that you will hear economists at this inquiry who will be more happy to put a 10 to 12 per cent rate on it, which would definitely put the project under water.

Another point that was made, and I have emphasised this, was that nowhere was it stated that Treasury had mandated a 6 per cent rate until Mr Meyrick, who shall we say was under a bit of pressure when he was doing his response to questions from the SEES inquiry, stated that the use of a real discount rate of 6 per cent was not an independent judgement — bearing in mind he is an independent consultant — made by Meyrick and Associates but was mandated by the Department of Treasury and Finance.

Another point I would make here is that when Mr Hehir, the secretary of Treasury, did his presentation at the SEES, he did not mention two aspects of this project which I believe are relevant seeing that they both come out of his department. One is the discount rate, which Meyrick says was dictated, and the other is the alliance with Boskalis. It is the department of Treasury that sets out the information in relation to the alliance document, which supposedly, and I will mention that later, Boskalis and the Port of Melbourne operate under, the terms of which are unknown. It was outside the terms of reference for the SEES. You can argue the merits of why not. To me, it should have been included. It is a cost, and how can you assess the costs of a project if not all of the costs are in it?

We have got project benefits on an assumption basis out for 27 years, and we maintain that not all the costs are included. In our opinion, the net present value basis ratio, and we have heard all sorts of ratios, is at a cost of $969 billion, and we have already reduced the cost on our assumption to 1.4. Then there has since been a change of currency rates, which is now 95, 96. Looking at the tables, the same tables I mentioned before on the SEES


documentation, there has been a decrease in the rate — and he has used a 70 cent rate. When questioned about that at the SEES inquiry, he said, ‘I have used that because I have taken an average’, and he produced a graph. It has not been at 70 cents for over three years. So we believe there is a further amount to come off the net present value basis on that basis alone. We come down to around about $1 billion worth of costs for $1 billion worth of benefits.

The CHAIR — On the issue of exchange rates, given you are looking at a 30-year time frame, where would you say the estimate should be based, if you are saying that 70 cents is too low?

Mr ROBINSON — I am an ex-banker, and I would not like to make an assumption on that.

The CHAIR — But an assumption has to be made.

Mr ROBINSON — But by the same token, 70 cents in my opinion in the current climate when the SEES was held was far too low.

The CHAIR — But an assumption does have to be made for the purposes of the assessment.

Mr ROBINSON — Okay. I have got a figure here, an assumption of 80 cents, which he has used in his sensitivity basis, so we take another $174 billion off the benefits. So you can argue in terms of whether we use the 70, 80, 90 or parity, but it is certainly not 70.

The CHAIR — A point that Ms Warfe referred to in the introductory comments was that major costs excluded maintenance of the channels. Do you contend that the maintenance costs of the channels will be higher as a consequence of the dredging project, versus maintaining the existing channels? Channels have to be maintained whether they are the newly-dredged channels or the existing channels.

Mr ROBINSON — Perhaps if I could answer that, Chair. I know that the Port of Melbourne and Meyrick contested that it is irrelevant because you have got to do the maintenance dredging over the period, but the amount that is to be dredged in the maintenance period is about equal to the total amount taken out for this particular project, so someone will have to convince me that there is no additional cost involved. I think there is to be and should be an additional cost involved. We also have, shall we say, a cost involved in monitoring the contaminated spoil ground that is being created in the middle of the bay. The contract, the alliance, call it what you will — which we do not know the full details of — with Boskalis, it would appear on the figures provided by the Port of Melbourne, finishes when the dredging is completed, so they are certainly not involved in the monitoring of the contaminated spoil ground. That has to be maintained at least until the period of the project, and this is one of the issues that I mentioned before. We have not included all of the costs for the period of the project.

Ms WARFE — A very significant additional cost, too, is the issue referred to of monitoring the mobile rock that is now going to be in the shipping channel, which was only revealed by the port on the last day of the inquiry basically. There is going to be a shipping hazard in the great ship channel caused by the mobile rock created by the project. The consultant there suggested very regular surveys of that, obviously, otherwise there would be a shipping incident which would add further costs to the environment of the bay and this project. That is potentially a highly significant impact and certainly an ongoing cost to maintain the great ship channel, let alone the fact that it is elementary that the deeper you dig a hole in the sand the more often you have to maintain it.

The CHAIR — I am conscious of the time, and there are a lot of questions from the committee so I will move to Mr Viney.

Mr VINEY — Thank you for your submission, and I appreciate the interest of the range of community groups that you represent in the project. You have talked a lot about the need to include costs that you do not believe have been properly included. Have you had the opportunity to do some detailed analysis of all of those costs that you see, or are you just giving us some examples here? I have not seen you present us with a final NPV, if you like, based on your own assessments.

Mr ROBINSON — I am glad you raised that question. I am also glad that you raised the point that we are a community group. We have been involved in this for the EES and the SEES as a result of our concerns, and our background information is such that we are, I would say, pretty reasonably analytical people, but, no, we have not done any specific surveys.


Ms WARFE — We have done an analysis of just two of the industries in the bay in terms of what benefits they would be providing to the economy by the year 2035 if they also grew at 5 per cent per annum, as the port is claiming that it is going to in its business case. On those figures that I have there, the recreational fishing in the bay currently contributes about $350 million to the Victorian economy annually. By 2035 that would be $1.4 billion per annum. Diving alone — and that is not including any of Judy’s business or any of the other ecotourism-related industries in the bay — contributes currently $60 million. By 2035 that would be $220 million, if they were allowed to grow at 5 per cent per annum until 2035. We draw the analogy there with the channel deepening project, which is contributing at most $2 billion in total over 28 years. That is to the national economy. It has admitted that a proportion of those benefits are not going to be flowing to Victoria anyway, whereas those other two businesses, which we have done that analysis on, are entirely Victorian.

Mr VINEY — Are you suggesting that those industries cannot survive?

Ms WARFE — I am suggesting that they could well be impacted. Even the port admits that recreational fishing could be affected for two to three years post-project — that is, five years in total.

Mr VINEY — Affected, but have you done an assessment of the degree of effect?

Ms WARFE — The port itself did an assessment on the degree of effect for the dive industry. I think you will be addressed by somebody from the dive industry tomorrow, but maybe Judy would like to talk about that.

Ms MUIR — The assessment done by the port was just to say the only impact would be the cost of fuel to take a prospective diver from the original dive site to another dive site. Given that they are dredging most of the area that is involved in the dive site hotspots, if you like, which is the southern end of Port Phillip, where would that be? Perhaps interstate. I think if tourism is displaced, either by perception or by deed and outcome, it is a very long time before it picks up again. If you look at places like Bali, for instance, and the Philippines with coral bleaching and other areas, we know that diving does take a big impact, and tourism is very fickle.

Mr VINEY — But surely it is not your contention that these industries will be destroyed by channel deepening?

Ms MUIR — We are saying they will be affected at more than the cost of just taking somebody somewhere else to dive. The cost of fuel, it was $15 or $25 per person, was the only cost given by the port.

Mr VINEY — For example, what would be the biggest risk to the recreational fishing industry? What is the biggest risk to that industry?

Ms MUIR — Loss of fish stocks.

Mr VINEY — But surely the biggest risk to the recreational fishing industry is commercial fishing. Is that true or not?

Ms WARFE — I do not think so.

Mr VINEY — People in the recreational fishing industry have expressed that view to me. Am I getting the wrong advice?

Ms MUIR — The recreational fishing industry equals the commercial fishing industry outtake and income, in terms of that there are that many recreational fishers, whether they are the person who dangles a line off the end of the pier or whatever, equaling almost the value — or equal to the value — of the commercial fishery. I can give you a ‘for instance’, and it is very recent. In Queenscliff, where we slip our boat each year for its annual maintenance — and we undertook that last month — at the Queenscliff boat harbour there is a personality there in Queenscliff, a barracouta fisherman of many decades, who said that the barracouta fishing total for one boat this season was 18 barracouta whilst the dredging is taking place. It is anecdotal, but it was 18 fish — not boxes; 18 fish. And they bring in, like, 300 boxes a night.

Mr VINEY — Do you agree that there is appropriate commercial use of public assets like Port Phillip Bay? Do you see that there is a commercial value to Port Phillip Bay? Does the coalition agree that there is?


Ms WARFE — Obviously, yes. That slide in itself says that. We are not denying that the port of Melbourne should exist. We are saying that its case for its further demands on the bay and expansion are not well justified.

Mr VINEY — And so do you accept that there is a problem in relation to the increasing propensity for there to be constructed larger vessels which will need access to Port Phillip Bay? Does the coalition agree with that view?

Ms WARFE — I could probably address that better if I went through my presentation, but we are saying, in part, that the port’s shipping projections for the future are not robust either and do not take into account any of the very different future that we are obviously facing. Your government is committed to being proactive about climate change, but climate change is entirely driven by our continued expansion and our continued consumption of goods and all of those things that I am sure you do not need to be told about, which this project is predicated on. This project is predicated on quadrupling the trade through the port by the year 2035, regardless of whether channel deepening goes ahead in fact. As the PricewaterhouseCoopers analysis says, there is going to be the same amount of boxes through here by 2035 regardless of whether channel deepening proceeds or not.

Mr VINEY — So your projection for the future economy is essentially a smaller economy? You think that is the way to deal with climate change — that we have to have a smaller economy.

Ms WARFE — I did not say we had to have a smaller economy. I am saying we have to do things very differently. The economy does not need to continue to grow by 8 per cent in the way that we have grown it in the past, which is by being very demanding on the environment and polluting of the environment.

Mr VINEY — Jenny, we are not going to disagree with that, but I am trying to understand. You are saying that the Port of Melbourne’s projections are wrong because you see that in 30 years time we are going to have a different economy, but you have also said you think we cannot grow at that rate. I take it if it is your view that we cannot grow at the rate, then, as a consequence, you would predict that the Victorian economic activity in 30 years time will be less than it is today — that is your view — or less than we are projecting.

Ms WARFE — Maybe not. We might be doing things very differently to achieve an expansion in the economy, which is not as intensive.

Mr VINEY — It is your contention there will not be a need for the same level of economic activity through the port?

Ms WARFE — Not a need for the same level of the same sort of activity.

Mr HOWARD — In terms of activity, it has been openly admitted by Meyrick at the SEES inquiry that the port of Melbourne with or without channel deepening will continue to grow at the now rates. Now that has been a point that has been made by Meyrick at the SEES hearing and what I have heard today about the port of Melbourne disappearing is just frankly crap — that is the only word for it. That is from their own experts, that the port of Melbourne will continue to grow at the present rate with or without channel deepening.

Mr VINEY — Can I ask you about the assessments that we have also heard in relation to the costs of not proceeding: does your group have a view about that analysis that has been done?

Mr HOWARD — I would actually like to step back a point here if I could. We have heard a fair bit about discount rates and what is appropriate and what is not, but I think there is a more critical factor to be determined first. The benefits as calculated by the Port of Melbourne are basically nearly all reductions in shipping costs. They are earned by international shipping companies. The Port of Melbourne and their experts have put forward a case where they reckon that 95 per cent of those cost savings will be passed back to the Victorian economy. I will refer to my notes and go through it. Meyrick on page 56 of the SEES channel deepening cost-benefit analysis states that:

In the first instance, the benefits will flow to shipowners. However, because competition in the market for shipping services is reasonably competitive, the benefits (or at least the vast majority of them) will be passed on to those who pay for the shipping services.

The benefits have been calculated on the basis that international shipping companies will pass on 95 per cent of the cost saving to those that pay for the shipping services. This percentage is a critical variance that determines the viability of the project, yet to date there has been a blanket acceptance of this figure of 95 per cent. By way of


example, how viable is the project if only 25 per cent or 50 per cent of the cost savings are passed on to those who pay for the shipping services? One must question whether it is financially responsible to assess the viability of a billion-dollar project on the basis of international shipping companies passing on 95 per cent of cost savings.

More importantly, can the Port of Melbourne guarantee that 95 per cent of cost saving benefits will be passed on to the Victorian and Australian interests? Clearly the answer is no. The critical variance that determines the economic viability of the channel deepening project is the extent to which international shipping companies will pass on the cost savings to Victorian and Australian interests. Not even God can predict or quantify the extent or percentage of the cost savings over a period of 26 years that may include varying supply-demand cycles, commonly known as maritime cycle. I think it is a joke.

Mr VINEY — Can you think of any business project or infrastructure projects that are determined without there being some assumptions, though?

Mr HOWARD — This is an enormously critical variance. This is the only case that I could probably recall where the initial incident benefit goes to a non-resident.

The CHAIR — We are going to have to move on, Mr Viney.

Mr HALL — Thanks for coming in and making this presentation today; we appreciate that. I want to start on that issue of cost savings when we are saying that 95 per cent of the cost savings are going to be directly paid to the shipping companies, or will be achieved by the shipping companies. Are there really going to be cost savings once you add the additional costs of delivery and the repayment for the project back onto those owners? Do you believe that there are going to be cost savings to them?

Mr HOWARD — No, I think, in terms of the local economy, no, the costs are going up. The Port of Melbourne has been advocating cost reductions — I will cover that later if I get time to speak on my paper — they have been advocating cost savings when in fact costs are going up. There are a couple of documents here I would like to table. I think it has been referred to already, the Port of Melbourne Corporation’s response to the Essential Services Commission port regulation issues review paper, and also pricing policy, which I think sets down certain rates of return. Could I possibly table these?

The CHAIR — Thank you, Mr Howard.

Mr HOWARD — I think if you read the statements made by the Port of Melbourne in response to that, and compare them with the documents on what has been said at the other hearings, you will see a big variance in what has been said.

Just while on the question of cost passing, another submitter at this inquiry, Frank Beaufort, who is president, Australian Peak Shippers Association, the designated peak shippers body, stated that:

… dredging would bring no benefits to exporters. It would only boost the profits of some … international shipping companies.

That was in the Age on 21 February 2005.

Mr HALL — What is his basis of the claim that there will be no benefit to exporters?

Mr HOWARD — He believes that the international shipping companies that derive these benefits from cost savings will not pass them back to the Australian economy. Given the nature and behaviour of shipping companies over the long period of time, frankly, I agree with him. When I read that article I actually phoned Frank Beaufort and he told me that not one dollar would come back to the Australian economy. He is actually presenting at this inquiry. I would also go on to say in terms of the submission he has put in, Frank Beaufort has also stated in a submission to this inquiry that although shippers believe they must contribute to the costs of the project, it is the owners of these large container vessels who stand to benefit significantly from the greater depths who should contribute their share of the cost. It is quite clear.

I do not know how we have got to this point when there has been a blind acceptance that 95 per cent of the benefits of international shipping companies will be passed back to the local economy. It has been argued that it happens through competition. Competition has also been affected. There have been megamergers in the shipping industry.


Meyrick himself in a paper believes that in the year 2025 we will probably be dealing with two major shipping companies. Some competition! I think it is a nonsense.

The CHAIR — Thank you. Mr Barber.

Mr BARBER — No thanks, Chair. I think we are doing fine. I will save questions for follow-up.

Mr TEE — I just want to revisit the issue of the discount rate, and I think you have a concern about the 6 per cent and whether that was high enough. We have a submission — and I think they are giving evidence today — from the Economists@Large & Associates. They have a document and I do not know if you have seen it but what they essentially say is that a discount rate of as high as 14 per cent will give you a positive net present value. My question is, have you seen that and do you agree that conclusion that they have reached?

Mr ROBINSON — What rate has been mentioned?

Mr TEE — They say essentially that you are in a positive right up to and including 14 per cent. At 16 per cent you then start looking at a negative.

Mr ROBINSON — I cannot comment on that because I am not an economist and they are. You have heard from economists this morning. Far be it from me to dispute what they are saying, but I remember that last year at the SEES the rates put forward by Francis Grey, Economists@Large, with a 10 per cent discount rate I thought showed the project to be close to underwater. So that is something perhaps you can take up directly with him.

Mr TEE — Yes. This is Francis Grey and their table shows 14 per cent but they are giving this evidence this afternoon.

Mr ROBINSON — I am older than him and my memory would not be as good.

Mr TEE — Thank you. The other issue is that what you are saying, as I understand, is that if you take into account all the costs you are effectively spending $1 billion to make $1 billion. I suppose the concerns I have with that are numerous, but the other evidence we have had today from the Victorian Freight and Logistics Council and from Victorian Employers Chamber of Commerce and Industry says that the figures that the port have used are hopelessly conservative. They say that the real benefits are in the ballpark of $15 billion or the cost of not proceeding are around $8 billion. It just seems to me from your evidence that you are sort of chipping away at bits and pieces of port’s modelling but the real picture if you believe VECCI and the freight and logistics council is that it is pretty academic because the benefits are so large, really.

Mr ROBINSON — All right. I will answer that one. It is an interesting one but I think we have to bear in mind that, with due respect to the two parties that you mention, they do have a vested interest. From my point of view and from Blue Wedges point of view we have not still included all the costs. One of the issues that gives us great concern is the little thing called the alliance agreement with Boskalis which was put in place in July 2004 before they did a trial dredge. Questions were asked at the EES inquiry about what is the make-up of this alliance, what does it consist of? In part H in the Port of Melbourne’s response they listed issues relating to the alliance which is in very brief point form: 7.30, 7.31, 7.32, in which issues such as risk and risk sharing were mentioned. Profit was also mentioned. Our concern was, what does this really relate to in dollar terms in the project? It is interesting, and again I mention Mr Hehir’s submission to the SEES inquiry where the alliance was not mentioned. The alliance is a Treasury document. It is put forward under its umbrella and — —

Mr TEE — Sorry, my question was really do you disagree with the economic analysis that VECCI and the freight and logistics council have done?

Mr ROBINSON — Shall we say that I do not have the knowledge to compete with their knowledge. I think it is a question, with due respect to the committee, that should be asked to the economists who will be appearing later on in this inquiry.

Mr TEE — I know. Their economist appeared this morning.

Mr ROBINSON — But I would still like to make a point with due respect in relation to the alliance, because the alliance is — —


Mr TEE — Someone else might ask a question about the alliance. I have only one more question to go.

Mr ROBINSON — I am sorry. Right.

Mr TEE — I am sorry. If there is someone else — I am happy to hear it. Just the other issue and it came from what Mr Howard was saying, and really as I understand your evidence, Mr Howard, it is that the costs are not really being passed on. Savings will be gobbled up, as it were, by the shipping companies rather than passed on ultimately, I suspect, to the consumer.

Mr HOWARD — Correct.

Mr TEE — And again as I understood the evidence from the business community — from the VECCIs of the group — really what they were saying is costs are an issue and they would prefer government — much to my friends’ annoyance here — to put in more but ultimately their problem is they just cannot get the ships in. For them the bigger picture issue is just not getting access and I think the figures that they used, which they got from the port, were 44 per cent of ships just could not get it and that really was a problem for them rather than the issue of cost which they ultimately would have to wear.

Mr HOWARD — Sorry, can I just cut across. In terms of — —

Ms WARFE — Sorry, can I just put onto the end of that that what they did not make clear this morning was that that $15 billion worth of the benefits they were talking about are indirect benefits. They are not nor have we looked at the other side of what the indirect costs are of this project, like having a toxic dump in the bay.

Mr TEE — To be fair, I think they were clear it was indirect, or perhaps I was not that clear when I framed the question but they were quite clear that they were looking at indirect benefits, that is right.

Mr HOWARD — Just on the question of 44 per cent, I think — whilst I hate to keep quoting Frank Beaufort — in response to 30 per cent he previously stated that he believed the figure was more likely 15 per cent. And we do have the question as to how empties get moved around the world. As you have heard today, I think the empties are about 20 per cent. The perfect time to take empties out is on ships that are partly laden, so I do not know whether that cost factor has been factored in.

Ms WARFE — This slide that I have gives you the facts as they were in 2005–06 reporting year. Of 1356 container ships that used the port, only 2 per cent of those elected to use tide assistance; and 30 per cent of them were designed to draw more than 11.6 metres if they were required to, but only 2 per cent of them did. Only 3 per cent of the ships with a draught over 11.6 metres were exiting and less than 1 per cent were coming in. As was said earlier, 20 per cent of container trade is empty containers and 40 per cent of exports are empty containers. Claims that over 40 per cent of ships cannot load to capacity are misleading because that is really talking about some theoretical figure of potentially being draught constrained. If you look at the port’s media releases now, they do use the word ‘potentially’ about draught constrained — if there were goods to be put on them, they may be constrained by the draught.

The other point there is that Murray Goulburn, our largest exporter through the port, exports 23 000 containers per annum, approximately. That is, I would note, about six full ships of current capacity, per annum. I would say that there is not any good evidence that importers or exporters or farmers do need channel deepening and that the facts are being distorted at the moment.

Mr HOWARD — If I could just add to what I said a moment ago, I have actually found the reference now. It is an article, ‘Exporters break ranks on bay dredging plan’:

Mr Beaufort challenged shipping industry figures — often used by the Port of Melbourne to justify the project — that 30 per cent of ships calling to Melbourne must be underloaded to avoid hitting the bay floor.

‘That is an exaggeration for press purposes, to make it sound more alarming,’ he said. ‘It would be more like 15 per cent’.

If I can table that press article.

Mr TEE — My final question, just coming back: if it is not necessary, why is it that we have the VFF and the business community banging down the doors to get the dredging done? Are they being misled? Why is it that these groups are so passionate about the dredging if it is not needed?


Ms WARFE — Well, I can only speculate about that, that perhaps they are doing the bidding of government who are committed to an infrastructure project for the sake of being committed to an infrastructure project, which in my view is now outmoded and should be rethought with a view to the 21st century, not the middle of the 20th century.

Mr TEE — I suspect that if they are committed to infrastructure around transport they would prefer to spend the money on trains but, anyway, that is an argument for another day.

Mr HOWARD — We can’t get even a decent bus service down our way.

Mr GUY — Ms Muir, Polperro Dolphin Swims sounds like a small business, to me.

Ms MUIR — It is a microbusiness. I do not come here to represent my own business but rather a geographic area of the Mornington Peninsula, which will be hugely impacted if the effects of the Channel Deepening Project did have the consequences that we so fear from a project of this size, a project of this size that has not been done anywhere else in the world. We do fear that if there is even a perception of harm to the bay there will be a downturn in ecotourism, and this is one of the largest and exponentially growing businesses in tourism. People are seeking that which is getting harder and harder to find, a green experience. Tourism should really all be a green experience, I suppose. We also know that there is a multiplier effect. If you look at the region that I am in, it is geographically constrained. We cannot go somewhere else for a job. We have sea on 190 kilometres of our 210-kilometre circumference, if you like, around there and we have a 5-kilometre edge with Frankston, which does not offer any potential for employment for anybody displaced on the peninsula. In the geography of jobs study it does say that this is the most self-contained area for employment. Most of the jobs on the peninsula — 80 per cent of them — are taken up by locals and the largest employment sector is tourism, and that is from the council’s own study.

I understand from Meyrick, when I asked him, he said, ‘Well, we just say if we spend $1 million here and you make $1.2 million and somewhere else it will make $1.5 million, we don’t care where the losses are as long as the gains are somewhere in the state’. I just think that we do not actually understand the losses that will come from the multiplier effect. We source wetsuits, as do most dive industries, in Dandenong, where they make Australian-made products, locally made goods — this is an example of another industry affected — and there is also the example of our local ships chandlery. There is so much that is sourced locally from a very diverse and collection of microbusinesses. Tourism in Victoria is all about microbusinesses — it is not about large businesses — but collectively the micro-businesses are important. The Mornington Peninsula has the tourism sector as the largest employment provider.

Mr GUY — That is very good. I had only one question — —

Ms MUIR — I am glad I amuse you. I do not know why somebody should be — —

Mr GUY — I am not amused. I have not actually asked the question as yet. I just wanted to more or less know from you, given that this government was elected on a platform that they consulted — that no-one consults except for these guys — I just wanted to know from you, as an operator of a small business, how much consultation you had as the operator of a business before the decision was made.

Ms MUIR — We had a lot of delivery of information. If consultation is a two-way street, then that was limited, initially. That was badly handled. Later on, I was invited to represent on the channel deepening stakeholders committee and that took in a number of people, including myself, as representing tourism in the local area and in the maritime region. Consultation was not the name of the game. It was actually delivery of information on a project that was being imposed, rather than listening to the applied knowledge of people who work on and around Port Phillip and because the project is multidimensional in its effects. I suppose my background is largely environmental rather than economics but we do not have the potential to grow –the potential exists but is limited by the imposition of the project, because we have the constraints of possible threats of the CDP to the industry. This has been five years — five years of not being allowed to grow, and we are on the crest of, really, international iconic status, with being the only industrialised city in the world where you can go and swim with wild dolphins. That is a bit of a drawcard. It is also a hook to a whole region. So what might be seen as a microbusiness really has a fairly large impact, if it is extrapolated across a region.

Mr GUY — Thank you.


The CHAIR — Just on that point, Ms Muir, if the project had not been delayed for five years through objections, surely you would not have had that five-year hiatus on being able to grow?

Ms MUIR — And we may not have one shred of tourism or environment left. I am very glad that the processes allowed us to have a voice one way or another, and I can only hope we get the best outcome out of this. But it would be foolish to say in a democracy that there would not be a chance for people in this enlightened day and age to voice concerns about the imposition of a project of these dimensions, a project of dimensions unheard of anywhere else in the world, and while we know that where they have done channel deepening there have been large consequences that have severely impacted local economies in one way or another. I would think that would have been a worse outcome than delaying the channel deepening project for five years for due consideration.

Mr ROBINSON — Chair, in relation to that, because the panel handed down 137 recommendations for further work to be done because they were not happy with the results at that inquiry, that is what led to the SEES. It could be contested that if the Port of Melbourne had done its job properly in the first place we would not have had an SEES and we would not be here today either.

The CHAIR — Thank you, Mr Robinson.

Mr BARBER — A final question. For the benefit of Mr Howard I have the Essential Services Commission’s Ports Monitoring Report 2005–06. I do not know whether that was one of the documents you passed up before. It is at table 4.1 where the ESC says that the proportion of vessels visiting the port that are draught-constrained is 14.1 per cent. I just have a quick question for Mr Robinson. Given that the nature of the alliance agreement between the port and — —

Mr TEE — You have got your alliance question.

Mr BARBER — And Boskalis is one of our terms of reference, what questions should we be asking if we were to get a look at that alliance agreement which you have not?

Mr ROBINSON — All right. One of the issues we have got is the costs of the project. In my opinion the costs of the project are hidden to a large extent in the Boskalis alliance agreement because that is where the majority of the costs lie, and they are all commercial in confidence. How can you come up with the cost of a project if you cannot delve and sustain and put forward the facts for dissemination and transparency? The department’s guide states:

Project alliancing should generally only be considered in the delivery of complex and high-risk infrastructure projects, where risks are unpredictable and best managed collectively.

For some time they have been telling us there is no risk. If there is no risk why are we using an alliance? The other point that comes out of the alliance — —

Mr BARBER — If there is a high risk then there is a high discount rate.

Mr ROBINSON — That is dead right. You cannot have it both ways. They are having a bit each way, and at the moment they are on a winner on both, and they should not be.

One of the issues that comes out of the Project Alliancing Practitioners’ Guide — their words not mine is ‘the absence of legal recourse between participants, except in the event of wilful default and acts of insolvency’. Another point says that ‘There is no cap on the potential cost of the project’ — their words not mine. And yet here we have the major cost of an infrastructure project which has not been subject to scrutiny.

I asked many questions at the SEES inquiry about Boskalis and, as we well know, it was outside its terms. The questions were answered in the main by the Port of Melbourne. We had a dredging alliance in place when they did the trial dredge in the entrance, and one of the major issues I asked was whether Boskalis was subject to a penalty for the damage they caused in doing the trial dredge? No. Why not? It was outside the terms of the alliance. The alliance only referred to the capital dredging program. My question is: how many alliances are there? What are the terms and conditions? If it goes pear-shaped, who picks up the tab? They are potentially high costs which would blow this project completely out of the water.


Ms WARFE — Particularly given the history of Boskalis’s activities around the world, which are documented in our submission.

Mr HOWARD — Excuse me.

The CHAIR — Mr Howard?

Mr HOWARD — Can I just get in one point here? I know you have been talking about comparing the charges in each of the ports. It is not directly related to charges, but I came across another article, once again from Frank Beaufort, who seems to be well involved in shipping matters. His comments are in relation to a previous chairman of the Port of Melbourne saying that Melbourne is the lowest-priced port in Australia. Admittedly the Port of Melbourne Corporation’s charges are competitive, but when one adds to these charges the cost of the 4-hour pilotage up and down the bay and the high cost of tugs up and down the Yarra River, the cost of bringing a ship into Melbourne is more than bringing one into Brisbane, Sydney, Adelaide or Fremantle.


Mr HOWARD — So far as going up and down the bay it is.

The CHAIR — The committee appreciates your attendance here this afternoon, and the evidence you have given, as well as your substantial written submission which I found very detailed. We will have a draft version of the transcript to you in the next couple of days for any corrections you wish to make. The committee appreciates your efforts.

Mr HOWARD — Thank you for hearing us.

Witnesses withdrew.






Members




Substituted members


Staff


Witnesses

Mr S. Ramsay, president, and

Mr G. Ford, executive manager, policy, Victorian Farmers Federation.


The CHAIR — I welcome Simon Ramsay, the president of the Victorian Farmers Federation, and Mr Graeme Ford, the executive manager, policy. All evidence taken at this hearing is protected by parliamentary privilege as provided by the Constitution Act 1975 and further subject to the provision of the Legislative Council standing orders. Any comments made outside the precincts of this hearing are not protected by parliamentary privilege. All evidence is being recorded by Hansard. Witnesses will be provided with a proof version of the transcript in the next couple of days. I now invite you to make an opening statement, if you would like, and then we will proceed to questions.

Mr RAMSAY — Thank you, Chair. If it is all right with you, I would also like to invite Graeme Ford to make supplementary comments as we go along. I will just make a quick statement.

Obviously given agriculture is the largest exporter out of the port of Melbourne we have a considerable interest in seeking full potential benefits of sea freight of our export food production into international markets. The channel deepening project will ensure the port of Melbourne continues to be Australia’s premier trade and transport hub. Melbourne is the largest container port in Australia and handles nearly 40 per cent of the nation’s container trade, worth about $70 billion, employing 80 000 people directly and indirectly generating $5.4 billion worth of economic benefit annually. As such Melbourne cannot survive with a medium-sized port, and that is what we have at the moment. In a globalised world, scale is everything. Trade volumes driven by India and China through Australian container ports will increase by 66 per cent over the next eight years.

As I said, agriculture is the single largest exporter out of the port of Melbourne. The project is economically vital to Victoria’s farming community and is crucial in generating economic activity to country Victoria. The agricultural industry generates one-third of Victoria’s exports, which equates to $7.6 billion. The channel deepening project will ensure that the port of Melbourne continues to be Australia’s premier trade and transport hub. It is estimated this project will generate economic benefit in excess of $2 billion to the Victorian economy over the next 30 years. The Victorian Farmers Federation is a strong supporter of the government’s position to deepen the channel and improve the facilities. Deepening the channel will provide large container ships access into the port of Melbourne and is vital for the agricultural sector to remain internationally competitive. Per day on average the port handles 10 000 tonnes of agricultural produce, 2400 tonnes of dairy product and 2200 tonnes of fruit and vegetables. It is vital that the next generation of shipping is able to access the port of Melbourne, allowing the farming community to deliver the world-class products that we produce to the rest of the world as efficiently and as competitively as possible.

Current depths prevent around 30 per cent of container ships from loading to full capacity, and this figure will accelerate to 50 per cent by 2010 as international shipping trends to larger, more cost-efficient vessels. Shipping Australia estimates that each container ship loses $400 000 when it is unable to enter or leave the port fully laden. Uncompetitive shipping costs, as the most efficient ships bypass the port of Melbourne, are one of the costs of doing nothing. Increasing fuel costs will impose greater costs for less efficient ships by doing nothing. Melbourne and Victoria will lose industry growth by doing nothing. The VFLC report the net present cost of doing nothing over 20 years will be in the order of $8.5 billion.

The project’s environmental management plan is arguably the most rigorous and comprehensive ever applied to a dredging project anywhere in the world. The VFF is satisfied that the CDP is environmentally sustainable. The rigorous environment effects statement has found there will be no long-term impact on the health of Port Phillip Bay.

The VFF believes the business case is sound. PWC found a $1.7 billion benefit for Australia, with 80 per cent accruing to Victoria. The benefit-cost ratio is 1 to 3, or 3.3 — every dollar invested in the CDP is expected to return over $3 after one year of use. The project will ensure Melbourne remains the most cost-efficient port, per container, in Australia. This will safeguard jobs, keep our exports competitive, drive new investment and industry, and ensure strong, ongoing business confidence in Victoria. The increased costs due to court challenges and the additional environmental studies have not shifted the VFF’s view of the business case. In fact all it has done is cost the taxpayers more money and delayed the project. Yes, there will be some additional container costs. The $40 per TEU additional charge still leaves Melbourne’s rate competitive with the remainder of Australian ports. The VFF believes this charge should only be applied to imports and not exports.


Mr BARBER — What are you, a communist?

The CHAIR — Mr Barber!

Mr RAMSAY — Australian farmers operate in a world market distorted by subsidies. Government support to remove this additional charge is warranted and invited.

Mr GUY — The Greens just called someone a communist!

Mr RAMSAY — It was an interesting statement.

Mr BARBER — I would not dare put that in my policy.

The CHAIR — Thank you, Mr Ramsay.

Mr RAMSAY — Is that recorded?

The CHAIR — Mr Ford, did you want to make some comments?

Mr FORD — No, I think Mr Ramsay has covered it.

The CHAIR — Mr Ramsay, I will pick up at that point. Can you outline the VFF’s reasons for believing the charge should be on imports, incoming containers, and not outgoing containers?

Mr RAMSAY — We believe initially the stevedores will be charged. As I understand, it was always the case at the beginning of the project there was an understanding there would be costs associated with the stevedores on the basis of the funding of this project, or the cost of the project to the Port of Melbourne. It was made very clear to us at the start of the project that costs will be transferred to the stevedores and most likely then transferred to the containers. Invariably we will, as a user of the port, have to carry some of those costs. For Greg’s — I am not sure what it was, an enunciation or whatever — —

Mr VINEY — An interjection.

Mr RAMSAY — We believe a fair equity might well be — and I must say we have not canvassed this with our full membership, but it seems to me a reasonably good idea — that a charge be applied to imports rather than a charge being applied to the producers of this country to help allay some of those costs to the container charge.

The CHAIR — Why would you make the distinction between incoming and outgoing?

Mr RAMSAY — If the costs are applied to export invariably the producers of those exports are going to wear the charge. In our case agriculture will, and in our case the farmers will. We do not mind and we expect to pay some part of the cost of the dredging, but again we also believe, obviously, some of the imports that come in, that have no direct relationship with the producers of this state or country, should wear a significant part of that cost — given that they are actually benefiting by, presumably, the economic benefits of being able to have fully laden ships coming into port.

The CHAIR — But is not everybody who is either bringing a container in or sending a container out benefiting from the project?

Mr RAMSAY — They are, but again I am saying that the cost should be spread away from the producers of the state. I suppose it all depends on how the costs are actually transferred. We are yet to fully understand how the Port of Melbourne is to apply the increase in costs to containers, but we can only assume that the costs will be borne by those using the containers, which will invariably be the producers. Do you want to add any more?

Mr FORD — The only comment I would make is that the agricultural world markets are significantly distorted by subsidies in other countries that are applied to other producers. We have to compete in those markets and adding additional costs such as this — if we can avoid it it would be better for our producers.

The CHAIR — If it cannot be avoided?


Mr FORD — We will have to compete. Australian farmers have always had to compete in these distorted world markets and have always done a remarkable job in doing so.

The CHAIR — It does not shift the VFF’s view of the project?

Mr FORD — No, definitely not.

The CHAIR — The inquiry is primarily about effectively this committee assessing the business case that has been put forward by the Port of Melbourne as to how rigorous it is, et cetera. Does the VFF have a view on the business case as articulated through the supplemental EES process? Do you believe there are issues that have not been picked up or correctly addressed — costs, benefits, or the estimation of those? Have you formed a view on the rigour of that published cost-benefit analysis?

Mr RAMSAY — We have been working closely with the Port of Melbourne ever since this project was implemented and we have raised a number of issues with the Port of Melbourne in relation to costs, particularly, as we have indicated, costs to containers. I suppose it is reasonable to say I think the cost of this project has certainly not ballooned but increased from what it originally was estimated to cost. Nevertheless we thought the business case, the environmental impact studies, the two overlays that have been done and certainly the progress have been well supported by the VFF.

Mr FORD — I think in general in the reviews that we have done of those documents we are more than comfortable that the business case is adequate. It covers the issues that should be covered and covers the issues of our concern.

The CHAIR — I will leave it there for now.

Mr VINEY — The business case has been developed on the basis of some assumptions and forecasts of economic activity in Victoria over the next 20 years. Are you familiar with those forecasts and how that business case is structured, the PricewaterhouseCoopers one and the Meyrick and Associates one? Are you familiar with those forecasts?

Mr FORD — Familiar with — sorry?

Mr VINEY — With the forecasts for the business case — the basis upon which the business case is established?

Mr FORD — Yes.

Mr VINEY — That includes forecasts about projected exports and imports and economic activity in and out of the port. People who are opposed to this project have essentially questioned those assumptions and made suggestions that those assumptions are wildly exaggerated. In particular they have questioned some of the projections in relation to agriculture over the next 20 years. Did you hear that evidence earlier?

Mr FORD — No.

Mr VINEY — Okay. If I can attempt to summarise their views: it was that the projections for grain and other agricultural products are exaggerated in the business case and that climate change and other factors will mean, as I understood it, that there will be a significant decrease in the amount of export of agricultural products. Would that be something you take issue with? What is your view about the future of agriculture in Victoria in particular?

Mr RAMSAY — If we are able to keep the water in our northern regions, we can add vastly to increased production.

Mr VINEY — I might have known that was coming!

Mr RAMSAY — The reality is we believe Victoria has a great opportunity to increase its food production. Obviously the weather is going to impact on production and we cannot forecast that. But what we are hearing is there are world food shortages; what we are hearing is there will be a significant increase in price in world food, and we have a great capacity to produce food here in Australia — very good quality, clean food. We believe, given the right conditions, we can increase production. In fact I think our efficiency in production is


increasing at 4 per cent per year. We believe with the right technology — and we will certainly, given the lifting of the GM moratorium, be able to access new biotechnology — and if we are still able to do that with government policy supporting us, we can increase production and certainly take advantage of the world food shortages globally. The port of Melbourne is an important part of our being able to access international markets at a competitive rate.

Mr VINEY — I guess — picking up on your little aside — that the $2 billion investment in improving irrigation might help in that too. So is it reasonable to assume then that you are comfortable with those projections in terms of the economic activity in relation to agriculture and that you would forecast that, with the general provisos of maintaining water and agricultural innovations, we will be able to maintain those sorts of levels that are predicted?

Mr FORD — I think, as Simon as pointed out, on the trends agricultural has been one of the most innovative industries in Australia. Its productivity grows at a substantial rate, and that is primarily driven by the competitive pressures we face. There is no sign of that slowing down. On the impacts of climate change, yes, it is possible that it will have significant impacts on Victorian agriculture, but on our best guess at the moment — we do not exactly know — I think it is a reasonable foundation to base it on what has happened in the past to predict our growth rates in the future until we have more understanding of the climate change. Even with a significant impact from climate change, given access to some of the new technology, I am not sure that we can still cannot grow significantly. Victoria is a state of many climates; it is not one climate. And, as we have seen over the last few years, particularly last season when the north of the state suffered significantly from a drought, farmers were still able to produce a reasonable crop in some areas, quite remarkably given the levels of rainfall. The southern half of the state had an exceptional year and produced probably the biggest crops and biggest yields of livestock and milk than they have for some time. So we are reasonable comfortable that the forecasts are on a sound basis.

Mr HALL — First of all, thank you, Simon and Graeme, for coming in today. I appreciate your submission. Mindful of the fact that you said that you are not fully sure yet how the Port of Melbourne is going to apportion the costs of this project at each level, do you have any sense or view about what the net cost impact of this project is likely to be on Victorian food producers?

Mr RAMSAY — We have only just received the proposed charges per container from the Port of Melbourne. We have not done a full assessment of how that will spread across the commodities and how that will actually impact financially to a net cost, if you like, on each individual commodity. Because each commodity obviously uses the port in a different way. Certainly I think grain and dairy are probably the more primary commodities using the port. We are yet to discover what the dredging and the passing of the costs of dredging back to the commodities will be, net, to the producer.

Mr FORD — Could it also be — if I might just add — that the way that the infrastructure systems are being shaped up, in particular rail and perhaps more variable harvesting of grain, we might actually see a shift of more grain from bulk grain transport to containerised grain as well. Those mixes will also impact upon the cost per container unit. That could actually significantly increase the container units, if that occurs. We have already seen over the last probably 10 to 15 years fair growth in grain by container as opposed to bulk because of the niche markets that are being developed.

Mr HALL — For our actual food producers in Victoria that cost benefit may not be nailed down completely yet, but I think from what your submission is saying you see a great opportunity for your members in respect of this project. Perhaps you might want to elaborate on the opportunity benefits this project offers food producers in Victoria.

Mr RAMSAY — We in our submission and in my statement just a few minutes ago suggested there would be a 1 to 3 benefit. So we are seeing a triple benefit to agriculture in being to allow ships fully laden to come in and out of the port of Melbourne. We have not made those figures up; they are figures that have been provided to us in an economic feasibility study on the benefit to the Victorian producer in relation to supporting this project. We have been very mindful that it is an expensive project. The environmental issues aside, what is the benefit to the Victorian farmer? The analysis in the report that we have got back says that we have a net benefit of 1 to 3, which we believe is significant.

Mr HALL — Who undertook that study for you, Simon?

Mr RAMSAY — I have to refer to Graeme.


Mr FORD — That is the information in the business case provided by the PricewaterhouseCoopers report. We have no reason to doubt those numbers.

Mr BARBER — That study came out in 2007; you guys were signing on to this project right back at the beginning, weren’t you?

Mr FORD — Yes.

Mr BARBER — What material did you examine at that time?

Mr FORD — Anything that improves our efficiency, and we have no doubt that improving the efficiency of sea freight transport is a benefit to agriculture — infrastructure costs, or, sorry, transport costs — —

Mr BARBER — Until you have to pay for it at $35 a container!

Mr FORD — As it turned out from the business case it seems we were right even when we were perhaps making some guesses, but we had to make some guesses when the proposal was put forward. We are not an organisation, which we would perhaps like to be, to be able to undertake our own economic analysis. We based it on how we would view any of these proposals on the principal basis at the start, and we thought as the principles stacked up, yes.

Mr BARBER — So those are the available documents that we have got as well, Meyrick mark 1, 2 and 3, and PricewaterhouseCoopers. That is what you are referring to.

Mr FORD — No, probably the most detailed document we looked at was the 2006 PricewaterhouseCoopers. But as a principle we have always supported improving the transport infrastructure.

Mr BARBER — You say in your submission that current depths prevent around 30 per cent of container ships from loading to full capacity. Where did you get that number from?

Mr FORD — I believe that is also in the PricewaterhouseCoopers report.

Mr BARBER — We heard 44 per cent this morning.

Mr VINEY — It has gone up.

Mr BARBER — It is in the PWC report and you are relying on that report. Of the roughly 2 million TEU that goes through the port now, what proportion of that contains agricultural products?

Mr FORD — The percentage figure is there, isn’t it? It is 40 per cent of the export, isn’t it? I cannot remember the exact figure.

Mr BARBER — In your submission you talk about tonnes. I am just talking in terms of containerised —

Mr RAMSAY — 38 per cent.

Mr FORD — I think he is saying that is tonnes. I am not sure of the exact rate in the number of containers.

Mr BARBER — Okay, but it is important. You have given us figures in terms of tonnes here: 5100 tonnes of cereals, dairy products, fruit and vegetables in your latest handout.

Mr RAMSAY — We said that Melbourne is the largest container port and handles 40 per cent of the nation’s container trade — —

Mr BARBER — Yes.

Mr RAMSAY — And we said we are the largest exporter out of the port of Melbourne.

Mr BARBER — Yes, but what proportion of those containers is agricultural product? That is container movements and I think that is in and out, 2 million.


Mr FORD — It is mainly out because I am not sure of the precise numbers coming in of food.

Mr BARBER — It is not much coming in. So you do not know how many of the TEU is agricultural?

Mr FORD — No.

Mr RAMSAY — We do know it is the largest part, Greg.

Mr BARBER — Of containers?

Mr RAMSAY — Yes.

Mr BARBER — Because when you give me these figures like tonnes of cereals, I am wondering how much of that is bulk rather than containerised. You said before, which was useful, that an increasing proportion of grain is containerised. Do you know much of the 5100 tonnes of cereals is containerised versus bulk?

Mr FORD — No, I would have to —

Mr BARBER — Do you know what proportion of bulk ships are prevented from loading to full capacity and would benefit from this channel deepening?

Mr RAMSAY — I do not have that information here today. I honestly — —

Mr BARBER — But is it something you have examined? Are bulk ships being constrained by the lack of depth in port?

Mr FORD — The large ones would be, yes.

Mr BARBER — They would be. And you are a big user of those bulk ships?

Mr RAMSAY — In agriculture, yes.

Mr BARBER — It is not iron ore going out through Melbourne’s port.

Mr RAMSAY — It is mainly grain.

Mr BARBER — I would like to get those figures if we can. Which of your members do business with the port directly — members of the VFF?

Mr RAMSAY — Directly? Or through the commodity?

Mr BARBER — Who are they who do business with the port directly?

Mr RAMSAY — We mainly do business through the port through agents.

Mr BARBER — Who does that?

Mr RAMSAY — I do not think the local dairy farmer in Cobram deals directly with the Port of Melbourne in moving — —

Mr BARBER — That is what I am asking. So who does?

Mr FORD — Murray Goulburn, which is essentially a cooperative.

Mr RAMSAY — Dairy cooperatives, grain cooperatives, Australian Wheat Board, GrainCorp, Australian Barley Board.

Mr BARBER — So all those big co-ops do business with the port and they are members of you.

Mr FORD — The co-ops themselves are not, but the members of the co-op will be members of the VFF.

Mr BARBER — So the co-ops are not members of you.


Mr FORD — No.

Mr BARBER — The AWB is not a member of you

Mr FORD — No.

Mr BARBER — The grain and barley boards are not members of you.

Mr FORD — No.

Mr BARBER — Now just in terms of these great figures, it depends which one you want to look at, but typically they are projecting 6 to 8 per cent compound growth in container movements over the next 10 to 15 years, possibly out to 30. What is the growth of your production in terms of export as a component of that? Are you also growing at 5 to 6 per cent annually, and do you expect to do so over 30 years?

Mr FORD — I think dairy has been growing at around 8 per cent. Obviously the last few years have had an impact on those growth rates because of the climate.

Mr BARBER — What is the growth over 10 years, 20 years, in dairy export, this is?

Mr FORD — Most of it is export. We have got a very small domestic market. I think it is almost 80 per cent of grain and dairy production that is exported.

Mr BARBER — It has been growing 8 per cent over what period?

Mr FORD — I think for probably 30 years. Again, I do not know off the top of my head.

Mr BARBER — It is important. What about fruit and vegetables? What is the rate of growth of fruit and vegetables exports by ship?

Mr FORD — Again, I do not know. It would be a matter of having a look at the stats.

Mr BARBER — How do you know it is going to keep growing at 8 per cent compound for the next 30 years?

Mr FORD — It has certainly been growing. Whether it will grow at 8 per cent, I do not know.

Mr BARBER — This is the basis of the whole business case that we are discussing here — the rate of growth.

Mr RAMSAY — We have a productivity growth of about 4 to 5 per cent. Obviously as markets open themselves up to our export trade, Greg, we will take the opportunity. Markets open and close almost on a weekly basis. As you know, we are looking at a whole range of markets for our wheat products internationally now. We have done away with a single desk, and obviously there are going to be more traders in the marketplace looking for a whole lot of international markets globally. Again, for dairy you have seen China and India opening up their doors to a lot of food produce, and we see the growth being 30 or 40 per cent in those countries as their standard of living rises and they want to consume more high-quality food. We have seen the Asia-Pacific bowl significantly seeking out Australian produce, and we again see those export countries looking to consume 30 to 40 per cent more of the type of food we produce than we do now. Globally, the doors are open for us to take an opportunity to move into those export markets, and growth could be anywhere from 8 to 50 per cent if we had the capacity to produce food at that rate. Unfortunately, we are still relying on stuff upstairs to actually be able to maximise and optimise those opportunities.

Mr BARBER — That is right. That would certainly explain the last 10 or 20 years of rapid growth with South-East Asia and China. My question for you is about ABARE’s outlook, if you rely on their research: is it 8 per cent compound for the next 30 years?

Mr FORD — It is very positive. I cannot give you the exact number but it is very positive about those opening markets in Asia, particularly China.


Mr BARBER — So in summary you pretty much rely on what is in the PricewaterhouseCoopers and other reports as a basic business case, and you say you support that business case.

Mr RAMSAY — We have also relied on our own RDC companies like Dairy Australia and the Australian Wheat Board to forecast potential production and potential export opportunities. Our peak councils nationally do a significant amount of work and analysis in what is possible in relation to export, what countries might open up their doors, what the potential growth is into those export markets, and we take that into consideration. My understanding today is that the dredging is continuing. The business case was provided. We supported it on the basis that it gave us an opportunity to grow in export markets and be competitive with sea freight. I understand that dredging is not going to stop; I assume it is going ahead, and I am perhaps a little unclear as to why we are delving into the what-ifs in this particular committee in relation to ‘Is the business case sound or is it not?’ and ‘Are we going to maximise the opportunity or are we not?’.

Mr TEE — You are not alone.

Mr VINEY — We are all wondering that.

Mr BARBER — As my final exchange I will give you one good reason why it is important that we delve into it. You are now saying that the $40 charge — but I think it is a $35 charge — per TEU should be removed. I ask you: if it is retained and we do not get these levels of growth, do you think the port can repay its $1 billion cost by levying containers, or will that inevitably lead to higher charges per container, which you will oppose? As a supplementary to that, do you support the ESC and the current model by which prices in the port are set, do you seek to change that and have the minister set prices as occurs in some other ports, or what?

Mr FORD — The ESC — we have been comfortable with that process so far, so I do not think we will be seeking to change that at the moment.

Mr BARBER — But you want to get rid of the $35 fee?

Mr FORD — Well, why wouldn’t we?

Mr BARBER — Yes, I would have thought so. The benefits of this project are so incredibly enormous, but somehow they just cannot quite be captured by actual customers of the port, so everybody should chuck something in the tin.

The CHAIR — Is that a question or a statement, Mr Barber?

Mr BARBER — Sarcasm does not go down real well in Hansard transcripts, I have noticed, when I have read back my own lines.

The CHAIR — No, it does not.

Mr TEE — Does it come across as arrogance?

Mr RAMSAY — The transparency of costs associated with this project and how it will be borne by those users of the port is still a little unclear to us; however, the Port of Melbourne has identified charges that will be applied. We have asked for some transparency in how that will be reflected back to the principal users, which is us. I can assure you, Greg, that if we are not satisfied with the costs that are borne by our industry, we certainly will be strongly advocating that the Port of Melbourne relook at the way they price their container charges.

Mr BARBER — Sharpen up their pencil.

Mr RAMSAY — I do not quite understand the sarcasm. I thought we agreed to support a channel deepening project. The government supported it; it is happening now — I understand they are about 50 per cent of the way through.

Mr BARBER — Who pays?

Mr RAMSAY — Who pays?

Mr BARBER — Who is going to pay for it?


Mr RAMSAY — We are all going to pay because we are all the beneficiaries. You will be a beneficiary as you chomp away on your steak each night and your chips — to add a good competitive foodstuff. You are supporting the farmers who are actually growing the food, and you are trying to make us more — —

Mr VINEY — And he has imported a hybrid car.

Mr BARBER — But you want to levy tractors as they come in over the docks.

Mr RAMSAY — We do not want to levy tractors. We suggested that maybe a charge be applied to those imports to share the cost — —

Mr BARBER — Does fertiliser come over the docks as an import?

Mr RAMSAY — Not as a container.

Mr BARBER — Not in a container.

Mr RAMSAY — It tends to be more bulk.

Mr TEE — Irrespective of anything in PricewaterhouseCoopers’ report, I take it that your evidence is that in terms of the use of the port for exports you have got a very positive outlook for the next 5 to 10 years in terms of opening markets. Is that right? Is that your evidence?

Mr RAMSAY — We have. In fact we have a Premier who is very supportive of looking at and encouraging export markets, new and old, and of regional Victoria taking advantage of that. Unfortunately we are constricted by the weather. A business case always provides estimates in targets, and I cannot think of any project anywhere around Melbourne that has properly met its targets anywhere in relation to its business case or plan. But certainly from our point of view the estimates are reasonable if we have reasonable seasons so that we can actually take advantage of the 4 per cent productivity growth that we do every year. In fact I think the productivity growth in agriculture is higher than in any other industry in Australia.

Mr TEE — The previous witnesses were from the Blue Wedges coalition. Their evidence was that farmers really do not need channel deepening. I asked Ms Warfe, the president, why then were groups such as yourselves so passionately advocating for channel deepening. She said that you were simply doing the government’s bidding. I wonder if you would care to comment on that?

Mr RAMSAY — It was a stupid statement, really. If anyone had seen what has happened in the last 24 hours, I think they would accept that I am certainly not an advocate for the government, particularly on a range of water policies. That is just nonsensical because we have always been strong supporters of government policy that supports farmers and regional Victoria. In this case we see significant benefits in having ships coming into the port of Melbourne that can be fully laden in and out, and trade competitively. Melbourne we see as an important hub. Obviously as Victorian farmers we would like to see Melbourne retain its international competitiveness in sea freight, and we work on the basis that this will be a prime benefit for the agricultural sector.

The CHAIR — Thank you. Mr Guy?

Mr GUY — I do not wish to take any more of Mr Ramsay’s or Mr Ford’s time, but thank you for coming.

The CHAIR — I would like to go back to the issue — I think Mr Barber raised it — of the proportion of ships that are not able to fully load in and out of the port of Melbourne currently, and you may or may not have an answer to this. Your statement refers to the 30 per cent of container ships which you indicated came through the port of Melbourne which were prevented from loading to full capacity by the current depth. Do you happen to know if that is a theoretical full capacity — i.e., ‘Yes, we accept that 30 per cent cannot load to full capacity, but that does not mean that 30 per cent want to load to full capacity’. Is the number of ships unable to come in and out of the port at the load they would like to come in at 30 per cent, or is that merely a theoretical figure? Do you have any — —

Mr FORD — No, we do not. We are not counting ships and the number of containers on those ships. We are relying on information provided by others.


Mr RAMSAY — Can I just add that it is not just the VFF that has been a supporter of this project.

The CHAIR — No, it is not.

Mr RAMSAY — Nearly all industries associated with sea freight have been strong supporters, and they have done their own analysis on the benefits and the merits of the business case and of the benefits to them. I suspect that through these hearings they have all provided some support of some part of the business case and the merits of it. We have not gone into detail about how many ships come in half-laden, how many go out half-laden, how many half containers there are and asked, ‘How many is that?’, but I suspect you have probably heard a lot of that information.

The CHAIR — We are hearing from the port tomorrow, certainly. Thank you, Mr Ramsay and Mr Ford. The committee appreciates your attendance here this afternoon and your evidence. We will have a draft version of the transcript to you within the next couple of days for any corrections you wish to make, or deletions. Thank you very much.

Committee adjourned.


C O R R E T C E D V E R S I O N


Subcommittee



Members

Mr G. Barber Mr G. Rich-Phillips Mr P. Hall Mr B. Tee


Substituted members


Staff


Witness

Mr F. Grey, principal, Economists@Large & Associates.


The CHAIR — I welcome Mr Francis Grey, principal, Economists@Large & Associates. All evidence taken at this hearing is protected by parliamentary privilege as provided by the Constitution Act 1975 and further subject to the provisions of the Legislative Council standing orders. Any comments made outside the precincts of the hearing are not protected by parliamentary privilege. All evidence is being recorded by Hansard. Witnesses will be provided with a proof version of the transcript in the next couple of days. This hearing is being undertaken by a subcommittee of the standing committee and consists of Mr Barber, Mr Tee and myself. Mr Grey, would you like to make an opening statement or proceed to questions?

Mr GREY — No, I am happy to proceed to questions.

The CHAIR — One of the key issues that has been discussed in the other hearings the committee has had to day and also in your submission is the issue of the discount rate that is applied to the business case as presented by the Port of Melbourne. Would you like to outline your position on what an appropriate discount rate is for this project and why, please?

Mr GREY — Yes. The discount rate is absolutely central to the viability of this project, as you already know, and in our submission we put a couple of graphs on page 2 showing rate of return. In those two graphs we have a red line through the graph, and the red line is the sort of return you would expect from a commercial project.

Mr TEE — My graphs are not coloured, so just bear that in mind.

Mr GREY — Okay. The line, whether black or red, is representative of the commercial rate of return. If you were BHP Billiton or some large corporation and your team came up with a project, they would be expecting you to pull in a real rate of return along the lines of that red line. Taking the first graph on the left, the purple represents the return on investment based on what the SEES document told us we were going to get from this project. So this is the document’s own rate of return. The little bar on the far left — which is the little black one on yours, but the green one on others that are in colour — represents the public sector’s rate of return, 6 per cent, on a project. If this is BHP Billiton and this is a big mining project, the problem is that the gap between the line and the returns in the early years is significant. Basically this is not a commercially viable project in those early years. Obviously later on it does become commercially viable. That is an issue of good commercial judgement.

If the 6 per cent discount rate is the right rate, then this project could be just over the line, so it is above the discount rate. But the issue is: is this a commercial project or is this a government infrastructure project? The way to think about that is that in economics we talk about public sector projects like public railways, for example, and we ask: ‘Why do we fund the public railways? Why don’t we let the private sector fund the railways?’. Government funds them in order to capture the negative externalities that flow from too many people using cars. They subsidise public transport, and when people use public transport they take out the negative externalities, so there is a reason for government to step in and take those negative impacts back and encourage public transport use.

The question then becomes — particularly in the state of Victoria which pioneered, with the CityLink project, for example, private sector partnerships: is this project in the bay effectively a private sector project, or is this really a project with significant negative externalities that require a government to build it? Obviously if you build the CDP, there are negative externalities on the environment from doing that, but are there negative externalities on our society that are eliminated by the government being involved? If the government subsidises the Frankston railway line, we reduce traffic congestion; good, a negative externality is reduced. If the government builds or subsidises the CDP, what is the negative externality that we are missing here? What is the negative externality that is reduced?

Therefore on that logical basis you would argue that actually CDP is a bit like the CityLink tollway project. You could have outsourced it. The private sector could have stepped in and said, ‘Yes, we will build, fund, operate the whole thing’. Because I do not believe there are any negative externalities that are being eliminated by doing the project, though there are many being created by doing it, therefore this project falls really within the category of being a private sector business project and therefore should not be given the opportunity of the government 6 per cent discount rate but really should face the commercial rate appropriate to an infrastructure business of this kind, which is going to be considerably higher than 6 per cent real. That is the fundamental methodological proposition behind a discount rate.

The CHAIR — In making that point, are you suggesting 17 per cent is an appropriate commercial rate?


Mr GREY — We picked 17 per cent only because if you talk in industry, they all say, ‘We want 20 per cent nominal’, so we knocked 3 per cent off for inflation and so it was 17 per cent real. If you were doing a big mining project, for example, you would want 17 per cent and the rest. And the reason is the next part of it. If the government is undertaking this project, and effectively it is a commercial project, then obviously you want to protect your capital position, so you do not start out with a project that is already putting you on the margin. You want some big amount of fat in there so that when things go wrong, as they inevitably do in all projects, you have got plenty of margin so that this project, when it is delivered and operating, is still profitable for the corporate entity or the business entity concerned, and hence the same would apply here.

Whether we would pick 17 per cent for this or not is another matter. If it was my money, I would probably want 17 per cent, because infrastructure has some serious risks associated with it which are a bit understated — or had been until the market went down a bit. They have been a bit understated in this present market. Personally I would probably want 17 per cent, but this is very much also an individual area: what each capitalist, each investor is willing to risk and what return they are willing to accept for the risk that has been given, and the market will give you a reasonable rate of a turn. This is why this 17 per cent matters I think, because if you talk in the markets in general people will say in our company we have this 20 per cent rate of return. If you are looking at the stock market’s rate of return, you are looking at 15 per cent or something over a long period of time. It is that sort of rate of return. So you are going to be looking in that sort of category for a return. Others might want to do for somewhat less, but they are not going to do it at 6 per cent real on a private sector basis.

The CHAIR — And the argument that by virtue of the government being the shareholder, effectively being the investor, doing this project at 6 per cent, you do not believe is valid because there are no externalities that are compensated — —

Mr GREY — That are reduced.

The CHAIR — Reduced by virtue of government engagement.

Mr GREY — That is right, which is what you would expect. We have other examples. CityLink is a fine example. Government said, ‘Okay, here is the framework, tender out the deal’ and the deal was put out. Sydney Airport is privatised. It wants to build a new airport so it has to find it for itself. There are fine examples of this around now that we can use, and obviously good examples on the other side in public infrastructure. We have also quoted in here, as you probably read, the Victorian government’s own guide on discount rates, which I think also indicated those crucial elements. It had two criteria for the discount rate. Firstly, it indicated the discount rate should not be just the same rate for every project. There needs to be an individual rate chosen for each project; otherwise, as it says here, all the projects are going to have the same discount rate and yet some are highly risky and some are not. You are obviously privileging one type of project, a risky project, over another project to have a flat rate. We would have expected on the government’s guidelines that it chose an appropriate discount rate for this project and justified that in its documentation is well. Why it has chosen that rate — —

The CHAIR — Yes.

Mr GREY — Which we have not seen. Then obviously the second point that was made in the government’s own guidelines was that this particularly matters in projects that are big or when they are unique or have unusual systematic risk, and I think the CDP falls into both of those categories.

The CHAIR — If you were to apply your notional 17 per cent discount rate to the business case, what would the result be?

Mr GREY — This project would be uneconomic.

The CHAIR — By what magnitude? Have you actually plugged the numbers?

Mr GREY — That is why we did this particular — —

If we go back to page 2 because economics is such a messy, complex area it is hard for people to get their heads around it. We try to encourage more people getting their heads around it in the public interest at the very least. The impact is that effectively this project’s benefits would vanish in here because in essence what you are saying is there is no return. All we argued at a minimum was delay the project while you see where your return figures go.


With that high rate of return, we are thinking you have a lot of time sitting around waiting for something that may not turn up in terms of treasure delivered to the Treasury on a mat in this project. So therefore delay and we would cheekily suggest you invest it in an indexed fund on the market somewhere and you will grow your capital and by the time you come to do the project you can afford two CDPs, not one. That is a real opportunity cost that the public sector faces in all its decisions: that money spent on this sort of thing could be money spent on other things obviously, whether they are commercial projects or whether they are public sector projects and all the benefits that they entail. A simple argument is those lines on this graph represent your return on your bank account. There is a simple way to think about it. The question is: when the Commonwealth Bank is offering me 7 per cent on my cash at the moment, would I put it into the CDP for 6 per cent, given I am not getting any negative externality benefit like a negative externality reduction and I am getting a lot of negative externality additions — for example, the environmental impact, grief, the whole works to go with it. And that is before we get to risk as well, which is another issue around this. It is a high cyclical industry and therefore any investor would want a risk premium because if we hit a recession in the next four years they could be sitting on that when they are not getting their return and it starts to go further back.

The CHAIR — What comment would you offer on the issue of the business case for this project which has a long time frame of 30 years? One of the issues that has come up through the hearings today is picking particular assumptions, an exchange rate, a discount rate at any point in time. What comment would you offer on that issue? The Treasury would argue that its 6 per cent discount rate for its reasons was appropriate when it was chosen. How would you argue that is appropriate over 30 years vis-a-vis short-term shifts, and what is not appropriate?

Mr GREY — I think what you are asking there is taking a 6 per cent discount rate, over time the world changes and these rates move and therefore things change. On a discount rate that is one thing. In the universe of economics there are very few things that are pinned down with any precision, but the real discount rate that most developed economies would apply is relatively well known in terms of government expenditure and it is not surprising that it is around 6 per cent. The real rate that the Treasury uses for its internal processes I would expect would probably be — barring major economic catastrophes or something — the same over the next 30 years. If you look back over time, except for some unusual periods like the 1970s, that has pretty much probably always been the case. For the other variables though you obviously need to have a well-argued case for the variables that you pick and to do your sensitivity analysis around them in a well-structured way. We have had limited resources to throw at this, so we have focused on what I think is the elephant in the boardroom, which is the discount rate, to save it. But other issues are in there as well. We could add to that case by going to these other variables, but the discount rate I think needs to be clarified before we can go further.

The CHAIR — Do you have any comment to make on the exchange rate? We have heard this project was based on a 70 cents exchange rate as the base case, 80 cents on the sensitivity analysis and we are now 95 cents to the US dollar. Would you have your view on whether that 70 cents in the dollar is appropriate over that time frame?

Mr GREY — I would be inclined not to offer an observation. The reason being that on the benefits accruing to the ship owners, the argument is that those benefits are paid back to the people of Melbourne via cheaper shipping rates, both in and out, and the people of Melbourne are — as they should be — exporters and importers, so either direction is not going to matter overly much. The issue is back at the discount rate for exchange rates. I do not think exchange rates are significant in here for the moment.

Mr BARBER — Everything that we know about national competition policy, corporatisation of this port, the legislation under which it operates and the other sorts of strictures that are put on it suggest that the port is a commercial entity and is expected to operate as such; would you agree with that?

Mr GREY — Absolutely. That is absolutely correct.

Mr BARBER — Now, as far as we know, the full costs of this thing are being borne by the port — they are the project manager and operator — taking out the money that was given to them for the SEES process. So they are running the project. Since there has been no announcement from the government or anybody else that they are going to put in taxpayer funds, as far as we know this project has to be paid back by levies on port users. That makes it look more and more like a commercial project, doesn’t it?

Mr GREY — Yes. But they did not borrow their money at commercial rates.


Mr BARBER — We will come to that in a sec. Explain that: they did not create a bond issue, in other words?

Mr GREY — No, they have not done it yet and I assume at some point it is going to have to be financed in some way. Take, as an example, I used to work in the commonwealth Treasury in the 1980s, when the Keating government brought in a lot of this stuff about privatising government business enterprises and commercialising the remaining GBEs that were under government control. So the idea was to level the playing field between these GBEs and the private sector and stop giving them free kicks and distorting the whole investment landscape. Therefore the port of Melbourne is absolutely in this category.

Under the Keating government’s arrangements of those days GBEs would borrow money using the government as their source — the government standing behind them — and the government could go out to the market and borrow money at very low rates, because they were the government, and the federal Treasury of those days would actually charge a premium on top of that borrowing to the GBE to make it pay a commercial rate of interest on the borrowings it would take. If that were to happen here, then obviously the Port of Melbourne starts to fact the commercial realities of this business decision that they have made.

I might add that there are other differences here between them and a private sector institution doing this. If this project is a dud, does anybody’s bonus go? Does anybody lose their job? In the words of private equity or venture capitalist people: has anybody got any skin in this game, other than the Victorian taxpayer, who is borrowing the money to stick it into the Port of Melbourne’s activities, when the Victorian taxpayer could borrow the money to do a whole range of other fantastic projects for Victoria, whether it is rebuild schools or do more freeways or whatever they want to do? So the Victorian taxpayer and the state of Victoria are at risk in this project. They are the only ones with skin in the game, if the project does not go on. What you want to do to make this a truly private project, you want to transfer the skin in the game from the Victorian taxpayer to the Port of Melbourne. Let them wear the risks of this project, if it fails.

Mr BARBER — The cost at which they end up actually bringing in their debt, that does not have any bearing on the previous discussion, which is the discount rate, because the discount rate is an opportunity cost of capital that any other rational investor who was making this decision would apply?

Mr GREY — Yes, there is a difference between those two, between the discount rate and the cost of capital, but the discount rate needs to reflect the opportunity cost of the capital being put forward as a result of this project going ahead. That is why we cited for you in here the approach of the Victorian government through the department of Treasury on discount rates. They should take this approach to apply an appropriate discount rate. Then we went on to also cite the World Bank and the commonwealth department of finance approach here. The discount rate, however, needs to be appropriate. If it is inappropriate, the project looks great, and if it is correct, the project looks as it will look — we suspect in this case very weak — and then your decision making on the project benefits would change. That is what this is all about.

Mr BARBER — The equity component would also have to achieve a hurdle rate similar to what a completely privatised port would do or a completely privatised dredging operation would do, as well?

Mr GREY — Yes, basically.

Mr BARBER — The government must amend that in terms of dividends back from the port.

Mr GREY — They absolutely must and put them on notice for that. The only reason they would not demand that is, as I said, if they can identify some negative impact that the creation of a CDP is eliminating.

Mr BARBER — Let me just ask you about a couple of things then. This is the pricing policy document that the Port of Melbourne Corporation puts out because it is regulated by the ESC under a regime where it has to disclose its prices. If it was fully regulated, it would have to actually agree with the ESC about a weighted average cost of capital, a WACC. On page 5, right down at the bottom, there is a sentence where they say:

Allocative efficiency and the interests of Victorians will be served best by POMC funding most of this program on its balance sheet and recovering its costs, including a commercial return, over the long term through its prices. Competitive forces invariably lead to the efficiency benefits associated with improved port facilities being passed on to ultimate users. Thus while users such as cargo owners may bear immediate price changes, efficiency and volume effects should lead to lower long-term costs for those users.


Is that also being very clear by the port, that they are to run themselves on a commercial basis and the reasons for that?

Mr GREY — Yes, that is exactly the driver that you would expect them to be placed under, which begs the question of why they have chosen a government discount rate in their primary project document.

Mr BARBER — Let us turn over to page 11 of that same document I just gave you, where they actually disclose what their WACC is, and how they work it out. Down the bottom they give the formula, which is familiar. They say the target debt ratio is 40 per cent. In their annual report, which I checked last night, they say they are proposing a debt to equity pretty much around 50 per cent on an ongoing basis. They have got the right stuff about the tax rates because they pay tax equivalents. If you turn over to the next page, and the bottom points, there they say this is how they calculated it. Their average yield on commonwealth government 10-year bonds is 5.5. Would you agree that is likely to be closer to 6.5 now?

Mr GREY — Yes, that is fine.

Mr BARBER — Okay. Debt risk premium is 1 per cent. I think, and you can correct me, that what they are saying there is that because they are not the commonwealth government — if they were a company there would be an extra premium of about 1 per cent — —

Mr GREY — Okay, yes.

Mr BARBER — Corporate bonds, BBB rated would typically be 1 per cent higher than the 6.5 that Treasury bonds are currently looking at?

Mr GREY — Yes.

Mr BARBER — Okay. I can also inform you that elsewhere in their annual report they say they want to maintain their credit rating at investment grade — so that is BBB.

Mr GREY — Yes.

Mr BARBER — Just to hand over to you also, the RBA has a chart now showing the spread between government bonds and corporate bond yields.

Mr GREY — Yes.

Mr BARBER — If you just have a look at the far end of it you can see that the spread is more like 2 per cent in the light of current world events.

Mr GREY — Yes.

Mr BARBER — Whereas at the time this report was written, which was May 2005, they were looking at a debt risk premium of 1 per cent. Equity is at 89, and then they say a couple of other things. But at the end of the day they claim their weighted average cost of capital — and it is in that last line — is 8.7. Would you agree that with the extra one point on the commonwealth bills, and the extra one point on the spread, and a fifty-fifty debt to equity ratio, that that would have moved up by at least two points, getting them closer to 11?

Mr GREY — Well, it certainly moves them up. The question is whether it is adequate, and why this was not talked about previously. The issue here is that government has had to say that this project should go ahead. They have a yes or no position on the project. In order to convince government they provided a document, which is the subject of our analysis, saying, ‘Yes, this project should go ahead’. We have analysed that project and said that actually if you use an appropriate discount rate in that cost-benefit analysis, as required by all the government agencies and the World Bank and everyone else, this project would look very, very poor as a project from a government perspective. The fact that they can then go out and maybe finance this project is a separate matter, but then within the market obviously the question is how much risk premium will go on top of this. This does not necessarily address the first question: are the returns to Victoria in respect of the project in this project? When they went off and did the analysis to justify the project to government they did not say in there, ‘We are going to charge the shippers a fee for coming in’. That is a very relevant question because if the shippers save money then this project works. If they do not then it does not work. But if you charge them a fee for the privilege of using your


deeper channel, in theory, according to economics, less should turn up because it is more expensive. There should be less use of the channel. It is a relevant consideration to go into the economic analysis that justifies to the government why they should say yes to this project that was not put in here, and it rolls on from there. There is more to this as well.

In this document they talk about competitive situations. They are saying, ‘You are a competitive Port of Melbourne Corporation’. Competitive with whom? The obvious question to ask is whether it is competitive with the Port of Hastings. Let us take the Port of Hastings as an example. They set up a document for government to make a decision. In cost-benefit analysis methodology, accepted by all economists, you have got to put up your prime project and put up your alternatives to that project. The first absolute requirement is: what happens if nothing happens? The other one is: what is the next best reasonable alternative that a reasonable person could put up to this that would then allow us to test the prime project against this other possibility that we have? The obvious possibility in all of this, with all due respect to the people of Hastings, is the port of Hastings as an option. It was not tested out in the documents. When it says, ‘This is a competitive process’, the Port of Melbourne and the Port of Hastings are not free to run around as BHP and Rio Tinto are and compete with each other ferociously in a global market. They are under some government constraint here. If the Port of Hastings was competing with the Port of Melbourne for an alternative to the project development program, all of us in this room, and particularly yourselves as members of Parliament, would be much better enlightened as to what is the best thing for Victoria, because that is what this is all about.

It also begs the other institutional question which is: is this an institutional malady that we have got, because if the Port of Melbourne owned the port of Hastings would they have started this business at the port of Hastings and then gone to channel deepening later, bringing ships into Hastings and then moving to channel deepening? These are all the questions that are not answered in here, and yet a decision has been made, and that is our point. We need to get these decisions clearly laid out and then made on the appropriate frameworks, all of which have been laid out. It is all in the documents, but it has not been done here. In that circumstance you could then say, ‘Okay, the Port of Melbourne competes with the Port of Hastings. Their capital is at risk. Lenders to the Port of Melbourne may well go broke, and they would lose their money if the Port of Melbourne goes broke’. They will then price that risk appropriately. Recently we have seen the ANZ bank not financing Gunns. That is the sort of risk you face in the real world. I do not think there is any risk of that with the Port of Melbourne.

Mr BARBER — Just because technically Treasury can borrow money at 6 per cent and give it them it does not mean they should lower their discount rate when it comes to calculating it?

Mr GREY — Absolutely.

Mr BARBER — It would be like finding $50 in the gutter and going and paying $50 for a Mars bar.

Mr GREY — Basically, yes.

Mr BARBER — It did not cost me anything so I will just throw that money into the wind.

Mr GREY — Exactly. That is the impression that the whole process gives on the outside, and unfortunately governments of all persuasions are good at doing this if they get a particular project running. They have forgotten that taxpayers have to borrow that money, and taxpayers could have borrowed the money to do something else other than buy a Mars Bar. They could have bought themselves a healthy organic apple or something.

The CHAIR — Unless the government sees benefit in buying a Mars Bar.

Mr BARBER — No, they are telling you, ‘You will have a Mars Bar, whether you like it or not’!

Mr GREY — That is right. This is actually a crucial point, and this came up in the inquiry, because for reasons that I do not understand, of the three inquiry personnel, one was obviously a commercial person experienced in commercial life; the chair was the ex-secretary for the Department of Defence, and his question to us was, ‘The government can spend money on whatever they want, can’t they?’ — which is true; of course it can. But if the government is spending money on projects that it says are good for Victoria and it has a case to make, and has made its case, and you look at it and see the case does not add up, and in fact you could argue that Victoria would be better off with another project, then from a commercial basis, for the benefit of the shareholders in the


state of Victoria, you want to do that analysis correctly and come to the right conclusion — unless the government has mandated the Mars bar — if you want efficiently delivered Mars bars that make the population as happy as they possibly could. And that is all that is being said here — that we have got choices with our public expenditure, and we need to make them very carefully.

Mr BARBER — Meyrick’s response to some of your criticisms was, ‘We are not doing a business case, we are doing an investment case’ — and I am quoting them from your submission. If it had been clear from the beginning that this was a commercial project to be funded by the port users, it would have been pretty clear that we would be looking at commercial discount rates, wouldn’t we?

Mr GREY — Yes, that is our view.

Mr BARBER — This discount rate which they have quoted here at 8.7 — which I am now kind of alleging would be probably two points higher if we were to calculate it properly today — relates to all the port’s operations. What we have got now is the port in an alliance with the dredger, the dredging company, running a different sort of project, which is an infrastructure construction-type project. Those projects would generally be riskier, whereas running ports, if this equity beta is anything to go by, tend to be less volatile. So now that they have added this other part of their business, which is construction, does that make their overall operations even riskier?

Mr GREY — Well, yes. We did not have enough time to really take this project apart in detail, but I would argue quite clearly that there is a serious risk here. The Port of Melbourne runs wharves and harbours; it does not mean that they run — —

Mr BARBER — Ships just turn up.

Mr GREY — Yes, ships turn up. It does not mean they run channels and big infrastructure projects, and that is the risk that is being run here. Are they outside their performance envelope, basically? That just adds to the risk; it just goes on and on. But we have tried to argue hard on what I call the silver bullet issues — the discount rate and what have you, because we can get all the information around that. If they got that right and they still wanted to do it, then we could argue about that as well — their skill base here, which goes to the heart of your inquiry. This project started at 200 million; it is now 1 billion. As Parliament you have to go, ‘Yes’ or ‘No’, and my concern is that as parliamentarians you have a question: what is the best thing to do here in the interests of Victoria? That is the question that you have. How do you know when you have got the right answer to that question?

When I look at the witnesses appearing today at your hearing, and go through them — the Department of Transport, : if you are in government in Treasury, the Department of Transport, with all due respect, talks the Department of Transport book. They talk their own story and every department talks their own story. Treasury tries to take the big-picture view; it is egotistical enough to think that that is the way it is. But as parliamentarians you are relying on the Treasury, which works with the government, to give you the answers on things, and the Parliament itself, looking at the evolution of this debate, does not have any independent economic advisers to whom you could say, ‘Okay, we are paying you to tell it as it is; what is your view of this?’. And I think that is one of the flaws in the process here. That is how we got to be here today. My concern is that you have got big decisions to come in the future, major investment decisions, and I do not know that the firepower is there to help you make those decisions. You need independent, arms-length economic advice from people — not people like us, but people you can rely on to give you that sort of advice about these proposals of the government. I know you will have to spend some more money on economists and whatever, but I think it would help you.

Mr BARBER — Just for the next bit you are working for free — —

Mr GREY — Yes, I know.

Mr BARBER — There is another little issue I want to unpack with you, and I know this is not what you have done in the past, but it is part of our terms of reference to also look at the alliance arrangement between Boskalis and the port and how they are actually running the dredging. If the Boskalis part of that deal is that they are simply to be paid, no matter what, for every cubic metre of stuff that they dig up, and if the weather stops or the project stops or there is a problem, they just stop and they still get paid anyway, and their only risk is that their ship might sink, let us say, then the residual risk is also on the port, isn’t it?

Mr GREY — Yes.


Mr BARBER — Pushing the port’s weighted average cost to capital up again?

Mr GREY — Yes. We have a common expression in economic dialogue about privatising the benefits and socialising the risk, and government has done that over and over again, and one of the concerns about the privatisation process, whether under the Keating government or the Kennett government or whatever, was that in some way cash was paid and risks were moved. If you sell off brown coal-fired power stations and you have got global warming on the horizon, who bears the risk? If I want to buy the brown coal-fired power station, if I can get the government to keep the risk, I am going to pay more for it than if I had to bear that risk. The same applies here in the contractual arrangements. I know they are confidential and so on, but in the building industry there is an entire class of people employed to fight between private-sector operators — the building developer on one side and the builders on the other — about who bears what cost and who bears what risk, and they will get their lawyers at 10 seconds notice to fight out, ‘Well, we agreed to that’, ‘No, we didn’t’, and backwards and forwards it goes. They came up with an alliance-building program which shares the benefits of building properly so it is basically an effective incentive structure for the developer and the builder so they work together and share the benefits.

When I think about the channel deepening I assume that we have state-of-the-art risk-sharing arrangements between the Port of Melbourne and the dredging company. I have no reason to believe that, but I believe that is the case, because it would be highly risky and dangerous to do otherwise, because there is no skin in the game by the dredging company, and yet there ought to be.

Mr BARBER — This dredging company seems to — —

The CHAIR — Mr Barber, we will have to move on to Mr Tee.

Mr BARBER — Okay. I will come back to it if we still have time and energy.

Mr TEE — Thank you, Mr Grey. I want to come back to where you started. As I understand your evidence what you are saying is that the numbers do not stack up, in the sense that if this were a normal commercial arrangement, the project would not proceed. But stepping back a bit and trying to unpack that a bit, as I understand the way the model works, the buck really stops with business, because ultimately they are going to be paying the cost. We have heard from VECCI and the farmers federation, and they are passionate supporters of it, even though they are carrying the cost. That is not because they think it is a crazy project. What VECCI and the Victorian Freight and Logistics Council have told us is that the figures used by the port are incredibly conservative and that if you actually have a look at the real impact and the real benefit or the costs, this is a bargain. That is really why they think it is a great project, even though they are carrying the costs. I suppose that is my sense of where we have ended up today. I wonder what your comment is on that.

Mr GREY — They are paying for services, but the business of the channel deepening is owned by the public of Victoria by their shareholding in the Port of Melbourne. So the people of Victoria are carrying the risk. Those groups are in theory paying their way, but they do not have any capital at risk here. My concern would be that if they think it is such a great project, they could put the capital up and fund it. If it is that great a project, Macquarie Bank ought to be down here banging on the Premier’s door saying, ‘We do infrastructure, we do tunnels. Channel deepening’s the same thing — charge a toll and make it happen’. Maybe the government has not invited Macquarie Bank to tender to do the project for it, but my suspicion is that it is not as great a project from the shareholders’ perspective as it is from the customers’ perspective. Customers are always happy if you can provide them with something for a modest price that gets them a great outcome. We are here as the shareholders, or Parliament is here as a shareholder, and this proposal was put forward to cabinet from a shareholder perspective. So, looking at those numbers, you argue, ‘Well, there are better options out there for investment by government’. You would also have to argue that this whole process has been a disservice to the farmers federation and the others because — —

Mr TEE — I have to tell you that is not their view.

Mr GREY — I know it is not their view, and I may well debate the economics with them over this. But the thing is that if the port of Hastings was the better option and could be done more cheaply with more benefits, would the state of Victoria not be better off having lower tax rates and less debt forked out for this, so that there is more debt available to do other projects? The farmers and everybody else have an interest in making sure we get the right project here, rather than the wrong project. We need to start there as the shareholders and then work our way forward to see what the options are. At this point we cannot answer that, because that basic comparative


analysis was not done or provided. In fact I was delighted to see the Australian Peak Shippers Association, which supports the CDP and our submission here, say that Western Port has potential in this regard. The Australian Peak Shippers Association thinks Western Port could have been a better option right now.

Mr TEE — Leaving that aside, because I understand the issue with Hastings is a $10 billion price tag — —

Mr GREY — But we do not know that, because no-one has assessed it.

Mr TEE — But I just want to focus on the project at hand. I suppose it keeps coming back to me that the people who are going to wear the cost — businesses — think it is a great buy, as it were.

Mr GREY — At their idea of prices of the services rendered, it may well be, but that does not mean the same for the shareholders. BHP Billiton does not rush out and do a mining project just because the government of Mozambique would be happy and throw a party about it or the farmers of Mozambique would throw a party about it; they do it because it is good for them. So the question is: what is good for Victorian shareholders — taxpayers — in this project arrangement? And what is good is that at the very least we start the analysis correctly, do our analysis properly, evaluate all options and establish whether Hastings is a $10 billion project. On that basis, this project that started out at $200 million is now $1 billion, so, you know — —

Mr TEE — And is not the greater good, as it were, the benefit to our manufacturers and our farmers of getting our product in and out of the country as efficiently and effectively as possible?

Mr GREY — Absolutely.

Mr TEE — And is there not an argument that government ought to play a role in facilitating that, and is that not really what is happening here?

Mr GREY — Yes, and government has a significant role in managing our economy. But first of all you want to get a good policy framework that gives you good outcomes, because farmers, industry and business suffer if we do bad projects in government. We have seen enough bad projects already in government; we do not need more. Here is an economic analysis where this project is already under water; it looks under water where it stands. As simpletons all you had to do was delay five years and see whether or not those returns were going to improve, and you could have answered that question about the returns to the Victorian shareholder. So it is not in the interests of every industry to have bad government projects announced, because they have to pay more taxes; they distort our economy through movement of investment flow, so we pour money into channel deepening when we could be pouring money into rail infrastructure in Victoria, connecting the port of Hastings, for example. So business suffers too.

Mr BARBER — Port seems to get that when it talks about allocated efficiency.

Mr GREY — Yes, they do.

Mr TEE — The other issue I just wanted to touch on in your submission is where you talked about the 6 per cent discount rate. I see on page 7 of the submission that I have got from you that there is a table there which seems to suggest that the project was profitable, even if we use the discount rate of 14 per cent. Am I reading that right?

Mr GREY — Yes.

Mr TEE — I just wanted to make sure, because I quoted that figure on the basis of this document earlier in the day, and I just wanted to make sure I was reading it right.

Mr GREY — What that is saying to you is that in effect if the discount rate goes to 14 per cent — or taking 12 per cent as a figure — then you are getting some positive return on the investment.

Mr TEE — There is a net present value.

Mr GREY — There is a net present value there.


Mr TEE — And at 16 per cent you dip the other way.

Mr GREY — Yes, exactly. The issue here is: is that an adequate rate of return? For all the money invested, for all the risk that is taken, from a commercial point of view, if you were a farmer, would you do this? If you were a business, would you this? Because so many of these projects are done on a net present value basis, that is why it is so important to look at it in these rate of return terms. Your bank account has a 6 per cent or 7 per cent rate of return. If you are going to go down and buy shares in a company, you want some higher rate of return to cover the risk and so on. If you are going to invest in your best friend’s brand-new turtle manufacturing project, you want even more, because he spends too much time having fun and not enough time running his business. He is a high-risk individual. That tells you all you need to know in terms of rate of return. It is not very strong, and I expect that if you played with it a lot, you could turn it around the other way. I would ask the other prime question: if the Port of Melbourne and the Port of Hastings were joined together in one institution, would this project have come up this way, or would it have come up another way? Would it have been a Port of Hastings thing?

Mr BARBER — I have got a few more. You also criticise in your submission the fact that they use 30 years of projections. I think they are roughly working on 5 or 6 per cent sort of compound growth rate out to 30 years. That means, does it not, that if they want recoup all this from charges on containers, most of the money they ever get from those charges will actually be in the second half of the 30-year period rather than the first?

Mr GREY — Yes, that is right. Stepping away from the charges they have put on the containers, the savings are caused obviously by it being cheaper per container in a bigger ship, in a deeper draught ship. If those savings do not exist, then this project does not exist. That is the only bit that matters. Yes, their savings all come in later in the project, because the ships they are talking about are being built or are planned, and new ports are being set up in other places or discussed in other places. So, yes, we have to wait a long time to get our money back, and that is a serious risk. In your normal commercial project you would be saying, ‘We put our money on the table. We are the directors; we represent the shareholders, and we want our money back real fast to make sure that this covered’. Then the directors would be saying, ‘Given that we would normally expect 17 per cent, we are not getting 17 per cent now. Why don’t we do another project in the meantime that gives us above 17 per cent, and then in five years time when we are generating more revenue and have increased our balance sheet — bang! — then we can do a project like this?’.

Mr BARBER — They would have projects like that on the table down in the actual port itself, wouldn’t they?

Mr GREY — I assume so, because it is a commercial entity. They have got opportunities to do those sorts of investments.

Mr BARBER — Little stuff around the port might add up to a billion dollars, but there would be a lot of little projects with an even much higher rate of return.

Mr GREY — Yes. All businesses do, and that is what the board of directors is there for: to evaluate all of those and try to grow the balance sheet and the cash flow over time. whilst holding its risk under control. That is the part that is often missing in all government analysis of projects, let alone this one; there are projects with massive risks, and there are projects with little risks. You want to adjust it for the risk in some way or another.

Mr TEE — On that issue, is not the point in your executive summary about the rate of return that from a business perspective, even looking at that 17 per cent, what you are saying is, ‘Right, based on that model, we are not going to make the return in the first five years. But, goodness me, look at that return that we are going to get after 20 and 30 years; we’ll be looking at a 90 per cent return’? It might be unusual, but is this business not really taking a long-term view rather than a five-year view?

Mr GREY — Yes. Obviously there are going to be projects where you have to wait some time to get your return, but then you want to make sure you have got your risks under control, because if things start to go wrong, then you can go under very quickly with a project like that. You can bankrupt the company. We have seen that in Australia many times with business projects that did not pay soon enough for the directors. And that is what we are saying here: if it were your money, if it were your business, would you do this this way, or would you try to take it in baby steps? That is probably the way you would approach it. There might be demand out there for bigger draught ships to come to Melbourne, so you could say, ‘Let’s do a deal with the Port of Hastings. We’ll put them in at the port of Hastings, we’ll see what happens, and if more of them turn up, then we’ll start to build our case.


We’ve got real cash flow out there and real revenue, and now we start to invest’. That way you protect the balance sheet and your shareholders and minimise your risk. That is, in a sense, what we are saying here, from a shareholder perspective.

Mr BARBER — The shipping savings come from assumptions about the size of the ship fleet, and you also criticise Meyrick for a particular sort of analysis; it is in your submission. There would be zero ships, really, below a certain size. Has anybody got any better data than them? Do we even know what the current pattern is coming through the Heads right now?

Mr GREY — We struggled with this. In the end they have come up with a distribution of shipping sizes, draughts, that they think is correct, and that is their choice. We modelled a different distribution which we thought also was reasonable — like a reasonable person can say ‘This is also possible’ — and you get a markedly different outcome in terms of savings. That is the problem that we all have here. In some sense we need someone who is independent and at arm’s length of this process to go right through the numbers with the resources to say ‘Yes, here is the framework’. The Port of Melbourne wants this thing to happen, and their consultants have given them a good argument for why it should from their perspective. We need to be able to believe the data that we have seen, and all we are saying is that a reasonable person could look at these numbers and think, ‘Well, it could reasonably be something else’. So I need to solve that problem.

If I was going to be on the board of directors making the decision, I would want to get some comfort around those numbers, and I would be getting independent advice, fearless advice, from others — multiple, if necessary — by saying, ‘Okay, test out these numbers. You give us your approach’. We would not be so alarmed at this if we had not also seen the consultant from Drewry Shipping Consultants, who was a shipping consultant prior to Meyrick, who seemed to be saying the very opposite of what Meyrick was saying about shipping and seemed to be implying that there was no case for the channel deepening at this point in time. But obviously we cannot investigate his study, we cannot invite him to share it or what have you, so we do not know. But what I am saying to the Parliament is that I think you need more certainty on an ongoing basis about these sorts of projects, and you therefore need a process by which you evaluate them in the future so you can be sure, bearing in mind that government has its agenda and obviously Treasury is part of government. You are the Parliament, and then you have got agencies that are pushing their case, and their consultants, who are being paid to put that case for them.

Mr BARBER — So when you change the assumptions about the pattern of ships that are likely to arrive and you change the discount, what happens to the project in your analysis?

Mr GREY — Well, the project becomes even more leaky, so to speak. It just starts to sink gradually.

Mr BARBER — A lot of nautical analogies here.

Mr GREY — Sorry.

Mr BARBER — A final question. If we could get the contract between Boskalis and the port, this so-called alliance agreement for the doing of the works, out in the open, probably without things like cost per cubic metre in it, would you be interested in having a look at that?

Mr GREY — Yes, it would be interesting to have a look. Obviously we are working pro bono here, but we would endeavour to find some time to take a look at it if anyone was willing to listen to what we had to say about it. But we will probably take a look.

Mr BARBER — If the committee put it on the website there might be a lot of people who would be interested in giving us advice. Do you think we should do that?

The CHAIR — I think that is a matter for the committee, Mr Barber.

Mr BARBER — In your professional opinion, would it bring forth useful advice and commentary?

Mr GREY — Yes. I would support that, just for good governance sake. The reason it matters is because whether you are in opposition or in government or elsewhere, if you know your data is going to be severely challenged by your professional peers — like in a court or somewhere else — you are going to work very hard to make sure that data is correct. It is in the interests of the government that it puts this information out prior to projects starting so that there is adequate — —


Mr BARBER — Public confidence.

Mr GREY — So that there is adequate conversations, discussion and debate so that it helps underpin these projects and it helps build the support behind the project. I only take the grand prix as an example of a project with similar problems. Ten years it has taken for the Auditor-General; the Auditor-General has now said that, really, it is a bit of a bad project from an economic point of view, whether you like cars going around or not. But it took 10 years to get there, and some of us said that 10 years ago. Is this the way we want to run the state of Victoria, without knowing enough about whether or not each of these projects add up?

I might add that in the consulting business, consultants get paid to do certain things. I will quote an economic consultant to you, and this is a direct quote: ‘I can give you any answer you want on your project’. That is a direct quote from a consultant here in the state of Victoria somewhere in the last 20 years. I could do that for any project, and I could twist it, and most people would not be any the wiser. It is not in the interests of government to have that going on, and consultants need to be held to account in a process which is laid bare whereby their analysis is tested out. The inquiry was a good start, but what the inquiry lacked, in my view, was the economic grunt to take the numbers apart and analyse the case. That is just one observation. But the Parliament, I think, needs to have its own position on these issues as Parliament.

Mr BARBER — We have got the Auditor-General, and I would be pretty confident he will have a look at this in the next little while.

Mr GREY — Yes. Ten years later, though, the money has been spent and the opportunities have been missed, and that is the problem for everybody. It does not discipline your public servants in advance. So you say, ‘Okay, you are going to put up a project; it is going to be shredded. Everybody is going to have a go at it. It is going to be open and transparent — there is nowhere to hide — the whole thing’. That puts them under performance pressure, and that is what you need.

The CHAIR — Are you aware of any jurisdiction that does do that, that has that sort of mechanism?

Mr GREY — I was trying to think of one, but I think the US government accountability office to the US Congress does that. They tend to show you defence projects in particular.

The CHAIR — Okay.

Mr GREY — I think it is a model that we could pick up on, without being an expert on it.

The CHAIR — Thank you, Mr Grey. The committee appreciates your written submission and also your testimony here this afternoon.

Mr GREY — Thank you for the opportunity.

The CHAIR — It has been very enlightening, in view of our meeting with the port tomorrow. We will have a draft transcript to you in the next couple of days for any corrections you wish to make.

Mr GREY — I look forward to it. Thanks.

The CHAIR — Thank you very much.

Subcommittee adjourned.






Members




Substituted members


Staff


Witnesses

Mr J. Betts, secretary,

Mr T Garwood, executive director, freight, logistics and marine, and

Mr M. Curry, director, ports and marine, Department of Transport.


The CHAIR — I declare open the hearing of the Legislative Council Standing Committee on Finance and Public Administration. Today’s hearing is into the inquiry into the Port Phillip Bay channel deepening project, specifically the business case for the project as presented by the Port of Melbourne Corporation and the Victorian government and the legal and financial arrangements between the Port of Melbourne and Boskalis Australia Pty Ltd and/or its parent company, Royal Boskalis Westminster.

I welcome Mr Jim Betts, the Secretary of the Department of Transport; Mr Mark Curry, the director of ports and marine and Mr Terry Garwood, the executive director of freight, logistics and marine, from the Department of Transport.

All evidence taken at this hearing is protected by parliamentary privilege as provided by the Constitution Act 1975 and further subject to the provisions of the Legislative Council standing orders. Any comments made outside the precincts of the hearing are not protected by parliamentary privilege. All evidence is being recorded by Hansard. Witnesses will be provided with a proof version of the transcript in the next couple of days.

I now invite you to make an opening statement before we proceed to questions.

Mr BETTS — Thank you, Chair. To introduce myself and my team, I am Jim Betts. For the last three weeks I have been the secretary of the newly formed Department of Transport. Next to me I have Mark Curry, director of ports and marine in the department, and next to him is Terry Garwood, executive director of the freight, logistics and marine division of the department.

The Department of Infrastructure became the Department of Transport, DOT, on 30 April. The purpose of the change was to provide a stronger focus on the delivery of transport improvements within Victoria. DOT is responsible for the management and continual improvement of Victoria’s arterial roads, its heavy and light rail networks and services, freight and logistics, and the ports and marine sectors.

DOT supports two ministers, the Minister for Public Transport, Lynne Kosky, MP, and the Minister for Roads and Ports, Tim Pallas, MP. My role is to lead DOT in enhancing and implementing government policy for infrastructure planning, investment and delivery in Victoria. Within DOT there are a number of divisions, including freight, logistics and marine, or FLAM. The role of FLAM is to provide support to me and the ministers in developing and implementing the government’s agenda for the freight, logistics, ports and marine sectors. The executive director of FLAM is Terry Garwood.

Within FLAM there are four branches, comprising the office of the executive director, freight and logistics, ports and marine, and Marine Safety Victoria. The ports and marine branch of FLAM is responsible for providing advice in respect of the planning, management, regulation and development of Victoria’s four commercial trading ports, including the port of Melbourne, and key port projects, including the channel deepening project, or CDP. The director of ports and marine is Mark Curry.

The port of Melbourne is a significant driver of the Victorian and Australian economies. The Victorian government submission to the committee explains the relevance of the port and the CDP to various government policies and strategies and elaborates on the important role played by the port. The port is Australia’s largest container and general cargo port, handling approximately 37 per cent of the nation’s container trade. It is widely recognised as Australia’s premier trading gateway to the world, handling around $75 billion worth of trade annually. On average, it handles $90 million worth of exports every day. The economic output of the port in 2004–2005 was estimated by PricewaterhouseCoopers (PWC) to be $2.5 billion per annum, generating approximately 13 700 jobs. In that year, some 3400 commercial vessels visited the port, and each visit was estimated on average to have produced $733 000 of economic output, $334 000 of value-added output and four full-time jobs for each commercial vessel.

Total trade through the port grew by 10.4 per cent for the 2006–07 financial year and Melbourne’s container trade has grown by almost 8 per cent on average for the past 16 years. In 2007 the port handled a record 2 million standard containers, or TEUs, in the 12-month period and is expected to handle 2.2 million TEUs in the current financial year. Trade growth is expected to remain strong as Victoria’s population and economy grow.

The sustained growth in worldwide container trade has corresponded with increases in the size of container ships, which enable the same number of containers to be shipped with fewer voyages, resulting in lower unit freight costs and other operational efficiencies. As these larger container ships require deeper channels to access ports fully loaded, the issue of comparative depths of channels has become a major factor in competition between ports. In the


context of the world trade market, adequate channel depth is strategically critical if the port is to remain competitive and retain its position as Australia’s leading international container port.

In essence, the rationale for the channel deepening project is that, because of insufficient depth of the shipping channels, an increasing number of container ships will need to enter and leave the port with lighter loads than their operators would prefer. This means that ships are operating at suboptimal capacity, which results in higher costs per unit of goods shipped and, consequently, higher prices for those goods.

In the mid-1990s the port reform unit of the Department of Treasury and Finance, DTF, had primary responsibility for ports. During this period DTF oversaw a number of major port reforms, culminating in the enactment of the Port Services Act 1995 and the privatisation or corporatisation of Victoria’s main commercial trading ports.

By the late 1990s DOT began to progressively assume responsibility for ports matters, particularly in relation to policy and planning. In 1999 DOT and DTF jointly commissioned the Victorian ports strategic study, which was completed in January 2000. The aim of the study was to enable the government to gain a long-term perspective of the infrastructure issues associated with the Victorian ports. The study identified inadequate channel depth in the port as a major emerging infrastructure constraint — this was in 2000. Around this time, VCA commenced initial inception and feasibility work on the need for channel deepening, and liaison on the project commenced with DOT.

VCA commissioned an initial study by Drewry Shipping Consultants which indicated that there were sufficient benefits to be derived from channel deepening to justify further investigation. VCA then commissioned seven preliminary feasibility reports to consider channel design, port operations, geotechnical conditions, environmental considerations, hydraulics and sedimentation, economic benefits and the economic impact of channel deepening on the Victorian economy.

Two economic studies, undertaken by the National Institute of Economics and Industry Research and Booz Allen Hamilton, considered alternatives to deepening the shipping channels serving the port, including: developing an alternative container port elsewhere in Victoria — Hastings was assessed — and moving freight through an alternative Australian port and land bridging it to and from Melbourne.

These studies demonstrated that the preferred option was to deepen the existing channels to the port and fully utilise, and therefore maximise the benefits from, the existing infrastructure and facilities within the port. The NIEIR study, in particular, identified the higher transport costs of the Hastings and interstate options and the higher opportunity cost associated with the capital expenditure needed for Hastings infrastructure. The study concludes:

The channel deepening scenario is clearly the preferred option. Even when using very pessimistic values for the key assumptions, the preference for channel deepening over the other two options remains unambiguous.

In December 2001, following positive results from the preliminary studies undertaken by the VCA, which indicated that there were no insurmountable technical impediments to deepening the channels and that significant economic benefits would flow from the proposal, the government gave its in-principle support for channel deepening on the following bases: first, the proposal meeting the requirements set down in the Environment Effects Act ; second, the satisfactory resolution of all technical issues relating to the proposal; and third, the acceptance by government of a sound financing strategy for the proposal.

In March 2002 the Australian government Minister for the Environment and Heritage decided that the CDP was a ‘controlled action’ under the Environment Protection and Biodiversity Conservation Act 1999.

In May 2002 the Victorian Minister for Planning confirmed that an environment effects statement was required under the Environment Effects Act 1978 for the CDP. Shortly after the Australian government Minister for the Environment and Heritage decided that the approach to be used for assessment of the CDP under the commonwealth act was assessment by accredited process — that being the process under the Environment Effects Act 1978.

Since the government gave its in-principle support to the project in 2001, a number of mechanisms to review, advise on and support the project have been implemented, including the establishment and administration by DOT of the Channel Deepening Advisory Committee and the Channel Deepening Project Taskforce; the DOT Project Review Committee; the DTF Gateway Review Process; and the joint commissioning by DTF and DOT of an independent economic impact study. Each of these mechanisms fed into the final government approval in December 2007. I will now describe each of them in more detail.


The Channel Deepening Advisory Committee was established by DOT in 2002 to provide whole-of-government input to POMC in the development of the CDP and the EES for the project. The committee comprised representatives of relevant government departments and VCA, and then POMC.

The Channel Deepening Taskforce was initially established in April 2005 as a result of a recommendation from the panel inquiry into the EES that a high-level project management group representing interested government departments and agencies and POMC be convened. The requirement for the task force was confirmed by the Minister for Planning in his statement in response to the panel inquiry in July 2005.

The broad purpose of the task force is to support and provide advice to POMC in taking the CDP forward and to coordinate whole-of-government input to the project. The task force comprises members from DOT, DTF and POMC as well as the departments of Sustainability and Environment, Premier and Cabinet, Industry, Innovation and Regional Development, Primary Industries, and Planning and Community Development. The Environment Protection Authority and the Office of the Environmental Monitor also attend in an observer capacity. Terry Garwood, the executive director of FLAM, is the current chair of the task force. The task force continues to meet on a monthly basis, and I rely on Mr Garwood to brief me as necessary on the progress of the CDP. Mr Garwood and Mr Curry also provide regular briefings to the minister on the progress of the project.

Next up, the Project Review Committee of DOT is an internal review mechanism established by the department to review major project proposals over the value of $10 million. The PRC ensures that such projects within the DOT portfolio have been developed to a high standard — for example, that projects have demonstrable strategic and economic merit and that they are accurately costed, scoped and planned.

The CDP proposal was initially considered by PRC in July 2003, in conjunction with the preparation of the EES. The proposal did not proceed to final endorsement at that time as, after considering the EES process, in 2005 the Minister for Planning required the preparation of a supplementary EES. As the SEES process approached finalisation, the CDP proposal returned for consideration by PRC in August 2007 and was reviewed and finally endorsed by the committee in October 2007.

In parallel with the PRC process, in November 2004 and September 2007 the CDP business case was subject to the Gateway Review Process established and managed through DTF. POMC has advised that it received a favourable report for the CDP proposal from the Gateway Review Process in September 2007.

In 2006, in order to provide an economic assessment of the CDP independent of the proponent of the project, DOT and DTF commissioned PWC and the Monash University Centre of Policy Studies to prepare an economic impact study of the port and the CDP. The EIS was released in March 2007. It found that, based on a conservative and robust methodological approach, in 2004–05 the port generated a total economic impact of $2.5 billion per annum, and the port supported 13 748 full-time equivalent jobs. The EIS modelling estimates an overall net national welfare gain from the CDP of $2.2 billion in net present value terms. It is important to note that the economic modelling assumes that the costs associated with the CDP are borne by its beneficiaries. The increased tariff implemented by POMC is therefore reflected in the modelling.

The Victorian government submission to the committee explains in some detail the evolution of the financial and economic analysis for the CDP and the key findings which underpin the business case. I would like to reiterate and reinforce some key points. From the time of the project’s inception to achievement of final approvals in December 2007, the project’s design, scope and estimates of costs and benefits have been progressively refined and confirmed as technical and scientific knowledge has increased and environmental compliance requirements have been clarified. All standard economic analyses undertaken for the CDP have indicated that it would give rise to significant benefits for the Victorian and Australian economies. Those are set out in our submission.

In preparing various economic analyses Meyrick and Associates undertook a range of sensitivity tests, including a test involving a 20 per cent increase in project costs. This translated to a nominal project cost of $767 million, or a direct project cost of $944.7 million, and a present value cost of $708 million, resulting in a revised BCR of 2.7.

After completion of the SEES, the direct cost estimate for the CDP increased from $763 million to $969 million due to a range of factors including the cost impact of implementing the recommendations in the Minister for Planning’s assessment, additional environmental monitoring, updated costings for fuel and exchange and updated alliance costs. As the cost figure used in the sensitivity analysis by Meyrick and Associates was not significantly


less than the final cost estimate for the project, the BCR was considered unlikely to deteriorate to any material extent and was not revisited when the government considered the final business case.

Since lodgement of the Victorian government submission to the committee, Meyrick and Associates have, at the request of POMC, prepared a final estimated BCR for the CDP. I can advise the committee, for your further information, that the final BCR is 2.57, based on PV benefits of $1936 million and PV costs of $754.1 million. This produces a net present value of $1181.9 million and an internal rate of return of 13.3 per cent.

In terms of the economic impact assessment undertaken by PWC and Monash University Centre of Policy Studies, the increase in project cost is not expected to materially impact on the estimated net benefit over the life of the CDP. It remains reasonable to assume that the net welfare gain would be in the order of $2 billion, and on this basis the modelling was not revisited.

I now turn to the alliance agreement. The Victorian government submission to the committee sets out the background and rationale for the use of an alliancing approach in procuring dredging and related services for the CDP. Ultimate responsibility for procurement for the CDP rests with the POMC as project proponent and, as noted, POMC has all the necessary powers to enter into a range of contracts and agreements as appropriate to carry out its functions.

Alliancing is a widely recognised form of procurement applicable in well-defined circumstances, as set out in the Project Alliancing Practitioners’ Guide released by the government in April 2006 and attached to the Victorian government submission. DOT assisted VCA and POMC in the selection process for the preferred alliance partner and provided advice to POMC in the process of finalising the project alliance agreement with Boskalis.

In the government’s view, the alliance agreement provided the most effective approach for managing the development and delivery of such a unique, large and complex project. It enabled a collaborative approach, leveraging Boskalis’s extensive international experience and expertise, to be taken to solving the unique technical problems associated with dredging at the entrance. In particular, the alliance agreement facilitated the conduct of the trial dredge program by Boskalis in 2005, which was critical to proving the effectiveness of the technology ultimately incorporated in the project design.

Similarly, the alliance approach enabled the cooperative development of effective approaches to management and mitigation of environmental impacts of the CDP through adaptation of project design to minimise impacts and the development of a comprehensive, robust environmental management plan for the project.

I understand that POMC and Boskalis will be appearing before the committee later today and they will be in a position to provide further information on this aspect of the project as may be required by the committee. I now welcome the committee’s questions.

The CHAIR — Thank you, Mr Betts. I would like to take you back to an issue you touched on at paragraph 24 of your statement in relation to other projects. One of the criticisms this committee heard in evidence yesterday was that the channel deepening project has been considered in isolation from other possible projects. You have referred to the study by Booz Allen Hamilton and the National Institute of Economic and Industry Research, which considered the port of Hastings and alternative Australian ports. Was any work other than that particular review undertaken by your department or the project review group to consider alternatives to the channel deepening project?

Mr BETTS — There is plenty of work going on in the department around a range of different options to improve the performance of the supply chain’s freight and logistics industry in Victoria. I might ask Mark Curry to give you a little bit more background on that, if it is okay.

Mr CURRY — There is considerable work being done in the department, as Mr Betts said, in terms of long-term strategic planning for the port system in Victoria. The Victorian Ports Strategic Framework, for instance, in 2004 looks at the roles of the different ports in Victoria and sets out a sequence of development over the next 30 years, and that certainly considers the role of Hastings in the future. Planning has been initiated for Hastings as an overflow port for Melbourne to come into effect in around 20 to 30 years time, once Melbourne reaches capacity. Beyond that, there has been work done on relative costs of land bridging, for instance, from other ports, as is reflected in view NIEIR work and in the Booz Allen work. I think the simple answer is that the results of the


NIEIR and the Booz Allen work were quite compelling in terms of the cost advantage of channel deepening as opposed to using other ports.

The CHAIR — So at the time the government reached its in-principle support for channel deepening, which was December 2001, the other alternatives were discounted on the basis of the Booz and NIEIR work.

Mr CURRY — Including on the basis of the Booz and NIEIR work, yes.

The CHAIR — And there was other internal work at that time, which — —

Mr CURRY — As I said, there was general consideration of the costs of utilising other ports and land bridging and the like, but they were the primary pieces of work.

The CHAIR — And subsequently there has been no further consideration of those projects in the context of evaluating the channel deepening project in the subsequent studies.

Mr CURRY — There have been no specific studies commissioned.

Mr BETTS — Certainly not as alternatives to the channel deepening project. Clearly we think strategically about the role the port of Hastings can play in the future, and it will have a role to play.

The CHAIR — One of the issues — again it was raised in evidence yesterday — was the benefit-cost ratio, and I see there is a revised one you have included today. With respect to wider work done by the department of infrastructure and now transport — presumably your project review group — what is a typical range of BCRs where the department considers a project viable for a large infrastructure project?

Mr BETTS — Clearly the BCRs for projects will vary very considerably depending on their purpose, scope and so on. We would generally regard a project with the BCR of greater than 1 as a project which should be given very serious consideration for implementation. In the scheme of things, a BCR of 2.5 to 2.57, for instance, would be regarded as a very healthy project in terms of its generation of benefits relative to cost.

The CHAIR — In the delivery of this project were other models considered besides the alliance model that is being used now? For example, was the PPP model considered and was that dealt with through DOT or the Port of Melbourne?

Mr CURRY — I understand it was the VCA at the time, the predecessor of the Port of Melbourne Corporation, which was responsible, was the proponent at that time, and did consider other more traditional contracting models, but the proponent considered the alliance approach to have significant advantages over those alternatives and that was the approach opted for at that time.

Mr BETTS — For any major project where we were approaching a procurement phase, indeed a business case stage, we would look at the full range of different procurement options available. Obviously we would look at traditional contracting methods. Private finance is always considered in major infrastructure projects.

Alliancing is something which is coming to the fore now in Victoria. It has been used now for many, many years in the oil sector, for instance, but is now finding its application more generally. It has considerable attractions relative to other methods of project delivery, particularly where a project is complex, has multiple stakeholders, and where many factors are unknown at the project’s inception which require the development over time of a more sophisticated approach to developing project scope and to pricing it. We are seeing alliancing now, not just in the channel deepening project, but in some of the rail projects which are being undertaken by the department.

The CHAIR — One of the issues raised yesterday was that if this project was so compelling why is the private sector not jumping to get involved? Do you want to address that in terms of the considerations you gave to getting private involvement?

Mr BETTS — I guess the same criticism could be levelled at any interaction between the state sector and the private sector. The purpose of an alliance agreement is to ensure that the private sector and the public sector come together to team up to manage the risks associated with the project in such a way that those risks are minimised overall.


If the private sector makes a profit from that, that is not a crime, but the way alliance agreements are generally structured is in such a way that there is a fair distribution of benefits between the parties and there is a fair distribution of costs, should they arise during the course of the project.

Mr BARBER — It is not so much a matter of ‘fair’, as who is best equipped to manage the risk, isn’t it?

Mr BETTS — That is right, and alliancing underpins a view that where risks are jointly tackled through collaboration, that is often the best outcome in managing a project.

Mr VINEY — Yesterday we had evidence before us that questioned some of the assumptions that the business case has been developed on, in particular some questions, assumptions about growth of trade through the port.

Have you got any comments on that — and I assume that was based on the Meyrick and Associates’ work, those assumptions — or do you retain confidence in that work and still have a view that future trade through the port will grow?

Mr BETTS — I will pass that over to Mark Curry to answer in a moment. Clearly when you are putting together a project which has implications over many decades you are required to make a series of forecasts and assumptions. Each forecast and each assumption is eminently contestable. There is no absolutely provable scientific answer.

The criterion I would apply is whether the assumptions being used are as reasonable as any other assumptions that could be used, whether it is forecast levels of trade or whether it is discount rates or whatever.

There is no absolute, right answer and I think we need to bear that in mind as the debate plays itself out. I will hand over to Mark because I think our general view would be that the business case is based, if anything, on conservative assumptions.

Mr CURRY — Just to pick that up, I think it talks in the statement about, over the past 16 years, the average rate of growth of container trade to the port of Melbourne has been of the order of 8 per cent per annum. That is a very rapid rate of growth. Containerisation is a relatively new phenomenon. It really only commenced in the 1960s and 1970s and there has been a very rapid take-up of that as a method of trading.

The projections going forward over the next 20 to 30 years in the business case that Meyrick has developed are lower than those. They are of the order of 5 to 6 per cent, so significantly lower than the historical trends. That is based on, I suppose, a conservative assumption that containerisation will not continue to increase as rapidly as it has in the past.

The argument would be that they are reasonable and conservative assumptions. If anything, you might argue that they could be seen to be on the low side. Certainly there is a risk of higher growth than that. That has been seen in the last few years in the port where that rate of growth has continued at a higher level than was perhaps anticipated around 2000, for instance.

The other crosscheck, if you like, that the department has had is that there are figures also produced by reputable bodies such as BTRE which look at trade growth forecasts for Australian ports generally and they are very similar to the sorts of rates of growth that are used by Meyrick in their projections.

Mr VINEY — There was also some questioning about the assumptions or the position in relation to the number of vessels that are coming in or out, not fully laden, and there was a suggestion that these figures had been overstated. Has the department done any sort of checking of those underlying assumptions about that question of shipping and the capacity of ships coming in and out of the port?

Mr CURRY — The number of ships which are potentially draught constrained — that is, that actually could use greater depth than currently is available in the port — are figures that have been provided to us by the port and regularly recorded by the port.

The department has not done an independent audit of those figures but those figures are consistent with the pattern that we would expect and with the information that we get from industry about their deployment of larger ships to


the Melbourne services, and are certainly consistent with our understanding of the rate of increase of those kind of vessels in this area.

Mr GARWOOD — Just to add to that, that is something that the Port of Melbourne Corporation could talk in detail about, but obviously the Port of Melbourne Corporation has detailed technical information about ships that are coming in for safety purposes, for its own financial purposes et cetera, so those figures provided by the port we are absolutely quite satisfied with. I am sure the port would provide further information to the committee in relation to that.

Mr VINEY — The third area that we heard yesterday, of criticism of the processes, was the approvals process and it was alleged that this project had not followed some of the normal procedures for approvals. Have you got any comment or can you shed some light on that?

Mr BETTS — What was the criticism; what approvals were claimed to be lacking?

Mr VINEY — I think that is a good question. What was put to us was that the normal processes of evaluation and approval did not take place on this project.

Mr BETTS — Again I will hand over to Mark, but I point out that I think eight years worth of work has gone into a project which commenced earlier this year, so to suggest that this is a project which is light on review or light on approvals intuitively does not make sense.

Mr CURRY — Look, I am not aware of any — certainly all statutory approvals for the project have been complied with, both at a state and federal level, and all the normal processes of internal review, as Jim said, and government approval have been complied with. So I am not aware of any stage of approvals or form of approval that has not been secured for the project.

The CHAIR — Can I ask that witnesses and the committee ensure that their mobile phones are switched off, because they are interfering with the Hansard recording system — possibly that one there.

Mr GARWOOD — If I could just add to that, the approvals process, from our point of view, was a very rigorous approvals process, both from the state and the commonwealth level. More than that, it was also subject to legal challenge at the federal level for further scrutiny in relation to the approval process at the commonwealth level. So in terms of all the relevant statutory requirements, those approvals were obtained and the lead-in to that of course was the EES process and the supplementary EES process, and the committee has been provided with the volumes of material associated with the lead-up to that, which then culminated in the Minister for Planning’s assessment, which then led to the subsequent statutory approvals, both from the state minister and the commonwealth minister.

Mr HALL — First of all, thank you, gentlemen, for your comments this morning. Could I, first of all, ask what is the working relationship between the Department of Transport and the Port of Melbourne Corporation?

Mr BETTS — The Port of Melbourne Corporation is formally established under statute and reports to the Minister for Roads and Ports. The department’s role is to work very closely with the port to advise the minister on port-related issues, and therefore there is regular and intensive interaction between the two organisations, DOT on the one hand and the Port of Melbourne Corporation on the other. Mark Curry is our key contact point for Stephen Bradford and the team down at the port.

Mr HALL — In terms of DOT’s involvement in this project I think you have said in the submission, Jim, that it came around the year 2000 when the VCA, the Victorian Channels Authority, commenced initial inception and feasibility work on the channel deepening project. Was that your first involvement at a departmental level in this project?

Mr CURRY — Yes. I think, as the statement also says, in 1999 the DTF and the department commissioned a joint study entitled the Victorian Ports Strategic Study, which was a major piece of work looking at the role, future growth potential and infrastructure needs of all ports. It came to the finding in looking at infrastructure generally and the adequacy of infrastructure that channel deepening or the depth of channels in the port of Melbourne was a particular concern going forward, was going to be a constraint, and that was one of the key studies which initiated the VCA as the proponent or the waterside operator of the port of Melbourne, to start to


consider the need for channel deepening and start to launch into its inception studies, the Drewry shipping study in particular. It was roundabout that time that the conversations and discussions and interaction with the VCA department started to focus on the issue of channel deepening.

Mr HALL — Thank you for that. Can I also ask about the project review committee. I note at paragraph 37 of the submission you talk about the project review committee for this particular project you also mention that a similar processes established for any project over the $10 million. So for any project that DOT is involved with to a value of over $10 million, is a separate project review committee formed for each of those projects?

Mr BETTS — The project review committee is a standing piece of machinery within the department which reviews each project as it comes through — each project in excess of $10 million in value. So there are parts of the department — we have a capital planning and review division which dedicates its life to making sure that as projects are proposed they are properly scoped, properly justified, properly costed. So, yes, each project, whether it is a rail project or a road project or a ports project, will be subject to review by that committee.

Mr HALL — And the workings of that committee, the outcomes, are they public documents or just simply advice to government?

Mr BETTS — It is advice to government.

Mr GARWOOD — I would just add to that that there is also a peer review element built into the project review committee, which is that we have to engage outside independent experts who are put onto the PRC process for the purpose of adding outside expertise in the reviewing of projects. So it is an additional element, quite apart from the fact that a range of the divisions of the department are represented and as well departments aside from DOT. So the Department of Premier and Cabinet and the Department of Treasury and Finance are also involved.

Mr HALL — This process of project review committees would apply to any roadworks — for example, a section of road that is opened — of more than $10 million in value?

Mr BETTS — I believe that is right, yes.

Mr CURRY — Yes, it would have to be.

Mr HALL — Rail standardisation et cetera?

Mr BETTS — Yes.

Mr GARWOOD — All projects over $10 million.

Mr BETTS — It is one of the forums that we use to try and ensure that an integrated approach is adopted to transport planning, so that if a proposal is coming forward from the public transport side of the department for passenger rail services, for instance, the interests of rail freight are appropriately looked after.

Mr GARWOOD — I might add it is a rigorous process, and we need to prepare — if you are a proponent division, in our terms, you need to actually do your homework before you present yourself before PRC, I would have to say.

Mr BARBER — Is it the government’s position that all the costs and paybacks of this project are going to be borne by port users, taking up those amounts that have already been contributed by the state?

Mr BETTS — My understanding is that the Port of Melbourne Corporation’s intention is that the total cost of the project should be financed through user charges over time, such that the residual cost to the port is zero.

Mr GARWOOD — If I could just add to that, there is a contribution from the government — —

Mr BARBER — We know about that.

Mr GARWOOD — It is $150 million to the project and associated land infrastructure.


Mr BARBER — You say it is the port’s intention. I am asking if it is the government position just because a number of your key barrackers turned up here yesterday somewhat taken aback and now lobbying that those port charges should be reduced or constrained or that the state should put in more money. To be clear, that is not the government’s position, is it?

Mr GARWOOD — I can be clear on that. The government has made its position clear. It has made a contribution and that the port users are required to pay for channel deepening.

Mr BARBER — So when there the PRC and/or the Gateway groups were looking at these at this project, am I right in guessing that they looked at it as: here are the costs which will be borne by the port; here are the revenues which will be retained by the port; and the business case was effectively matching of those two?

Mr BETTS — Yes. That would have been a subcomponent of the considerations. It was not as simple as that. There was plenty of material which was reviewed as part of the business case but that would be the fundamental financial equation.

Mr BARBER — All the information that is released publicly and that we have been talking about is economic analysis. It is about the benefits to some group of people versus the costs, and so I am asking you to assure me that the analysis of the Gateway group which you said reported in September 2007 looked at this as a commercial project which would be contained within the port’s balance sheet.

Mr BETTS — Not having been at the Gateway discussions I cannot comment on that, but I am sure that was right.

Mr CURRY — We would need to get the port to confirm that in terms of the Gateway process.

Mr BARBER — Were not you guys on the Gateway?

Mr GARWOOD — No. The Gateway is a process that is responsibility of the Department of Treasury and Finance. It is not the responsibility of the DOT.

Mr BARBER — So you were not on it?

Mr GARWOOD — No. We were not a part of the Gateway process.

Mr BARBER — Did the PRC do the analysis that I just described, which is expected revenues from user charges and a little bit from the government versus the costs hurdle rate of return that the port is required to deliver — that is your business case. Is that what the PRC looked at?

Mr GARWOOD — Yes, that is what the PRC considered.

Mr BARBER — What were the headline sort of findings at that: the NPVs, rate of return?

Mr GARWOOD — Those are listed here in the submission. Perhaps if you would like us to go through them?

Mr BARBER — No. Sorry, which submission? The government’s submission?

Mr GARWOOD — Yes.

Mr BARBER — Does that report the outcomes of the PRC analysis?

Mr GARWOOD — It reports the benefit cost — sorry the BCA process as reported here.

Mr BARBER — Yes, not the public stuff that we have already seen. I am asking about the specific business case — —

Mr CURRY — We are not at liberty to talk about the detailed considerations of PRC because that does constitute advice to government. But I think in the broad we can say that the benefit-cost analyses that are made public here were considered or fed into that process.


Mr TEE — Sorry, where you say ‘here’ in your submission, can you just point that out?

Mr CURRY — Yes.

Mr TEE — And is that in your written submission or in the submission you gave today?

Mr CURRY — In both. The witness statement reflects the government submission — if you go to point 53.3 in particular.

Mr TEE — Thank you.

Mr BARBER — So you cannot tell me what the NPV for the port of this project was as a result of the PRC analysis?

Mr BETTS — The role of the PRC is to review documentation which would in any case have to be prepared in order for the project to be justified — for instance, the business case. Therefore PRC does not generate in and of itself a whole bunch of analysis purely for its own purpose. It reviews documentation which is going to be created anyway, so PRC’s consideration would be focused on the business case prepared by the port at the time.

Mr BARBER — Which would have included an NPV for the port, not the NPV of the project or the cost benefit of the project for a wider group of users — the benefits being things like cheaper shipping charges but actually the revenues that the port thinks that it can or intends to charge. Yes or no?

Mr BETTS — To be honest we would have to take that on notice — —

Mr BARBER — Thank you.

Mr BETTS — Because I do not have the detail of the documentation that went to PRC in my head.

Mr BARBER — No worries. At paragraph 54 of your witness statement you say there is now a new Meyrick analysis produced since the time of your lodging your submission. Are you able to release that to us?

Mr CURRY — That was provided to the port at the port’s request from Meyrick and that is a question you might put to the port.

Mr BARBER — You are reporting on it to us.

Mr CURRY — That is the advice we have from the port of those revised figures.

Mr BARBER — Did they write this paragraph for you or did you see the document?

Mr CURRY — They provided us with that information that constitutes that paragraph.

Mr BARBER — So you did not read the Meyrick report — this latest one?

Mr CURRY — We have been provided with that information by the port.

Mr BARBER — This paragraph here?

Mr CURRY — Yes.

Mr BARBER — Okay. So for us and you to know if that is right, we will need to see that latest Meyrick report, won’t we?

Mr BETTS — You will need to talk to the Port of Melbourne Corporation about that.

Mr BARBER — I just wonder if you guys are making a warranty on their finding without having seen it, that is all. Just a couple of other more general questions about transport issues as they relate to the port. I have heard that 15 per cent of containers into and out of the port travel by rail. Do you know if that is right — about 2 million containers?

Mr CURRY — It is roughly correct. It may be a little lower, I think.


Mr BARBER — Do you know where those containers go or come from?

Mr CURRY — In the broad, yes.

Mr BARBER — Is it within Melbourne? Is it outside of Melbourne? Is it other states?

Mr CURRY — In terms of the containers travelling by rail?

Mr BARBER — Yes.

Mr CURRY — A number of them are interstate; a number would come from regional Victoria particularly in terms of export containers.

Mr GARWOOD — But I think in the broad we would say that approximately 80 per cent of the containers stay in Melbourne. They move around Melbourne basically and I think in the broad something like about 10 per cent would be regional Victoria and something like 10 per cent go interstate.

Mr BARBER — Eighty per cent of total containers, whether they travel by rail or truck — —

Mr GARWOOD — Yes, in total.

Mr BARBER — Stay within Melbourne. We know 15 per cent of those are railed containers, so does that 15 per cent come out of the 20 per cent that leave Melbourne, or what proportion of them are travelling within Melbourne is my question?

Mr CURRY — On rail, virtually none.

Mr GARWOOD — On rail, virtually none, yes.

Mr BARBER — So the 15 per cent are probably all outside Melbourne — —

Mr CURRY — Correct.

Mr GARWOOD — Correct.

Mr BARBER — Regional and interstate.

Mr CURRY — As I said, regional and interstate.

Mr BARBER — So if the number of containers is going to quadruple and 80 per cent of the stuff is moving around inside Melbourne, what is your plan to get more rail movement of containers within Melbourne?

Mr GARWOOD — It is a big — you are identifying a significant issue that the department is currently examining in some detail. It is a matter that I can comment on in that the government is developing a Victorian freight network strategy. Included within that strategy, which is due to be released some time later this year, are some directions associated with examining this particular issue about the viability of getting containers onto rail in the metropolitan area. But of course it needs to be something that is economically viable. We have a very efficient road network system and a very efficient trucking industry, but it is a matter that the department is keenly interested in.

Mr BARBER — Just to go back to that issue of draught constrained, did you say when you spoke on that that you had got data from the port, but that you had not necessarily independently verified the issue of what proportion might be draught constrained?

Mr CURRY — We have not done an independent audit of the port’s figures.

Mr BARBER — The ESC’s ports monitoring report says 14 per cent in 2005–06, and it is a recently released report, so are you interested in why there are so many different numbers floating around?


Mr CURRY — It is the kind of number that will fluctuate from month to month or quarter to quarter. The trend is an upward trend, and it has moved from that to figures around 25 per cent and then more recently, in recent quarters, up around the 40 per cent mark.

The CHAIR — Mr Barber, we need to move to Mr Tee.

Mr TEE — Just on that, you say that you rely on the port’s figures in terms of constraint. Have you got any reason to doubt those figures?

Mr CURRY — None whatsoever.

Mr TEE — The other thing is we just talked about Hastings as the alternative. I think you indicated that Hastings is perhaps the future in terms of overflow and capacity and so on. I am wondering if you could give us an idea as to why Hastings is not a viable option now?

Mr CURRY — The reason for that is that the costs and time frames involved in developing Hastings as a significant container terminal facility are very significant. There are a range of issues, as people would be aware, including environmental and social issues, but just to get the transport and berth and related infrastructure in place is an extremely expensive process — multiple billions of dollars; just in transport links in excess of $1 billion we would estimate. In terms of time frames from the starting point of now, there are major scientific benchmark studies to be done, extensive environmental effects-type processes to go through. As we have seen with channel deepening, it has been at least a five or six-year process.

The Hastings development is a project of even greater magnitude than channel deepening, so optimistically it would take at least 10 years to get a major facility operating at Hastings, and the costs would be many times higher than the cost of channel deepening, so in an economic sense it makes much more sense to invest in the capacity within Melbourne and to plan long term for Hastings.

Mr TEE — Yesterday I think it was Ms Judith Muir from Polperro Dolphin Swims complained or suggested that there was not sufficient consultation. In terms of the channel deepening process can you give us a sense as to what consultation there has been with businesses who may be affected by channel deepening and what opportunities they had to engage in the process?

Mr CURRY — That is a question that the port can give a much more detailed answer to than I can, but I am aware that through the course of the project there have been a range of forums and advisory committee processes but also processes whereby the port has gone out and about to local government areas, addressed industry and business groups on a regular basis and kept them informed of the progress of the project and the arrangements for its development and implementation. That has been a major focus of the way the project has been managed by the port, so they could provide a lot more detail about that.

Mr GARWOOD — If I could add to that that the EES process and the supplementary EES process in themselves provide a number of weeks of public hearings and public submissions to be taken. So both of those processes were quite extensive and provide absolutely clear opportunities for people to be consulted and be involved. As Mark was saying, the whole process of the port has been around close collaboration and consultation with anyone who is interested in what they are doing with channel deepening.

Mr TEE — Finally, can you indicate as of today how the channel deepening is progressing? We got a figure of around 15 per cent yesterday, but I am wondering if that is right and if you can you elaborate on how it is going?

Mr GARWOOD — That figure is just over 15 per cent. The project has been proceeding quite smoothly from where we sit. We receive daily reports and weekly reports on progress with the project. As I said, it is proceeding quite smoothly from where we see that the environmental requirements are being met. It will continue on that path, we expect, but the department will continue to keep a close watch on how the project is rolling out.

Mr TEE — And nothing untoward in terms of the financial catastrophe or anything of that nature out there?

Mr GARWOOD — Nothing that we are aware of at this stage. Quite apart from the daily reports and the weekly reports and the monthly meetings of the channel deepening task force, the government and the department


are well apprised of progress. I meet with the CEO of the port on a fortnightly basis, as does the minister. The minister also regularly meets with the chair of the corporation, so there is a very free-flowing exchange of information between the port, the department and the government.

Mr GUY — The $150 million that the government is contributing, what is that actually for?

Mr CURRY — That is to contribute to the cost of the project and any complementary infrastructure projects that would — for instance, on the land side, on the berth side — contribute to the efficiency of movement of the cargo through the port, so it is for that combination of purposes.

Mr GUY — But when you say ‘efficiency of movement of the cargo’, what do you actually mean? Does it mean new rail, new roads or what are we talking about for $150 million?

Mr CURRY — It could be those kinds of things — to do with the movement of containers, for instance, once they arrive on the land side or are unloaded from the vessels. So there are a range of possible uses that that could go to.

Mr GARWOOD — It is a matter that it would be worth talking with the Port of Melbourne Corporation about. I mean, they have got a range of options available to them, including extension of Swanson Dock, some improvements on the land side in terms of container storage, and improvements on the rail interface and into the port, but the government has made a general contribution, and it is a matter in which they will work fully with the port.

Mr GUY — So at the moment it is just a general contribution to the ports. Will the port determine what it would like the money spent on, or will the port give a list of, if you like, priorities back to government and government will determine it? What is the process?

Mr CURRY — I think the expectation would be that the port will identify what it believes to be suitable projects and consult with the department on the appropriateness of those in terms of the purpose of the project.

Mr GUY — Is there an expiration date of the money if it is not all used by then, or is it all to go in the first couple of years?

Mr CURRY — I would have to take that on notice.

Mr GARWOOD — I do not believe that there is an expiration of the date on the funds, but there is an expectation, if I can just add to Mark’s comment, of liaison both with DOT and with DTF in relation to the use of those funds. I would not like to leave the impression that the port can do what it likes with those funds. In fact, there is a requirement to liaise with government on the use of those funds.

Mr GUY — Did the business case for channel deepening involve a freight logistics strategy?

Mr GARWOOD — No, there was not a requirement, in the way in which you put it, for that in working up the channel deepening project.

Mr GUY — So is there a freight logistics strategy?

Mr GARWOOD — As I indicated earlier, the government is committed to the development of a Victorian freight network strategy. The department is currently working on it at the moment. It has proposed to release such a strategy later this year.

Mr GUY — Who is actually doing it? Is it all internal, no external, or is it all —

Mr GARWOOD — No, the department has committed to external stakeholder consultation in relation to the development of a Victorian freight network strategy. Obviously the movement of freight takes place primarily in private sector business, and therefore it is important that government departments consult with industry stakeholders. That will be done in the period between now and later this year. The consultations around that have already started in terms of meeting with the Victorian Freight and Logistics Council, which represents a range of industry bodies, and also in discussions with the Victorian Transport Association, which is a peak body


representing large freight companies as well, and we expect to have more detailed consultations between now and the end of October.

Mr GUY — Are there any external consultants being used, or is it all being done in-house?

Mr GARWOOD — No, we are calling on external consultancies from time to time, as you would expect, and it is something that is important for the development of the Victorian freight network strategy.

Mr GUY — All right, thank you.

Mr BETTS — It is worth noting that we would not want you to feel that there was not a strategic framework within which the channel deepening project was conceived and the business case presented. Going back to the Victorian Ports Strategic Study, we were looking at strategic infrastructure issues at the time, but the thing called the freight network strategy is something which is in prospect for this year.

Mr GUY — Thank you.

The CHAIR — Thank you. If there are no further questions, I thank Mr Betts, Mr Curry and Mr Garwood for their appearance here this morning and for the department’s written submission. We will have a draft version of the transcript to you in the next couple of days for any corrections.

Witnesses withdrew.






Members




Substituted members


Staff


Witnesses

Mr D. Minnis, deputy chair, and

Mr M. Summers, chief executive officer, Australian Horticultural Exporters Association.


The CHAIR — I welcome Mr David Minnis, the deputy chairman of the Australian Horticultural Exporters Association, and Mr Maxwell Summers, the chief executive of the association. All evidence taken at this hearing is protected by parliamentary privilege as provided by the Constitution Act 1975 and further subject to the provisions of the Legislative Council standing orders. Any comments made outside the precincts of the hearing are not afforded such privilege. All evidence is being recorded by Hansard. Witnesses will be provided with a proof version of the transcript in the next couple of days for any corrections. I now invite you to make an opening statement or proceed to questions.

Mr MINNIS — Thank you. I thought I would just give a quick overview of horticulture, if I may, because you may not be terribly acquainted with our industry. If we look at the whole of horticulture, including the wine industry, farm-gate value is $7.8 billion, which makes it the second-largest agricultural industry in Australia. It is not often perceived that way because it is made up of many sections. If we look at rural employment and regional employment — Horticulture Australia, the peak industry body based in Sydney, estimates that 15 per cent of the rural workforce is involved in horticulture around Australia, so it is a very, very important industry in terms of regional employment.

In terms of exports, our organisation is only concerned with the export of fresh fruit and vegetables. That does not include wine or processed fruit and vegetables. It does not include nuts, which by and large are farmed by corporations which tend not to be terribly interested in joining industry associations; they like to do their own thing.

The fresh fruit and vegetable industry is struggling to be internationally competitive at the moment because of the dollar, the high exchange rate and the drought, and we certainly have production declines in Sunraysia and other areas where water availability is restricted. So it is not only the drought but also the cost and the availability of water which are restricting production. The other issue that really restricts our ability to export to the world is market access, and fruit fly is one of the quarantine concerns that continually comes up on our radar and prevents us from sending fruit to various parts of the world. As an exporter of stone fruit from the Goulburn Valley and Swan Hill, currently I cannot export stone fruit to the USA, Japan, Korea, China, the Philippines or India. So that really restricts our ability to get our product overseas. Unlike a lot of rural industries that have got much better access to markets, horticulture is severely restricted.

We export all in containers. We use refrigerated containers for 100 per cent of our trade out of Australia, other than citrus to the USA, where we operate charters out of the port of Adelaide. About 1.4 million cartons of oranges and mandarins are shipped to the USA using charter vessels, but the current charter market is very expensive, and industries are now moving more and more into containerised trade. Unlike the wheat industry, which largely exports bulk in bulk freight carriers, we export everything in containers, and therefore the operations of the port here in Melbourne are very important to us. That gives a quick overview, which leads on to the comments that we would like to make through Max.

Mr SUMMERS — Thank you. We have made a submission of a number of pages. The first 12 points I would like to speak to, if I may, and make additional comments on various claims that the port of Melbourne project rationale has made. Perhaps we would could use those as supporting comments for any questions to come on.

The CHAIR — The committee is keen to proceed to questions, given the limited time, so please keep your comments fairly brief and highlight the main points.

Mr SUMMERS — Yes. Thank you. If I can speak just very briefly to these comments.

The CHAIR — Certainly.

Mr SUMMERS — First of all, the exporters of fresh fruit and vegetables have not been consulted by the Port of Melbourne about its plans to dredge the channels in Port Phillip Bay. In fact we had our first meeting with the CEO of the Port of Melbourne on 18 March of this year. I wanted to make that point. Secondly, it should be noted that the Victorian Farmers Federation does not represent the views of the horticultural exporters.

Mr TEE — That much is clear.


Mr SUMMERS — They are primarily concerned in dairy and wheat farmer-type issues, and, as David indicated, we are very much interested in containerisation and shipments primarily out of the port of Melbourne. Thirdly, the decision to charge a channel deepening fee from 1 April is seen as charging a toll before the freeway is built and is very unpopular with port users at this point in time. The other part to that is that we have attached a copy of a bill of lading, and it is quite apparent that these fees are not transparent — the ones that are passed on by shipping lines. Often exporters are just not aware of what they are paying for.

Fourthly, Australian exporters of fresh fruit and vegetables do not generate sufficient volumes of trade to justify larger ships servicing the port of Melbourne, in our opinion. In fact the export trade has declined to a point where shipping lines are reluctant to position enough refrigerated containers at the port of Melbourne to service exporter needs, because they have to deliver containers out of Asia empty at additional costs.

The fifth point is that we believe the business case for the channel deepening project cannot be justified at this time on the basis of exports when, on average, 40 per cent of containers shipped out of the port of Melbourne leave empty as they need to be repositioned in Asia to supply the south-bound trade.

Point 6: in the business case there seems to have been an absence of solicited views from shipping lines themselves to determine their future requirements about ship sizes and draughts. As a result, the Port of Melbourne has apparently jumped to the conclusion that if a ship sails only 60 per cent full, then it is because of channel deepening restrictions. Our view is that it is the worst-case scenario — it is due to a lack of trade, not due to draught restrictions.

Point 7: shipping lines earn as much as 10 times more in freight on a container of imported goods in a dry box than they would for the same box going back to the same market in Asia. So weak is the export trade at the moment out of the port of Melbourne that some lines offer dry containers to potential exporters free of freight so that they can reposition that box in a northern port. The business case for this project, we believe, can only be justified on the basis of the growing volume of imports and not on the growth in exports in the foreseeable future.

Point 8: large ships sailing south from Asia with imports make their first port of call at Sydney, which remains Australia’s biggest import port. Their second port of call is the port of Melbourne, which is primarily an export port. Therefore, ships will mostly arrive less than full into the port of Melbourne, and, as we have indicated, they will leave the port of Melbourne less than full, so the need for deep draughts is questionable.

Point 9: the port charges, including channel deepening fees, seem to be inequitable for exporters as they are not charged on ships with a draught of less than 12.2 metres, but exporters using those ships are still required to pay that surcharge.

Point 10: it is the view of the AHEA that increased port costs will make the port one of the most expensive ports in Australia for horticultural exports. We are already seeing exporters looking at alternative ports such as the port of Adelaide because it is cheaper in road freight costs and import costs. Therefore we draw the conclusion that export usage projections supporting the business case for channel deepening indicating growth may in fact be grossly exaggerated.

Point 11: it is our view that it is scandalous that the Victorian government has remained short-sighted and has ignored its responsibility to invest more money in infrastructure for the long-term future of all Victorians by only agreeing to pay $150 million towards the cost of channel deepening, which in round terms is about 15 per cent of the total project funds, given that it has sold off Victoria Harbour to the Docklands Authority, it has sold off the World Trade Centre, and it gains around about $40 million a year in fees from the Port of Melbourne.

Our final comment is that the AHEA believes that as the business case for this expenditure is around about $1 billion, or heading that way, it could only be justified on the basis of a growth of imports and trade, so struggling exporters who do not need these additional benefits should not have to pay any surcharge at all, and the full cost of channel deepening should be borne by importers.

The CHAIR — Thank you for this addition to the original submission. Specifically in relation to the ninth point you made, can you expand on your reference to exporters using those ships still being charged a surcharge?


Mr SUMMERS — It is our understanding that ships that require less than 12.2 metres of draught do not incur a surcharge or a port channel deepening charge. However, the exporters who ship on those ships are required to pay a surcharge.

The CHAIR — Required by whom to pay the surcharge? Where is it — —

Mr SUMMERS — By the Port of Melbourne, as part of its port service charge.

Mr BARBER — On every container?

Mr SUMMERS — Yes, on every container.

Mr MINNIS — All containers pay the fee, as that bill of lading shows at item 4. We are already being billed. At item 4, the $148 on that bill of lading is port service charges, and that includes the channel deepening fee. In other words, there are very few ships at the moment that come into the port of Melbourne that require deep draught. There is only one line, to our knowledge, that requires deep draught. All of the other vessels are shallow draught, and for our trade, they are the sort of vessels that we ship to Asia and to Europe on. Therefore we are paying a fee for vessels because we use containers, not because the vessel is using the deeper channels.

Mr HALL — What was that port services charge prior to 1 April?

Mr MINNIS — It was about $76.

Mr HALL — And it has gone from $76 to $148?

Mr MINNIS — That is for one 40-foot unit. That is a 40-foot container, so two TEUs.

The CHAIR — Two TEUs.

Mr MINNIS — Yes.

The CHAIR — The other point related to that was at point no 10, where you indicated that the surcharge will make the port of Melbourne more expensive. The evidence this committee has received thus far is that the surcharge will only bring the port of Melbourne up to parity with the other major ports; you are saying that is not the case?

Mr SUMMERS — It is our understanding that it will be equal to or dearer than other ports. For example, it is our understanding that the port of Brisbane, which undergoes regular dredging, recovers its costs in a different way altogether and does not put a surcharge on users of the port at all. As a result, it is cheaper to ship out of the port of Brisbane than it would be to ship out of the port of Melbourne. That is our understanding.

The CHAIR — The base container charge in Brisbane, you are saying, is less than what is now being charged in Melbourne?

Mr SUMMERS — Our understanding is that the recovery of costs for dredging in the port of Brisbane is not incurred by port users.

The CHAIR — No, but what level is the container charge in Brisbane set at? It may not include a specific charge for dredging, but if it is already double what Melbourne was previously charging, it still will not be any more competitive than Melbourne after the levy has been added. That is my point.

Mr SUMMERS — I understand your point. I do not have that figure there, but my understanding was that this additional surcharge makes it more expensive. It obviously makes it more expensive to ship out of the port of Melbourne, and it is equal to or higher than others. That is our understanding now. I may be incorrect there.

Mr VINEY — You make the comment in your submission that you were not consulted on this project until 18 March this year. Can I ask: did your organisation put in a submission to the original EES process in 2004?

Mr SUMMERS — I do not believe we did.

Mr MINNIS — No, we did not.


Mr VINEY — What about in the supplementary EES process in 2005; did you put any submission in to that?

Mr SUMMERS — I do not think we did directly. It would have been on the basis of our involvement with APSA, the Australia Peak Shippers Association.

Mr MINNIS — Yes.

Mr SUMMERS — They would have been our spokesperson in that case.

Mr VINEY — There were public consultation processes conducted by the independent panel investigating the project in June and July last year. Did you go to those consultations?

Mr MINNIS — No, we did not.

Mr VINEY — I take it from reading your submission and hearing it now that you have the view that for various reasons you do not agree that there is the need for channel deepening, I guess, in terms of the deep draught vessels; you do not think that they are going to be required to come in here. Therefore you take the view that you should not be required to contribute to the costs of the project, which I guess is the essence of your submission; is that right?

Mr MINNIS — Well, we would question right from the beginning that the deeper draught is required for these larger vessels. There is no assurance that these larger vessels will come to Australia. The main shipping routes are in the Northern Hemisphere and we are on a trunk line — that is ostensibly what we are. As I said before, to our knowledge there is only one shipping line that brings in vessels of the size that would require that draught. Certainly people in our industry do not envisage that in the near future we will be exporting the volumes that would justify it. In fact the figures that the Port of Melbourne used for the daily throughput of fruit and vegetables across the port of Melbourne are totally inaccurate. They were 2200 tonnes per day, which is 800 000 tonnes per year. At the very best it is 500 000 tonnes of imports and exports of fruit and vegetables going through the port of Melbourne, so it is out by 300 000 tonnes. If that figure is open to question, you have to ask the question: how good are all the other figures in the document?

Mr VINEY — Well, we will check those things with the Port of Melbourne Corporation later. I guess my question is: are you aware of all the parameters of the project; are you across all the things that are being done as part of this project?

Mr MINNIS — Yes, we certainly are, even though we have not appeared. At the end of the day, we are a small association made up of businesses — I am a commercial trader; I do not get paid to be deputy chairman of the association — so we are not in the position to appear all the time.

Mr VINEY — No, I appreciate that.

Mr MINNIS — But we are well aware of all the arguments and we would question some of the rationale, certainly from our industry’s point of view, that has been used to justify the business case for this project.

Mr VINEY — Do you support all the non-dredging elements of the project, all the projects associated with the harbour-side work that has been done, the improvements to all the infrastructure associated with the port — set aside the dredging part — all the other things that are happening as part of the project?

Mr MINNIS — Look, if we can improve the efficiency of the port, we are obviously interested in that. I do take note of the comment made by John Lines from Shipping Australia that the days of river ports are gone and that greenfield sites are the way. Most capital cities around the world have moved their port facilities out of the CBD area of major cities. Certainly there will be a continuing problem in manoeuvring these big vessels in the River Yarra. So, to accommodate that, we understand and appreciate that they are going to have to dig the channels out, expand the wharves, strengthen the wharves and put in larger cranes. All that sort of infrastructure has to go in to make the port acceptable to these larger vessels.

Mr BARBER — Did you mean dig the berths out, when you said dig the channels out?


Mr MINNIS — Dig the berths out, yes, that is what I meant — East Swanson Dock, principally. That work is being done as a result of the requirement for the larger vessels.

Mr VINEY — I guess what I am getting to is: if all that work is being done, do you think that it is reasonable to be doing that work as well? Is that helpful to your industry, all that other work that is associated? Putting aside the issue of the deeper draught vessels — I accept your evidence that you do not support that — there is a lot of other work going into this project as well, isn’t there?

Mr MINNIS — Sure, and if that can improve the efficiency of the port, that would obviously be helpful. One of our concerns is that as an exporter when I deliver a container to the port of Melbourne — and I am loading fruit at Swan Hill — it has a half-hour timeslot to be delivered to the port of Melbourne. If that truck arrives late, I get charged a late fee. If the driver is stuck in a queue, I have to pay additional charges, because the trucking company is incurring extra costs. If we are going to double or quadruple the number of containers, it defies logic how we are going to cope with that, unless the port of Melbourne can come up with a more streamlined and efficient system of receiving containers. If they are going to be largely delivered by road, I for the life of me cannot see how I am not going to incur extra costs in the delivery of my containers to the port of Melbourne.

Mr VINEY — I agree with you. I think we might be in agreement here. What I am putting to you is that part of this project in fact is about improving the efficiency on the docks as well as the channel deepening, isn’t it? If the vessels are going to be larger and we are going to be bringing in more containers, we have to do more infrastructure improvements to the port itself, and that is part of this project. I guess what I am asking is: do you agree that users of the port should be reasonably expected to contribute to the cost of that component at least, even if you disagree with the channel deepening component? In other words, do you agree that users of the port need to pay for, contribute to the cost of, that infrastructure?

Mr MINNIS — But it is based on the premise that these larger vessels will come to Australia. Maybe it is imports that will drive it, but at the moment it is certainly not exports. When we are talking about 40 per cent of all the containers leaving the port of Melbourne empty, that is all export trade; it is not fruit and vegetables.

Mr VINEY — And if the port is more efficient, your industry will benefit, though, will it not? As a result of this other additional work — navigation aids, improved safety, improved movement on and off the docks, and all of that work that has been part of this project — your industry will benefit from that work?

Mr MINNIS — It depends how much of the costs are passed on to industry. At the moment it is $850 million.

Mr HALL — Thank you for your submission this morning. Looking at the submission you have made a number of claims challenging some of the assumptions made by the port of Melbourne in terms of its project rationale. It seems to me there are some serious issues within those claims that you have raised. In what forum have you put forward those concerns that you have?

Mr SUMMERS — We have put them through the shipping organisation that we work with and are a member of, which is APSA, and I understand it has had dialogue with the Port of Melbourne over a number of years. I understand there has been a number of exchanges of letters raising a number of these issues.

Mr HALL — Did you raise these issues with Stephen Bradford when you met with him on 18 March?

Mr SUMMERS — Yes, I did, perhaps not about all of these issues, but I talked generally about our feelings and our views on various issues.

Mr HALL — And particularly the area you have pointed out in terms of the amount of fresh fruit and vegetables being imported and exported — and I think David mentioned that before — how can they respond to that if there such a gross or 100 per cent inaccuracy in those figures, which you are claiming? What was the response?

Mr SUMMERS — That matter was not raised at the meeting with Stephen Bradford. That has really come out of subsequent analysis of the business case. It really became apparent when we looked at ABS data. We obviously have a feel for the amount of tonnage that goes out of the port of Melbourne, and we felt it was a bit


high. When we married up ABS data with this data we were surprised to see that there seems to be a discrepancy. I do not know why, but it is quite significant, and it is probably 50 per cent higher than it should be, in our opinion.

Mr HALL — So this is the first forum today in which really you have raised these issues in a public forum?

Mr SUMMERS — That specific issue, that is correct.

Mr BARBER — Your stuff goes out in refrigerated containers mostly?

Mr MINNIS — Correct.

Mr BARBER — How many of those containers went out last year from your members?

Mr MINNIS — Out of the port of Melbourne?

Mr BARBER — Yes.

Mr MINNIS — We used to say 5000 containers a year, but with the drought it is probably less than that. To give you an idea of costs, if I was to ship a dry-box container to Hong Kong, I might pay $300 in freight; if I ship a refrigerated 40-foot container full of fruit, I pay nearly $6000 a container.

Mr BARBER — In regard to this bill of lading that you have provided in your statement here, you say it is not very transparent, but can you give me a rough idea or a rough breakdown of what you are facing for that export component of your crop?

Mr MINNIS — It is not much — well, it is $70 a 40-foot unit. There is a cost of $148 there. The first item is freight, and then there are a whole range of other costs. There is quite a lot of costs there that keep being added on. The shipping companies are very good at adding fees on. We used to pay a $5 document fee which was introduced, and which we fought against because we knew it would climb. It is now $65 — for them to print our bill of lading. If the channel deepening fee is now $71 to $73 for a 40-foot container and the costs of the project blow out and continuing dredging is required to maintain the channel, what will be the fee in five years time? It might be $250.

Mr BARBER — They do about 2 million containers, and you are 5000 of those. I presume that is TEU, not 40-foot?

Mr MINNIS — That is TEUs.

Mr BARBER — Does that make you pretty much a captive customer anyway?

Mr MINNIS — We are a captive customer to the shipping lines. We are not in the position of a Murray Goulburn company, which exports 23 000 containers a year; and if a shipping line tries to put on an extra fee, Murray Goulburn says to the shipping line, ‘We will go elsewhere. We are not going to pay that’.

Mr BARBER — Where do they mean — a different line?

Mr MINNIS — To a different line?

Mr BARBER — But I am asking you from the point of view of a port and its charges. You cannot go from Swan Hill to Adelaide.

Mr MINNIS — We can. In fact this year there was a significant movement of cargo out of the Sunraysia region to Adelaide because of the saving in road freight and fuel tax; and Adelaide is encouraging us to use the port of Adelaide through a range of incentives.

Mr BARBER — So you have some choices, but the port of Melbourne is obvious — the port knows what Adelaide’s structure is?


Mr MINNIS — Of course, and a lot of ships do not call into the port of Adelaide. The port of Melbourne is the focal point. It is the largest container terminal port in the Southern Hemisphere, so of course a lot more shipping comes into this port.

Mr BARBER — Do you much about the growth in horticultural containerised exports through Melbourne over the last 10 years, what the rate of growth has been?

Mr MINNIS — It has declined, because exports have declined. In 2002–03, when the dollar was about 72 cents, we exported $830 million of fresh fruit and vegetables. We now export $500 million, with an exchange rate of 95. In our paper there is a graph there on page 7 which shows the sensitivity of currency to the export performance of horticulture.

Mr BARBER — Yes, I saw that. So when the port is projecting 5–6 per cent as an ongoing rate for 30 years for containers, that will not be coming from you guys?

Mr MINNIS — It certainly will not unfortunately.

Mr BARBER — Depending on the Aussie dollar and the like?

Mr MINNIS — Exactly, and that is the same with all commodity trades. At the moment the wheat price is $440 a tonne; it was $210 a tonne. It fluctuates, so it is very hard to project, but for our trade we have faced increasing competition from Chile, South Africa, Argentina and China — all low-cost labour countries.

Mr BARBER — There is almost as much in horticultural imports as there is in exports, according to your ABS figures?

Mr MINNIS — Imports have grown enormously. I have to say our most prosperous members of the association are those that are importing as much as they can. So we have seen exports decline by $300 million and imports increase by $200 million in the last five years. That is a $500 million turnaround in terms of trade.

Mr BARBER — You are called the Australian Horticultural Exporters Association but you have got members who are importers?

Mr MINNIS — Yes.

Mr BARBER — How many members do you have?

Mr MINNIS — We have about 80 per cent of all the members that do the trade. We have got about 80 members. We are characterised by small business. There would not be one exporter probably that would export more than $30 million. We are small traders, but we own the goods at the time of shipment. We do not sell on consignment; we sell forward. We are the owners of the cargo, and that is why we are paying the channel-deepening fee — not the growers.

Mr BARBER — So basically it is a 5000 container customer.

Mr MINNIS — Out of the port of Melbourne.

Mr BARBER — The port does not treat you like a big customer.

Mr MINNIS — Why would it?

Mr BARBER — I am just asking.

Earlier on when we were talking about developments around the port and you said you got support for some developments, are you basically saying that you certainly want the port to invest on the land side and around the berths? Have you got particular other projects that you think the port should be investing in there?

Mr MINNIS — We have certainly been interested in the efficiency of the cranes at the port of Melbourne. That has improved dramatically from about, from memory, about 14 TEUs per hour to 24, 25. That is a great improvement in productivity. One of our main concerns is access to the port of Melbourne when we have got problems with refrigeration in cargo — that has been an issue — and the monitoring of containers while they are


alongside, waiting to be loaded onto vessels. That has been an issue with us, but in terms of the efficiency of the port, the receival of goods at the port, that is of concern to us. For a long time we had queues outside the port of Melbourne and a truck would be in a queue for 4 or 5 hours. When it is 40 degrees in summer, that is not ideal.

Mr BARBER — So mainly that stuff you said earlier?

Mr MINNIS — Yes.

Mr BARBER — The whole basis of the benefits of this project are about savings made by shipping companies that are then passed on to customers.

Mr MINNIS — Yes.

Mr BARBER — I think their figure is that basically 99 per cent — or their analysis requires 99 per cent — of those savings to be passed through. Obviously your submission is that you think all those benefits will be retained by the shipping companies. Is that just from your point of view because, as you say, you are a small customer? You said Goulburn Murray would not cop extra charges.

Mr MINNIS — It could vary. First of all, we are saying of the containers that 60 per cent are full, 40 per cent are empty, then shipping lines are bearing a cost repositioning those containers into Asia to fill up with cheap imports from China. It is costing them to reposition the containers back into Asia. Why would they not try and recover that with savings if they do bring the larger vessels to Australia and to the port of Melbourne?

In other words, there is nothing that would compel them to necessarily pass all these advantages on to us. They may; they may not. At the moment they would certainly be looking to recover the cost of this repositioning of containers into Asia. There are vessels that leave the port of Melbourne that have huge numbers of empty containers — dry box principally, not reefer. Reefers by and large are fully used by the dairy industry, the horticultural industry and others that require refrigeration.

In terms of dry boxes, it is costing them to constantly reposition empty boxes back into Asia, and therefore that is a cost which they would look to recover some other way. I would think that would eat away at the supposed advantage and cost savings that we will receive from the channel-deepening project.

Mr TEE — I just wanted to pick up your point that this is really focused on importers — or at least the benefits are weighted towards importers — rather than exporters. I suppose I want to see how that fits with the evidence that we had from the VFF yesterday where it said that agriculture is a third of Victorian exports, worth about $7.6 billion. It is the biggest single export. Their view was, and they quote, that channel deepening is ‘vital for the agricultural sector to remain internationally competitive’. I suppose I am trying to grapple your views really with that view. I am wondering if you could help me navigate a way through.

Mr MINNIS — Traditionally the grain industry has exported in bulk carriers out of the port of Geelong and the port of Portland. That may change now because there is a world shortage of bulk carriers which are being converted to carrying minerals and coal. Therefore their price has gone up. That is why the grain industry currently is looking at using containers, virtually for the first time. Up until now, to my knowledge, it is only the rice industry which bags the rice up in New South Wales, sends it down by train and sends out in containers. But at the moment there are no rice exports because of the drought.

Basically if we are looking at grain, my belief is that— and I can speak from some experience; I was at one stage in my career in charge of all fruit and grain inspection for the state of Victoria — pulses and legumes and lentils and rice went out in containers, but wheat, barley, oats, all the big items went out in bulk carriers, not in containers. Dairy products by and large go out in containers — either reefer or dry box — casein and products that are temperature stable do not have to go out in reefer containers.

They are making a general statement, but I do not really know if they have got close enough to the action. I do not know if they really know what their members are saying. They are repeating comments that may be in a general sense, but whether they really know how the trade operates, I do not know.

Mr GUY — In your submission you have outlined a number of problems, some issues with the port of Melbourne. I just wanted to work out: are they mainly operation, efficiency, management, infrastructure? What are your major issues that you obviously have with the Port of Melbourne?


Mr MINNIS — At the moment we find that delivery of product to the port could be improved. The way in which we get access to the port of Melbourne, as I mentioned before, could be improved.

Mr GUY — That access issue, is that infrastructure related or is that being held up by poor management? What do you mean when you say you have got people waiting?

Mr MINNIS — It is more procedural. Our major problem in exporting fresh fruit and vegetables is the availability of reefer containers, so it is not so much the port itself. At the moment the port, in our view, probably works quite okay for our industry. Whether there is the need to increase the capacity, as this business case is suggesting, is the question we ask.

The availability of reefer containers, which is symptomatic of the comment that I made earlier — that we are at the end of a trunk line and shipping companies do not want to position expensive reefer containers down at Australia if they are not sure that they are going to be used or not going to be used for two or three months. In other words, those containers sit here unused. That is a cost and our competitors are able, with their increased volumes, to commit to exporting to various markets. We find it increasingly difficult and the drought has not helped. The port itself at the moment is adequate for our industry. There are these procedural issues that we could improve but that would be the major impediment.

Mr GUY — No more questions, thank you.

Mr BARBER — Just a very quick one: your submission reads very similar to the Peak Shippers Association, you are obviously of one mind on this?

Mr MINNIS — We are.

Mr BARBER — Who are the other members of the peak shippers, its other associations like you?

Mr SUMMERS — Other members? I do not have the list in my mind but certainly Murray Goulburn is a member, the wool people are members, the cotton people are members, I think the rice people are members, the BlueScope Steel people are members, the Motor Vehicle Movers are members. There is a broad cross-section and our primary interest is obviously in food and in like industries that use reefers, like we are required to do.

Mr BARBER — And you have all collectively, and individually as well, got a role through the Trade Practices Act so you must collectively be a pretty big customer of the port?

Mr SUMMERS — Collectively, yes, I think that members of APSA would represent a substantial number of movements of goods through the port.

The CHAIR — Mr Minnis and Mr Summers, thank you for your testimony here this morning. The committee appreciates your submission and the supplementary submission we have received today. We will have a draft version of the transcript to you in the next couple of days for any corrections. Thank you very much.

Witnesses withdrew.






Members




Substituted members


Staff


Witnesses

Mr S. O’Connor, economic adviser; and

Mr C. Smyth, marine campaigner, Australian Conservation Foundation.


The CHAIR — I welcome Mr Chris Smyth and Mr Simon O’Connor from the Australian Conservation Foundation. All evidence taken at this hearing is protected by parliamentary privilege as provided by the Constitution Act 1975 and further subject to the provisions of the Legislative Council standing orders. Any comments made outside the precincts of the hearing are not afforded parliamentary privilege. All evidence is being recorded by Hansard, and witnesses will be provided with a proof version of the transcript in the next couple of days. I now invite you to make an opening statement, if you like, or proceed to questions.

Mr O’CONNOR — Thank you. Just a brief opening statement from us, just referring directly to our submission and highlighting some of our key points: as a point of clarity from the outset I would also like to disclose my own personal association with Economists@Large, who presented here yesterday. Prior to joining the Australian Conservation Foundation in December I worked with Economists@Large last year to produce a submission to the SEES panel hearing and the expert witness report that we submitted there. I now work predominantly with the Australian Conservation Foundation, four days, and I still do some part-time consultancy with Economists@Large — just as a point of clarity.


Mr O’CONNOR — Just reiterating some of our key concerns that we have raised in our submission, the two major areas are that in the business case as presented within the SEES documents and particularly within the cost-benefit analysis by Meyrick and Associates, there are some major concerns there, but also we would like to highlight that since the approval of the project through the SEES process the business case has changed quite dramatically, so I would just like to highlight some of those issues.

Most particularly the capital cost estimates for the project have increased around 65 per cent in the few months since the approval of the project, and on the basis of that you obviously have a lot of implications for the benefit-cost ratio and the net project benefits, so you are really talking about a very different financial basis for this project now.

In particular the impacts on the benefit-cost ratio have decreased from about 3.3 to 2. Net project benefit is down to about 967 million without the inclusion of sunk costs and delays on the project, and the return on investment has decreased further than — basically we are looking at the project not really meeting a commercial rate of return of around the 17 per cent mark until 2023, so we are looking at a project with pretty low returns and very high risks. Clearly the opportunity cost of this investment therefore is quite dramatic. We would advocate therefore that this really is not prudent management of finances.

Importantly our analysis looks at the — the project is based largely on the forecast trade through the port. Our analysis indicates this is highly optimistic, particularly projecting this trade growth out 27 years. Clearly the impacts of oil price fluctuations, climate change and indeed the short history of shipping from which to make forecasts indicate that there is high risk of volatility in this projection. We have already seen the Port of Melbourne downgrade its forecast for container throughput in trade in this current year, projecting that that is decreasing from about 6 per cent to somewhere between 3 to 4 per cent.

What is quite important here is that there was actually no sensitivity analysis undertaken on this forecast growth of containers through the port, which is absolutely easy to do for an economist, to manipulate the model to change the forecast growth in TEUs going through the port.

These points are very critical, because in order to gain the public support for this particular project these are really the factors that are the basis of what has been put out there in public. One particular figure that is quoted often in public and was used in Shipping Australia’s submission to this hearing was that 44 per cent of ships currently arriving at the port are not able to load to full capacity due to draught constraints. I would argue from my reading of the SEES documents that in fact it is highly irresponsible to use this figure, that it is misleading and in fact we do not have data to substantiate this, as far as I have seen in any of the documentation.

In fact the SEES states that the number of ships coming through the port that use tide assistance is as low as 2 per cent. If this figure of 44 per cent is in fact true, I would ask the Port of Melbourne to actually name the vessels as they arrive and leave the port to give us an indication of exactly which vessels have these constraints.


The other thing about the forecast of container trade through the port that is particularly important is this impact of the levy, which has not been assessed in any of the modelling. What does the levy do to demand for trade through the port of Melbourne? That was something that was not raised in the SEES documentation, and I would say that there are certainly impacts on demand at the port due to increased pricing, just an elasticity of demand which needs to be modelled to really impact, how that affects the projected benefits over time.

Finally, we just raise the issue in our submission that there are a number of environmental costs that have not been costed by the economic consultant in the SEES documentation. This is entirely inadequate. There are definitely techniques that exist these days for evaluating environmental costs and environmental risks, as have been employed by the Exxon Valdez incident — that is, a contingent valuation technique, an environmental economic technique of valuation.

This is a method of valuation that has been prescribed in fact by Kenneth Arrow, a Nobel prize-winning economist, who asked that for the Exxon Valdez incident this be a valuation technique employed. So we really do need to be asking Victorians through a contingent valuation what is the bay worth to Victorians, what is the value of the bay, and then hold that up against the benefits and costs of the project.

Our position is that the Australian Conservation Foundation sees that there is not a strong enough business case to justify this project, considering the considerable risks to the fragile ecosystem. That is our opening statement. Thank you.

The CHAIR — Thank you. One of the points you make in your written submission on the second page is the reference to the benefit-cost ratio deteriorating from the original figure of 3.3:1 to 2:1. You then make the comment ‘in industry terms, an infrastructure project at less than 3:1 is deemed nonviable’. Can you explain on what basis anything less than 3:1 is not viable?

Mr O’CONNOR — Yes. This is an issue I guess in much the same way that there are many discussions around discount rates. These are the kind of back of the envelope figures that, if you are an infrastructure investor in an investment bank, you would have to achieve to proceed with a commercial investment. This kind of figure has been thrown around in the press and between discussions with investment banks — my own personal discussions with Macquarie Bank — so that is what that is based on.

The CHAIR — I do not know if you are aware of the evidence this morning from the Department of Transport, and indeed VECCI yesterday, who essentially said anything better than 1:1 is viable for a large infrastructure project.

Mr O’CONNOR — A large public infrastructure project or a private infrastructure project?

The CHAIR — An infrastructure project.

Mr O’CONNOR — I would argue obviously that as we saw in the discussions yesterday, this is a private investment I guess from the Port of Melbourne as a government business enterprise, a corporatised business. So it needs to be achieving commercial rates of return, yes.

The CHAIR — The other point I would like to ask you about is the issue of the lack of modelling of the impact of the surcharge in the business case. One of the previous witnesses helpfully included a bill of lading in their submission for a 40 foot container, 2 TEU, the total cost from Hong Kong to Melbourne was just over $3700. Given the impact of the surcharge would be $60 on that — 2 TEU — do you believe that is significant in terms of needing to model that for the business case?

Mr O’CONNOR — I do not think that is something that I as not being an exporter out of the port can answer. I think it was quite astute of the submission from the Australian Horticultural Exporters Association to say that they were not asked whether their businesses can actually bear those cost impositions. I think that is a critical point.

The CHAIR — Wouldn’t the critical point be whether that cost impost will change behaviour?

Mr O’CONNOR — Absolutely.

The CHAIR — And at just on 2 per cent, whether that would change behaviour?


Mr O’CONNOR — It depends largely on the margins of that business, I would expect. It may well do. I cannot answer that, not being an exporter out of the port.

The CHAIR — Okay.

Mr VINEY — You mentioned that you did not believe the project costed in the potential environmental costs. What are they? What environmental issues did you think were not costed?

Mr O’CONNOR — In particular Meyrick’s report stated that it did not cost the impacts of waste discharge, mobilisation of contaminants and turbidity amongst other things. But there is a section in their report that says we have not quantified these risks.

Mr VINEY — Why did you give the Exxon Valdez example?

Mr O’CONNOR — Because we look at methods of valuing a natural environment, something that is unpriced in the market. Environmental economic techniques are developed to value what is traditionally unpriced much in the way that carbon is an externality that has not been priced in the market in the past, and an emissions trading scheme is an attempt to price that. It shows that often when we look at a natural asset we undervalue it because it does not have a price in the market. It does not have an immediate price to the multiple users. To do an effective assessment of the risks of a project such as this, we really need to know the full valuation of that asset that is at risk and to do that, a contingent valuation would be a useful tool.

Mr VINEY — I ask you: you raised what is a fairly significant environmental disaster as an example — —

Mr O’CONNOR — Yes.

Mr VINEY — I am just interested whether you think channel deepening will increase the risk of an Exxon Valdez-type incident in Port Phillip Bay?

Mr O’CONNOR — That is not what I am advocating by making that statement. I am saying that we need to know the value to Victorians of that asset before we take an investment that has risks associated.

Mr VINEY — So it is not your evidence that there is an increased risk of an Exxon Valdez-type disaster in Port Phillip Bay as a result of this project?

Mr O’CONNOR — That is not what I am advocating in my submission.

Mr VINEY — I just want to be clear because it is a fairly emotional suggestion that you made. I have no other questions.

Mr SMYTH — No, I think Simon has used an example as more about the economic valuation not about whether in fact there was going to be a break up of a ship and an oil spill.

Mr VINEY — That is great. That is fine. I just want to be clear about the reason for the example being raised.

Mr HALL — Thank you for coming in this morning. The first question is — and it is probably to you, Simon — would you regard channel deepening as a public infrastructure or a private infrastructure being developed?

Mr O’CONNOR — I think this is a discussion that as I came in yesterday I noted as being a point of much debate. But I think as the Port of Melbourne presents itself as a GBE, this would therefore have to be assumed to be a private infrastructure investment. What we can really see is that you can compare the opportunity cost of such an investment so we can say that this same investment could achieve a certain rate of return elsewhere. I would say that this is a private infrastructure investment.

Mr HALL — In the same category you would say maybe rail would also be private infrastructure?

Mr O’CONNOR — I would probably draw the link more directly to a toll road or a — —


Mr HALL — Is that one of the reasons why you say it is inappropriate for the government to make a contribution of $150 million to this project?

Mr O’CONNOR — I think it is inappropriate until we see that the benefits are clearly established here and what exactly is the government getting as a return for that investment of $150 million.

Mr HALL — So that is why you do not believe the cost benefit work has been rigorous enough or inclusive enough of a whole range of issues, including some costs that you mentioned here?

Mr O’CONNOR — Yes, and I just think when some of the key assumptions beneath can be questioned quite easily and the dramatic impact that has on the returns from this project, then it really does, yes exactly, support what you have said there.

Mr BARBER — To be clear, was your point about the Exxon Valdez that it took an Exxon Valdez to get those responsible for shipping to start valuing the environment for what it is really worth? Otherwise it has not really been done, has it?

Mr O’CONNOR — It is a methodology that has been applied in other areas. I believe it was applied in Kakadu early in the establishment phase of the national park up there, the contingent valuation.

Mr BARBER — But you cannot find examples from other ports around the world where they have valued the environment in which they operate?

Mr O’CONNOR — That is right.

Mr BARBER — Yesterday we had a submission from the freight and logistics council, where they attempted to value, I think, the avoided greenhouse gas emissions, and they handed over at the time a spreadsheet. If the basic parameters are there would be a fourfold increase in container movements, according to the port’s evidence, and ships may become somewhat more efficient, can you from that speculate about how you might go about analysing the greenhouse gas benefits of this project, adding those in?

Mr O’CONNOR — Yes. Certainly theoretically we could do some analysis around that to ascertain the benefits from a greenhouse gas emissions perspective. I think there are probably a lot of assumptions behind their modelling as to loading and unloading time on the side of the ports, but theoretically that could definitely be calculated.

Mr BARBER — Are greenhouse gas emissions from international shipping the responsibility of any particular country under the Kyoto protocol?

Mr O’CONNOR — They are exempt.

Mr BARBER — Completely exempt, which means it would make it very hard to put a value on them, given that nobody is going to end up paying for them?

Mr O’CONNOR — That is correct. At this point in time there is no inclusion of shipping in any emissions trading scheme.

Mr TEE — I want to pick up on a couple of points that you made. You talked about the impact of the levy. I think you were saying, as I understand it, that not enough work had been done in terms of that issue. I suppose I am not sure on what basis you make that statement. Yesterday we had evidence from VECCI and the VFF, who essentially say that their members will wear the cost of that. Obviously they would prefer government to pay for it. They prefer government — —

Mr BARBER — No, they did not. They said they want to be exempted from it.

Mr TEE — They said they would prefer government to pay for it, but if they were required to — which is the scenario at the moment — then the benefits of the project were such that they would wear those costs. I suppose in that sense if the business community thinks that the levy is worth the benefits of the project, on what basis does the Australian Conservation Foundation challenge what really the business community is telling this committee?


Mr O’CONNOR — I would say they represent a portion of the business community. I think the Australian Horticultural Exporters Association would argue that they do not represent all the business community, and that is not a consensus perspective. I think that is a really important point. Like I said before, I think that levy is going to impact different businesses at different rates, and it is not something that I can really establish exactly who is going to be hurt from it. But I think the point raised by the Australian Horticultural Exporters Association probably hit the nail on the head in that predominantly, due to the large proportion of imports compared to exports using the ports, it is going to be predominantly a penalty on exporters disproportionate to those who actually gain the benefits from the dredging. I think that is probably the important point there — that in fact when you have exporters who are not asking for this project to go ahead, of which there are many, then they are in fact being penalised for what they do not perceive to be any benefits accrued.

Mr TEE — But they are just trying to focus on the cost.

Mr O’CONNOR — Yes.

Mr TEE — Again, it is a matter for the committee to weigh up the various views that we have heard, but I suppose part of that is that our biggest exporter is agriculture. The VFF says it is worth $7 billion compared to the $500 million from the Australian Horticultural Exporters Association, so we have got small but important versus the large. I suppose the other point I wanted to make or question is again on this issue where the business community say, through VECCI with its 15 000 members, that most infrastructure projects require a BCR of one to proceed — sometimes less if the piece of infrastructure is strategic. On what basis is the Australian Conservation Foundation challenging that view?

Mr O’CONNOR — Specifically the benefit–cost ratio.

Mr TEE — Yes. One to one is what the business community is telling this committee. On what basis are you challenging that view?

Mr O’CONNOR — I would like to see which infrastructure project has gone ahead with private funding and a benefit–cost ratio of one to one. I am not aware of any. If I am wrong, that is fine, but I am not aware of any. Perhaps they have the ability to say that because they are not wearing the risk of that direct investment. They are not having to raise the finance privately, particularly not in the environment we have currently of raising finance. I am not sure. That is the only response I can provide for that.

Mr VINEY — How many have gone ahead with more than three?

Mr O’CONNOR — More than three?

Mr VINEY — Yes; infrastructure projects.

Mr O’CONNOR — Any one that has been financed by Macquarie, Babcock and Brown, Transurban, ConnectEast Group — all of these have gone ahead with a benefit–cost ratio over three.

Mr VINEY — And you are putting the port in exactly the same category as the tollway?

Mr O’CONNOR — I am saying they need to raise finance in the same environment and repay finance in the same environment. In effect, they need to be able to demonstrate sufficient returns to be able to service that debt.

Mr TEE — What we have received obviously are the views of PricewaterhouseCoopers, and then the other views that have been put to the committee are that those figures that they have used are conservative in terms of the trade through the port, which has been 8 per cent on average for the last 16 years and 10 per cent last year. They were conservative in the sense that the freight logistics council said that the cost of not proceeding was $8 billion. They were conservative in terms of the $15 billion that VECCI said was the ballpark range for benefits. I suppose I am just trying to see how the other evidence is conservative, but you have got a different view. You are saying that those figures are not conservative and that they are risky. I am just trying to fit all that together.

Mr O’CONNOR — The PWC report is clearly raised often as some pretty strong evidence. It clearly states that its forecast projections for container growth through the port come directly from the Port of Melbourne Corporation. We would question that they have been overly optimistic about that forecast and trade projections.


Mr TEE — Even though they have had 8 per cent over the last 16 years and 10 per cent last year?

Mr O’CONNOR — Yes, and they have stated in the Age earlier this year that they are restating their forecast for this current year down to 4 per cent from 6 per cent, so already. We are projecting out 27 years in an economy that is going to change dramatically, globally. They are very courageous projections and forecasts. The other thing I would like to just refer to is, you mentioned the Victorian Freight and Logistics Council saying that they have seen an opportunity cost of not proceeding with the project of $8.5 billion, which was evidence they raised in their submission.

Mr TEE — Yesterday. I thought it was $8.1 billion but it might have been — —

Mr O’CONNOR — Sorry, it may well be. I did have a look at that submission. I was interested to note that they added this report at this time in this hearing. It was a report that was dated December 2005. It was eight pages without anyone’s name on it. It said that it had been independently reviewed. It did not state who had reviewed it independently, and it was produced at this time. It was not provided to the SEES inquiry. I would say that is nearly enough to dismiss that as evidence. I would not put too much faith in those figures from that perspective.

Mr TEE — I think they had the economist here.

Mr VINEY — They did it right here, giving the evidence.

The CHAIR — We might move on to Mr Guy. We can come back, Mr Tee.

Mr GUY — Thank you. I just have one area of interest and that is the infrastructure around the port and as you say on, I think, page 3 of your submission, accessing the port and the bottlenecks and the congestion and crowded roads around the suburbs if the channel deepening project proceeds. Does ACF have any alternative views, if we will have increased handling or usage of the port, as to what we should be doing long term with Melbourne’s container port traffic?

Mr O’CONNOR — Yes, I think it needs to be part of an integrated transport strategy but we have not assessed it. Any investment on this scale in the port infrastructure in Melbourne needs to be compared to an alternative. In any cost-benefit analysis an alternative should have been provided; it was not. Whether that is a port of Hastings or a Portland or land bridge in between Brisbane and Victoria, I do not know, we have not done the analysis, but I would say that that is a really, really integral part of this process, and that should have done.

Mr SMYTH — Just to add to that, certainly ACF would see this as being part of a national transport strategy. We really do need to be looking at how our ports, our roads, our rails all link up nationally rather than trying to see states competing with each other for the best port, the deepest port or whatever. That starts to really create some inefficiencies. I also think the point that Simon has alluded to is that some of the trade growth statistics are quite heroic in terms of what they are suggesting in terms of trade over a long period of time, and we need to take into account things like the cost of fuel, how that will influence shipping, movements around Australia, whether they may in fact start to use rail coming into certain ports rather than coming down this far south. All those sorts of things need to be taken into account when looking at, I guess, the economic output in terms of the analysis.

Mr GUY — Is it cheaper to keep a container on a ship and bring it all the way down to Melbourne as opposed to taking it off and handling it in Brisbane where the costs are higher then putting it on a train?

Mr SMYTH — When fuel possibly reaches $200 a barrel I think they will be starting to think very seriously about how they actually start to move containers around. I think that is something which will need to be questioned by the transport industry.

Mr GUY — Yes, no more questions. Thank you.

Mr BARBER — Where carbon emissions have been formally traded, such as the emissions in the European market or even some of these other more futuristic trades that have gone on, what has been the price of emissions in dollars per tonne?


Mr O’CONNOR — Of a certified emissions reduction unit, for example, in the EU? They tend to be modelled on about $25. I think in phase 2 of the EU emissions trading scheme they are currently projected at around the equivalent of A$40–45.

Mr BARBER — Thank you.

Mr VINEY — You made some criticisms of the projections for growth of the models that the business case is assessed on. Have you got projections that you would base your models on?

Mr O’CONNOR — No, but what I would probably say — I have not done that analysis of projections because we do not have access to the model that Meyrick used, in which we would need that model to manipulate to do that, but the sensitivity analysis should have been done in that cost-benefit analysis.

Mr VINEY — So what are you saying is going to happen to trade in the port?

Mr O’CONNOR — We are saying that there is massive room in a 27-year forecast period for volatility around that projection that has been forecast.

Mr VINEY — Is it reasonable though to ultimately make a judgement? You have to make a judgement as to how you see it in order to assess the project.

Mr O’CONNOR — I could definitely do the modelling for you under a climate change scenario or a high oil price scenario that would dip the container trade into Melbourne dramatically due to that. There are a number of assumptions and we can do the modelling in that way.

Mr VINEY — But you cannot give this committee advice as to what you think it should be.

Mr O’CONNOR — I would say that under a climate change scenario where we have a 50 per cent reduction target by 2050 in Australia and oil price projections where it could be, as analysts have said recently, up to $200 per barrel, we would see lower growth in container trade through the port of Melbourne than what has been presented.

Mr VINEY — Will it still grow?

Mr O’CONNOR — It will still grow, I would assume.

Mr GUY — You would have to factor population growth into that as well, too.

Mr O’CONNOR — Yes, that would be a factor we would include in the model.

The CHAIR — Thank you. Just in the minute or two left, can I ask you to comment. At the bottom of page 4 of the submission, you have made the statement:

ACF urges the inquiry to recommend that the project is inappropriate for Victoria and should cease immediately because the project’s economic arguments cannot clearly demonstrate a benefit to Victorians.

Now that is, I would have to say, beyond the scope of what this committee can recommend, but does the ACF stand by that position given there has been $190 million in sunk costs so far, the port tells us they are 15 per cent into the project so roughly $300 million has been spent to date. Is it still the ACF’s position that the project should cease immediately?

Mr O’CONNOR — I think that would still be the ACF’s position.

Mr SMYTH — Yes, basically the submission we have given today is around about the economics of the project. We see it as having three elements to it: social, economic and environmental. Certainly in terms of the environmental risk, we still see a very big risk to the bay in terms of the affect on things like sponge gardens and seagrass meadows, the movement of toxic materials around the bay as well. There are certainly some big risks associated with the dredging. When you look at the environmental risks and the social impacts — for instance, in terms of recreational fishing or commercial fishing or just people using the bay more generally — I think there are certainly some risks there. So when you put all these three elements together — there are some major concerns we have with the project, and we would argue that it should not go ahead because of, I guess, the weaknesses in the


way in which the project is being managed in terms of environmental management, in terms of its environmental controls and so on, the lack of evaluation of some of those environmental and social assets, and the need to really look more closely at the economic arguments.

We would certainly suggest that this is something which probably the Auditor-General should look at in terms of trying to come to grips with the nature of the project from an economic point of view. We think there are some really serious questions that can be raised about the economic processes being followed in terms of developing the benefits and the cost benefit arguments. The sort of work that Simon has been doing and projected today I think certainly adds a lot of weight to that.

The CHAIR — Thank you very much for your appearance here this morning, Mr Smyth and Mr O’Connor. The committee appreciates your evidence and also the written submission that we received. We will provide you with a draft version of the transcript in the next couple of days. Thank you very much.

Mr O’CONNOR — Thank you.

Mr SMYTH — Thank you.

Witnesses withdrew.






Members




Substituted members


Staff


Witnesses

Mr S. Bradford, chief executive officer, and

Mr N. Easy, executive general manager, channel deepening project, Port of Melbourne Corporation; and

Mr R. Yeung, alliance general manager, and

Mr J. Haak, senior legal executive, Boskalis.


The CHAIR — I declare resumed the Legislative Council’s Standing Committee on Finance and Public Administration. Today’s hearing is in relation to the inquiry into the Port Phillip Bay channel deepening project, specifically the business case for Port Phillip Bay channel deepening, as presented by the Port of Melbourne Corporation, the Victorian government; and the legal and financial arrangements between the Port of Melbourne Corporation and Boskalis Australia Pty Ltd and its parent company, Royal Boskalis Westminster.

I welcome Mr Stephen Bradford, the chief executive of the Port of Melbourne Corporation; Mr Nick Easy, the executive general manager, channel deepening project for the port of Melbourne; and Mr Jan Haak and Mr Raymond Yeung from Boskalis.

All evidence taken at this hearing is protected by parliamentary privilege, provided by the Constitution Act 1975 and further subject to the provisions of the Legislative Council’s standing orders. Any comments made outside the precincts of the hearing are not protected by parliamentary privilege. All evidence is being recorded by Hansard. Witnesses will be provided with a proof version of the transcript in the next couple of days.

I now invite you to make an opening statement, if you would like to, or we will proceed to questions.

Mr BRADFORD — Thank you, Chair. With me today is Nick Easy, who is the executive general manager of the channel deepening project; Mr Jan Haak, who is the senior legal executive from Papendrecht in the Netherlands for Boskalis; and Mr Raymond Yeung, who is the alliance general manager, based in Melbourne for the project. Handed out to members of the committee is a detailed submission for the Port of Melbourne Corporation and some slides which I will talk to shortly — I am not intending to read that detailed submission, I will address slides — our annual report and our pricing schedule. After I have presented these slides, Mr Haak would like to make a brief statement on the Boskalis position.


Mr BRADFORD — Just briefly describing the port of Melbourne, 70 per cent of the ports business is containers; 86 per cent of the channel deepening benefits relate to the container trades. Yes, we are the no. 1 port in this country for the import and export of motor vehicles. We have a smaller trade in grain, petroleum, cement and other products, but Melbourne port is characterised by the container industry. We handle over 2.2 million containers a year, or TEUs — 20-foot equivalent units — and for 16 years we have had consecutive growth at an average of 7.8 per cent per annum. We handle around 38 per cent of the nation’s container trade, equivalent to Fremantle, Adelaide and Brisbane combined. That is worth about $100 million in exports on average every day through the port, and we believe trade generates tens of thousands of jobs. In world terms, we are about no. 55 in world ports. For a nation of 22 million people, we think we punch above our weight.

The Port of Melbourne Corporation is governed by the Port Services Act. The Minister for Roads and Ports, in consultation with the Treasurer, appoints the board members, chairman and deputy chairman of the corporation through the Governor in Council process. The board’s role is to recruit and retain the chief executive officer in consultation with the two ministers, and it is my role to engage the management team.

I refer to the alliance between Boskalis and the Port of Melbourne Corporation. The board, which is effectively the alliance executive team, has four members: Nick Easy and myself from the Port of Melbourne Corporation, Mr Mattys Siebinga and Mr Martin Dekker from Royal Boskalis.

Talking about the project alliance, why did the VCA at the time embark on an alliance and not more traditional forms of project management? This is a unique and complex project with a high risk at inception. Whilst the Port of Melbourne and the VCA had regularly done maintenance dredging in and around the berths, the last major maintenance program was in 1986. In that time, the Port Phillip Heads were blasted. That is inappropriate in 2004, 2005 or today, so it required a new solution. The VCA determined that the best way to do that was to embark on a worldwide study of who would be best suited to tender for this work.

The world of dredging is made up of four major dredging companies — they are typically Dutch or Belgian — and a few others that most independent observers would admit are probably lower order or particularly focused in the United States. In doing that assessment they made an assessment that they should invite six parties to tender, and also, of course, appointed a probity auditor to oversee the project. No local or Australian-owned dredging company was available or capable of doing a project of this magnitude. This, in port of Melbourne terms, is a very large


capital project. The largest project previously probably was the Coode canal in the late 1880s. This is a significant project.

The planning and approval process was thought at the time to require considerable intellectual input from the selected dredging partner. Time has proven that that was exactly right and how much involvement with the partner was required was probably underestimated. Of course, the environmental controls for delivery must be discussed with the partner through the process, and the alliance concept has served us well.

The alliance agreement was signed by the Port of Melbourne Corporation with Boskalis in 2004. There are other experts who assist the corporation and Boskalis in this project. The part of the direct cost estimate that I will explain shortly is based on actual direct costs of Boskalis or of contractors it uses and of wages it pays. We have appointed KPMG to independently audit those costs to show to both parties that they are actually costs and that they are not being inflated.

Secondly, Boskalis felt that the port of Melbourne’s knowledge of dredging was not equivalent with their own and would benefit by and strengthen the alliance by appointing an alliance partner who had expertise in dredging, an alliance independent consultant. You will see in our papers Evers Consulting, or Heini Evers Consulting, performs that role. Also, with the approval of the secretary of DSE, we could use Mr Nick Bray, who is part of the expert panel.

In setting the alliance, of course you have to test the health of the alliance to make sure that both parties are abiding by the spirit and intent of the agreement from the original days. SRD Consulting performs that. Staff working in the management area of the project are all pre-trained by SRD, so they understand that this is a not a master and servant, this is not a contractor dominating those paying the bills; this is an alliance worked on a simple principle of ‘best for project’. The alliance partners share and manage the risks and responsibilities collectively.

The most important part to start is the direct cost estimate. The alliance management team was required to come up with a final direct cost estimate taking into account known risks and sharing those risks and explaining those to the alliance executive board and explaining how they came up with a final direct cost estimate, built on direct costs — no overheads, no profit, no add-ons, no kickbacks from suppliers. This is direct cost.

You would expect that in doing that, to give you a few examples of the risks, they considered weather. Weather in Melbourne is not always consistent. Would weather affect the Heads, and therefore how should the partners approach that? So we discussed that at length. The potential for industrial disputes: reasonably infrequent in Victoria, but a potential. How would we handle that, how would the project manage it? They were part of effectively sharing the risk.

Key performance indicators were also agreed by the parties, particularly on the environmental side. Strong incentives are on Boskalis to achieve the environmental management plan. The environmental management plan is the rule book; that is the rule book by which this project is governed. We wanted them not only to say, ‘Well, that’s interesting’; they are committed.

The pain-gain share regime is another way of saying: if Boskalis does a good job, if they are ahead of schedule, if there are cost savings compared to the direct cost estimate and they achieve the environmental objectives, they will share the profits of this project. If they take longer, if costs exceed the direct cost estimate, they will share those costs. The percentage of those costs shared is a matter that the parties agreed before they set the direct cost estimate. So effectively this is a pain-gain. There is no incentive for Boskalis — as some people may well suggest — why wouldn’t they just go rip, tear and bust, and take the sand away? Because if they did and if they breached the environmental management plan they would get nothing. If they have misread badly the dredging market or some of the risks, they will bear some of the pain, as will the Port of Melbourne Corporation. This is a true alliance, where you have to align two parties to achieve a common objective.

The overhead and profit margins were established in 2004. One of the first roles was to robustly, as a partner would do, discuss and agree: what are the appropriate overhead and profit margins? They were agreed some years ago. The market in dredging has changed since that time. What occurred since then, there has been an explosion in the demand of coal and iron ore by China and the desire of the Middle East, particularly Dubai and the United Arab Emirates, for dredging projects. The dredging market is probably at its peak; this is a very good time to be a dredging company. The profit and overhead margins agreed in 2004 apply today. If we were to tender today, we would pay much, much more.


It also involved intimate involvement in the planning and development phase. So the parties worked together to understand, including discussions on matters: how would the corporation assess the work that is actually done? How do you do that independently and how does Boskalis prove it? The trial dredge program was suggested by parties external to the corporation and external to the alliance. It proved to invaluable in the supplementary environment effects statement. The alliance agreement gave the Port of Melbourne Corporation through the alliance the ability to ask Boskalis to bring their major dredge to do an eight-week program. If we did not have an alliance program, I would doubt that any dredging company in the world, at a time when their business is growing, send their most significant vessel to Melbourne to trial so that the intellectual property gained would then be shared to the world. Why would you do it? They did not expect to do it. It came, as we would admit, as a surprise, but an excellent suggestion by the person who made it. It was valuable learning in completing the supplementary environment effects statement.

The project commencement followed all approvals. We now have all requisite state and federal government approvals. We are at day 120 of this critical infrastructure project. We are in full compliance with the environmental management plan, we are ahead of schedule, we are under budget, but it is day 120. Our role is to achieve that when the project completes.

As I said, it is a major marine infrastructure project. Some of these matters were discussed by others this morning, so I will not dwell on it. It basically went through a significant and lengthy planning and development phase and the project scope and requirements for delivery fully crystallised at the point of approval.

So what is the project? It is about access for 14-metre-draught vessels. The big users of this, 86 per cent, are the container traders. People look at the bay and see the very large cruise ships, they see the very large car carriers. Channel deepening is not for them. This is about draught, this is about weight — this is about the weight of containers and the displacement of water, this is about the container traders. The dredging itself and the placement of material is conducted over four main areas: the Yarra River and Hobsons Bay, the north of the bay, the south channel, and at the entrance. The works include not only just the dredging but berth upgrades, particularly east and west Swanson Dock. The Swanson Dock complex is the most significant container facility in this nation and will be for at least the next decade. The banks of the Yarra need to be protected at points, and the swing basin. That is the area near Lorimer Street, across from Swanson Dock entrance. It has to be widened to allow the longer ships to swing and then reverse into the dock.

Of course this requires a complete revision of navigation aids, because the channel dimensions are changing, so they are being refreshed and renewed through this project. An added feature — or complication, I guess — for the project is that there historically are a number of services under the Yarra River, beneath the bed of the Yarra River, most significantly the Melbourne sewer. There is also a gas pipeline and electricity — CitiPower — and other pipelines.

The role of the project is either to protect those in situ, particularly the Melbourne sewer, or in the case of the CitiPower pipeline and Telstra, relocate them. The cost you will see in the total cost includes the berth upgrades and all those issues. Not all of that work is being done by Boskalis. For instance, the contractual arrangement on the berth upgrades is a direct contract from the Port of Melbourne Corporation to the contractor doing that. The reconfiguration , for instance, of the Telstra network nationally is being funded by the Port of Melbourne Corporation directly with Telstra — who else would be best suited to reconfigure their network? Our role is to protect those in situ, and with the agreement of the service owners remove the pipes that remain for those which are no longer viable.

As I said, it is 120 days. All major dredging equipment is now being mobilised. I can give another example of how the alliance works. The Cornelis Zanen, the dredge working in the north of the bay at the present time, requires — as vessels do — its routine dry docking. Boskalis can do that to suit themselves, but they apply the alliance principles, to say, ‘When we send it to Brisbane or Newcastle or overseas for a four-week dry docking, we will do it at the point where it is best suited for the environmental management plan’, which is October–November this year. We think that is a sensible alignment of the environment and the alliance contract. I will not go through the individual cubic metres, except to say that we are about 15 per cent complete, there is still quite a way to go.

The physical berth upgrade works have commenced. The environmental monitoring, of course, is every hour, every day; and we are in full compliance with the environmental management plan. Mandatorily, this project must be completed by 31 December 2009. We have no approval to undertake this project past that day.


The benefits will allow 14-metre draught vessels to access this port. The expert studies suggest this provides an asset to this state for 30 years. At the end of the project, Drewry and others estimate, about 7 per cent of vessels will be draught constrained. There has been discussion at length this morning — and I was very interested in the committee’s questions — about the 44 per cent of container vessels. Yes, 44 per cent of the container vessels that enter this port would have the potential to load more if the channels were deeper. We are not saying that every ship would load to the gunwales on every single visit — that is clearly impractical — but we know that if the draught was available they would start to use it, particularly in the peak export periods, and particularly in the peak import periods. The Christmas retail part of Victoria is a boom for imports. The Boxing Day sales are a boom for imports. They would use it.

In understanding container vessels and why they are constrained, this is not about bulk vessels or fuel vessels, which are going from one port to another delivering a full cargo, or partial cargo. This is about typically a network of eight ports — it could be nine, it could be seven — with a number of ships of which the market demands a weekly call in Melbourne. Most of the major shipping lines call here weekly. They could call monthly and have super-ships, except that would be devastating to our economy because of the just-in-time system; much more stock would have to be held and our exports would get away more slowly, so the pressure on the market on both importers and exporters has been for weekly calls. We do not expect that to change in the foreseeable future.

Those vessels operate to a timetable determined months and years ahead. What using the extra draught of the tide half a metre means is that you are saying to major container vessel operators, ‘You should configure your program to take into account the vagaries of the tide in Melbourne when you arrive here’, which is one in eight ports, when you are trying to run a weekly service. For instance, APL announced last week that its market research says its vessels from China should arrive in Melbourne on Saturdays. That allows the boxes to be available to importers on Mondays, and exporters of course in the week coming up to that Saturday to get their containers into the facilities. That seems to make sense to me. But then you cannot say to them, ‘Yes, Saturday, plus or minus 6 hours’. That is why the tide extra draught is not used. That is why most of the container vessels do not use it. I will come back to it later, if you wish, to talk about market share and how competitive the bluewater component is.

The benefits of this project are not all about Victoria, even though that is what the Port of Melbourne Corporation is interested in. Sydney and Brisbane have the same constraints. They have the same vessels, because the vessels come to the largest port. That is how they are draught constrained. They already can handle 14-metre draught vessels. The reason the shipowners do not put in larger vessels is that if you cannot come to the biggest port, why would you? You need therefore effectively to match your business to reflect the smallest draught , particularly if it is the largest port. We believe failure to deepen will affect the competitiveness of Victoria and lead to suboptimal efficiency in sea transport.

Let us talk about the costs and where they have gone since they were first conceived. The feasibility work has used historically the best cost estimates available at each stage, predicting the known requirements. The final project budget — and we have said this consistently through the Port of Melbourne Corporation’s evaluation presentations — was going to be determined following project approval, because we were not to know until we got the final approval from both the state and federal ministers what would be the conditions they would put upon this project. At the conclusion of those approvals that provided our ability to confirm project costs and inform not only government but the shipping and cargo interest community.

All the feasibility and economic assessment that we have seen, including the sensitivity analysis, has indicated the project is viable both technically and financially, there are positive benefits and the benefit-cost ratios (BCRs) are above 2. That is a bit of a history on the cost changes in the project. I have not gone back to before 2004, because before that they tended to be done, for instance, on the VCA only on the matters affecting the VCA. In those days the berths were a matter for the then Melbourne Port Corporation; and at that time others felt that the services were a matter for the former Department of Infrastructure. Of course this is holistically looking at the project; that changed, and you can see the changes in both the cost and the BCR over time. That has come from sophisticated refinement and knowledge of the final requirements. As to the latest cost benefit, I have put in a BCR of 2.57. That is the latest advice we have had from Meyricks. I think Mr Meyrick will be here later this afternoon and he can answer questions on that.

The PMC board approved the project on a budget of $969 million and signed off the business case for submission to government. The government approved the project, and you know our position on talking about matters in the business case.


Where have the cost increases occurred? A number of areas — confirmation of channel depth to 14 metres; confirmation of channel design, the final channel design with a two-way channel navigation system; the services protection and design and relocation. Even late last year we were talking to the service providers of the cost to reconfigure their networks and to get agreement with that — that was done towards the end of the project, for instance. Designing the Melbourne sewer protection was part of the intellectual property developed by the corporation. Boskalis was the designer of the Yarra tree, which is a 23-metre structure Victorians will see in the next two to three months. It will sit on the base of the Yarra River to allow precision dredging above that Melbourne sewer pipeline — very critical work. It also includes all the land-based works project development and contingency.

The final matter we have to consider as a management team and then recommend to the board was the level of contingency for a project of this nature; therefore, ‘Have you considered all the risks?’. That was robustly discussed, as you would expect inside the corporation. There was the refinement of all dredging costs — things that change, for instance. The learnings of the trial dredging program said that doing the Heads should be done by leaving a lip on the edge, so effectively to reduce rock fall into the canyon — that came at a cost. The addition of the sand-capping of the bund came at a cost. They were all part of the dredging approval project and they are in the final cost.

Fuel — I will not need to say much about fuel. The price of fuel has risen quite considerably since 2004. The previous national government also made the decision to change the tax arrangements. The Port of Melbourne did not win from that; we lost. That is part of life. That is now reflected in the cost estimate, as are the final foreign currency movements.

The trial dredging and the environmental and all the technical studies — the environmental offsets, we paid, as part of the condition and the approval conditions.

A lot was said this morning about what return the Port of Melbourne should receive on projects. What would the private sector accept as reasonable? Let us get down to tin tacks. The only container port in this nation that has a price regulation is the Port of Melbourne. The Essential Services Commission reviews our pricing annually. It is a light-handed approach. We must return a profit of no greater than our weighted average cost of capital. That determines profit, that determines how the corporation works. If our profit in one year is higher, we then have to factor that in lower cost to the users in the next year, to effectively give it back.

We have issued a pricing policy statement. In working out our pricing model and the capital requirements of this corporation over the next 30 years, we have developed a long-term strategic business model. That is to feed in all the cost inputs and all the capital requirements of the corporation to develop the final cost model.

We receive our revenue in three basic ways: from rent from the land ownings we hold and that is not impacted by channel deepening; tonnage levies, which we have made a change to tonnage levies; and the most significant one, wharfage — that is the $31.50.

Given the decision to provide a government contribution, we felt, was a matter for the government and not for the corporation to comment on, we worked the channel deepening project on the user-pays system. The costs are reflected or published in our pricing statements reflect user-pays. The decision by the state government, we are appreciative of, to provide $150 million has been reflected in that. I am happy to explain later how, if you wish to know.

The pricing model on a 30-year basis is based on a levy of $31.50 plus GST per TEU on all full international containers — 5 cents per tonne, 1 cent only to Geelong on vessels with a draught exceeding 12.1 metres. All these charges apply from 1 April 2008.

Future escalation in accordance with our model and accordance with what we published will be in the order of CPI plus or minus 1 to 1.5 per cent, dependent on a number of things — trade growth, cost impacts on the Port of Melbourne and other developments. We are reasonably confident that would reflect a 30-year model. No other port in this country has ever published 30-year pricing model or a 30-year port development plan. The draft port development plan is on our web site today and has been for 18 months. We are the most cost-effective port on the eastern seaboard. If you wish, later I can outline how the costs are worked out on port and how they charge users.

That ends my short presentation. Thanks for your attention. Mr Haak would now like to say a few words.


Mr HAAK — I hope the members of the committee do not mind my Dutch accent; so apologies for that in advance.

The CHAIR — Not at all.

Mr HAAK — The origins of Royal Boskalis Westminster go back to 1910 in the Netherlands. Since then, Boskalis has grown steadily both in the Netherlands and elsewhere in the world. Boskalis today is a widely recognised player in the global dredging market. Boskalis has one of the largest and most technically advanced fleets in the world. Our leading edge expertise and equipment allows us to tackle the largest and most complex infrastructure projects.

Our fleet at present consists of over 300 units. With its partners, Boskalis has around 8000 employees worldwide. In Australia, Boskalis has been present for a period of some 50 years. In this country we have successfully worked and at present we are successfully working for various other major Australian companies, port corporations and multinationals — to name just a few: Woodside Energy, Hamersley Iron, Newcastle Coal Infrastructure Group, the Dampier Port Authority and Port of Brisbane.

With respect to the Port Phillip channel deepening project it is to be realised that Boskalis is one of the only four companies worldwide with the capability to perform an operation of this size. Boskalis believes it was successful in its tender for this project because of its demonstrated track record in Australia and overseas, the competitive nature of our tender and Boskalis’ environmental and technical expertise.

Technical expertise is based on propriety information developed over years of operation in the dredging industry. In this respect, it is important to note that Boskalis, contracting in an alliance, was and is required to disclose to the port more commercially sensitive information than would be the case if a standard contracting approach were to be adopted.

Another important thing to realise — and Mr Bradford already mentioned it — is that since the alliance agreement was signed in July 2004, the demand for dredging services worldwide has changed significantly. If the project went out for tender today it is very likely that Boskalis and also its competitors would have submitted substantially higher prices, but Boskalis is here and the alliance is in place, dedicated to complete the project for the benefit of the state of Victoria.

Even several court cases surrounding this project did not chase Boskalis away and some 120 days ago the dredging for this project commenced. As pointed out already earlier, at this moment the project is on time, within budget, and Boskalis is meeting all environmental parameters. Honestly speaking, Chair and members of the committee, Boskalis does not know what it has done wrong.

Despite the positive news surrounding this project, Boskalis has some serious concerns about this parliamentary inquiry and Boskalis’ unsolicited involvement in it. Boskalis has read the submissions on the committee’s website and is very concerned that the committee would publish a series of allegations naming Boskalis, which have the potential to damage its hard-won reputation, and apparently without regard for the truth. In general, these allegations are incorrect, baseless and have no relevance for this business case, but more important, they are beyond the terms of reference of this committee.

More specifically, and with respect to the matters that might be relevant for the business case, Boskalis is extremely concerned that its confidential, commercial information — and that is information not disclosed when it contracts anywhere else in the world — has the potential to be disclosed in this process. Disclosure of this confidential commercial information will cause substantial damage to Boskalis’ interest, both in Australia and elsewhere in the world. Needless to say that the confidential, commercial information provided by Boskalis under the alliance agreement has significant value to Boskalis’ competitors and to those with whom Boskalis may be invited to contract in future.

I trust the committee also realises that disclosure of Boskalis’ confidential information will not only damage Boskalis’ commercial interest but may also potentially damage the interests of the people of Victoria. I think there is a serious risk to the state of Victoria that those with specialist expertise, knowledge and ability will not be prepared to contract here because of the risk of disclosure of this type of information; or if they are prepared to contract, they will only do so at a higher price.


Nevertheless, despite these serious concerns, Boskalis is happy to be here and we are willing to answer as much as possible any questions you may have and that are relevant to the committee’s terms of reference. Thank you.

The CHAIR — Thank you, Mr Haak. To address a couple of the matters you have raised in your comments with respect to the committee’s processes: the matters that have been canvassed in submissions received by this committee are not positions that are endorsed by this committee. They have been received as submissions relative to the terms of reference. Under the requirements establishing this committee, they are required to be published on our website, but they are not endorsed by this committee, or those views supported by this committee. The committee will express its views in the report that it produces.

With respect to the matter of confidential information from Boskalis, the only information that has come to this committee is that which has been provided jointly by Port of Melbourne and your company with respect to the alliance agreement. We assume that is on the basis that you are happy for this committee to have access to that information?

Mr HAAK — That is correct.

The CHAIR — Thank you. I go back to one of the points made by Mr Bradford in his presentation relating to the 44 per cent of vessels that are potentially depth constrained.

This has obviously been a key issue that has been raised with this committee through the course of its proceedings. The committee understands the theoretical concept of ‘potentially constrained’. Are you able to give the committee any evidence as to the vessels in the last 12 months, 18 months, whatever, that have sought to access the port of Melbourne but have been actually constrained in the volume of cargo they can carry into Melbourne and have, as a consequence, either bypassed Melbourne or had to offload at one of the other ports before coming to Melbourne?

Mr BRADFORD — The short answer to that is, obviously for import cargo the ship owners would not load to greater than the 11.6 metres draught at all times; or if they are in a situation to wait for the tide, for 12.1. They do not approach the corporation and say, ‘Can you handle 13 metres?’ because our regulations are 11.6 or 12.1.

In terms of exports, there is a great opportunity because at the point of loading the ship owner may take the decision to take extra boxes if they think the departure time will actually coincide with the tide. You have to be reasonably careful about that because with ½ metre tide and a 4-hour transit zone, it actually has to go the right way to enable that to occur. Certainly we would expect when the grain trade is moving in bulk — it is very quiet now because of the drought — they would attempt to use the 12.1 metres of draught.

If I could just explain how the corporation works out that 44 per cent because I think it was under quite some debate this morning: it is based on the published summer draught of vessels entering the port of Melbourne. The published summer draught is what the classification societies have deemed the capacity for the vessel. We particularly check it to make sure that we are getting our correct tonnage due because they are based on gross registered tonnes.

In the December quarter, ship movements — I might just read this out so you can get the actual number of ships. I am only talking about container ships at this point:

Container ship movements in the March quarter decreased from 715 in December to 706 in the March quarter.

313 of these ship movements were by ships having a maximum summer published draught of 11.6 metres or more. This was 24 less than the December quarter 2007.

I will go to the next bit:

Of the 313 movements by container ships with greater than 11.6 metres of summer draught, 18, or 5.8 per cent, operated at a draught of at least 11.6 metres.

In other trades the numbers obviously are less, because this is a container port. The issue is: if it was available, would they use it? We would suggest yes, but not every ship every time. Two recent examples: ANL, who have a significant market share in this port and this nation, two or three weeks ago introduced a brand new vessel; it has a summer draught of 12.8 metres. It is dedicated to the Australian-Asia trade. Mitsui OSK, a prominent Japanese shipping line, has put a second-hand vessel on the trade, but that is quite normal. It has a summer draught of


13 metres. They know the cargo is increasing, and they are looking to see how they can grow their market share and become very competitive.

The CHAIR — Does that demand exist now in the port?

Mr BRADFORD — Yes, demand continues. In the year to date, the total trade of the port, to the end of April, has increased by about 7 per cent. I expect the year to June to finish up in the order of 6.9 to 7 per cent. April, interestingly enough given the evidence given earlier, was the biggest month for full-loaded exports in this port in its history; 65 500 full export containers is a record for the port of Melbourne in the month of April. To give you the full picture, the year to date for April, full exports growth, is in the order of 2.8 per cent. What we are seeing is obviously the drought is certainly impacting exporters, but there are new emerging export industries that are replacing them.

The CHAIR — I probably should have phrased the question differently. Is there unmet demand in the port now — that is, are there ships coming into the port of Melbourne that are leaving containers behind because they are draught constrained currently?

Mr BRADFORD — You would have to take evidence from the individual shipping lines based on peak seasons. Clearly they are setting up their strings to fill their ships to the capacity they are able to at the present time — not all fill it to that — and how their marketing works. There would be times when, yes, cargo is left behind. Is it a daily event? I would suggest not.

The CHAIR — You mentioned at the beginning of your introduction 16 consecutive years of growth at an average of 7.8 per cent. Why do you see that continuing? Why is 8 per cent the basis of the business case that has been used?

Mr BRADFORD — The business case I believe is less than that. It is between 5 and 6 per cent. The historic growth of the container trades in the last 16 years in this nation and other ports has interestingly been double GDP. There is a correlation between GDP and container growth. Why do we think it will keep growing at 5 per cent compound?

There are a couple of reasons: this state and city are growing. The population is predicted to increase by a million people. A million people consume; they buy retail. That will force import containers to come into this country.

Exports: there have been some interesting price rises in more recent times. I think the dairy industry, apart from the drought, are reasonably happy with the price rises they are achieving. Exports are in pretty tough times with the Australian dollar very high to the US. I appreciate that makes it hard for some of our exporters, and you heard some of that pain this morning — the effect of that on their businesses. But a new and emerging trade is effectively wastepaper and waste plastics. Ten years ago this city would put those into landfill. Today they go into containers, and they are exported. They are leaving this country. That is another industry. Grain is moving to containerised processes.

If you look at the world exports on trade growth, we think 5 to 6 per cent over 30 years is a reasonable estimation. We review that annually, as mentioned earlier. We take views. For instance, we did not predict 7 per cent growth this year. Our budget growth was 5.5 to 6.

The CHAIR — One of the issues that has been raised with us is a factor not included in the business case, the cost of maintenance dredging of the deepened channel. Can you outline the sort of quantum involved in maintenance dredging, the frequency that will be required and how that will change from the existing channel as a consequence of a deeper channel?

Mr BRADFORD — Yes. The reason maintenance dredging was excluded — and we believe for the correct reason — it was considered by those who would give us approval and those who were doing the supplementary environment effects statement, would it not be best to determine the outcome of the capital projects, the major channel deepening project, before approval was given for maintenance dredging so that the conditions in the EMP, if required to be changed, could actually be reflected at the time? So that is why maintenance dredging was left out.


The port has routinely, for a century, we have regularly been dredging. The berth pockets are done annually. New areas of the channel — we do not expect the Heads to change, but the south channel, a significant body of sand, we will closely monitor the requirement for maintenance dredging over a long period of time. We will set up — we run our own hydrographic survey group and they will manage the depth of the channel and what maintenance dredging is required and then reflect that on how the EMP/MP works with a capital project.

It is not particularly urgent because the dredging of the south channel, this is an asset for 30 years. Do not expect on day 1, 14 metre draught vessels to come steaming through the Port Philip Heads. This is about slow, incremental growth over 30 years and the reason we did 14 metres now is because environmentally it is best to do it once. It certainly is economically, but environmentally it is best to do the project once. Maintenance dredging is something that will we determine in the years ahead, but we have examples of the current maintenance dredging of the port of Melbourne channel. I would expect the first maintenance dredging program to be contemplated about five years after completion.

The CHAIR — Is that not an inevitable consequence of doing the channel dredging project, that you need to maintain it and therefore that is an inevitable cost of undertaking the CDP?

Mr BRADFORD — As is maintaining berths at 30 years out, as are constructing extra berths or maintaining any asset. The broad costs on how we would do maintenance dredging are of course reflected in our business model. We have to make estimates on that. We have to make estimates of where wage growth will go.

The CHAIR — But with the maintenance dredging, is that not a direct consequence of the deepening project? I take your point about maintaining berths but that would occur presumably irrespective of whether you undertook the CDP. With the existing channel you would still need to do berth maintenance.

Mr BRADFORD — I think the reasons for not seeking approval are quite sound.

The CHAIR — It is not so much a question of seeking approval as a question of counting the cost in the business case of the CDP.

Mr BRADFORD — Mr Easy?

Mr EASY — I think, as indicated, maintenance dredging does occur and will occur on a routine basis moving forward for the port. The long-term strategic business model for the corporation includes all capital costs but also recurrent costs moving forward. So the maintenance dredging program would be a recurrent cost for the organisation and is included in the model and therefore the tariff reflects that expense for the organisation in the future.

The CHAIR — Will that cost be incrementally higher as a consequence of the channel deepening project than it would have been if you were maintaining the existing channel? Is there a difference to the expected maintenance cost going forward as a consequence of the CDP?

Mr EASY — In the assessment that was undertaken there was an examination of the volumes of material for maintenance dredging in the future, and there was an indication based on previous history of sedimentation rates that it would be generally consistent. What we do know, though, perhaps, is that the controls that might apply to those maintenance dredging programs will be similar to those imposed on this project, and that will only be determined once approvals have been issued for those programs in the future.

The CHAIR — On the port’s annual report last year you had an amount of about $7 million or you had capitalised previous maintenance dredging and amortised that over four years. Are you familiar with that particular — — ?

Mr BRADFORD — No, not specifically. I would need to take that on notice. That is a detail.

The CHAIR — I was just wondering if that $7 million amortised over four years is reflective of the cost of a maintenance dredge process.

Mr BRADFORD — No, I do not think it is because that would be berth maintenance, particularly around the berth pockets of the annual maintenance. I think maintenance of the South Channel will be higher than that but I do not have the figure in my head.


The CHAIR — Okay.

Mr BRADFORD — Why would the amortisation occur? You would expect that if the maintenance dredging has a life of four years in normal accounting treatment, you amortise it over the life and we follow the Australian Accounting Standards, but we would probably take a pessimistic view on that rather than optimistic.


Mr VINEY — One of the key criticisms of this project from opponents has been that the Port of Melbourne Corporation has overestimated the growth of demand for port service, particularly container movements, over the next 20 to 30 years, and it was put to us that your estimates they are based on an 8 per cent compound growth. Are you saying that that is not correct? That it is on 5 per cent?

Mr EASY — I think what was indicated was that if you look at the historic growth it has been 8 per cent compound growth over the last 10 years, but the forecasts that have been identified are upwards of a period of 2030, they indicate an increase up to a figure of around 8 million containers and that reflects a 5–6 per cent growth rate.

Mr VINEY — That is what the business case is based on, that growth?

Mr EASY — That is correct, yes.

Mr VINEY — Have you done any work assessing the validity of that estimate? It seems that a lot of the evidence we have had from people who have supported the project have accepted the Port of Melbourne Corporation’s assessment of growth, and I guess this is now the opportunity to hear the degree to which that is a robust assessment and a reasonable one. That is what I want to hear from you.

Mr BRADFORD — We believe it is a robust assessment. In the port development plan we outlined the growth, particularly of Swanson Dock and when it would reach capacity. We think it will reach capacity at about 3.4 million containers. Interestingly enough, the two stevedores think its capacity will be 4 million. Traditionally, the port has always been more conservative than the terminal operators in this state. To make sure we actually got the forecasts right, we robustly viewed the model on an increase in container growth and a decline, so what would happen. If you take perhaps a pessimistic view and say, ‘What if it only grows at 3 per cent? What will be the impact on this port?’. First of all, you postpone the development of the next port of Hastings for potentially X years.

That is a significant cost to users at that time. That would not necessarily be a bad thing. The pressure on the corporation would be, have you factored in your debt levels to work through a period of, perhaps, recession? The short answer to that is yes we have, unless it was a prolonged national recession that affected this nation, which I think would then affect every other port and every other industry. That is the sort of doomsday scenario that we did not think was a highly probable circumstance.

Mr VINEY — And it was put to us that with climate change there could be significant change in the way business is done and that that may affect imports and exports. Have you done any assessment of that?

Mr BRADFORD — We have done our own assessment and relied on that of others and listened to people like the farmers federation. Where do they see grain going? Where do they see farm exports going? How do those who do demographics and population growth do their assessments? And work it through that way. I think this committee has an interesting task, with four economists each taking slightly different views — it is a bit like duelling economists — so we are trying to be helpful. We try to come at it from a very practical way. Nick, would you like to add something to that?

Mr EASY — Perhaps just to add to that, the organisation obviously treats the forecasts and the growth in trade as very important because it does influence a number of matters and operational requirements within the business. In producing our land use and our projections for infrastructure for the next 30 years we have reviewed our forecasts, and they have consistently come up with a figure in the order of 5 per cent as a reasonable long-term projection for growth in container trade. It was also consistent with trends worldwide, and there are consultants like Drewry and others who undertake this on a global basis and they have consistently and repeatedly on a number of occasions indicated a 5 per cent growth rate on a global basis and that has been also considered reasonable within the Melbourne port.


Mr VINEY — Have you done similar analysis of a greater than 5 per cent growth?

Mr BRADFORD — An explosion in trade?

Mr VINEY — Yes. Have you done an analysis on the basis that perhaps it is a conservative estimate, and what does that show?

Mr BRADFORD — How do you define ‘conservative’? We looked at could an 8 or 9 per cent long-term growth rate be sustained, and what impact would that have on the corporation and its facilities. If that commenced to occur, for instance, over a five-year period, it would suggest to government — and it is ultimately their responsibility to develop the port of Hastings; we are the Port of Melbourne — I think that their long-term plans would need to keep an annual very close watch on that, so if trade grew at a greater rate, it would then bring forward other developments. It would certainly make the channel-deepening project very viable.

Mr EASY — To add to that answer, with this analysis the corporation has used what is considered to be a reasonable long-term forecast. We consider it is conservative, based on what some of the actual growth is that we are experiencing, particularly over the last 10 years. But if there was to be an explosion or a change of that, the actual benefits and the viability of the project would only improve.

Mr BRADFORD — The corporation takes the view at the direct waterfront container terminal that we like to see the facilities operated by the private sector to have a buffer of at least 15 per cent, so if there is a sudden surge in trade through Melbourne, are you able to handle through the acquisition of cranes — which have to be here a year in advance — and that model has existed for at least the past five years.

Mr VINEY — One of the criticisms that came also this morning was that you failed to do any sensitivity analysis. It sounds from your evidence that you have done that. Is this analysis factored into your thinking in this whole — —

Mr BRADFORD — Yes. Without divulging board confidences, you would expect the Corporation’s board to take that issue very seriously and robustly, to question management and understand how they came up with their estimates.

Mr EASY — I could also suggest that in the inquiry and the work done for the supplementary environment effects statement there is sensitivity analysis that was included and published with that work. That included discount rates and the capital costs, plus or minus 20 per cent. It also included variances in exchange rates, so there was work that was produced as part of the examination of the project.

Mr VINEY — I have a question for Mr Haak in relation to Boskalis. It relates to the issue of concern that you expressed about your company’s reputation and so on. As a pretty significant company you are doing channel-deepening and dredging-type work across the globe, as I understand it?

Mr HAAK — That is correct.

Mr VINEY — How would this project sit in terms of the obligations you have as part of this whole business process to ensure you meet environmental standards? Where would this project sit as a comparative internationally?

Mr HAAK — I can tell you that Boskalis has recently been awarded several projects, not for its price level but for its environmental approach. In this project there are very strict environmental requirements, and we are complying with these requirements.

Mr VINEY — When you say those environmental requirements are very strict, are they internationally? Have you got an assessment of whether internationally they stand up as good practices — or average? Where would you place it?

Mr HAAK — I think nowadays these are normal requirements.

Mr HALL — Thank you very much, and thank you for all the information that you have put before us. Mr Bradford, the Chair was talking about how you actually reached that figure of 44 per cent of vessels that are


potentially draught constrained. Can you use measures of, say, ships with a bigger draught actually using Sydney and Brisbane, where I think you have indicated they do have 14-metre draught capacity?

Mr BRADFORD — I do not have specific examples of that — of Sydney receiving vessels larger than 11.6 metres. I do not doubt they would have, only because Sydney is a very heavy import port and Melbourne has a higher percentage of exports. They could unload and then come to Melbourne.

It is interesting — if I could give you a bit of an explanation — to note the competition of the bluewater component in shipping rates. In the full year to 30 April the port of Melbourne handled 1.9 million overseas containers. If you handled 15 per cent of that as a shipping company, you would be no. 1 in market share. There are 25 shipping companies that come to Melbourne, plus a few more. Their annual volumes range from 2000 to 250 000. It is a highly competitive industry. This is not about two major operators or four pillars of banking.

Economists may argue, but this is probably the pure competition model where 15 per cent market share gets you to no. 1. If there was an advantage in using the half a metre of tide, I would have thought at least one of those lines would have actually tried to factor that into their thinking. I think they have, and I think they have worked out — like we have — it just does not work. At all times you need reliability. This is about a regular production chain.

Mr HALL — So you are not sure, in respect of Sydney or Brisbane, what percentage of their shipping movements — —

Mr BRADFORD — No. I do know that most of the vessels on the eastern seaboard in the container trade, you would expect, would come through both Brisbane and Sydney, but not necessarily in that order.

Mr HALL — Can I now refer you to the pricing structure in the submission — the tariff schedule provided in the submission? First of all, do those tariff schedules have to approved by ESC?

Mr BRADFORD — No, they do not. The ESC regulation is light-handed, so after the event they examine the pricing schedule and the profitability of the corporation, and compare it to weighted average cost of capital over a five-year period.

Mr HALL — In respect of the summary that you have provided about the key tariffs, I notice the channel infrastructure fee is charged to cargo rather than a charge on vessels. Why do you structure that fee in that way?

Mr BRADFORD — That is a good question. That was an issue we gave a lot of thought to. If I look at the history of container charging in this nation, I think it was led by the Port of Brisbane in order to encourage shipowners to come to Brisbane when there was a lot of consolidation n Sydney. They then changed the pricing structure to put more reliance on wharfage and less on tonnage. It is saying, ‘We will attract you to come to this port’.

Quite a number of cargo owners — not all — have said to us, ‘We prefer that, because on the shipping company invoices we can actually see what the port charges are’. They were identified as a port service charge. We feared that if we put it on tonnage, how would we stop the shipping companies clipping the ticket on the way through and adding perhaps a profit margin. Not all would, but some may. How do you prevent that? After all, shipping companies come to Melbourne for cargo; that is all they come for, and as the cargo grows they will come and carry that cargo. We thought, to be transparent to our users and our large customer base, to reflect it in wharfage.

That was our thinking behind that. It is interesting to reflect on wharfage across this nation. We studied shipping company invoices on a routine basis to understand if they are reflecting the actual costs of the Port of Melbourne Corporation. We can actually work it out — ‘Yes, you are doing that’ — and they virtually all are, except, interestingly, a couple of large lines have taken a national approach, and they have decided to put all the port charges, the wharfage into a basket and average it. As they are single operators, they are able to do that.

That effectively means for the long period of time where Melbourne was $35 and Brisbane was $74 and Sydney $67, Melbourne’s consumers were subsidising that differential. Our thinking was, first of all, be transparent. As there is some move to national pricing, if you keep it on a consistent formula you at least have transparency and some way of monitoring it. That is why we did it that way.

Mr HALL — Thank you for that. Given that, the direct cost of this is user-pays, as you say. The user pays and will recover the cost of that.


Mr BRADFORD — It is, except for the government contribution, yes.

Mr HALL — Except for the contribution from government. So that has been borne by the importers and exporters, that cost alone, and presumably the payoff for the shipping companies would be more efficient; they will be able to therefore land a greater deal of stock on Victorian wharfs at a lower price. How confident can we be that that reduction in price is going to be passed on to importers and exporters in Victoria?

Mr BRADFORD — I am reasonably confident. If you look at the history of the growth of the container industry in this nation since it started in the mid-60s since containers were invented, there is a solid review. As bigger, greater ships come onto the market, the shipping lines market heavily to fill those ships in this string of 6–8 vessels going between those ports, and therefore reflect that in lower prices. I do not think we could have a more competitive market in terms of ‘15 per cent makes you no. 1’ in this industry. I think it is a pure economic model that says that this is a competitive industry.

The paying leg for the ship owners is southbound, it is imports. Imported cargo pays a premium because that is the demand leg. Our national exports pay less because they are, to some extent, a repositioning leg. We see that as a good thing. I am old enough to remember when it was a bit the other way.

In that repositioning leg you have also got to realise the weight of containers. Draught is about weight. Typically, imports weigh 8–9 tonnes TEU: clothing, electronics, that type of thing; it is lightweight. Our exports by the fact of our nation are heavy, typically 18–20 tonnes. If there was an equal balance of cargo, we could not actually get all the exports away because they would weight out. Weight means draught.

I think if you look at all that — with the freight rates biased to be higher on imports, lower on exports and then have a charging mechanism that is fair. The Sydney model, by the way, actually differentiates between imports and exports. We thought of that, but the reason we discounted it is that when we checked the shipping lines’ invoices, they actually found it fairly confusing so, as they were able to, they merged the prices together and divided it up. We thought, ‘I think the corporation would like to be in control of that’. That is our thinking behind that. I am not sure if I have answered your question.

Mr HALL — Can I carry that a bit further through? We notice the channel infrastructure fee has been imposed since 1 April 2008. Some would argue this is probably 12 to 18 months before the channel deepening is completed and therefore some benefits hopefully will be returned to the Victorian community. What is the rationale for introducing that increased fee now?

Mr BRADFORD — We considered that at great length. Our earlier thought, if you go back two or three years before, was to bring it in on a staged approach. The corporation has to maintain a solid balance sheet. We knew we were going to have to raise debt — this is a significant capital project — so how is it best to reflect it for users over a longer period of time? We felt to start on the 1 April 2008 would give the requisite 60 days notice to the cargo community of how this should work. We also thought of what was happening with some of the lines nationalising the price and effectively averaging down. April 1 was considered by the corporation as the most appropriate date.

Mr BARBER — Mr Bradford, can you tell me what the current weighted average cost of capital you use in your business planning is?

Mr BRADFORD — I think I will have to take that on notice, Mr Barber, because I am not sure that is a figure that is in the public domain.

Mr BARBER — Well, a figure that is in the public domain is from the information that you disclosed for the benefit of the ESC in 2005 and as you noted, that is a five-year period — and you are coming to the end of that five-year period — and the figure then was 8.7.

Mr BRADFORD — Yes. I do not recall every document. As I said, I am not sure if it is in the public domain. If that is the figure in that report, that would be correct.

Mr BARBER — Okay, but at that time you also told us that the way you work that out is you take the commonwealth government 10-year bond rate which was then 5.5, and is now about 6.5, and you then add to that the debt risk premium, which I gather is the investment rate bond premium, which was then 1 per cent and is now a


2 per cent premium. If all these other things have stayed the same, is it a fair bet that your weighted average cost of capital now is 10.7 or nearly 11 per cent?

Mr BRADFORD — Mr Easy?

Mr EASY — It is in that order of magnitude. That is correct.

Mr BARBER — Okay. As a matter of business practice, would you apply the same discount rate when you are doing analysis of this dredging component of your business case, as opposed to your normal port operations?

Mr EASY — I think when considering the weight of average cost of capital, and we made reference to the organisation’s long-term strategic business model, it takes into account all capital investment, all expenses and all revenue when we are dealing with calculations on what is for the weighted average cost of capital (WACC) associated with the overall business.

Mr BARBER — Sure there is an average of your average WACCs but here you are moving really into a major new type of business. Now you are becoming a construction company and that has got a very different set of risks associated with it to the risks of running a port. Are you saying you do not run separate WACCs for the two bits of your investment?

Mr BRADFORD — No, we do not. We do not see ourselves as a construction company. Part of the risk minimisation is to engage alliance partners and contractors who assist us to manage those construction programs.

Mr EASY — The Port Services Act prescribes the functions and responsibilities of the organisation which include dredging. It has done that for its entire existence so it is not a new endeavour or new activity associated with the corporation’s roles and responsibilities.

Mr BARBER — We will come back to the issue of how the alliance risks are shared, but I would note that most analysts are putting Boskalis’s WACC at about 7.5 per cent, and there must be a component of that, given you share in risks and benefits with it in your WACC. As a matter of your policy, until the government tells you any different, the port through user charges is going to fund on a commercial basis all the works associated with this channel deepening. Is that right?

Mr BRADFORD — Yes.

Mr BARBER — You have got about a $60 million capital program that you did this year?


Mr BARBER — I guess that is mostly land-side sort of investments?


Mr BARBER — Would you be able to provide the committee with just a list of what this coming year’s capital program looks like for the land-side, just so we can get a sense of the other investments you are making in association with this?

Mr BRADFORD — I would need to take that on notice. I do not know that — at the back of mind.

Mr BARBER — Sure.

Mr BRADFORD — I think we could provide the major infrastructure programs that we are planning for this year.

Mr BARBER — Sure.

Mr BRADFORD — It is also instructive to — — the port development plan outlines the major ones.


Mr BARBER — Your cash flow from ops was $60 million last year, and your capital program was $60 million. You borrowed $20 million and paid a $20 million dividend. Does that mean you were borrowing to a pay a dividend?

Mr BRADFORD — That is a detailed question that I would have to take on notice. Our requirement is to pay an after-tax dividend of 50 per cent.

Mr BARBER — That is your dividend policy?

Mr BRADFORD — That is the dividend policy, yes.

Mr BARBER — Okay, that is actually in your cash-flow statement, so you can have a look at that. Earlier on you said in response to another question that Drewry sees 5 per cent growth in containerised trade is a reasonable kind of investment. Are you able to show me any document where Drewry projects 5 per cent growth for the next 30 years?

Mr EASY — I think we would need to take that on notice, but we can produce documentation that supports those forecasts for the future, yes.

Mr BARBER — No, I am asking a specific question. I mean, is Drewry out there saying there is going to be 5 per cent growth for the next 10 years, and then we do not know? Or are they actually out there saying it is going to be 5 per cent for 30 years?

Mr EASY — I think perhaps if we could just correct — the forecast for the channel deepening project originated from work that Meyrick undertook. Drewry is a recognised international consultancy that also does forecasting for many organisations and clients. They have done work that indicates that global trend for 5 per cent growth.

Mr BARBER — Over how many years?

Mr EASY — My understanding is — I do not know the exact time frame, so I would have to confirm that for you.

Mr BARBER — That would be good if you can do that. In your Meyrick analysis, which has formed the basis of your case so far, it was pretty clear what possible disbenefits they were not measuring. What ongoing analysis of the economic impact of this project on others are you doing at the moment? Are you tracking that?

Mr BRADFORD — No.

Mr BARBER — You are not tracking the impact on the dive industry or the fishing industry or any of these other people who have been out there saying, ‘It is going to impact us’?

Mr BRADFORD — We have consultation groups and that, but we do not have any specific quantum.

Mr BARBER — Have you at this time received any kind of correspondence, or I suppose anything that is starting to look like a claim from one of these groups about the impact on them?

Mr BRADFORD — One of the groups has indicated in the public domain its intention to sue the Port of Melbourne Corporation to do with this project, and we have received correspondence, yes.

Mr BARBER — Okay. Will there be any contingent liability in your next annual report associated with that?

Mr BRADFORD — I would have to consider that before I sign the annual accounts.

Mr BARBER — In conjunction with appropriate accounting standards, I am sure.

Mr BRADFORD — Absolutely.


Mr BARBER — Okay. The issue of Melbourne Water’s sewer line and Ecogen and the turbidity issue with the power station and, I think, the gas main — you have entered into agreements with these people over these issues. Is that correct?


Mr BARBER — I am guessing those agreements would be about what, if any, liability you are willing to take.

Mr EASY — The organisation has entered into agreements with each of the service owners associated with the service protection work and also the works associated with the reconfiguration, and the corporation is responsible for all matters associated with those works.

Mr BARBER — And what liabilities have you agreed to there?

Mr EASY — The organisation has agreed that if there are any negligent actions or omissions, as would normally be the case, we would be responsible for those.

Mr BARBER — You would normally be responsible, but what sort of agreement have you entered into around that?

Mr EASY — The organisation is operating under the laws that would normally apply in the case where any negligence or acts of wilful damage occur, and we will be responsible for that.

Mr BARBER — So why did you need to write that down with them and get an agreement? Is there anything else in that agreement beyond the norm?

Mr EASY — No. I mean the service protection works are an important element of the project. They are important assets for the state of Victoria. It was important that there was a clear understanding of the nature of the works, and the work methods that will be undertaken in terms of the carrying out of those works. Therefore it is a document that clearly outlines what are the various responsibilities of the parties. We would say that is a very prudent measure to put in place.

Mr BARBER — Would you be prepared to release that document?

Mr EASY — They are documents that are commercial agreements between the corporation and those asset owners.

Mr BARBER — Is that a yes or a no?

Mr EASY — They are commercial-in-confidence documents.

Mr BARBER — So it is a no. Okay. You produced a few figures before — just back to Mr Bradford — about this issue of draught limitations. I was wondering if you would be prepared to basically release to us a full report that describes the various vessels that come through the port, and, from your understanding of your operations — of which you said you had a clear understanding — the sort of TEU they were leaving with and the sort of draught that they were on when they were leaving.

Mr BRADFORD — I do not totally understand your question. Just take me through that again.

Mr BARBER — Would you name the vessels that came in and out of your port in the last 12 months and provide also with the names of those vessels and their sailings the draught that they were operating on when they left, and perhaps also the TEU, which is the figure you started to quote, for those vessels?

Mr BRADFORD — That information in terms of the loadings of individual shipping lines and ships would be commercial in confidence to them and their partners. I can answer your question another way — if you would like a schedule of the vessels that have a summer draught of 11.6 metres or greater, I am happy to provide that to the committee.

Mr BARBER — No, it is about the actual operations and whether they were or were not draught-constrained. That is the information we are seeking.


Mr BRADFORD — No, they were not draught-constrained. We have never said they were draught-constrained; we said they have a summer draught which is capable of greater than 11.6 metres. They effectively sailed inside either 11.6 or 12.1 fixed in agreement with the heads.

Mr BARBER — Of course they did, otherwise they would still be sitting at the wharf, wouldn’t they?

Mr BRADFORD — That is exactly right.

Mr BARBER — So what does 44 per cent represent then?

Mr BRADFORD — Forty-four per cent represents the number of vessels in container trades only that entered or left the port of Melbourne with a summer draught of greater or equal to 11.6 metres.

Mr BARBER — You quoted some figures earlier on. Are you prepared to provide — —

Mr BRADFORD — Which figures are you talking about — the numbers of ships?

Mr BARBER — Yes.

Mr BRADFORD — I have said that I am prepared to table to this committee the names and summer draught of container vessels with a draught equal to or greater than 11.6 metres. They are regular callers.

Mr EASY — Perhaps if I could just add to that: the vessel arrival and departures through the port of Melbourne and their summer draught is publicly available information through Lloyd’s List now, so the information is available.

Mr BARBER — I would have thought so, but that is not the issue we are discussing, is it? We are discussing how full or empty they were when they left.

Mr BRADFORD — And we would not necessarily know.

Mr BARBER — You told me you measure all the containers because you are charging them per container.

Mr BRADFORD — We measure the loaded and empty containers put on or taken off in this port; we do not record the ones that come on the ships when they have already arrived. Why would we?

Mr BARBER — When the ESC quotes a report, as it did in the Ports Monitoring Report of 2005–06, that 14 per cent were draught-constrained, do you challenge that?

Mr BRADFORD — I have not got the exact figures but, no, from rough memory I would say that is right. There has been an interesting trend in the port of Melbourne. As the months have gone on since 2005–06 the number of vessels with a draught of greater than 11.6 metres has increased; and given that trade is increasing, you would expect that.

Mr BARBER — And when the SEES published a figure of 4 per cent.

Mr BRADFORD — You will have to show me the paragraph you are referring to. Are they the ones who actually used the draught?

Mr BARBER — I haven’t got that chapter in the SEES with me. It is in chapter 6. It seems to have disappeared from your website, by the way.

Mr EASY — The SEES refers to two things again — what are the number of vessels that can potentially utilise the deeper draught, and that figure was consistent with what we indicated today. Then it talks about those that actually utilise the draught. I think that is what you are referring to as the 4 per cent figure, and we do not contest that.

Mr BRADFORD — To be clear on the 44 per cent, it is international container ships in and out of the port of Melbourne. It does not include passenger ships, it does not include car carriers, it does not include coastal cargo.


Mr BARBER — Going back to the Drewry report, which was back around 2001, here is a paragraph that said that analysis of actual arrival and departure draughts at Melbourne during a 12 month period shows that only 10 per cent of the affected services’ sailings operated at a draught in excess of 11.6 and that many voyages were seemingly not limited on loadings at all. The estimated cost to containership operators of the Melbourne draught limits in 2000 is consequently estimated at $1.9 million — that was US — compared to a prospective maximum cost of US$12.2 million if all sailing vessels over 11.6 had been affected. Does that explain the 10-fold difference between the different numbers that we are talking about?

Mr BRADFORD — I think the first numbers you were quoting were 2001.

Mr BARBER — It was 2000 actually.

Mr BRADFORD — It was seven or eight years ago. Clearly the trade in the port of Melbourne as a published statistic has increased by an average of 7.8 per cent compounded over that time. That would encourage ship owners to put larger ships on the run.

The CHAIR — The committee will have to move to Mr Tee’s questions shortly. You probably have one more — —

Mr BARBER — Make it 30 minutes. I would like to kill this cat.

The CHAIR — Twenty minutes.

Mr BARBER — I would like to kill this cat, and I think it is in everybody’s interest to do so.

Do you have an analysis or do you monitor which lines are currently building and commissioning ships that would benefit from this project?

Mr BRADFORD — Who would potentially put vessels on the trade routes?

Mr BARBER — Yes.

Mr BRADFORD — No, we do not. The reason is that most of the shipping lines treat that as commercial-in-confidence because if they predicted ahead — on the Australian trades we are talking about; this is not worldwide ship building?

Mr BARBER — Sure.

Mr BRADFORD — If they predicted ahead and telegraphed what they were doing, it actually would send a clear signal to their competitors that it is highly competitive.

Mr BARBER — It would be useful information for your business plan, too, wouldn’t it?

Mr BRADFORD — Sorry?

Mr BARBER — It would be useful information for your business plan.

Mr BRADFORD — Yes, but would you let me finish the answer. Australian trade, with a nation of 22 million, is not the largest in the world. Clearly Asia to east-coast USA and Asia to Europe are the bigger trades. Historically in the container industry and probably other industries the vessels coming on the Australian trade are vessels that have worked on those and smaller trades and worked their way down rationally to fit a trade of the size of the Australian trade.

You would not expect a shipping line to build a 14 metre draught vessel and allocate it to the Australian trades. They were typically allocated to the American trade, and then shuffle the vessels down. The older vessels of course are then scrapped. It is quite a logical process. Australia is not big enough to feature in world shipping as a leading edge.

Mr BARBER — In paragraph 54 of the Department of Transport’s witness statement this morning they gave us some updated figures from Meyricks that have been done even since the government’s submission to this inquiry. Are you prepared to release to us the full document where that was worked out?


Mr BRADFORD — I think, to be fair to the committee, you should ask Mr Meyrick that when he appears at the next — —

Mr BARBER — No, they did it for you, at the request of PMC — they prepared an estimate. It is in the DoT’s — —

Mr BRADFORD — Yes, we will provide that as commercial-in-confidence if that is acceptable to the Chair.

The CHAIR — You will provide —

Mr BRADFORD — The copy of that letter from Meyricks as a commercial-in-confidence document.

Mr BARBER — Is it a letter? It says that since lodgement of the Victorian government submission — Meyrick and Associates have, at the request of the PMC, prepared a final estimated BCR for the CDP. And then it goes on to say ‘I can advise you’ — these are the values — ‘NPV, IR’.

Mr BRADFORD — Yes, they have provided us with a letter with the information in it, and you are most welcome to ask Mr Meyrick for the detail behind that.

The CHAIR — You will provide a copy to the committee on a confidential basis?

Mr BRADFORD — We will provide a copy on a commercial-in-confidence basis.

Mr BARBER — If it goes to you; you will give it to us — Meyrick?

Mr VINEY — He just said he will.

Mr BARBER — Just getting it clear.

The CHAIR — Mr Barber, we need to move to Mr Tee’s questions. We can come back to you if we need to.

Mr BARBER — Yes, right.

Mr TEE — I would like to start, Mr Haak, where you finished. Clearly, after 10 years and a long process I suppose I can understand your concerns about having another process and another committee, and I suppose I am quite alarmed by what you are saying in terms of the impact it might have on businesses such as yours being willing to trade with governments like Victoria, so at this end of the table I share some of those concerns.

What I wanted to ask is probably for you, Mr Bradford. We had some evidence yesterday that one of the models might have been to progress a project such as this in the same way that the CityLink project was progressed. There you have a road which government then effectively contracts out. I am wondering whether that sort of model was something that the port considered and where it ended up — and why it ended up taking a different approach, I suppose?

Mr BRADFORD — The channels are a critical part of our business and the VCA, I understand — and certainly the corporation — would consider that control of the project and working with partners is a key part of the organisation’s responsibilities. After all, it is our role, as Boskalis and the alliance complete various parts, to accept those parts as complete. So we would see it as a critical part of the port of Melbourne project. I think, from what I heard on the question asked yesterday — should it be a PPP or financed in another way — that is a question best answered by our shareholder, the state government.

Mr TEE — The other issue that I think emerged was in relation to the horticulturalists who gave evidence. Essentially what they were saying was that the project really benefits importers and not exporters — almost importers at the cost of exporters. I am wondering if you have a response to that?

Mr BRADFORD — I think it benefits both parties, particularly as Australian individual container weights are heavy — they are twice the weight of importers. A lot of the evidence given this morning I think was — perhaps, to be fair — anecdotal. I have tried today to give the exact figures of what is happening with trades in this state and what is happening with exports. April was our biggest single month in exports in our history. That is in a


drought and when the Aussie dollar is so high. It really surprised me. I think that is a very clear sign of what is going to happen in Victoria.

I have done some research previously, and I had a meeting with horticultural exporters. They are a key customer, as many others are. I would suggest the main impact on their business has been the rise in the value of the Aussie dollar compared to the US. That appears to me to be the main issue that is impacting their business. Yes, the $31.50 is clearly important to them. After this meeting I will try and meet with them, because I would like to explain how they can actually — in reviewing their invoices from shipping companies — confirm that the charges of the Port of Melbourne are accurately reflected, because we know that some shipping lines have a national charge. I think that is information the users should be aware of. It is a matter for the individual shipping lines, but we do take a monitoring role to advise customers what is happening.

Mr GUY — Thank you for the material you have provided. In general terms, how much material are we talking about being removed in the whole process, the total volume?

Mr EASY — The total volume of material is 23 million cubic metres.

Mr GUY — And all of it will be stored in the DMGs, the dredged material grounds locations in the bay?

Mr EASY — Yes. There are two DMGs, one in the south and one in the north and that is where the material will be placed.

Mr GUY — Can you just run me through the aspects of the construction of those facilities? Do they exceed the height of the water line or are they located below the water line?

Mr EASY — Both of the dredged material grounds are at minus 15 metres, so that is 15 metres below the surface level. There is very good reason for that, which is associated with the influence of wave currents and tides being able to move or mobilise that material. So at that depth the advice and analysis suggest that they would not be mobilised.

Mr TEE — They do not sort of stand; it is not like a small mountain under the water?

Mr GUY — No, it is 15 metres — —

Mr EASY — Perhaps if I could expand: on the northern DMG is the existing dredged material ground that has been used by the port for decades for the placement of material from dredging, particularly material from the north. There will be a bund structure created, which is effectively a mound under the water, where the contaminated material, or the material that has been recommended for confined disposal, will be placed. Then that will be covered with a capping layer of clean sand, which will come from the south. The dredged material ground in the south will be an open environment because that material is effectively clean material and is recommended for unconfined placement.

Mr GUY — Are there any exclusion zones or anything around any of those two locations, in terms of dive facilities, fishing grounds or anything of that nature?

Mr EASY — There are restricted access areas in place for the project. They principally surround the vessels, the two main vessels, the Queen of the Netherlands and the Cornelis Zanen. The second area where there are restricted access areas is around the barge and the floating pipeline for the transfer of the contaminated material from the vessel to that northern dredged material ground.

Mr GUY — I just meant in terms of the long-term containment of that site, that is all. I am asking in terms of the long-term facility. I must say that I did not know that there was actually an existing facility as well in the north. Are there restrictions around it currently that would be new or is that something that will be associated with the — —

Mr EASY — There are existing areas. The restricted areas are associated with the operation and safety of the project. They are not about controls that will exist in the longer term.

Mr BRADFORD — Additionally, of course, the recreational craft are not able to anchor in the shipping channels, in the interests of their own safety. They can traverse of course when it is safe to do so.


Mr GUY — In general terms, do you think the federal government should contribute financially to this project as well, given its significance?

Mr BRADFORD — The corporation took the view we were owned by the state government and we should do a robust cost estimate and project budget and deliver this project in accordance with that. We did not lobby our shareholder to contribute; we did not think it was our role. In terms of the federal government, the same. We felt that was more a matter for industry to do that — VECCI, the farmers federation, the union movement and others should do that.

Mr GUY — Do you know if the federal government made any commitments in the past to the trade coast in Brisbane?

Mr BRADFORD — I don’t know. In my general recollection, I cannot recall a dredging infrastructure project that has been funded by the national government. I cannot recall. I try and stay abreast, but I cannot recall one.

Mr GUY — So could I ask, maybe very cheekily, is $150 million enough?

Mr BRADFORD — That is a matter for the shareholder to determine. We were pleased to get it. Just to expand on the answer this morning, I think it may be not entirely clear to users how we treated that: $100 million was to be used for an immediate reduction in the cost of the project to users, so that is reflected in the $31.50. The other $50 million was for an infrastructure project which would be of benefit to the port and the community, and in the near future the board will contemplate those projects and seek the state government’s consideration of those.

Mr GUY — I asked the department this morning about the process for those projects and the expenditure of the money. Is it your understanding that they are on recommendations that the port will proved to the department as to associated infrastructure projects? That is the case, is it: that you will provide effectively a list to the government, saying ‘This is what we see as a priority on the port’?

Mr BRADFORD — Yes. With the current published delegations of what the corporation board can approve, $50 million would be above its current delegation so it automatically would have to go for the Treasurer’s consideration. Given that this was a specific payment to the corporation, we would expect that those giving the money would expect to view the benefits and how that would impact this port and this community.

Mr GUY — Are there any guidelines on how the money can be spent? Could it only be spent, for example, on rail or road? Are there any parameters around the recommendations which you have to provide back to the government as to how it is to be spent?

Mr BRADFORD — Not that I recall. But you would expect that a shareholder would expect us to do a rigorous analysis and present to them a project that has significant benefits to be undertaken. To give you some guide, I guess the port development plan, which is the road map for this port for the next 30 years, indicates quite a number of projects. So we will be looking in the development of the port how best to benefit the users of the port.

I should add one thing which will become clearer when our published results are out later this year: the state government has paid the $150 million. It has paid it considerably earlier than we had expected, so when we review our pricing for next year we will need to reflect the fact that our interest bill has been reduced for a period because we are still using that money. I think that is good news for users.

Mr GUY — It must be the first time the state government has paid a bill early!

Mr BRADFORD — We are trying to be transparent and explain what is going on. Yes, we had to make an estimate of when people would pay money, when government would pay money, and we got that wrong — it was paid very promptly.

The CHAIR — Mr Haak, in relation to the alliance agreement, what benefit does Boskalis get out of this alliance agreement compared to a traditional procurement, where you would be simply a contractor delivering a dredging project?

Mr HAAK — I think that information is commercial-in-confidence.


The CHAIR — There is nothing you are happy to expand on in that regard?

Mr HAAK — Perhaps the Port?

The CHAIR — Mr Bradford?

Mr BRADFORD — I think I have explained the pain-gain arrangement. Mr Dekker has also explained it to me. He is the most senior executive responsible for this project. He has other duties in the Netherlands and unfortunately could not come at short notice. He and Dr Berdowski, the managing director, take a very long-term view of the future of Boskalis. What they indicated to us very early on in this project was that regarding the growth of the dredging industry, they wish to be leading-edge, key player, and that by being involved with the Port of Melbourne Corporation they certainly chose a project with complexity; but the alliance contracting gives them another model in which to promote their services worldwide. They are presently very busy, particularly in the north-west of Western Australia, on other matters of tenders, so they have been trying also grow their business.

Part of the due diligence we did on the Boskalis alliance was to examine its performance in other ports. I particularly looked at the port of Gothenburg. Whilst it was not directly related in that there is a lot more rock there than there is in Melbourne, it had certain very much key marine issues, such as the lobster industry and how that would be protected. The feedback from the port corporation of Gothenburg was very positive for Boskalis. That was done as part of our thinking and consideration of whom best to award this to. Alliancing requires very close partnership, I think. Both Mr Easy and I have learnt a lot through the process.

Mr VINEY — I just want to get clear this question of the shipping capacity and the questions that have been asked around that. Just so that I understand it in clear terms as a layperson, is it your evidence that 44 per cent of ships have the capacity to go beyond the 11.6 or 12.1 draught?

Mr BRADFORD — About 44 per cent have a summer draught — that is, the ability to go below the 11.6 or greater.

Mr VINEY — So you are not giving evidence nor have you said that all ships will do that? I think what you said was that the ships that are coming through to Melbourne are regular, so therefore they basically load or if they are picking up, they plan to load to that capacity of the port. Is that correct? That is how they plan?

Mr BRADFORD — Yes, that is exactly right.

Mr VINEY — Therefore the position of the Port of Melbourne Corporation is one that if we improve the capacity of the port for larger draught vessels, we are going to increase the number of vessels that load to that increased capacity, is that right?

Mr BRADFORD — That is right. That is exactly right. Just to explain the 44 per cent, you would naturally expect that the vast majority of those would have a summer draught of 11.6 and below 12 metres. There is not a great deal over 13 metres, because that would clearly be uneconomic by the ship owner. They have put bigger draught vessels on in an attempt to perhaps load between other ports. It could be how their fleet has cascaded down from other trades.

As I said, the international container Blue Water components are very competitive and you often see a bit of me-too-ism: that if one company puts on bigger ships the others will follow, because it is marketing initiative to look for growth. They are highly competitive. But we do not actually know the capacity to which they would load. We do not ask them to say how much they would have loaded. That really is their commercial business. They each have their own operating models. Some particularly like matched pairs between ports to maximise profit; others take a more growth-is-better approach and take lots of containers. Each of those 25 shipping lines has their own strategies on how they will be profitable.

It is an interesting industry. It is a risky industry in that the capital costs to enter it are very high. A typical container vessel, I would imagine, is worth about US$80 million. You would need, just to service Shanghai, Hong Kong and the three ports in Australia, five of them. That would be a small trade. If you have not got worldwide capability and links, that then further reduces your ability. For instance, the New Zealand trades are not typically higher draught because the exchange is not as high. The growth area— clearly as you will see in the annual report — is China.


Mr VINEY — Just on an entirely different topic, we had evidence this morning from the horticultural exporters that they had not been consulted in this process until 18 March of this year. Have you got any comment on that in terms of their criticisms of that process?

Mr BRADFORD — Yes, I should have seen the horticultural exporters early. I have certainly apologised. I went out to Knox on 18 March to meet with them, to understand the project. They were clearly not a group we had on our radar. That is a problem with our marketing group. We have marketing executives based in Melbourne, Wagga Wagga and Adelaide watching the growth of trade and where containers move and trade generally. That is an oversight by the corporation. We will now stay close to them. Five thousand they said is not particularly large, but every container is important to the Port of Melbourne.

Can I just correct an answer they gave earlier on the actual wharfage charges and the price of Melbourne. We have actually done a summary, and it will only take me a minute to outline it. The price at Melbourne on 1 July this year is the same as it is today It is $73.70 — this is including GST. Brisbane is $74.80 and has been for years. I cannot recall when it started. It is a longstanding charge. Adelaide has just increased its prices effective of 1 July, which will be $76.78, higher than the cost of the Port of Melbourne. Fremantle has just announced an increase applicable on 1 July. It will go to $59.64 — they are lower than the Port of Melbourne.

Sydney has a bit of a mixed basket. It is a significant import port. It does not have the percentage of exports that Melbourne has. Melbourne is about 40 per cent full exports. It has an $89.65 charge on imports, $51.15. But a number of the shipping lines average it based on the weighted average, which brings it in at $77.48 on a weighted average, not dividing it by two.

I think that shows that the Port of Melbourne with a $969 million project to undertake and fund is doing that responsibly. We have tried very hard to mitigate risk. For instance, we have hedged the fuel price to the end of the project. We have hedged the currency, which is primarily euros, to the end of the project. We have taken a 10-year debt funding model. We have locked in those interest rates annually for the next 10 years. The corporation is entering an interesting phase in its existence. It requires risk minimisation. That is what we are trying very hard to do.

The CHAIR — Thank you. We have got time for a couple more questions. Mr Hall has one, and then we will go to Mr Barber.

Mr HALL — Just going back to that channel infrastructure fee of $31.50: that applies for both containers being exported and containers being imported?

Mr BRADFORD — Yes. For every international container — full international container — pays $31.50. We have a facility fee directly levied on to shipowners of around $9 for an empty movement. The coastal trades pay less.

Mr HALL — So you have all that information to send the bill to prospective people from overseas who have sent their product to Australia?

Mr BRADFORD — Yes. The beauty of the port service charge we have found it generally transparent. With a bit of working out you can work out how the shipowner has calculated it, and then you can relate directly to the Melbourne, Sydney and Brisbane prices.

Mr BARBER — When you said you had to put a rigorous business case to the shareholder, you did that via the DTF Gateway process and the DOI’s PRC process; is that correct?

Mr BRADFORD — I need to be careful in answering that question, but yes, we abide by government policy.

Mr BARBER — I am just asking if you prepared a business case and put it before those groups. They seemed to confirm that this morning.

Mr BRADFORD — Yes. I am not saying we did not. I said I have to be careful answering that. Yes, we followed the Gateway process and the approval process.

Mr BARBER — What information can you give us about the business case? What can you provide to us?


Mr BRADFORD — What would you like to know?

Mr BARBER — I would like to know the business case. This is an inquiry into a business case. We have not got any documents that represent the business case.

Mr BRADFORD — Under the code of conduct I am not able to talk about that. If you wish to put questions on notice, we will certainly consider them.

Mr BARBER — You are saying it is advice to a minister?

Mr BRADFORD — I beg your pardon.

Mr BARBER — Are you saying that is advice to a minister and therefore you will not speak about it under the code of conduct?

Mr BRADFORD — No, as I believe it, the business case was considered by cabinet.

Mr BARBER — I will get back to that one. Financing for this has been organised by Treasury, yes?

Mr BRADFORD — Yes, the corporation uses the Treasury Corporation of Victoria to assist with its financing. We have our own policies on how we manage debt and interest rates and we follow government policy.

Mr BARBER — What rate will it be at — this 10 years of debt?

Mr BRADFORD — That is commercial-in-confidence. We have taken a 10 year profile with annual risks of expiry. We are trying to spread this risk over a long period of time.

Mr BARBER — Sure, you said it was a fixed interest. You have locked that interest rate in. And you cannot tell me the rate?

Mr BRADFORD — Perhaps I can answer your question another way. The corporation pays the TCV the government agreed rated or agreed rate that is settled for each of the tranches of this project. In order to ensure that the corporation also reflects the private sector model, for instance, we would calculate income taxes if it were the tax act applied. We pay a financial levy to Treasury to reflect the difference between our rating and that government rate.

Mr BARBER — BBBs.

Mr BRADFORD — You said BBBs.

Mr BARBER — BBB means investment grade, doesn’t it?

Mr BRADFORD — Yes, but I am not confirming that the corporation is a BBB. We are higher.

Mr BARBER — But your annual report says that you aim to maintain investment grade?

Mr BRADFORD — Yes, our objective is to maintain BBB. Our internal target is to achieve A. The long-term business model confirms that.

Mr BARBER — Why can’t you tell me the rate? Your annual report discloses the weighted average cost of debt.

Mr BRADFORD — I will have to take that on notice. I do not have every interest rate.

Mr BARBER — Just in terms of the cost of the project, the published figure you have got at the moment is $969 million. When we wrote to you and asked you about this you told us there was about $150 million had been contributed and you also informed us that Boskalis has already reported publicly €300 million — let’s say A$500 million. Where does the other 300 million go?

Mr BRADFORD — I think I explained that. Part of this process is that the corporation is responsible for the direct cost estimate, the pain-gain arrangement, the bonus if any paid to Boskalis, particularly the service


relocation works, the payment to Telstra CitiPower, the berth works — that is considerable, the navigation aids. It is not all about the alliance. The corporation also has parts — all of it is directly responsible — that is in the budget, including contingency.

Mr BARBER — So the €300 equates to the direct part of your alliance agreement — the direct costs?

Mr BRADFORD — Boskalis disclosed to the share market that their value of the project value of the port of Melbourne was in the order of €300 million, yes.

Mr BARBER — Just briefly, in terms of the allocation of risks under the alliance agreement.

Mr BRADFORD — Sorry, the allocation of?

Mr BARBER — Risks. I am guessing that some of the risks that you will bear under this will be break costs if you change your mind?

Mr BRADFORD — Of cancelling the contract?

Mr BARBER — Yes. Or in a major way modifying it?


Mr BARBER — You will bear that. Approvals and any regulatory delays: you would bear those risks?

Mr BRADFORD — From a certain point in time.

Mr BARBER — Direct cost profit and overhead, as you have said, is already guaranteed. Liability for environmental damage and economic damage: how would you deal with that and how would you share that between the parties?

Mr BRADFORD — That is a matter for the corporation in terms of any, as you alluded to earlier, potential action by third parties for costs — it would be a matter for the corporation.

Mr BARBER — Meaning you would cop it?


Mr BARBER — Okay.

Mr BRADFORD — We could have discussed that as part of the alliance agreement. We obviously chose not to because we thought we could better manage it ourselves and that is more risk to us.

Mr BARBER — So the upside, or the pain-share, gain-share as you called it, you could work that out using a bunch of key result areas?

Mr BRADFORD — KPIs, yes.

Mr BARBER — Whatever. They include things such as milestone achievement, stakeholder and community and environmental KPIs?

Mr BRADFORD — They are the type of things you would expect to see in a general alliance agreement, yes.

Mr BARBER — What would the environmental KPIs be?

Mr BRADFORD — I am not at liberty to disclose those, but you would expect that they would be closely linked to the environmental management plan and the achievement of all the rigorous controls expressed in that document.

Mr BARBER — Yes, but are you saying they get paid a bonus for complying with what is in the EMP?


Mr BRADFORD — I am saying that there is a bonus pool and there is a pain-gain arrangement and one of the key criteria for Boskalis as part of the alliance is to perform in accordance with the environmental management plan.

Mr BARBER — They get incentivised for performing, for not breaching the EMP?

Mr BRADFORD — I think that is given the rigorous nature of the environmental management plan. I can give you an example, if you wish, of a matter that has been closed in terms of a KPI.

Mr BARBER — How about stakeholder and community?

Mr BRADFORD — You would expect to see matters of those included in alliance KPIs.

The CHAIR — Mr Barber, we are going to have to leave it there. We are over time.

Mr BARBER — Can I ask one final question of Boskalis, a real simple one?

The CHAIR — A short one.

Mr BARBER — Just for the gentleman from Boskalis: you said earlier that you are engaged in projects all around the world and that they all have rigorous environmental guidelines. Are there any projects you are involved in where that involved dumping material of this sort of toxicity, which we all understand, or think we do, in the water?

Mr HAAK — I think that is a question outside of the terms of reference of this committee.

Mr BARBER — No, it is about risk, it is about the business plan. You brought it up. Can you name other projects around the world that you are involved in?

Mr HAAK — I can name for you various other projects where there are strict environmental requirements. You will find more of them as well in the annual report that I gave. But, for example, some recent projects: one in Brazil in Sepetiba with very strict environmental requirements. Another one recently awarded — Khalifa Port in the UAE with some very strict environmental requirements as well.

Mr BARBER — But do those projects involve dumping and containing toxic material in the open water, because I understand this is a bit of a new thing?

Mr HAAK — I cannot say that but I can say for example in the Khalifa Port project we are talking about working very close to a coral reef so you can imagine the strict requirements that we get there, that are complied with.

Mr BARBER — Where does the dredged material go there?

Mr BRADFORD — Just one point, Chair, the EMP does not allow the dumping of contaminated material. Material has to be carefully placed on the ocean floor, and it will be.

Mr BARBER — Outside the environment.

The CHAIR — Thank you, Mr Bradford. We have to leave it there. We may have some additional questions on notice that we wish to submit to you given that we have run out of time. The committee thanks you for your attendance here this afternoon, and Mr Haak and Mr Yeung from Boskalis, and for your submission. We will have a draft transcript to you in the next couple of days, and as I said, we may have some follow-up written questions. Thank you very much.

Witnesses withdrew.






Members




Substituted members


Staff


Witness

Mr S. Meyrick, chief executive officer, Meyrick and Associates.


The CHAIR — I welcome Mr Steve Meyrick, chief executive officer of Meyrick and Associates. All evidence taken at this hearing is protected by parliamentary privilege as provided by the Constitution Act 1975 and further subject to the provisions of the Legislative Council standing orders. Any comments made outside the precincts of the hearing are not protected by parliamentary privilege. All evidence is being recorded by Hansard, and witnesses will be provided with a proof version of the transcript in the next couple of days.

I now invite you to make an opening statement, if you wish, or we can proceed straight to questions.

Mr MEYRICK — I am quite happy, Mr Chairman, to proceed straight to questions.

The CHAIR — Thank you, Mr Meyrick. Over the course of the last two days the committee has had a lot of testimony with respect to the business case prepared for the project. One of the issues raised has related to some of the assumptions that underpin the business case: reference to the growth rates of the trade forecasts, the exchange rate used in some of the estimates. Can you tell the committee how you determined the growth rates, exchange rates and indeed the discount rate that you used in preparing the business case?

Mr MEYRICK — They are three questions, Mr Chairman. I propose to take them separately, if I may.

The CHAIR — Certainly.

Mr MEYRICK — The methodology by which we made our estimates of the growth rates I think is spelt out in the benefit-cost analysis which we provided to the supplementary environment effects study. Essentially it is a top-down methodology that we use. We start with estimates of future world growth and then estimates of the ratio of trade growth to world economic growth. A third set of ratios that we employ are the ratios of containerised growth to world trade growth, because we have got plenty of historical data to give us some tracking on those. Finally, we map those world trade growths onto the Australian trade growths. That is basically the process we used to come up with the estimates of the future container trade growth in particular, which is the one I have been describing.

The other two pertinent growths are for the grain and oil trades. The oil trade growth is very largely based on discussions with industry. The grain trade was based primarily on a third-party source. The name of the organisation escapes me for the moment, but it is a grain industry organisation who took the estimates of grain production through to, I think, about 2020, and we more or less extended the series beyond then, because the grain contributes only a small part of the total benefits.

The exchange rate assumptions are the most difficult ones to get any sense out of. I think we are all aware that during the time this project has been analysed the Australian dollar has fluctuated between 54 cents when we started, and it is 95 now. Really, the exchange rate level is very much judgemental. We just took it from our at-the-time review — and this was in late 2006 — of what appeared to be the market intelligence on what the long-run equilibrium rate for the exchange rate is, and that was around about 70 cents at the time.

I think people are still talking about the long-run rates, probably in the 70 to 80 cents band, but certainly recent movements in the exchange rate would give you some frights about that, but all I can say about that is it is a particularly volatile series. I do not think anybody really knows what the long-run exchange rates were. At the time about 70 cents seemed to be about central in market estimates. It is probably somewhat north of that now. They are probably not as high as the current level of the exchange rate.

Sorry, Chair, your third question was the discount rate?

The CHAIR — The discount rate, yes.

Mr MEYRICK — The discount rate, we did not estimate. It was given to us, if you like, as the standard discount rate in Victoria, the real discount rate for this type of project. I am aware that that has been criticised in some quarters as too low. My personal view, for what it is worth — it was not my choice, but my personal view is it is pretty much on the money. It is a reasonable sort of discount rate.

I know that rates for economic evaluation that are used by the World Bank and the Asian Development Bank have been quoted in some of the submissions. I am aware of those rates. We have used them in projects that we undertake for the Asian Development Bank and the World Bank, but context is very important here.


They are development agencies which are looking at projects undertaken in a developing country context. There are a lot of significant differences between the sort of discount rates that you would use for an economic evaluation in a developing country and in a developed country, not the least of which is the very tight capital availability constraints that one encounters in developing countries.

I would personally put very little weight on Asian Development Bank or World Bank numbers and I would look at the kind of mandate or guideline numbers from other jurisdictions. If we do that, you find some to the north of 6 per cent, some to the south for this sort of work.

The Office of Best Practice Regulation, for instance, I think recommends 7 per cent real and that is I think the New South Wales Treasury guidelines, if I am not incorrect. The European Community guidelines in the 2002 benefit cost manual were 5 per cent real. The UK, in the early 2000s, brought down its discount rate for evaluations of projects to 3.5 per cent. Germany uses, I think, 3 per cent. The French revised theirs down also in the early 2000s from 8 to 4 per cent. There is an immense literature on the appropriate discount rate to apply for economic evaluation of projects.

It seems to me on my take that the rate we were mandated for this project is roughly in the middle of the field and that the sensitivity analysis which you undertake in the evaluation of the project pretty much spans the credible field, certainly at the north end, at the 8 per cent end. It does not go quite as low in the range of sensitivities as, say, the British mandated rate now, or the one that is preferred in Germany, I think it is. But this is not a precise science.

We were given the discount rate as a mandated rate. It seems to me — and it is my personal view — it is quite a reasonable one given my understanding of the rates which are generally considered reasonable in other jurisdictions in developed countries.

The CHAIR — Some of the evidence the committee has heard suggests that this is a commercial project and should be treated as such and given a discount rate. Yesterday we heard evidence that the discount rate should be up at 17 per cent. Would you like to comment on that?

Mr MEYRICK — I think we need to distinguish quite clearly between the sort of discount rates you would use for a social cost benefit analysis, which was our task, and the sort of discount rates that you would use in a financial evaluation for an individual corporation. They are quite different. They are different numbers that you would use. There seems to be some confusion in the material that has been presented to the committee between these two things.

Generally speaking I would expect the financial rate to be somewhat higher but I am not in a position, not having done the requisite homework, to tell you how much difference I would see between the social cost benefit discount rate, which is what we use, and the sort of rate that you would use in a kind of business case or financial evaluation.

Obviously part of the issue there is that the spectrum of risk is quite different, because when you are looking at it from a single corporation perspective you have to worry about not only whether the benefits are generated but also whether your individual entity is going to capture those benefits as an element of risk. That is not relevant to a social cost benefit analysis. It does not matter from a social cost benefit point of view whether the Port of Melbourne Corporation gets the benefits, or the exporters or whatever, so it is not like the private sector. It is a different issue that is involved and you will get a different number for the two contexts. In my view at least it is quite important that we clearly distinguish conceptually between those two contexts.

The CHAIR — Thank you. On the issue of the cost estimates, I am just looking for the page where you laid them out. There were two issues I wanted to ask about. The first was the cost of maintenance dredging, which is not picked up in cost estimates. Could you make a comment on that? Why is that not included.

Mr MEYRICK — I would like to preface my remarks, Mr Chairman, by saying that it is some considerable time since we undertook this analysis, and I am relying on my memory which, as the colour of my hair shows, has probably become less reliable. On this particular aspect I have not had the opportunity to consult my files. It was not an issue that I anticipated the committee would raise. I will tell you my best recollection of that issue and I am happy to check later on and confirm that that recollection is accurate.



Mr MEYRICK — But bear in mind that I am doing this from memory, and I acknowledge that my memory on this particular aspect is not perfect.

The concept though, it seems to me, is quite clear. Maintenance dredging per se is not an attributable cost to the project. What is an attributable cost to the project is the difference in maintenance dredging that would occur with the project and the maintenance dredging that would occur without the project. My recollection of the advice at the time that we got from the engineers is that at that time there was no reliable estimate of any difference. The best guess was that it would have no material effect on the ongoing dredging program.

Yes, there are certainly maintenance dredging costs in order to maintain the deepening channel but there would be for the original channel anyway, and the best information at the time, as far as I recall it, was that there was no material difference between the two. I will check that for you and get back to you to make sure that my recollection is accurate.

The CHAIR — There is just one other matter I wanted to ask you about. Again, I cannot find the page. You estimated the impact of the project on the dive industry, which is something this committee received submissions about, and we will take evidence later today. Can you tell the committee how you arrived at that estimate of the impact on the dive industry?

Mr MEYRICK — Unfortunately that is one of the elements of the analysis I cannot be terribly much help to you about. The reason for that is because that particular element of the social costing was undertaken by the specialist firm which looked at the recreational and tourism impacts, I think, for their full brief. As far as the cost impact on the diving industry is concerned, we simply asked them for the appropriate number and incorporated that number in our analysis. We did not in fact independently arrive at that particular number.

The CHAIR — Who was that firm that provided — —

Mr MEYRICK — It was SKM, from memory. Again, I say ‘from memory’. I think it is footnoted in our report, so it should be fairly easy to clear the reference.

Mr VINEY — There has been some questioning of the decision point as a result of the cost–benefit ratio — in other words, my understanding is that your latest revised figure is the cost–benefit ratio of 2.57, I think.

Mr MEYRICK — I think so.

Mr VINEY — We were advised of it half an hour ago, so it probably tells you more about my memory than yours, Mr Meyrick!

Can you advise the committee why the 2.57 — or 2.5 or 3 — what that means in terms of a decision whether or not a project of this sort should proceed? Would you think a 2.57, if that is your final analysis — — Some people have said it should not occur unless it is at least 3, and we have had other advice that anything above 1 is a positive project.

Mr MEYRICK — I think 1.0 would be pretty tight, but I know that a number of road sector projects, for instance, have gone with BCRs of 1.2 to 1.6, that sort of thing. I would certainly regard 2 as a robust number, personally.

Mr BARBER — Public roads?

Mr MEYRICK — Yes. Again, my remarks are all framed in the context of the social cost–benefit analysis, so it is kind of not particularly relevant with a public–private road, because it is not about who gets the money. It is about the generation of the benefits that can be selected.

Mr BARBER — Totally.

Mr VINEY — So a 2.57 — I cannot remember whether it is 2.57 or 2.51, but anyway, 2.5 — —

Mr MEYRICK — Five seven is the latest one I have got, and I cheated!

Mr VINEY — Thank you. So 2.57 is a pretty robust number?


Mr MEYRICK — I would regard it as such, yes.

Mr VINEY — Thanks. The Chair actually asked a range of questions that I had in relation to those forward estimates, and I think you have responded and satisfied some of my questions in that area. It seems to me that, in the questions that have come before this committee of people who do not support the project and the advice that the committee has received to say that the project is viable, that a lot of it rests on your analysis.

I ask this as a genuine question. I know nothing of your background and your experience in doing this work, and I thought it might be useful for the committee to have a bit of that understanding. I am certainly not questioning it; I am just trying to understand the basis upon which your advice is being relied upon.

Mr MEYRICK — Perhaps I could give you a potted biography in three sentences or something like that?

Mr VINEY — Yes; just very short.

Mr MEYRICK — Basically my training is in engineering, economics, mathematics — and English literature, just for fun! I started my career working in government — in state governments in Western Australia and n Tasmania — originally with road agencies, oddly enough, but ultimately with policy advisory units in government, one of the responsibilities of which was capital works evaluation and programs like that.

I moved from my government career to a short academic career in an outfit called the centre for transport policy analysis at the University of Wollongong. For various reasons I left that in 1991 and established my own consulting company, which has specialised in transport and particularly transport economics. That company has grown and has been reasonably successful.

My personal sphere of interest for the last 15 or 16 years has been in the maritime sector, most particularly in container shipping. I have worked for all Australian state governments and the federal government, as well as the Asian Development Bank, the World Bank and the United Nations in that particular area, and with some organisations like the Korea Maritime Institute on long-term forecasting of container trades in particular.

I have provided trade forecasts, I think, for most Australian port authorities, with the regrettable exception of Sydney over the last decade or so. The maritime sector and maritime economics is my game, if you like, so I feel reasonably well qualified to comment on these particular issues. Is that sufficient?

Mr VINEY — That is fine.

Mr HALL — Mr Meyrick, in your cost–benefit analysis of February 2007 — chapter 3 and chapter 4 — I want to get some idea of what issues or matters that you chose to put in chapter 3 and chapter 4. Chapter 3 is ‘Quantifiable environmental and social costs and benefits’ and gives three or four particular areas in which you said the impact can be quantifiable. Chapter 4 is ‘Effects not included in the quantitative cost–benefit analysis’. Some of those you assess as having zero value in direct effects and others have uncosted risks and effects. How do you make those decisions about what type of issues are put in each of those three categories?

Mr MEYRICK — Thank you so much for that question, because I think it is a very pertinent question and an appropriate one — and it has obviously been a contentious one. Let me start by saying it was our endeavour to include as many of the non-market effects of the project as we possibly could but not at the expense of undermining the estimates of those elements of the cost and benefits stream which can with some confidence be estimated. It is possible to interject — and you have all seen, no doubt, some extremely rubbery numbers into cost–benefit analysis on very little basis.

So we have essentially three qualifying criteria for an effect, which is included in the quantitative cost–benefit analysis. The first of those is that there should be a reasonable scientific basis for assuming that the effect will occur, or at least for assigning a defined probability to that event occurring. That is the factual scientific stuff. I know nothing about the science about most of these things so to get that we had to go to the specialist scientists in each sector and say, ‘Do you think there will be a measurable effect?’.

The second criterion which is related to that is that you then need to be able to in some way quantify that impact with some degree of reliability — not exactly, not precisely, nothing is precise — to a reasonable level so that you can put out a number that you could credibly discuss with people on it.


The third element is that you then need to have a reasonably robust process for converting that effect into a dollar value. All of the effects that you see in section 4 fell at one of the first two hurdles. Some of them would have fallen at the third one anyway, but all of them fell at one of the first two hurdles. In almost of all those cases, the scientists said to us, ‘Where we have said zero effect, it is not going to happen. There will not be this type of effect when we put into place the EMP’. In some cases they would have without the sophisticated — I do not want to make judgements about that — or elaborated environmental management program that evolved through the course of the project.

In very early drafts, working through these pages, we actually had a few more of these non-market effects with costs attached to them but then the project changed. They internalised some of that cost. They elaborated the environmental management program, and then the judgement of the relevant scientists was that effect will no longer occur. Obviously it cannot be costed if it does not occur. The scientists say, ‘It ain’t going to happen’, basically, and we are taking their word for it. I do not feel competent to challenge on those bases, and I have no reason to believe they ought to have been challenged.

There is another set, which is the ones that are the unvalued but not necessarily on zero, when the scientists basically said something of the sort, ‘Yes, I guess it could happen but the probability is very, very low, and if it does happen the effect is likely to be containable’.

We cannot give you a reasonable estimate of probability nor can we specify with any clarity the magnitude of the effect. In those circumstances it is not possible for us to place a credible dollar value on the effect. The information is just not clear enough to do that. However, because we did not want to lose that material altogether, we actually put in those chapters in a cost-benefit analysis, although they did not impact on the numbers, just to alert people to the fact that these had been raised as issues, that the science has been done, and these were the comments we have gotten. That is basically how we distinguished it. Anything that passed the three gates, and there were not very many, as you can see, got included in the quantitative cost-benefit analysis.

Mr HALL — Yes. What do you mean by ‘internalising’ those costs?

Mr MEYRICK — Okay, that is econo-speak, isn’t it, and I apologise for that. Basically, if I am about to do something — let’s say dredge a channel — and I foresee that that might disturb a certain fish species and that would have a cost to the society at large, I can effectively internalise those costs by saying, ‘Okay, as well as actually dredging the channel I will do this thing, this thing, this thing and this other thing while I am doing the channel at additional cost, which will reduce or eliminate the risk of that disturbance occurring’. By doing so, I am effectively internalising the cost. That is, I am taking the cost on my shoulders as part of my project which, in the absence of those mitigation measures, would find its way out to the system in a social cost. Is that clear enough?

Mr HALL — Yes. Lastly, I just want to ask: in respect to these matters that have been zero-valued or uncosted, did you receive any direction from the Port of Melbourne Authority in respect to what to include and what not to include in your report?

Mr MEYRICK — No, we did not, and frankly I would have resisted that. I have not built a company for 20 years trying to do business on that sort of basis.

Mr HALL — Thank you.

Mr BARBER — Thanks, Chair. I guess you were not really asked to do a business case in some ways, were you?

Mr MEYRICK — Regrettably, no.

Mr BARBER — Why ‘regrettably’?

Mr MEYRICK — Because we do that line of work, and we have done it for other clients, and it would have been an interesting exercise to be involved in.

Mr BARBER — Basically what you were doing was looking at all sorts of diffuse benefits or at least diffuse beyond the port itself into port users versus the costs which were going to be borne by the port? That mandated Treasury rate — if it was around 6 per cent, that is virtually a government borrowings-type rate. That is effectively saying what? What is 6 per cent saying?


Mr MEYRICK — 6 per cent real?

Mr BARBER — In non-technical terms.

Mr MEYRICK — The social discount rate is what it should be. Let me put it this way: as I say, there is an immense literature on this so whatever I say will essentially oversimplify it.

Mr BARBER — Give it a go.

Mr MEYRICK — My prejudices in terms of the different schools of thought will be showing. Basically, my view on this and it seems to be the European view is it should reflect a social-type preference rate — that is, the extent to which we, taken collectively as a society, would prefer to have our cake today than tomorrow.

Mr BARBER — We are not worrying about our grandkids.

Mr MEYRICK — Well, we are, in fact and that is one of the reasons why I must admit I am really concerned about the proposition that we ought to use discount rates which are 12–15 per cent because if you did that, you would count as nothing the benefits to your grandchildren, perhaps even more importantly to my grandchildren. So it is very important that we do not get stuck using excessively high discount rates. That means only what we get today matters, in the short term, and what flows down to our children and our children’s children would be valued at virtually nought.

Mr BARBER — So if you were doing a business case, you would have definitely gone with the weighted average cost of capital that a business or corporatised government entity does? They drive the equity returns from the market and they do the debt also from the debt market?

Mr MEYRICK — I certainly would have been focused on what is the cost of capital to the entity rather than to the society as a whole, yes.

Mr BARBER — The Department of Transport just came in here and told us in their witness statement that you have provided a final estimated BCR for the CDP since the lodgement of their submission, so I presume it is in the last couple of weeks. The most recent one I have got from you is the 2007 Meyrick and Associates one where it quotes the results of the revised October 2006 analysis.

Comparing what is in this latest announcement here today and that in October 2006 — PV benefits are still 1936: they have not changed; PV costs are now 754 whereas previously they were 590; NPV then goes to 1.18, down from 1.35: we have lost $250 million; and that changes the BCR to 2.57 instead of 3.3. Is the only thing that has changed between those analyses an update of the PV costs?

Mr MEYRICK — Correct. The numbers that you read out were provided by the department, were they?

Mr BARBER — By the Department of Transport, and then I asked the port, and they said, ‘He wrote us a letter saying that’.

Mr MEYRICK — I did. That is precisely what happened. I received a call from PMC about two weeks ago, I think it was, informing me that the cost estimate for the project had significantly increased since the material we did for it and asked if we could update the analysis purely to reflect the increased cost, which is what we did, and we sent the results of the analysis in a letter to the Port of Melbourne Corporation.

Mr BARBER — Are you still getting the invoicing for this, or is this after-sales service?

Mr MEYRICK — I do not know.

Mr BARBER — Okay. Assuming there is anything more in it than just what is here, which is a couple of lines, can you provide us with the same letter?

Mr MEYRICK — That letter is something I have sent to PMC. I will certainly relay your request to PMC.

Mr BARBER — They said, ‘You will have to ask Mr Meyrick.


The CHAIR — They did, indeed.

Mr BARBER — In fact twice over they said, ‘You will have to aske Mr Meyrick’.

Mr VINEY — If he has got a commercial arrangement with someone else — —

Mr MEYRICK — I just cannot do that.

The CHAIR — I think Mr Bradford indicated we would receive that letter.

Mr MEYRICK — So do you wish me to convey your request to him, or has he already got the message?

The CHAIR — He is aware of the request, thank you.

Mr BARBER — Present value costs of 754 — but they are telling us the cost of the project is 969. Given the project is under way, I am gathering it is not the time value or money that is getting us from 969 down to 754. What are you still excluding from that? It is 12 months worth.

Mr MEYRICK — Consistent with the approach we took in the SEES, I am excluding any costs which have been expended or irrevocably — actually, not true; I do not know what costs have irrevocably committed, so I did not exclude them. I have excluded any costs that were expended up until the end of 2007. The reason for that is quite simple: I was asked to present an analysis on the same basis as that which went to the SEES. In my view, the entirely appropriate way we presented the analysis in the SEES was in a forward-looking sense. The reasons for that are explained quite clearly there.

Mr BARBER — There is some debate about the sunk costs and whether they should have been in, but I am asking you: are there any new sunk costs that you are excluding since October 2006 and yesterday when you wrote that letter?

Mr MEYRICK — Yes. There are costs which were expended in 2007.

Mr BARBER — What were they?

Mr MEYRICK — I honestly could not tell you off the top of my head, but I am happy to — —

Mr BARBER — It seems the more they dredge, the more they have got some cost — —

Mr MEYRICK — Correct.

Mr BARBER — So you continually exclude that from the costs in each analysis they ask you to do?

Mr MEYRICK — Absolutely. And that would be entirely correct, because — I mean, let me put a hypothetical to you — —

Mr BARBER — Option value, sure, but we are still trying to get to the bottom of the original business case, so it is kind of not helpful in some ways that they keep subtracting some costs off that and present that as the business case.

Mr MEYRICK — You will be aware that in the BCA to the SEES we actually did a supplementary analysis, which included all of the sunk costs. So you can make that comparison at least so far as that is concerned.

Mr BARBER — It is just mathematics, isn’t it?

Mr MEYRICK — It is not being swept under the carpet or whatever, it is there. I have maintained strongly that from a decision-making perspective it the wrong way to look at things, and you know why.

Mr BARBER — Yes. The economists’ criticisms, at large, I suppose have been back and forward a few times are about the sensitivity analysis. Is there anything wrong with the way they have done a sensitivity analysis? It is also just mathematics, isn’t it?


Mr MEYRICK — Frankly, I have not had a look at their sensitivity analysis, so I cannot comment on what Economists@Large have done — well, I did for what they did for the SEES, and my comments there are on the public domain already, and I do not wish to repeat them. There are many, many ways of doing a sensitivity analysis. We included quite a lot of sensitivity analysis in the work we did for the SEES, as you are aware.

Mr BARBER — You did ones on different discount rates too, didn’t you?

Mr MEYRICK — We did; 4 and 8 per cent.

Mr BARBER — But you never examined — I mean, the port basically admitted this morning that its weighted average cost to capital is about 11. So you never did one to examine what this would have come out as if they had treated it like a commercial project?

Mr MEYRICK — No, and I would have resisted any urging from the port to do that, because it would be an entirely inappropriate way to behave for a social cost-benefit analysis.

Mr BARBER — Yes, but in some ways — here is a social cost-benefit analysis: the government has already determined that the port will operate at a commercial level. In making that decision the government and the Parliament decided ‘We will operate the port on a commercial basis and that is how we achieve the best social outcome for our shippers and all those other people downstream, regardless of who ends up getting the benefits’. So why do a social cost-benefit analysis when the decision has already been made that the best way to do that is to run the port’s commercial entity as spin-offs of the spin-offs?

Mr MEYRICK — With the greatest of respect, you are confusing two conceptual universes there. It would be much better for clear decision-making and public policy if you clearly distinguished between the spheres of the area of interest of the corporation and the way in which the government chooses to manage its corporations and the issue of whether a physical project will yield benefits to society. They are quite different issues. I will maintain until the day I die that they ought to be treated as completely separate issues, and I have the overwhelming weight of authoritative academic opinion on my side.

Mr BARBER — I was not conflating them; I was asking you to separate out for me.

Mr MEYRICK — I think I have done so.

Mr BARBER — But the way I opened it was: why would there be a social benefit analysis — —

Mr MEYRICK — I am sorry, it happens to be something that oddly enough I feel quite passionate about.

Mr BARBER — Good on you! The port told us earlier this morning that over the last 16 years there has been 17.8 per cent growth in containerised trade. Do you know what it was in the 16 years prior to that?

Mr MEYRICK — For the port of Melbourne, offhand, no. I can tell you globally because I do that homework. The global rate of growth has averaged over the last 30 years about 8 per cent.

Mr BARBER — They said double GDP is a good rule of thumb.

Mr MEYRICK — A little bit crude for my taste, but not bad. It has tended to work out that way. Again, I have to get a little bit technical to try — —

Mr BARBER — Talk to me like I have an MBA in corporate finance.

Mr MEYRICK — It is not a financing issue.

Mr BARBER — That is what I mean, I am not that smart when it comes to economic concepts. They only teach us enough to ask smartarse questions!

Mr MEYRICK — The problem that confuses that a little bit — and this is why we do the top-down analysis the way we do — is that we have lived through a period where we have seen a significant liberalisation of global trading systems.

Mr BARBER — Growth in China; the internet?


Mr MEYRICK — All of those things.

Mr BARBER — Nobody saw that coming!

Mr MEYRICK — What has happened as a result of that is that you have had quite a bit of volatility in the ratio between trade growth and economic growth over that period. So we have tried to make our assumptions on that very explicit in our analysis. That is where I get a little bit cringey about a very simple thing. In fact, as a long run average, it is not bad.

Mr BARBER — Were you feeling cringey when you had to project 7.8 out over the next 30 years?

Mr MEYRICK — I did not project 7.8 out over — —

Mr BARBER — You got that from somebody else’s?

Mr MEYRICK — Never did it. We have never done it at any stage of the analysis.

Mr BARBER — You bought that data in from somebody else.

Mr MEYRICK — We have never bought that data in — we never used those figures.

Mr BARBER — What did you use?

Mr MEYRICK — I have got them here, as it happens. For the first period we used a figure, I think, of 6.71 per cent for the short run, by which I mean through to — —

Mr BARBER — Ten years?

Mr MEYRICK — 2010, for our 2011 through to 2020 years, 5.59; for 2021 onwards we used 4.68 per cent.

Mr BARBER — Did you do a terminal value, or was it not worth it?

Mr MEYRICK — We did not do a terminal value.

Mr BARBER — Thanks, that is helpful.

Mr MEYRICK — We truncated it at 25, yes.

Mr BARBER — Back to the earlier issue you raised about the scientists and the advice they were giving you about environmental effects: you and they would have been hampered somewhat in that you were doing this before, during and after two different SEES’s — yes? It would only be at the end of the final SEES that there was a definitive statement on environmental effects?

Mr MEYRICK — Correct. To the best of my knowledge and belief, the VCA incorporated the final views of the relevant scientists that went into the SEES. I will not pretend that the process of trying to get that coordination so that we got the final views into our analysis in time was not a terribly fraught process, but to the best of my knowledge and belief, all of the scientific views which are noted in here reflect the final views of the relevant scientific experts at the time of the SEES.

Mr BARBER — You said it cannot be costed if it will not occur. That is a little bit cart before the horse. They are telling you that the probability is zero, and you are saying that you cannot cost it. You can cost it in the way that it is zero.

Mr MEYRICK — Okay.

Mr BARBER — Or do a decision tree.

Mr MEYRICK — Certainly, but if I weighted the probability as zero — —

Mr BARBER — Science and probabilities — —


Mr MEYRICK — Yes, zero — —

Mr BARBER — And that has a huge effect, very low probability?

Mr MEYRICK — You can do that. My objection to doing that, and it is a standing objection; it is not manufactured for this particular project, is that what you are doing then — you can do that, and it has been done. Methodologically I find it exceptionable because you end up with one very low number, which you have really got no idea about, multiplied by one very high number, which you have got really no idea about, and you end up with a number which is sometimes large enough to swamp all of those numbers in the analysis that you do have some idea about.

It seems to me that is methodologically destructive to the intelligent decision-making process, and one is far better to quarantine those effects about which you have to say, reluctantly perhaps, ‘There is no way I can put a reasonably reliable value on this effect’, point them out and deal with them truly qualitatively. There are methodological arguments about that, but I am quite happy to fight my corner on that.

Mr BARBER — That is probably why this project is still in huge dispute though, isn’t it?

Mr MEYRICK — No, this project is — —

Mr BARBER — We have fallen into the gap between those two — —

Mr MEYRICK — Perhaps.

Mr BARBER — What you are happy to do and what we are all asking about?

Mr MEYRICK — The real reason why it is in dispute is, I think, with the greatest respect to some of the submitters, is that people are mistaking assertions for evidence on most of these matters.

Mr BARBER — Just a final question: there has also been a bit of discussion about the ship size estimates that you used in your report. One of the things is that you were basically having zero ships before a certain size. You had a probability distribution curve, which I have looked at, assuming obviously the average increasing but the tails on either end pretty much conking out. Where did you get the data from to do that?

Mr MEYRICK — Let me make one clarification: there is a subset of ships which is not included in the analysis anywhere because they are irrelevant. They are the ships that serve the rats-and-mice trades: the New Zealand trade, the Pacific trade and so forth. They are not included anywhere in the analysis because in our view they are never going to grow to the size where they are going to be impacted by the current depth of the channel. So we deal in our analysis only with those ships which we expect to operate in the major trades, of which there are four: the north and east-Asian trade, the south-east Asian trade, the North American trade and the European trade.

We are not asserting that there will not be any little odds and bobs floating around in Melbourne, we are simply asserting that they are irrelevant to this analysis because there is no economic benefit to them from the channel deepening project. There is, if you like, an invisible tail at the low end of ships deployed in the rats-and-mice trades, for the want of a polite term.

Mr BARBER — But as far as the raw numbers or the distribution of those other ships, you are quite happy to warranty that they are all reasonable assumptions?

Mr MEYRICK — They are all reasonable assumptions. I think they are well-founded assumptions.

Mr BARBER — You are not a shipping expert. Where did you get the data from?

Mr MEYRICK — Pardon?

Mr BARBER — Where did you get the data from to predict what that will be looking like in 30 years time?

Mr MEYRICK — There are a number of sources we can rely on. Basically I would point you to three. There is no precise way of doing that; I am perfectly happy to admit that.


There are three leads of evidence that can help us to get a set of reasonable assumptions. The first is to look at what has happened in the Australian trades historically and look at the rate of growth of ship size, both the maximum ship size and the average ship size in these major trades. We did that, and the analysis is presented in our report for you to see. Basically, it turns out that historically we have witnessed an increase in the maximum ship size of around 4 per cent per annum over a very long period of 20 years or thereabouts. That is one element. Put that aside for a moment.

The other thing we can look at is the evolution of ship sizes in other trades which are in a sense more advanced than ours, because they are heavier volume trades, or whatever. You may or may not be aware that the largest ship now is well over 10 000 TEU in size. Ships of the sort of size we are talking about arriving in Australian trades in 20-odd years time have been deployed on the Europe–Asia services and the trans-Pacific services since, let’s say, at least the early to mid-1990s, for 13 to 14 years.

If you look at the historical lags in Australian ship size between global, typically we are talking in the order of 20 years. So there is a little bit of a linkage there. We can look at what happens elsewhere, where things are more along the track, if you like, as an indicator. If that is broadly consistent with a continuation of past trends, then you have some sort of a feeling for what is likely to happen in the future.

As it happens, we got a bit cowardly about it, and we thought that the leading indicator stuff tended to point a bit south of the historical trend line in Australia, so we adopted the more conservative of the two points of view in that regard.

The other area where you can get a lead of what is likely to happen is to just look at the ship order book, look at the position — —

Mr BARBER — That is what I would have thought, but the representatives of the port sat here and said, ‘That’s all trade secret. You can never get into that’. It would be kind of hard to build a ship with no ship doing that.

Mr MEYRICK — I think, again with respect, there may be a slightly crossed wire here. I think they were talking about the individual plans of particular shipping lines in the short term, which it tends to be. The state of the order book, the overall composition of the global container fleet, you are quite right saying, ‘You can’t hide that’. Everybody who is prepared to pay the right amount of money for a subscription database can hook it down from the database and build up the profiles, which is exactly what we did.

Mr BARBER — When an individual line connects, it will probably show up in their accounts, too, would it not?

Mr MEYRICK — That is true as well. One complexity is that it does not really tell you when they are going to come here.

Mr BARBER — That is why I say ‘the individual’.

Mr MEYRICK — They swap the ships in and out of the trades with monotonous regularity, if you like. So that is why we try to rely more on the two long-run trends, which is the historical Australian and then the forward looking, and say: what sort of ship size?

Of course, the fourth element is you go out and have a yak to people in the industry. I do that with some caution because you have to be a little bit sceptical about what shipowners tell you about what is going on, because sometimes they have a vested interest in pushing a particular value.

Mr BARBER — They will give you good goss on the opposition, though.

Mr MEYRICK — That is exactly right. You are quite right: it is better to ask them about somebody else’s behaviour than their own.

Mr BARBER — But that was not a major component of what you did in this instance?

Mr MEYRICK — It was a cross-check. We found that what we worked out from the databases was broadly consistent with the industry gossip.


Mr BARBER — Did you call the actual lines that are currently operate in Australia? There is a list of them.

Mr MEYRICK — We called on them. We went to visit them and chatted to them about what they saw the future being. Everyone has a slightly different perspective, but it was broadly consistent with what we saw happening.

The CHAIR — Thank you, Mr Meyrick. The committee appreciates your attendance this afternoon and for clarifying some of the matters in the cost benefit study. We will have a draft transcript to you in the next couple of days for any corrections you wish to make.

Witness withdrew.




Subcommittee



Members

Mr G. Barber Mr B. Tee Mr P. Hall Mr M. Viney Mr G. Rich-Phillips


Substituted members


Staff


Witness

Mr L. Salter, Dive Victoria Group.


The CHAIR — I welcome Mr Len Salter from the Dive Victoria Group. All evidence taken at this hearing is protected by parliamentary privilege as provided by the Constitution Act 1975 and further subject to the provisions of the Legislative Council standing orders. Any comments made outside the precincts of the hearing are not afforded such privilege. All evidence is being recorded by Hansard. Witnesses will be provided with proof versions of the transcript in the next couple of days.

Mr Salter, I would invite you to make an opening statement, if you wish, or we can proceed straight to questions based on your submission.

Mr SALTER — Thank you. I would like to make a short opening statement. The dive industry is in a unique situation in this in that the people in it are in the front line in the effects of any change in the operating conditions down around the Heads. I reiterate that all the diving is done in the Heads area of the bay, which is the drainage point for all the water that goes in and out of the bay, so any disturbance eventually goes past our dive sites.

At the SEES there was a large exclusion zone that envisaged by the Port of Melbourne. That would have effectively locked the diving industry out of about 90 per cent of its reliable bread-and-butter dive areas. Since the SEES, the Port of Melbourne has decided to drop that large exclusion zone and impose on us a 200-metre exclusion zone around the dredge.

The Port referred to consultation groups. In those consultation groups we tried to get a communication line that would give us a schedule of where the dredge worked, because an exclusion zone of 200 metres diameter that is subject to movement anywhere in the bay does not give any opportunity for us to operate with surety on the dive site. So the Port of Melbourne has removed a compulsory exclusion zone and has forced us to introduce a self-imposed one because a 250-metre exclusion zone and the fact that we cannot ascertain where the dredge will move to — although we have tried communicate and have asked the port to give us that information. We fail to see how 2 or 3 hours out from us diving they are not able to predict the next work spot for the dredge.

This has two effects on us. One is that you cannot take a booking with any surety in the future. A lot of people want to dive a particular site. They will look at the traditional dive calendar, and they will book on it, but if the floating 200-metre exclusion zone encompasses that at that particular time, then it is a no-go, it is a substitute dive. Divers will put up with substitutes on rare occasions for weather, that is believable, but consistently telling them that we cannot offer a quality service is starting to have a flow-on effect with repetitive business.

The other thing that is going to affect us and have an unknown cost at this stage is visibility. With the interim dredge process that happened at Hovell Pile recently was of a short duration, but it was long enough to tell us that the diving became absolutely impossible at traditional areas off Rye and Rosebud for scallops because of the low visibility — despite the port putting out its monitoring process saying that, I think, it was 0.2; it was an incredibly low number, but it was effectively non-diveable.

The duration of that, as I said, was short enough that it did not eventually affect all the dive sites right up at the Heads. It got up as far as Popes Eye, so it eliminated in that period major areas of seals at Popes Eye and Portsea Hole, which probably constitute about 50–60 per cent of the low-end school market.

The fear that we have is that in the future the major work will be done in the south channel at a time when that low-end market is predominantly happening, and that is the school training at the start back of school terms in January–February, and most of the low-end recreational diving is done in that good weather period from Christmas through to roughly Easter. They have taken no account of our actual operating time, when we make our most money, and they have introduced their worst situation.

We also cannot evaluate the cumulative effect of the turbid water coming down from the north and combining with the operations in the south. As I have said before, the only way the turbid water can get out of the bay is through the Heads, so there is going to be an unknown combined effect which will affect our business, but we have no way of ascertaining it.

We have repeatedly asked the port to sit down and work out a compensation model in advance. We figure that we are going to be affected. The port, in its own document the SEES, has identified the dive industry as suffering a 25–30 per cent downturn; that has been done without any consultation with the actual main players in the dive industry to ascertain whether that figure is accurate or not, and we would contend that it will probably be greater than that.


The Port has refused to sit down and discuss a compensation model. I presume that is because it hoped we would go broke and disappear and it would not have any compensation to pay. The Dive Victoria Group is the largest operator. It operates out of Queenscliff and Portsea. On the Queenscliff side there are two accommodation centres that hang off the activities of divers and school groups, and there are approximately 80 beds at accommodation centres there. There are five large boats involved, and the infrastructure that is required to run a viable large-scale dive business in Victoria is up around the $5 million mark. With a downturn of 30 per cent it really does not take a financial genius to work out that servicing that capital cost is going to be incredibly hard, if not impossible.

The other unknown effect is the rock falls that are going to occur in the dredging of what we call the plateau. We predicted the rocks would fall in the trial dredge, and we were right. On this current dredging in the Heads we have not been able to go in and ascertain what rocks are going over the edge, but this is technically a very hard spot to control the rocks because there are cliffs on three sides of the knoll. If you are bulldozing on top of the knoll, there is a huge chance it will go over.

Anecdotally we are guessing that from the reduced number of trips that the Queen of the Netherlands is making up to the DMG, they are either having extreme difficulty removing the rocks, so there is very little volume being taken, or there is an awful lot going over the sides. We look forward to seeing that. Why I mention that is that that has ongoing damage to our dive sites. It will be loss of habitat and it will also be the scouring effect the constant plume that will stay around and depreciate the dive sites. Even though the dredging finishes, we anticipate that we are going to have long-term effects and medium-term affects that will go out for years in affecting our business.

The CHAIR — Thank you, Mr Salter. I would like to ask you about— if I can find the actual assessment — and you would be aware of the dollar figure that was put on the impact to the dive industry in the business case. I think it was $4.1 million — I cannot find the reference immediately. Do you have a view on that dollar figure? I think it was over two years.

Mr SALTER — That was based on an estimate of the value of the dive industry over $44 million, I think. We did a survey for the EES which placed the value of the dive industry at around $60 million. There has been no real in-depth analysis of what the dive industry is worth. The cost that has been extrapolated out of those figures I really thought were underestimated. Again, there was no consultation with the major players in the industry as to what their market was made up and how it would be affected and what would be affected. There is an assumption by the Port of Melbourne and the people who put our SKM that substitute sites can be inserted. I can assure you, having operated in the industry since 1980, there are no substitute spots. If there were, we would be exploiting them now.

The only possible substitution is going out through the Heads. In the last couple of years the access out through the Heads has been reasonably high. But 15 years ago I was lucky to get 10 to 15 per cent of the available time to access out through the Heads. That is because of marine regulations prohibiting us going out in bad weather. Anything over a certain set of climatic conditions, we cannot go out. We also operate out there in the open water with a reduced payload. It is not a viable substitute to have an unreliable access and a smaller payload.

The CHAIR — Based on your survey of the dive industry, you would say that these figures are at least a third less than they should be?

Mr SALTER — Quite possibly a third.

The CHAIR — That is assuming a level of impact is as they are suggesting, which you also believe is underestimated?

Mr SALTER — Yes. We cannot conclusively put up figures that will state that it is going to be a 45 or 50 per cent increase. We have looked at as much analysis as we have the resources to do. We feel and our accountants feel that that is the minimum cost.

The CHAIR — What impact have you seen to date over the first 120 days in terms of interest in the dive sector? Have you seen a drop off in customer interest? Have you seen an increase in customer interest? Has that flown through?


Mr SALTER — There is definitely what appears to be a future lack of interest. At the moment, because of the scheduling that has been done and the short duration of the Hovell Pile works, the effects, whilst they were great, were for a very short duration. As soon as the source producing that pollution stopped or the turbidity stopped, it dissipated to a relatively acceptable level relatively quickly.

The big effect on our business is going to be as soon as the massive works starts in the south channel, because that will be constant and for an extremely long period of time. On the experience of the Hovell, it will totally obliterate the diving right through to the Heads from basically the whole dive area.

Mr BARBER — Clearly it is not the operations of the dredge that you need to avoid, it is the turbidity?

Mr SALTER — Turbidity, yes.

Mr BARBER — If they cannot tell you a couple of hours in advance where the dredge is, they have no hope of telling you where turbidity is likely to be?

Mr SALTER — Yes.

Mr BARBER — How many key dive sites do you have? Which ones are likely to be excluded at various times?

Mr SALTER — I had best explain that. The channel comes in at an angle from the Nepean side and diagonally crosses the theoretical rip line and then swings around towards Portsea. That creates a horseshoe, if you like. The inside of that horseshoe is roughly under the main shipping leads.

The western side, which roughly equates to the shape of the Lonsdale bite or bay is the predominant dive site and that whole area is generally referred to as the ‘Lonsdale Wall’. It is inside the national park and it is protected from the prevailing winds and the seas so it has got everything going for it. It is fantastic terrain, protected and on that wall there are literally hundreds of dive sites named. Because divers will dive from the sea floor down to around about 45 or 50 metres, you can have six or seven dive sites in the same horizontal strip.

For instance there is one spot where there is the wreck of a yacht and it is at about 40 metres so it has an attraction. Above it there are coral and reef dives which also have names. That is the major area that is affected and that is the major area that we are being excluded from by this floating exclusion zone.

On the other side, on the Nepean side, again the same situation exists. Then on the Queenscliff side, on the northern side if you like, in the wall through there, there are dozens of dive sites. There are hundreds of dive sites but effectively there are three main areas if you want to talk geographically.

Mr BARBER — Did you say before that you have already been excluded from diving with some seals due to the exclusion zone, or due to the turbidity?

Mr SALTER — The turbidity.

Mr BARBER — The seals cannot be doing too well, then. They hunt by sight, don’t they? They are excluded from hunting?

Mr SALTER — They have not got a voice in this analysis, but yes, obviously they are probably not enjoying a healthy life.

Mr BARBER — And you said that the port has not been willing to enter into discussions about compensation. I asked them earlier if anybody had made a financial claim against them or had commenced to, and they kind of confirmed that someone has. Do you want to confirm that that is you?

Mr SALTER — It is the dive industry in general through what effectively will be a class action and they have been put on notice, but at the moment the law states that you have got to have a loss that you can substantiate to take a court action.


At the moment there is not categoric evidence that you could go to court on and, with confidence, expect a win. We have to wait until the real effects come on and of course at that stage the downturn in our revenue will be fast and sudden and our problem is then going to be surviving long enough to continue with the court action.

Mr BARBER — What do you have to do? Some of the bigger operations might have deeper pockets, but what do you have to do to allow for the possibility of a downturn? What decisions are you making right now?

Mr SALTER — The decisions are being made to change our operations as much as possible. We have just taken delivery of a larger boat again, and the larger boat will be more comfortable out through the Heads. It will carry more people. There is an application going into the Port to change some of the access rules so that we can get out through the Heads at night time and do some night-time dives outside.

We are trying to mitigate our loss as best we can. There will be, at some stage in the future, probably a year out if everything goes well, a wreck that is sunk outside in the ship’s graveyard. That will introduce some more advanced-level diving opportunities but the major area that it is going to affect and there is no substitute at this stage, is the school market, snorkelling market, which predominantly goes to the seals and Popes Eye. There are no substitutes for that, so we are scratching.

Mr BARBER — Have your accountants or banks made any comment on this issue? To you, I mean.

Mr SALTER — They are predictable: that there are tough times coming up, and basically their comment is that they cannot see why the government is not looking at a compensation model because there are precedents in other industries. There were precedents with the equine influenza scare a while back when the government stepped in and looked after participants before the fatality of their situation.

Mr TEE — Thank you for your evidence. There are a couple of things: you mentioned the lack of consultation and I think there has been some evidence given to us already about there being a number of briefings, particularly in June or July last year by the independent panel as well as a number of other consultation processes in 2004 and 2005. Were you involved in those?

Mr SALTER — Yes, I have been involved in most of them and Jason has been involved in the last two or three consultation sessions with the Port of Melbourne.

Mr TEE — The other thing, I think you have said in your submission, is that:

… we have noted a downturn in patronage due to the uncertainty in where clients are able to dive and the reality of the experience they are likely to have.

Yesterday VECCI, when they gave evidence, said that individual businesses have highlighted the dangers to local businesses of individuals and groups talking down the bay. I think what they were getting at is that some of the downturn in business was related to concerns about what might happen rather than what is actually happening. Has that been your experience?

Mr SALTER — A business that is operating when along comes a threat surely has a right and an obligation to its stakeholders to express their concerns and to use their expertise to highlight risks that they can see.

Mr TEE — Sorry, I am not being critical. I am just asking whether that is — —

Mr SALTER — The dive industry has been criticised by the Port of Melbourne and threatened that our objections to this will be used by their lawyers to mitigate their liability and accuse us of bringing on our own demise by talking down the industry. I have always run an ethical business where I have told customers the truth, and if I think that the conditions are going to be bad and they are not going to enjoy it at their level of experience, then I feel that it is my right and obligation as an ethical operator to tell them that.

Mr TEE — I just want to be clear about what I am asking, because I probably could have been clearer. I am really just asking whether you have got a view on the evidence that we got from VECCI yesterday around highlighting the danger to local business of individuals and groups needlessly talking down the bay. I am wondering whether or not that has occurred and whether that is having an impact on your business.


Mr SALTER — The impact on our business — the growth has slowed down. Dive Victoria Group was formed out of two companies, one on either side of the bay, and there has been a very substantial growth rate for a number of years in those two businesses. In the last three months that growth trend is flattening. With three months figures it is really not enough to say that it is a lack of customer confidence, whether it is the general economy, the price of fuel and so forth. But the anecdotal evidence that we are receiving back from divers is that they are happy to dive at the moment, but future diving — as soon as the real project gets going, then it is goodbye; they are not going to dive. They will look at substitute overseas trips or whatever. But that is the anecdotal evidence that we have got.

We are yet to get into the 12-monthly cycle of school bookings to know whether they are going to be affected, but one would assume that they will be slightly slower to lag in the marketplace and they may take a punt on next year’s booking, but if they have got a bad experience at that stage, then we have lost them for probably two, three or four years before we can get them back and convince them that the bay is on a recovery road, if it is.

Mr TEE — The supplementary environment effects statement I think concluded that there would be disruption to recreational diving and associated businesses during the period of the dredging. They anticipate that would recover, and you are saying we are yet to see that. It occurs to me that what you are experiencing has been anticipated. It does not make it any easier, and you are now going through this process, I suspect, of anticipating or looking at the risk, and then you will go through the process of seeking compensation for any of the damages that you have suffered. I suppose that is really where we are in terms of the timing and the cycle, is it not?

Mr SALTER — Yes. You cannot quantify the effects on the business at this stage, but you can speculate that there are going to be risks in our own analysis, and it is confirmed with the port’s own experts that compiled the SEES, and yes, because it was brought on by external forces, by another business profiteering at our expense, basically, then the compensation path would be an obvious one, I would have thought.

Mr BARBER — When you said that it had been communicated to you from the Port that if you talk down your industry, they will use that against you — did that come in the form of a written letter under a legal letterhead?

Mr SALTER — No, I believe it was at a consultation group, and it was also, I think, the subject of an Age article.

Mr BARBER — So it was just said in words at a meeting?

Mr SALTER — Yes. There is a distinct lack of written guidelines from the Port at consultation meetings.

The CHAIR — Thank you, Mr Salter. The committee appreciates your company’s submission and also your evidence here this afternoon that explained some of those issues to us.

Mr SALTER — Thank you for hearing me.

The CHAIR — We will have a draft transcript for you in the next couple of days for any corrections you wish to make. Thank you.

Committee adjourned.

standing committee on finance and public … · 5 june 2008 standing committee on finance and...

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