Mr Arto's further evidence
2047 Mr Arto gave this further evidence, in cross-examination.
2048 The Holcim group of companies adopted a standard "five-year road map plan or simulation called a [FINPLAN]" for forecasting future sales, financial and technical objectives, financial results and projected expenditures to meet forecast sales (T, p 1218, lns 30-47). Mr Arto said that the FINPLAN process had been used by him and was, as he put it, absolutely, part of his Holcim role in France in forecasting cement sales over five years (T, p 1219, lns 19-21). Mr Arto believed that the FINPLAN process applied to QCL when he arrived in February 2002 (T, p 1219, lns 7-10).
2049 The aim of the FINPLAN process is to make forecasts which allow the company to make future investments or determine the future financing needs of the company (T, p 1219, lns 40-43). The forecasting numbers projected in the FINPLAN for the first year are rigorously assessed as they actually represent the budget for the upcoming year, and the remaining four years are less easy to predict. Mr Arto assumed that QCL had undertaken the normal FINPLAN analysis for forecasting future demand for flyash consistent with Holcim's usual process, although he could not precisely recall the position.
2050 The role at QCL in February 2002 was a "new environment" for Mr Arto. Mr Arto was briefed by Mr Townsend on the market and competition. Mr Arto's critical role for the first three to four months, at the request of Mr Maycock, was to assess QCL's strategy and formulate opinions designed to address QCL's perceived vulnerability to high concentration in the customer base represented by customers (purchasing 60% of QCL's cement sales) who were also competitors of the cement business. Although cement was the primary concern, concentration in the flyash sales was also a concern.
2051 A "key concern" of Holcim, having built, through QCL, a new cement production plant at Gladstone two years earlier, was seeing a "lower level of margin generally speaking compared to other Holcim operations" and a very high dependency on or exposure to key customer competitors. The flyash business was new to Mr Arto. However, Mr Arto considered that CSR, Pioneer and Boral could leverage their buying power as customers to extract price concessions. Also, because ACH was a cement company controlled by Pioneer and CSR, those buyers (together with Boral) could also use ACH (or FAA) to develop flyash operations in the market, and they were "much more difficult for us to manage" (T, p 1221, lns 39-47).
2052 One possibility, although perhaps not a likelihood, should one of these customer competitors obtain a contract at Millmerran or Tarong was that they would not purchase flyash from QCL (T, p 1222, ln 20).
2053 Mr Arto said that QCL's strategy was to keep its customers including key customers and that required QCL to have the resource available. Because QCL did not know which contract would go first, it had to look at both contracts. Mr Arto said location was also a factor as one station (Tarong) was more competitive as a source of flyash supplied to customers north of Brisbane (and at the Sunshine Coast), and the other (Millmerran) was more competitive for customers south of Brisbane to the Gold Coast, due to the "pretty obvious" differential transport costs reflected in the actual selling price (which could be as significant as 10%) into the respective locations (T, p 1222, lns 25-45).
2054 This locational advantage, as Mr Arto saw it, of having both sources was discussed with QCL's sales and marketing manager (T, p 1223, ln 4), as a benefit from having two locations instead of one although Mr Arto could not recall any written analysis of this factor (T, p 1223, lns 42, 43).
2055 As to the demand for flyash described at para 12(a) of Mr Arto's first affidavit, Mr Arto saw demand in Queensland as falling into two different parts. In the central and northern part, QCL was sending flyash to New Zealand (and possibly Noumea), and Victoria. Victoria was growing fast. In south Queensland, growth in demand was driven by trend line growth in the housing market which, long term, was about 2% to 3% with cycles, although in 2002 Mr Arto said that QCL had seen a big upswing in demand for cement and flyash of 14% or 15%.
2056 The second element of the anticipated growth in demand was that demand for flyash among the major customers (representing between 60-70% of QCL's flyash sales) was "saturat[ed]" (T, p 1224, ln 14) but there was a remaining opportunity to increase sales to smaller less sophisticated customers.
2057 Logistics costs meant that Tarong and Swanbank flyash supplied south Queensland and not central or northern Queensland or Victoria. Millmerran would be a source of flyash for south Queensland and northern New South Wales and not for northern or central Queensland due to distance (transport costs) (T, p 1224, lns 25-42).
2058 However, as to the export market, Mr Arto said that he had a "little bit of a different view" as he thought it could be possible to actually take flyash from either Tarong or Millmerran to Brisbane and load ships. Although the costs of doing so would be higher than using Gladstone or Callide ash (out of Gladstone), "it could still [have been] possible" (T, p 1224, lns 42-45). Mr Arto accepted, however, that at March 2002 it was not a "rational thing to do" because central Queensland flyash was cheaper and so activating the logistics costs associated with taking Millmerran or Tarong ash to Brisbane for export "would not have made sense". Mr Arto thought it could have made sense depending on flyash prices, the costs and the risk of CO2 emissions quotas adding to the cost of cement production, rendering greater use of flyash as a cement substitute, possible (T, p 1225, lns 1-22).
2059 As to these considerations, however, Mr Arto accepted that when he was forming a view about whether Pozzolanic should enter into contracts with both Tarong and Millmerran, it was no part of a three to five year forecast horizon that flyash from either station would be transported to Brisbane for export (including to Victoria) although an additional source, as a contingency substitution solution, for central Queensland ash and CO2 emissions considerations, was taken into account in his thinking. Mr Arto accepted that so far as he was aware, nobody within QCL or Pozzolanic, at March 2002, had undertaken any analysis of the profitability of using Millmerran or Tarong flyash for transportation to Brisbane for export (T, p 1225, lns 24-39).
2060 As to the rationality in business decision-making of assessing profitability, Mr Arto accepted that in making a rational business decision to pay for a source of flyash a decision-maker would need to assess whether paying for that source would be profitable (T, p 1226, lns 16-20) which would involve an analysis of where that source of flyash could be sold and at what price (T, p 1226, lns 21, 22). Mr Arto accepted that if it was contemplated that a source of flyash should be acquired for sale, for example, for export to New Zealand, Mr Arto, as a rational business man, would have expected to see a profitability analysis of such an enterprise and so far as he was aware, there was no such analysis.
2061 Mr Arto again conceded (T, p 1226, ln 30) that regarding south Queensland, there was no QCL plan to export flyash using Millmerran or Tarong flyash, to New Zealand, because it would have been cheaper to take flyash from central Queensland, rather than southern Queensland.
2062 As acquiring both sources of flyash (Tarong and Millmerran) was not part of a QCL plan to supply possible export markets out of Brisbane, Mr Arto was asked to identify the basis, at March 2002, for his belief that QCL or Pozzolanic should enter into both the Millmerran and Tarong contracts.
2063 Mr Arto said that when he joined QCL in February 2002 there was a "sense of urgency" because the Tarong contract was due to end in August and the Swanbank contract, described by Mr Arto as a very small contract, would end in December 2002. Therefore, QCL "had to do something". Both Tarong (and Tarong North) and Millmerran were in bidding processes. Mr Arto said this (at T, p 1226, lns 43-46):
So our first priority was to keep a source and ideally the preferred source was Tarong because this is where we already had installation, and this was where we had the highest volume of flyash available. So our intent was to preserve our source and to be as competitive a supplier as possible.
2064 Mr Arto also said this.
2065 Because the two bidding processes were running in parallel QCL "could not take the risk to just go after one bidding process and potentially lose [the] tender" (T, p 1227, ln 4). Mr Arto said that QCL had to follow both processes at the same time. QCL did not know which tender it would win or whether it would win both bids. Mr Arto said that QCL also knew that its biggest competitor, FAA, was actively bidding on both power stations (T, p 1227, lns 5-9). At some point, the Millmerran process began going faster than Tarong, and Pozzolanic became the preferred tenderer at Millmerran. At the same time, QCL was making progress at Tarong. Tarong was, for Pozzolanic, "a much better source". Pozzolanic had installations at Tarong. Pozzolanic knew the quality of the flyash. Millmerran flyash was unknown (T, p 1227, lns 15-22).
2066 Mr Arto accepted that the March Board paper set out the reasons why QCL should enter into both the Millmerran and Tarong contracts. Mr Arto said that Mr Ridoutt would prepare the flyash marketing and sales sections of Board Reports. Mr Arto does not recall whether he discussed the March Board paper with Mr Ridoutt before the Board meeting. Mr Arto was asked whether he agreed with the reasons set out in the March paper and said that he agreed with the remark at Point 3 that "Pozzolanic's objective is to be the preferred ash manager in Queensland".
2067 Point 4 of the paper identifies the following risk:
Loss of either contract (Tarong or Millmerran) may result in a loss of up to 250,000 [tonnes] of fly ash and an EBIT of $6 million. However, there are some risks associated with securing both of the new contracts for 7+ years. [The risks and the appropriate corresponding actions are then set out in a chart in the paper.]
2068 As to that risk Mr Arto said this (at T p 1228, lns 32-35):
I think it's clear that if one of the contacts went to any third party, there would be an impact on the fly ash market in terms of volume and price. And we can speculate on what kind of impact would have taken place in terms of volume or price depending on the third party.
2069 Mr Arto also said (at T, p 1228, lns 36-38):
… when we look at the risk, to mention the risk to the board, we take kind of a strongest possible case, where this risk could be a loss of up to 250,000 tonnes of fly ash and be up to $6 million.
2070 Mr Arto accepted that the starting point of the consideration of this risk is that if any other party obtained either the Millmerran or Tarong contract there was a risk of a loss of market share and a loss of EBIT (T, p 1228, lns 30-43), with the March Board paper reflecting a "worst case" scenario (T, p 1228, ln 46) of an EBIT loss of $6m out of QCL's total EBIT at that time which was approximately $100M. Mr Arto considered the risks confronting Pozzolanic as including "another supplier in the market" and "one of [QCL's] customers supplying himself" and accepted that addressing these risks was "a component" of the decision to attempt to secure both contracts (T, p 1229, ln 15) although "the important component" was "to keep our ability to supply the customers and be a competitive supplier to these customers" (T, p 1229, lns 20-23).
2071 In terms of the component of "keeping the ability to supply the customers", Mr Arto accepted that he was not suggesting that there was insufficient volume available at Tarong to enable QCL to supply its customers (and QCL assumed that Tarong North could be a further source), but that pursuing and having both contracts:
… would put us in a better position in terms of logistics, in terms of reducing our risk regarding quality, reducing our risk regarding shut down; that these power stations shut down for a few weeks of maintenance from time to time. So for me, having several sources is always better than having just one.
(T, p 1229, lns 33-37)
2072 Mr Arto accepted that if QCL won the contract at Tarong and Tarong North, those sources "would probably have given us a reasonable quantity of fly ash compared with our needs" (T, p 1229, lns 45, 46) which would probably be good for "a number of years" depending upon the assumptions adopted.
2073 Mr Arto accepted that if Tarong flyash gave QCL a reasonable quantity of flyash compared to its needs for a number of years, the danger or "one of the risks" in not being able to supply existing customers (if QCL had Tarong) was that a competitor operating in the market using Millmerran ash might take part of QCL's market share. Mr Arto, however, said there were also "other reasons" for wanting Millmerran flyash, as earlier identified by him.
2074 As to future growth in demand for flyash as a business reason for Pozzolanic entering into both the contracts, Mr Arto accepted that the March Board paper does not explicitly suggest, as any part of the reasoning for entering into both contracts, a need to be able to supply future growth in demand (T, p 1230, lns 18-20). Mr Arto considered, however, that the statistics at point 6 of the March 2002 Board paper showing 2001 actual sales of 288,000 tonnes and estimated 2003 sales of 331,000 tonnes implicitly suggests a growth forecast "but the document doesn't address [future growth in demand] in terms of a sentence" (T, p 1230, lns 10-17).
2075 At T, p 1230, ln 21, Mr Arto was asked:
And it is fair to say it was no part of the decision-making process of QCL to attempt to enter into both contracts, so far as you were aware, that the two power stations were required [by QCL] to meet future growth in demand?
2076 Mr Arto in reply emphasised what he described as his key point about growth in demand by saying:
Again, my key point is not the growth in demand in the first few years. I think if we assume reasonable growth, I agree that Tarong and Tarong North were probably able to support the growth. If we look at other factors I mention, logistic costs, quality and ability to offset the impact of a shut down-breakdown of a power station, it was better to have more sources than just one.
2077 Counsel for the Commission put to Mr Arto that so far as Mr Arto knew, the decision to attempt to enter into both contracts "had nothing to do with" securing sufficient flyash supply to meet future growth in demand. Mr Arto regarded the phrase "nothing to do with" as a "bit of a strong statement" and said that in light of the surge in demand QCL had seen in 2002 with growth of 15% and 16% Mr Arto was "not convinced that the existing installation was able to supply enough flyash" because not only does QCL look at the annual demand it "looks at peak demand and the ability [of] the fly ash station to produce fly ash on certain day[s] for the demand coming into the fly ash station" [emphasis added]. Mr Arto accepted (T, p 1230, lns 40-42) that:
… the document [the March Board Paper] doesn't mention growth. I agree with you. But, again, I think we are much better off to go over these cycles of demand with two sources than just one.
2078 And at T, p 1231, ln 6, Mr Arto said:
… assuming a growth of a few percent per year, the Tarong source was probably sufficient to cover the following five years. Now, considering the fluctuations of growth of any given year, I think we had a safer network with two locations than just one.
2079 Mr Arto said that this notion of fluctuations on days in any given year was discussed with Mr Ridoutt. Mr Arto said that "for us" fluctuations in growth in any year was not the "compelling reason but it was a significant factor to be taken into consideration" in trying to secure both contracts (T, p 1231, ln 15). Mr Arto accepted that the southeast Queensland market was "well-developed" and "already at a highly developed stage" although not properly described as "saturated" (T, p 1231, lns 20-24).
2080 Mr Arto explained the sources of information available to him and his approach to decision-making in entering into both contracts, in this way. Before the March 2002 Board meeting, Mr Arto did not read QCL's tender to Millmerran (T, p 1231, lns 25-26). Mr Arto did not seek out any information about what the tender contained beyond the information presented in the Board Papers (the March and September papers): T, p 1231, lns 28-29. As to seeking out information about the price QCL was bidding for the Millmerran contract, Mr Arto said that he was "really relying on Ian Ridoutt to prepare this bidding and to ascertain this price" because it "was difficult for me to form an opinion on what this price should be" (T, p 1231, lns 32-33). Mr Arto said (at T, p 1231, ln 37) that his level of understanding of QCL's profitability of entering into both the Millmerran and Tarong contracts "is as described in these Board Papers, and looking at the numbers, this was good enough for me" (T, p 1231, lns 38-39). In this context, Mr Arto also returned to Holcim's focus on acceptable margins, an area of concern mentioned early in Mr Arto's evidence. In this context, he added (at T, p 1231, lns 39-41):
We had objectives from Holcim to achieve about 30, 33 percent, a big margin on cement and mineral components product like fly ash and slag, and this was meeting our targets.
2081 One of the important considerations therefore for Mr Arto was that in securing both contracts, QCL would secure a "big margin" in the QCL flyash business of the order Holcim regarded as consistent with its margin objectives for Holcim companies and, having seen the "numbers" in the Board papers, this was "good enough" for Mr Arto.
2082 Mr Arto also said that until giving his oral evidence in cross-examination, he had never seen Pozzolanic's non-conforming tender to Millmerran of September 2001 (T, p 1240, ln 27). His knowledge as at September 2002 about the tendering was "reflected in the board documents" (T, p 1240, ln 32) and Mr Arto's "level of knowledge" on the terms of the documents was "[no] more than" the information contained in the Board papers. Mr Arto said he could not recall any discussions with Mr Ridoutt, the team leader of the negotiations, about the terms of the tender to Millmerran before September 2002 (T, p 1240, lns 36-39). Mr Arto says that he did not receive any information from Mr Ridoutt or anybody else within QCL or Pozzolanic about the tender price to Millmerran other than the information contained in the March and September Board papers (T, p 1240, lns 41-44).
2083 Mr Arto recalls that the September 2002 Board paper was presented to the Board meeting (T, p 1231, ln 44; p 1232, lns 26-27). At pp 2 and 3 of the September Board paper in relation to the Tarong contract, the observation is made that:
… While we have not been officially offered a new contract, we are confident that a new contract will be secured for the following reasons:
• We have been involved with reviewing the draft contract which has been written around our offer and our capabilities;
• We have just been verbally awarded a minor six-month contract to manage the furnace ash at Tarong North that starts on 3 October 2002 and is conditional on having a current ash sales agreement with Tarong. We are now awaiting formal contract documents for review and execution.
[emphasis added]
2084 Mr Arto accepted that this was the view of the negotiating team led by Mr Ridoutt (T, p 1233, lns 10-13) which included Pozzolanic's manager, Mr Michael Wilson, who reported to Mr Ridoutt (T, p 1242, lns 16-26). Mr Arto said that he "was never personally involved in the negotiations at any step of the process". When asked whether he trusted Mr Ridoutt's judgment, Mr Arto said: "if somebody says he is confident you will listen to what he believes", and as at September 2002 Mr Arto "heard this view and we resolved on that basis to approve the Millmerran contract" (T, p 1233, lns 18, 19). Mr Arto further explained his view about Mr Ridoutt's above references to the state of the Tarong negotiations in this way (at T, p 1233, lns 21-28):
Our view was that Tarong was the preferred source, so we were happy to hear that we are still in the process with Tarong, and that our negotiations were optimistic or positive about the negotiations. Still we had the view that having the two sources would be better for our company, and nevertheless, without having any assurance that Tarong could be closed, we decided to pursue our objective and to reduce our risk, to close the Millmerran deal.
[emphasis added]
2085 Mr Arto said that although he had no reason to doubt Mr Ridoutt's confident view as at September 2002 of obtaining a contract with Tarong, "you only know for sure when the contract is signed" (T, p 1233, lns 30-34), and although QCL "hoped" to "be able to close the deal" FAA was "still in the game to try to obtain Tarong" (T, p 1233, lns 45, 46).
2086 Mr Arto explained his thinking in discounting or "downgrading" Mr Ridoutt's confident view, in this way:
… 20 years of professional experience … as long as a deal is not closed, its not closed and at the last minute somebody else - a competitor would take advantage and sign a different deal. So … as long as the deal was not closed, we could not take it for granted that we would complete it.
2087 Mr Arto did not accept that as at September 2002 it was "imperative" for Pozzolanic to enter into a contract with Tarong. Mr Arto only accepted that it was an "objective". Nor did Mr Arto accept that he was willing to do "whatever it took" to secure a contract with Tarong. Mr Arto identified the rationale for a contract at Tarong in this way (at T, p 1236, lns 38-42):
We make rational economic decisions. I mean, obviously there is an amount of money we were not prepared to pay to get this contract, so we don't want to do whatever it takes. [We have the objective to have] a very efficient network to supply fly ash to our customers, and there was obviously a limit to what we could do … to do this … to achieve this.
2088 Mr Arto described his role as managing director, concerning Millmerran, as "to check the strategy purpose, the business case and the legal aspects" of the transaction (T, p 1241, lns 22-23). Mr Arto said that as to the tendering process, that was "fully delegated to Ian Ridoutt and his team" (T, p 1241, lns 46, 47) and Mr Arto was not involved "in any means". Discussions about progress occurred at monthly Executive Committee Meetings. Mr Arto said that he had many chances to meet regularly with Mr Ridoutt "[b]ut we did not discuss the terms of the tender" (T, p 1242, ln 5) nor the price of QCL's tender to Millmerran. Mr Arto said his knowledge of price was confined to the March and September Board papers (T, p 1242, lns 9, 10). Mr Arto however accepted that Mr Wilson's briefing email of 4 March 2002 set out prices in preparation for Mr Arto's "first real briefing on both tenders" at the meeting arranged for 6 March 2002 between Mr Ridoutt, Mr Wilson and Mr Arto.
2089 Mr Arto accepted that Mr Wilson's briefing email sets out QCL's current profitability at Tarong of $7.3M EBIT on 2001 sales of 247,000 tonnes; and the price QCL would need to offer Tarong to win the contract (as against FAA), of $2.6M (indexed) over 10 years (with new plant at Tarong North in 2003 of between $1M-$1.5M). Mr Arto accepted that Mr Wilson's email also set out the terms Pozzolanic would need to propose for Millmerran of 135,000 tonnes per annum at $1.242m over seven years (indexed) and capital expenditure of $1.5m in 2002. Mr Arto could not recall seeking any "justification" from Mr Wilson or Mr Ridoutt for the proposed prices the subject of the recommendation. Mr Arto said that Mr Ridoutt and Mr Wilson had been in the company for many years and they had come up with "a proposal". He thought it reasonable to trust them and because QCL "had a lot of relationships already with the power stations through MPA", Mr Arto assumed that Mr Ridoutt and Mr Wilson "had some inside information from the power stations on what was expected" (T, p 1244, lns 11-19). Mr Arto says that what he recalls of the briefing on 6 March 2002 about the tenders as to why Pozzolanic should enter into each contract was first, to solve the problem of the expiration of the existing contracts and, second, to make sure QCL and Pozzolanic could continue to improve the flyash business in south east Queensland.
2090 Mr Arto does not recall any wider discussion at the meeting with Mr Ridoutt and Mr Wilson of the reasons QCL ought to enter into each contract on the particular terms recommended to Mr Arto, although "part of the discussion was to make sure the business case would make sense in the end" (T, p 1244, lns 38-40) in the sense of providing a justification for the amounts paid. Mr Arto says the business plan would be made later on, as part of the five year plan containing forecasts including the higher costs paid to the power stations and the new selling price and volume.
2091 Mr Arto accepted that a business plan justification for offering the particular prices would need to identify the volume of flyash likely to be sold from each power station, the price to be paid and the profit to be derived. Mr Arto regarded the March Board paper as containing a business forecast at least for the following year.
2092 Mr Arto also said that the meeting of 6 March 2002 was a briefing meeting only and he was not asked by Mr Ridoutt or Mr Wilson to approve prices. Nevertheless, on 6 March 2002, Mr Wilson send a letter to MPA (for referral to Millmerran) increasing Pozzolanic's offer to $10.10 per tonne (over a guaranteed 135,000 tonnes per annum indexed over seven years). Mr Arto said he did not approve the increased price offer. Mr Arto said that Mr Wilson may have needed Mr Ridoutt's authority to increase the offer but it was not Mr Arto's decision to approve the offer and it did not come from him (T, p 1245, lns 41-43).
2093 Mr Wilson's letter increasing Pozzolanic's ash payment offer for Millmerran Ash was sent attached to an email sent by Mr Wilson to Mr Cameron at MPA under the reference "Response to Millmerran" on 6 March 2002 at 6.17 p.m (ATB 4.27).
2094 Mr Arto accepts that he discussed with Mr Ridoutt and Mr Wilson in the meeting the sums that would have to be offered to secure each contract as reflected in Mr Wilson's email, but at this time, Mr Arto says he had no decision to make on the price question because the process was "dedicated to Mr Ridoutt" and, in any event, a contract would eventually need to be signed by Mr Arto. In addition, capital expenditure would need to be approved by the board. Thus, in Arto's view, Pozzolanic and QCL could later approve or disapprove anything arising out of Mr Ridoutt's negotiations (T, p 1246, lns 1-8). Mr Arto says no approval for a bid price was sought from him, and Mr Arto says that he:
… thought that Ian Ridoutt, with the history of the relationship, and the responsibility [for] this profit centre, was in a better position than I was [to] determine which price was necessary for one, [to win the bid], and for two, to make an acceptable profitability for the company.
2095 Mr Arto said that Mr Ridoutt had authority to negotiate and make offers, "knowing that in the end, he would need my approval [and would need Mr Arto] to sign the contract and commit the company" (T, p 1246, lns 27-29). Mr Arto, on this topic, returned to the adequacy of the numbers and said (T, p 1246, lns 35-37):
[Mr Ridoutt] briefed me, and gave me the numbers … and gave me the prospect that these numbers … were likely to make us successful, and secondly that these numbers would make sense for the company, going forward, in terms of profitability.
2096 Counsel for the Commission put to Mr Arto that Mr Ridoutt's explanation given at the 6 March 2002 briefing about why securing each contract would be profitable at the prices proposed had nothing to do with meeting future growth in flyash demand and future sales. Mr Arto rejected the phrase "nothing to do with growth", and said: "I don't think we had any speculation of very high growth rates", and "growth was not the main driver behind the proposal of Ian Ridoutt" [emphasis added] (T, p 1247, ln 2; lns 8, 9).
2097 Mr Arto did not accept that Mr Ridoutt had told him that the main driver for the offers at the suggested prices was that if QCL lost one of the contracts a competitor would take some of QCL's market share and QCL's EBIT would potentially fall substantially. Mr Arto said that this was "just one of the risks" to be considered in both contracts. Mr Arto said that the "driver was to keep our business and to make ourselves [as] competitive as possible to supply our customers with fly ash" (T, p 1247, lns 14-16). Mr Arto said he could not recall Mr Ridoutt identifying another reason for winning each contract.
2098 On 28 March 2002, a "Capex Expenditure Request Summary" (a "Capex Request") was prepared and proposed by Mr Wilson and recommended by Mr Ridoutt concerning a proposed QCL investment of $3.5M in Tarong North and Millmerran plant and equipment (ATB 30.9). Mr Arto accepted that Mr Ridoutt's March Ash Market 2002 Board paper attached to the Capex Request was the explanation for the request. Mr Arto accepted that he had reviewed and approved the Capex Request and signed it on 2 April 2002, as explained by the attached Board paper, for submission to the Board (T, p 1248, lns 6-32). Mr Arto accepted that by signing his approval of the Capex Request he was indicating to the Board that the explanation was a sufficiently complete and accurate explanation of the Capex Request for the board's consideration and thus, decision-making. Mr Arto accepted that normally, in Holcim, a "more detailed calculation spreadsheet" showing the investment and the return would be present and, "it doesn't appear here". Mr Arto was surprised that there was no "extensive financial appendix" to the Capex Request. Mr Arto assumed that the Capex Request document and attached March Board paper "is what we have". Mr Arto said: "We had to make our decision" (T, p 1248, lns 42-46).
2099 Mr Arto accepted that normally the Board of a Holcim company would expect to see a Capex Request of $3.5M supported by a financial analysis setting out why the investment ought to be made and how it would be profitable to make the investment. Mr Arto thought it possible that since these events were eight years ago, processes may have been different. However, Mr Arto accepted that he was not suggesting that a financial analysis would not have been required of QCL at the time of the formulation of the Capex Request to support a capital expenditure of $3.5M.
2100 A proposition was put to Mr Arto that he knew that there was no proper financial analysis in support of the Capex Request. Mr Arto said that he did not remember a "specific [financial analysis]" in support of the request. Mr Arto accepted that a proper financial analysis would have contained an analysis of the production resulting from the capital expenditure; the volume of product that would be sold; and the price of the product, all with the aim of establishing that the capital expenditure would result in an acceptable return in profit. Mr Arto also accepted that such an analysis is the orthodoxy of the Holcim procedure (T, p 1249, lns 33-46; T, p 1250, lns 1-2).
2101 As to that orthodoxy, Mr Arto said that some times such a procedure is not necessary where, for example, as here, the Capex risk can be seen by its nature (T, p 1250, lns 6-7). Where capital expenditure is required for safety, maintenance, environmental reasons, the analysis would be done "with a shortcut … where the alternative of not doing the Capex is clearly negative for the company" (T, p 1250, lns 7-10). Mr Arto was asked whether the Capex Request fell into the category that the risk of not expending the capital was so clearly negative that no financial analysis was necessary. Mr Arto said the context of the present matter was that if nothing was done, and QCL and Pozzolanic had no contract at all, it was easy to see how much QCL would lose (T, p 1250, lns 14-17), and added (at T, p 1250, lns 17-19):
So I think the case was relatively straightforward that allowing this investment, subject to concluding the agreements and winning the bids, was a very obvious decision for the company.
2102 As to the question of whether the risk was so obvious that no financial analysis was required, Mr Arto said this (at T, p 1250, lns 29-34):
I'm saying that the analysis is clearly a bit too simple here. It should have been more sophisticated. I think I am disappointed to see that we had - that I had accepted this analysis as simple as it is presented here, but the - I think the rationale of this capex was to be consistent with the objective to sign both contracts and to secure the business of the company in fly ash going forward.
[emphasis added]
2103 Mr Arto was asked whether by signing the Capex Request, he agreed with that part of it recited in these terms:
SIGNIFICANT STRATEGIC BENEFITS
Securing the contracts at Tarong and Millmerran will maintain our ash sales to our existing customers. Loss of either contract may result in a loss of up to 250,000 t of fly ash and an EBIT of $6 million.
2104 Mr Arto accepted that statement as a "fair statement" recognising that the second sentence is a "worst-case scenario" (T, p 1251, lns 7, 8). Mr Arto was further pressed about the Capex Request not containing any financial analysis dealing with the things Mr Arto would "usually cover in justifying a capex request" and said (T, p 1251, lns 45, 46; T p 1252, lns 1-2) that "the people who presented this capex assumed that the attached document [the March Board paper] was detailed enough to support the capex they were presenting". At T, p 1252, ln 4, Mr Arto accepted that his reference to "the people who presented the capex" included Mr Arto as one of those people.
2105 Mr Arto said he regarded the attached March Board Paper as giving QCL "very strong reasons" to invest the capital, and the 2003 prospective or estimated results for profitability satisfied, for Mr Arto, the objectives of keeping the business; keeping the capacity of supplying customers; and continuing to improve QCL's results (T, p 1252, lns 6-10).
2106 Mr Arto was asked about the statement in the March Board paper describing the "risks associated with [Pozzolanic] securing both of the new contracts for 7+ years". The first risk is described as "Imports from NSW or Asia" and the "Action" or mitigation comment is this: "Cost structure of importing fly ash should prevent large volumes of ash from Asia; Use NBA [next best alternative] analysis from NSW power stations to determine ceiling for ash pricing in SEQ".
2107 Mr Arto thought that Mr Ridoutt and his team had analysed "the numbers" and he assumed that some estimates had been done which led Mr Arto and the team to not consider this a major risk although it was considered to be a constraint on QCL's pricing (T, p 1253, lns 14, 15; 27-30). As to next best alternative pricing, Mr Arto accepted that transport costs were a very large component of the costs of supplying flyash to the concrete market and that Pozzolanic would attempt to determine how much it would cost someone to supply ash into SEQ from a New South Wales power station. Mr Arto accepted that that cost would, always, be largely determined by transport costs and ex-power station plant costs.
2108 Mr Arto did not accept that there was a very large difference between transport costs from Tarong to Brisbane as compared with transport costs from Bayswater to Brisbane. Mr Arto could not recall any calculations on that topic although he recalled that when QCL increased prices by about $10.00 (per tonne), some customers switched to Bayswater suggesting to Mr Arto that the difference was not making it impossible to bring flyash from Bayswater into SEQ. Mr Arto did not accept that such a result arose because the price in SEQ was so high that a supplier could afford to transport ash from Bayswater and still use that flyash profitably.
2109 Mr Arto regarded the pricing of flyash as relevant to the price of cement which represented a ceiling price for flyash, and secondly, the customer had other alternatives depending upon the location and the particular proposal from another flyash supplier.
2110 As to competition, Mr Arto accepted that if there had been a competitor able to supply flyash from Millmerran, that competitor could have driven down the price that Pozzolanic could have charged for supplying flyash out of Tarong (T, p 1254, lns 19-21). Mr Arto said that a competitor could also have developed a volume of sales, without impacting the price "to a great extent". Also, customers could have purchased blended cement and flyash from Sunstate for their concrete operations. Thus, in Mr Arto's view, there were a number of alternative sources for customers (T, p 1254, lns 22-26).
2111 Mr Arto was asked this question:
… do you agree that if there had been one supplier from Millmerran [and] a different supplier from Tarong, that would have led to increased price competition in the south-east Queensland market for the fly ash?
2112 Mr Arto responded:
It seems like an obvious question. If you increase the number of competitor[s], there is increased competition, yes.
2113 Mr Arto did not accept that it was also obvious that one likely result of increased competition would be a lowering of flyash prices, because that result would depend upon the dynamics of the market and Mr Arto could not speculate on what could have happened in different circumstances which included, in Mr Arto's view, the proposition that QCL took making it possible for third parties to buy flyash from Tarong and Millmerran, seriously.
2114 Although the table at Point 6 of the March Board paper says that the 2002 budget had been prepared on the footing that the average selling price of flyash for SEQ for that year would reflect a lower selling price of $57.00 per tonne as compared with the 2001 actual average sale price due to the loss of the Millmerran ash contract, thus reflecting an assumption that a rival selling Millmerran flyash in competition with Pozzolanic's Tarong flyash would result in a price reduction in SEQ of $10.00 per tonne, Mr Arto regarded this assessment as a conservative one for budget purposes, reflecting conservatism because people's bonus depends on achieving the budget to some extent (T, p 1255, lns 19-22).
2115 Mr Arto observed that the budget was formulated on an assumption which was simply "one possible scenario in the market" (T, p 1255, lns 42-43). Another scenario involved loss of volume but the scenario in the paper involved a lowering of price and in any event the budget was probably prepared some time towards the end of 2001 when Mr Arto said that he was "not yet in charge of the company". The "loss of price" scenario reflected "what was thought of back in October 2001" and at that time "the teams thought that the budget would be built with a slightly increased volume and potentially lower price under the circumstances described by this note [the loss of the Millmerran ash contract footnote]". (T, p 1256, lns 2-5). The following exchange then occurred with Mr Arto:
And the circumstance was a cause and effect relationship, was it not? Loss of the Millmerran ash contract to somebody else would lead to a lower average selling price?
--- Yes.
And you had no reason to doubt the realism of that estimate, did you?
--- No. I mean, if another competitor and another source, there will be an impact either [on] price [or] volume or both, obviously.
2116 A further risk of securing both contracts, identified at Point 4 of the March Board paper was the risk of "New power stations in SEQ". Mr Arto said he saw that circumstance as a risk and regarded a consideration of new sources of ash or competition in the forthcoming years as a normal business risk to be analysed (T, p 1256, ln 26; 30-31). Mr Arto was then asked (T, p 1256, lns 33-35):
And it was a risk because if that eventuality occurred, there was a prospect that [Pozzolanic] would receive lower prices for its fly ash and lose market share; correct?
--- Like any business, absolutely.
2117 Mr Arto also observed that the risk as described in the 2002 budget represented a reduction in QCL's EBITDA of less than $1 million which was approximately one per cent of QCL's EBITDA.
2118 A further risk described at Point 4 of the March Board paper was the risk of "Product manufacturers distribute ash into market". To mitigate that risk, so described, the Board paper says this:
We are negotiating some protection in the contracts for this possibility. Further to this, a product manufacturer should only be able to get run-of-station fly ash, which will require processing to be suitable for the concrete market.
2119 Mr Arto said that the issue of "negotiating some protection in the contracts" was the "key issue to resolve" between the power station and QCL. Mr Arto said that the power stations did not want any sort of exclusivity on the one hand, and QCL was trying to secure a return on its investment by having "protection" which meant "some sort of preferred customer status" for Pozzolanic and QCL as the largest customer (and one making capital investments at the power station), on the other hand. Mr Arto said that "we wanted to ... find this balance between obtaining this preferred customer status and not locking [up] the source itself" (T, p 1257, lns 18-25).
2120 Earlier in Mr Arto's evidence he had said (at T, p 1241, ln 15), that he was not aware at any time before the Board meeting of September 2002 that Pozzolanic had requested of Millmerran as part of its tender document in September 2001 "an exclusive agreement for sale of ash into the cementitious market to justify [our] investment" and that "exclusivity was not something we had as an objective" (T, p 1241, ln 30). Mr Arto said that as to this third risk set out at Point 4 of the March Board paper, he fully understood as at March 2002 the objective mentioned in the Action box at Point 4 of being able, as he described it, to supply ash to other parties but also to find a way of securing a return on QCL's investment (T, p 1257, lns 26-30). Mr Arto said that at March 2002, he did not know that Pozzolanic had asked for exclusivity, and that he and the Chairman Mr Maycock "knew that exclusivity was not an option" (T, p 1257, lns 36-39). Mr Arto said that he did not know that Mr Maycock had signed the tender for the Millmerran contract. Mr Arto said that he and Mr Maycock had retained Clayton Utz to assist QCL in developing the contract and "part of their mandate was to help us find a solution which did not include exclusivity" (T, p 1258, lns 1-2).
2121 Mr Arto said that QCL did not want to limit access of other parties to ash from the Millmerran Power Station.
2122 Mr Arto put the matter this way:
We wanted the contract to be fair to us, still make it possible for them to access the source of flyash, but to be fair to us in terms of being the largest customer and making financial commitments over a number of years.
2123 Mr Arto said that the protection being sought was protection against "the loss of our status as a preferred customer". Mr Arto said the power stations had the same objective as Pozzolanic and QCL of ensuring that the contract could not be interpreted as exclusive in any sense. Mr Arto said that, as at March 2002 at least, he did not want to see a position where the company commits to payments for a number of years, makes the capital investment and then sees the power station sell "exactly the same fly ash even at a lower price the following day" (T, p 1258, lns 31-34). Mr Arto said:
… we wanted to commit for years but to have a preferred status compared to somebody else who would just come and buy on a spot basis or on different terms.
2124 Mr Arto said that the notion captured in the Action box on this topic was that Pozzolanic receives ROS ash and the flyash has to be processed to make it suitable for the concrete market. Therefore, if somebody wants ready-made flyash suitable for the concrete market they can either buy it from QCL or some other company, or if they want to buy ROS flyash, they will have to implement a process for making it so it is suitable for the concrete market (T, p 1259, lns 14-21). Mr Arto said that there was no constraint confronting a third party negotiating an agreement with a power station except for "what is referred to in the contract with us" (T, p 1259, lns 32-33) and, in any event, ROS flyash had other uses. Mr Arto said that to the extent that a third party wanted to make "proper fly ash for concrete, you need to have [processing treatment]" requiring an investment of about "1 or 2 million dollars, to have the capability to process and store the fly ash" (T, p 1259, ln 38; lns 24-26). Mr Arto regarded it as possible, physically, to divert the flow of flyash into two streams and have another processing station which would require "relatively small [scale] equipment" (T, p 1259, lns 39-41).
2125 Mr Arto did not accept that he wanted to have available to Pozzolanic "whatever fly ash was coming out of the station on a daily basis to meet [Pozzolanic and QCL's] requirement for processed fly ash". Mr Arto put the matter this way (T, p 1260, lns 10-13):
We wanted to have enough fly ash for our own needs, and if I compare how much we produce and use compared to the total production of fly ash of these stations, there was plenty available for third parties to come in and set up another business.
[emphasis added]
2126 Mr Arto also said this (T, p 1260, lns 35-39):
We wanted the contract to make it possible for power station[s] to supply raw fly ash to a third party and in that eventuality, we wanted to have some protections from a commercial standpoint regarding either the price or our ability to terminate the contract or renegotiate [it] ...
[emphasis added]
2127 Mr Arto was taken to p 4 of the March Board paper which sets out a summary of the current contracts Pozzolanic held with Queensland power stations. Under the schedule, the paper notes this: "It is important to note that there is a good possibility of getting an extension for the Swanbank contract. This would take this contract out to 2004". Mr Arto said that he did not read any of the existing contracts. He was satisfied with the summary at p 4 (T, p 1261, lns 1-2). Mr Arto said that he did not know that the Pozzolanic/Swanbank contract gave Pozzolanic an exclusive right to take flyash from Swanbank.
2128 On 2 April 2002, Mr Peter Klose sent a memorandum to the Executive Management Group or Executive Committee comprised of Mr Arto and his "direct reports" (ATB 4.39). Mr Klose was the Business Development Manager for QCL and reported directly to Mr Arto as secretary to the Executive Committee. Mr Klose worked on projects. Mr Arto did not recall Mr Klose's memorandum but accepted that he would have received the document providing the Committee with an "Update on QCL Group Position Analysis and Strategic Options 2000-2005". In the memorandum, Mr Klose says that the issues raised in the document are "particularly focussed on those items to be discussed during the April 2002 Business Planning Sessions". Those sessions commence the Business Planning Sessions which are usually completed "with numbers by September".
2129 At p 5 of the memorandum addressing QCL's control of Secondary Cementitious Materials, Mr Klose says that the threat of a second flyash supplier in the Queensland market remains current and both Transpacific and FAA are tenderers for the Millmerran and Tarong Power Station contracts. Mr Klose observes that "The ability to secure these contracts is vital in retaining value to the Pozzolanic business" and that the current estimates to secure the contract involve an additional cost of $3 million per annum "but this will be offset by increased ash prices".
2130 Mr Arto accepted that the ability to secure these contracts was "very important in retaining value to the Pozzolanic business" (T, p 1263, lns 29-30) although Mr Arto regarded the word "vital" as a strong word.
2131 In the March Board Briefing paper, budgeted total flyash sales for South East Queensland for 2002 were 297,000 tonnes as compared with 2001 actual sales of 288,000 tonnes, an increase of 3.125%. The 2003 estimate reflected a projected increase in sales over 2002 of 34,000 tonnes to 331,000 tonnes, an increase of 11.44%. Projected 2003 sales represented an increase on 2001 actual sales of 43,000 tonnes or an increase of 14.93%. As to the recoupment of the additional $3 million in costs by offsetting price increases, Mr Arto said that throughout 2002 QCL was faced with a very strong surge in demand for cement and flyash and was considering increasing the cement price and also the flyash price by $10.00. Mr Arto said that QCL had "reached a point where the fly ash business would not be able to improve further in the next five years, but … our objective was to try [to] maintain the same level of profitability we had in the fly ash business" (T, p 1264, lns 15-18). In other words, volume growth would be difficult looking five years out but profitability ought to be preserved.
2132 Counsel for the Commission put to Mr Arto that the idea underlying the notion that the additional costs would be offset by increased ash prices was that QCL would be able to increase ash prices if it had both supply contracts from Millmerran and Tarong because there would then be no effective competitor selling flyash in the South East Queensland concrete market. Mr Arto rejected that proposition and said that the intention was to try and maintain the profitability of the flyash business but QCL could not guarantee, by any means, doing so. Mr Arto said that price increases were not "fully implemented" and some customers bought flyash from other sources. Mr Arto said that "our forecast was that we would not be able to fully pass on this [increase] to the customers" (T, p 1264, lns 27-30; 36-37).
2133 As to the relationship between securing both contracts and the opportunity to recoup additional costs through price increases (whether "signing both contracts would trigger the price increase") (T, p 1264, ln 43), Mr Arto also said this:
I think I want to also correct my previous answer to your question. You were asking whether signing both contracts would trigger the price increase. I think the logic was not this one. The logic was, "We want to sign new contracts. These new contracts will be at the higher [cost] and [our management task] is still to try to improve our result, and we will try, through increased prices, and at that time, as the market was going very strong, we believed that there was a potential for price increase".
[emphasis added]
2134 Mr Arto was pressed with the notion that he understood that part of the reason there would be potential for a price increase would be Pozzolanic securing both contracts, and no effective competitor selling flyash in the SEQ concrete market. Mr Arto did not accept the QCL faced no effective competitors. Mr Arto said, as he had earlier said in evidence, that the competitors were Sunstate in providing flyash cement blended products, and flyash from New South Wales, although Mr Arto had no knowledge of the "numbers" or the "analysis". Mr Arto said that Mr Klose was "a bit [expansive] in his wording and "we can never say we will obtain a price increase" [emphasis added].
2135 In his second affidavit (Ex-35, paras 5-9), Mr Arto describes the factors that helped to explain Mr Arto's statement in para 12(a) of his first affidavit in which he said that in around March 2002 he understood that the demand for flyash for use in concrete was growing and as a result QCL needed more flyash for supply into Victoria and possibly New South Wales and New Zealand. Mr Arto (at T, p 1267, lns 42-45) accepted that he was not intending to indicate, by paras 5-9, that a future increase in demand for flyash was some part of the rationale for entering into the Millmerran and Tarong contracts. Mr Arto made further reference to para 12(a) of the earlier affidavit (Ex-35A) which he said referred to demand growth for flyash for Victoria, New South Wales and New Zealand but which "we know [the ash] does not come from south-east Queensland". However, Mr Arto regarded para 4 of the second affidavit as containing a more general statement that demand was growing and the relevance of the general reference to demand growth (T, p 1268, lns 14-18) is:
… to recognise that there was a moderate growth over the long term for fly ash in south-east Queensland, and a moderate potential for further substitution to cement and I am not suggesting that a huge growth would be the key driver for acquiring the contract with one of two power stations as such.
2136 Mr Arto explained that the point of his second affidavit was to explain his view in 2002 that there was potential for long term growth in the market for fly ash sales which "offered QCL the potential to expand sales to some extent … to support a sensible growth - not a huge growth rate but a sensible growth rate for the flyash business in south-east Queensland" (T, p 1268, lns 34-38). Mr Arto explained the point of these references in this way (T, p 1268, ln 42 to p 1269, ln 3):
All of these reasons suggested that we had to enter into at least one contract. It does not, as such, support two sources. Other reasons I mentioned [earlier] support two sources. But the growth, as such - but to some extent, for a number of years, would probably have been enough with the Tarong source. The Millmerran [ash], we didn't know the quality, the quantity was lower, so Millmerran was probably not as good a source to continue to support the growth as Tarong was. … These reasons support one good source. The question [being addressed] was not two versus one [in] the context of the growth of the market.
[emphasis added]
2137 Mr Arto regarded the one good source as being Tarong and it was QCL's preferred objective. Mr Arto said that if we had to have only one, we would certainly have preferred Tarong.
2138 In Mr Arto's second affidavit, Mr Arto supports his propositions by reference to slides drawn from a document described as Ex-35, PPAA-1, which is the "QCL Business Plan" dated 12-14 September [2002] under the reference Philippe Arto and Gary Sherlock. Mr Arto says that Slide 12 (mis-labelled 2) shows that capacity utilisation for cement was very high and thus there was little scope for further growth in cement sales without losing QCL's export activity and, in part at least, that meant there was opportunity for increased flyash sales. Mr Arto accepted that Slide 12 addresses capacity utilisation for the whole Australian industry and is "completely unhelpful in determining what QCL's capacity utilisation of cement was" (T, p 1269, lns 31, 32). Mr Arto accepted that the real factor was "the utilisation of our own cement capacity, which I believe was close to its potential" (T, p 1269, lns 15, 16).
2139 Mr Arto accepted that probably (although he did not remember exactly), the document referred to in his affidavit is a presentation made by Mr Arto to a Holcim Group meeting in Singapore in 2002. At Slide 51, some of the key strategic issues for QCL are identified including "Customer Concentration" meaning more than 50% of QCL sales are made to three customers who are also the major cement competitors in other States. Another key strategic issue for QCL is described as: "QCL has excess capacity with currently only low margin opportunities". Mr Arto said, however, that he could not characterise QCL as having "excess capacity". Mr Arto said that QCL's operational efficiency was close to 80% (although Mr Arto could not recall the number exactly) and Holcim's assessment is that normal capacity utilisation is close to 85%.
2140 On that basis, Mr Arto regarded QCL as "running very close to full capacity" (T, p 1270, lns 1-2) rather than having "excess capacity".
2141 Mr Arto described the basis for that view as his understanding that QCL was exporting clinker to local competitors in some states, or ACH, and the remaining clinker was being exported with the result that QCL did not have any additional clinker for export. Mr Arto was asked to reconcile the notion that QCL's "cement business was basically sold out with domestic and export sales" (para 5 of Mr Arto's second affidavit) with Mr Arto's statement in the QCL Business Plan he presented in which it is said that "QCL has excess capacity with currently only low margin opportunities". Mr Arto said that QCL had excess capacity, as compared with "domestic sales in cement" and, in that respect, QCL was actually running at full capacity thanks to sales to competitors like Sunstate or ACH or, sales to export which gave QCL lower margins. However, the plant was sold out.
2142 Mr Arto accepted that the reasoning in his affidavit was that because domestic cement capacity was basically sold out, with no more cement able to be sold into the domestic market, an opportunity presented itself to sell flyash instead (T, p 1270, lns 25-28). Mr Arto did not accept that the reasoning in the affidavit was incorrect. He said that QCL wanted to keep Sunstate as a customer for clinker, and QCL needed cement to supply growth in the market. Mr Arto said that "it was good for us to have enough fly ash to also grow" (T, p 1270, lns 30-34).
2143 The following exchange took place in relation to para 7 of Mr Arto's second affidavit and his references to Slide 13 in the presentation:
Q Now, can I take you to paragraph 7 of your second affidavit? You say: I understand that there was scope to increase fly ash sales to existing customers. And then you refer to Slide 13 of the presentation, as showing that, as at 2001, fly ash represented about 16 per cent of all sales of cementitious products … [Slide 13] refers to the use of bulk fly ash in the cement industry in Australia generally doesn't it?
A It does.
Q It does not relate to the use of fly ash by QCL's customers in south-east Queensland, does it?
A … it's illustrative of the argument. It's not the data we need to support the argument. The data we need [is] the actual sales of fly ash in Queensland versus [the] sales of cement.
Q Well do you agree that the data in slide 13 is useless to support the argument you seek to advance in paragraph 7 of the affidavit?
A It's not enough to support the argument. I think the real data [would] allow us [to] form a view on this argument.
2144 Mr Arto was pressed to identify the foundation for the view set out in para 7 of his affidavit that there was scope for QCL to increase flyash sales with small to medium customers to the level reached by larger and more sophisticated customers. Mr Arto said that flyash sales in SEQ were about 300,000 tonnes, and the cement sales were about 700,000 tonnes (or so) and thus the market was probably over 1,000,000 tonnes in SEQ. Since the ratio of flyash sales to the cement market would be in the range 20-25%, Mr Arto considered that there was some potential for "further penetration" but he "would agree it was limited potential" (T, p 1271, lns 27-34). At T, p 1281, lns 44-46, Mr Arto accepted that on that arithmetic, flyash sales in SEQ were between 25 and 30% of total sales volume, already.
2145 On 28 June 2002, Mr Ridoutt sent an email at 8.06 am to Mr Des Chalmers and Mr Michael Wilson saying that he had organised a meeting with Mr Arto for 2.30pm that day for Mr Ridoutt, Mr Chalmers and Mr Wilson to give Mr Arto "a compelling story of why Intergen should award us the contract and make sensible decisions about distribution of their ash" (ATB 5.22). Mr Ridoutt asked Mr Chalmers and Mr Wilson to pull the relevant information together. A briefing note was prepared dated 28 June 2002 (ATB 5.20). In cross-examination, Mr Arto said that the briefing note was not for him, and this was the first time he had read the document. Mr Arto did not recall having seen the memorandum. Mr Arto was also shown a memorandum dated 25 June 2002 under the heading "Briefing Note Millmerran Ash Sales" (ATB 5.19). Mr Arto did not recall having received the memorandum of 25 June 2002. The 28 June 2002 memorandum begins by saying "Further to the previous briefing note, there are some other issues that should be considered". Mr Arto did not regard the 25 June 2002 memorandum as one directed to him.
2146 Mr Arto accepted that a meeting occurred on 28 June 2002.
2147 Mr Arto thought that the point of the meeting was to discuss how Pozzolanic and QCL "could address both parties' desire to have an agreement compliant with trade practices and to discuss the commercial aspects of this contract which would allow sale to third parties, with the support of Clayton Utz" (T, p 1272, lns 24-27). Mr Arto said that he could not really recall a meeting but he assumed from the email that there must have been a meeting. However, Mr Arto recalled that he had a number of discussions as to how "this objective of having a legally compliant contract and commercial terms which would be acceptable to both parties" (T, p 1272, lns 35-36), could be achieved. Mr Arto said that in the course of discussions about a legally compliant agreement neither Mr Ridoutt nor Mr Wilson told Mr Arto that the original non-conforming offer had been one which required exclusivity. Mr Arto said he knew that exclusivity was a red flag and a sensitive issue which led him to obtain legal advice about the contract.
2148 Mr Arto was asked these questions (T, p 1273, lns 41-47; p 1274, lns 1-19):
Q Did Mr Ridoutt explain to you what the issue was about trade practices compliance in the negotiations between QCL and Millmerran?
A Well, he explained to me in simple terms that initially, the intent of both parties was to have a clear solution where we take responsibility for the ash and we sell the ash and we run our business, and the power station were happy to have us taking care of everything. So it was a simple business deal in principle. And later on, lawyers on both sides got involved and rang the warning bell and [said] "What you want to do is simple, but we cannot do it exactly as you want. We have to ensure that your transaction is compliant with trade practice, and what you want to do, as simple as it is, cannot be done exactly how you want to do it, as a simple business deal where we take all the ash and we take care of it". So we - on that basis, we said, "Okay, we need to change the terms that were initially thought of without taking into account the restrictions of the Trade Practices Act.
Q So you understood from Mr Ridoutt's explanation that a reasonably simple business deal involved Pozzolanic taking all the ash; is that right?
A Well, I don't know which side it came from. I think the power station wanted also somebody to take the ash … . I did not know the terms of the tender … . whether it was considered that several operators could be also taking ash at the same time. I think Pozzolanic wanted to secure a certain quantity of ash and to have a preferential position vis-À-vis other potential parties taking ash from the power station. If they have considered an exclusivity agreement, this may have been problematic.
[emphasis added]
2149 Mr Arto said he understood the "original simple deal that Pozzolanic would take all the ash" as meaning that the power station wanted to have an operator that would fulfil its objective of having somebody use as much ash as possible instead of putting the flyash into a landfill, and at the same time get the best possible value for their ash, from the flyash produced from the ash (T, p 1274, lns 25-35).
2150 In the 25 June 2002 memorandum (ATB 5.19), the observation is made at p 2:
Trade Practices Issues
Our non-conforming offer to InterGen included the proviso that we get exclusivity for concrete grade fly ash. Prior to the announcements of Pozzolanic as the preferred tenderer, InterGen made it clear that they did not have any intent to sell ash to other parties. Within a couple of meetings their position changed to one of wanting the ability to seek additional revenue from ash sales. We have expressed our concern about entering such a contract.
[emphasis added]
2151 The memorandum notes that a number of suggestions had been made by QCL to "reduce our risk profile" developed in conjunction with Clayton Utz and they involved a right in Pozzolanic to seek a price re-negotiation in the event that Millmerran sells concrete grade flyash to any third party at a price and on terms more favourable than those agreed with Pozzolanic. Negotiations with Pozzolanic would then be required and Pozzolanic would have the ability to elect to terminate its agreement. The second suggestion involved a yearly contract whereby Pozzolanic enjoyed the sole discretion to extend each year up to seven years and the only reason not to extend would be limited to not being able to compete in the market place.
2152 Mr Arto was asked about his understanding of Mr Ridoutt's suggestions of the arrangements that Pozzolanic should try to put in place rather than the original simple business deal. Mr Arto said that he acknowledged that Pozzolanic had to give access to third parties to the flyash from the power stations both at Millmerran and Tarong, and therefore, Mr Arto says he tried to find commercial terms which would accommodate that access but which would still give Pozzolanic a realistic possibility of having a proper return on the investment and the financial commitments made to each power station (T, p 1274, lns 40-44).
2153 Mr Arto could not recall whether he discussed with Mr Ridoutt the suggested substituted arrangements set out on p 2 of the 25 June 2002 memorandum. Mr Arto thinks there may have been a discussion of a number of terms relating to price or extension or termination, although Mr Arto does not recall the content of the discussion. Mr Arto recalls that his "own position" was to have the lawyers provide an opinion as to whether "these terms were acceptable and to have Ian Ridoutt tell me whether these terms would still make sense from a business perspective" (T, p 1275, lns 10-13).
2154 Mr Arto was asked whether his position was that Mr Ridoutt talked to him about possible terms for protecting Pozzolanic's interests but did not show him the memorandum in the course of the briefing. Mr Arto again said that he did not recall the briefing, and the memorandum was not needed "because we were not at the point where we would discuss specific drafts of any contract or agreement". Mr Arto said the discussion concerned a matter of principle that "we could not and we should not make this deal exclusive, and therefore we had to find an acceptable solution with different commercial terms and which would have to be negotiated" (T, p 1275, lns 20-22).
2155 Mr Arto said that he could not recall, at all, the briefing memorandum of 28 June 2002 (ATB 5.20).
2156 The following exchange occurred in relation to the 28 June 2002 memorandum.
Q You see what is said in the briefing note under the heading Ash Market … "The fly ash market is truly saturated in Queensland thanks to the efforts of Pozzolanic over a number of years." Are you telling the Court that neither Mr Ridoutt nor anybody else in QCL ever made a statement of that type to you .. up to September 2002?
A I don't recall this statement.
Q Did anybody say to you, "The fly ash market in Queensland is saturated"?
A Again, I don't recall this statement ...
2157 As to the state of penetration of flyash into the concrete market in Queensland Mr Arto said that his view was that large customers had already achieved a "very high level of penetration" whereas smaller ones had "not achieved that same level" which suggested to Mr Arto that further growth in the market was to be targeted at the small customers representing maybe 30% of the market and linked to the general growth in the construction industry in SEQ. Mr Arto said that he could not recall anybody within QCL discussing that view with him.
2158 Page 2 of the 28 June 2002 memorandum contains what is described as a breakdown of the current "value proposition" (determined on the basis of the 2001 figures) for QCL. The amounts seem to be QCL's EBIT by reference to each of Tarong, Swanbank, and Central Queensland in amounts of $7.3M, $0.7M and $2.7M, respectively (and offsetting head office costs) resulting in total EBIT (excluding Millmerran) of $5.7M, or $3.7M (including Millmerran and the revised Tarong contract). Mr Arto said that he could not recall a discussion about the table on p 2 of the memorandum. Mr Arto said that when it comes to assessing the impact of the contracts on QCL's EBIT or EBITDA, Mr Arto had regard to the March and September Board papers.
2159 Mr Arto said that he did not remember having seen the table.
2160 Mr Arto was asked further questions about Pozzolanic's tender to Tarong.
2161 Mr Arto said that he had not seen the tender document before September 2002 and to the best of his recollection he did not ask to see it. Mr Arto was asked whether he came to understand that Pozzolanic had indicated a willingness to Tarong to guarantee revenue from 200,000 tonnes per annum of flyash and that one option offered by Pozzolanic was a fixed payment to Tarong of $2M per annum. Mr Arto said that he understood Tarong was interested in guaranteed revenue but he did not know of the options put. His knowledge was confined to the information in the Board papers.
2162 Mr Arto said that he did not know that Pozzolanic's tender to Tarong had sought exclusivity in respect of concrete grade ash. When asked whether it was Mr Arto's position that Mr Ridoutt had never explained to him that Pozzolanic's tender proposal had sought exclusivity with respect to concrete grade flyash, Mr Arto said: "I don't remember having this discussion with [Mr Ridoutt]" (T, p 1283, lns 27-29). Mr Arto said that he recalled a discussion in March 2002 during a Pozzolanic Board meeting in which Mr Maycock said that Pozzolanic and QCL should be extremely careful in relation to exclusivity and the implications of the contracts. Legal advice was to be taken. Mr Arto said that he did not discuss the legal implications of the bid with Mr Ridoutt because Mr Arto felt he did not have the skills to do so. Mr Arto said (T, p 1284, lns 14-18):
My priority was to win the bid against [FAA], that was my - the driving force for us … to keep - the source of fly ash and to be able to continue to supply these major customers. It was not such a dramatic issue whether somebody else would have access to the fly ash and develop an alternative supply in the market, which we made open in both contracts, actually.
2163 Mr Arto was asked further questions about the protection he sought to achieve in the negotiations with the power stations to mitigate the perceived risks earlier spoken about. Mr Arto said that each contract was to be absolutely open to the possibility of a third party obtaining "access to the raw ash" and, in the case of each contract, QCL negotiated with the power station to "reduce our exposure" which meant that "we wanted to have a shorter contract or have an exit option in the contract, in case the market environment would be different because a third party would have access to the ash, and this is what we actually did" (T, p 1284, lns 22-30). The following proposition was put to Mr Arto:
What you were seeking protection against was the effect of a third party having access to the ash from one of these power stations; correct?
2164 Mr Arto explained his position in this way:
No. That is not what I call "protection". We were negotiating these contracts in the sense of being a preferred customer, making a long-term commitment and investment, taking a large volume, and the contract did not mention, obviously, any exclusivity, so they made it possible for a third party to go and negotiate with the power station, access to the raw ash. Having this in mind, we reflected on our investment and our risk, and we re-negotiated some terms to reduce our exposure to this risk by reducing the duration of the contract, or having an exit possibility.
[emphasis added]
2165 Mr Arto accepted that the risk of another party obtaining access to, for example, Millmerran ash and processing that ash to sell flyash to concrete producers in the SEQ market was a "market risk" that could happen in any market, that is, an actual risk in the market that somebody could go to the same supplier and develop a new business. Mr Arto took the view that should such a situation occur, it "would create risk for us, and that we should therefore reduce the exposure in terms of the length of the contract we had with the fly ash stations" (T, p 1285, lns 9-11). Mr Arto accepted that one response to the risk, in the Millmerran contract, was to adopt a provision which permitted Pozzolanic to terminate the contract on 60 days' notice after 31 December 2006 and pay $50,000.00 per month amounting to $600,000.00 per year rather than the minimum amount of $1.3M per year (as indexed annually). Mr Arto said that Pozzolanic was seeking to reduce its exposure for the relevantly remaining period by 50% of the payments (the remaining three years after 31 December 2006).
2166 Mr Arto said that he did not give consideration to the effect of that provision on decision-making, within Millmerran. In response to the question of whether it occurred to Mr Arto that, for Millmerran to decide to permit access to a second off-taker, Millmerran would have to form a view that the benefit derived from a second off-taker would need to off-set the risk that it would lose approximately $700,000.00 (50% of an annually indexed base of $1,353,000.00), Mr Arto said: "I think the logic was that if they would give access to another offtaker, they would hope for a higher volume or a better price, and therefore more than offset the 50 per cent loss for the last three years of the contract". The business case for Millmerran, in Mr Arto's view could be either volume or price or term (T, p 1285, lns 35-38).
2167 Mr Arto assumed that Millmerran's acceptance of the provision "[made] sense to them" so that any apparent switch would be a possibility for Millmerran to consider and determine whether "there was an offer in terms of either volume, or price, or both, which could make it attractive" (T, p 1287, lns 1-2).
2168 Mr Arto was asked whether at any time up to the September Board meeting of QCL he had seen a graph indicating QCL's forecast demand in SEQ for flyash, of the kind set out on p 4 (ATB 4.15) of Pozzolanic's tender to Tarong. Page 4 contains a graph under the statements: "The following graph shows our forecast for the concrete grade ash market in South East Queensland". The graph is followed by a table setting out potential revenue to Tarong power station under proposed Options A, B or C based on the forecast sales of concrete grade flyash. The forecast shows sales by the end of calendar year 2002 of 294,000 tonnes (294k) and by the end of calendar years 2003, 2004, 2005, 2006, 2007, 2008 and 2009 the forecast volumes were 322k, 350k, 369k, 378k, 377k, 345k and 319k.
2169 Mr Arto said that he had never seen the graph (reflecting the volume predictions). He did not understand the graph. Mr Arto said the graph more or less matched what his expectation had been in terms of growth although he did not understand the downturn in the last two years. Mr Arto was asked whether he had asked Mr Ridoutt, Mr Wilson or Mr Chalmers whether they had obtained demand forecasts for flyash sales in SEQ. Mr Arto said that he could not recall exactly asking and getting an answer to such a question but he assumed that there were numbers and calculations reflecting growth forecasts for flyash sales. Mr Arto assumed that the business planning process required demand forecasts to be undertaken.
2170 Mr Arto was asked whether he recalled "seeing numbers" produced as a result of such a forecast. Mr Arto could not recall seeing numbers relating to a demand forecast for flyash.
2171 Mr Arto was asked:
Q Any time before the board meeting of September 2002, did you ask to see the numbers for the forecast demand for fly ash in south-east Queensland?
A I did not. I relied on the forecast for 2003 and very strong trend in 2002, and the general view that, through the cycles, the overall general trend for [the] construction market was in the range of three per cent growth per year and my personal view was that fly ash … had the possibility to penetrate more, especially through small customers, and there was also at Holcim some research done regarding the technical possibilities to go even beyond 30 per cent, and a lot of pressure from [the] Holcim group to reduce CO2 emissions … . So … I thought that a three per cent growth per year was a minimum, and that we could have cycles, like [those] in 2002, with 15 per cent growth in any given year.
2172 Mr Arto accepted that the business planning process within QCL involved doing research and obtaining available statistics consisting of general economic indicators such as housing trends and infrastructure demand in order to derive forecasts of demand. Mr Arto accepted that the graph demonstrated cyclical movements showing a peak demand in 2007 with demand falling away in the later years. Mr Arto was asked whether his own views about demand represented an appropriate basis to commit QCL to entering into a contract with Millmerran which would cost $1.3M per year. Mr Arto said that his own views or feelings about demand was only a "small part" of the decision and that even the graph demonstrated that over the period of the contract there was "quite a significant growth from 270[K] to close to 380[K] tonnes" (T, p 1288, lns 44-47).
2173 As to capacity, Mr Arto said that prior to the Board meeting in September 2002 he did not ask for management's analysis of the amount of concrete grade flyash which could be produced from the Tarong and Swanbank power stations (T, p 1289, lns 1-6; 26-29).
2174 Mr Arto was asked whether, in order to determine whether contracts with the Tarong and Millmerran Power Stations were needed so as to meet either existing or future demand, Mr Arto would have needed to know the production capacity of Tarong and Swanbank. Mr Arto responded by saying that the Tarong site would probably provide enough capacity for a few years and the benefit of the Millmerran site was the virtue of having another location which gave the flexibility earlier described by Mr Arto. In answer to the specific question, when pressed, Mr Arto said that he did not accept that in order to determine whether contracts should be entered into with both Tarong and Millmerran, it was necessary to know the production capacity of Tarong and Swanbank because, it is not easy to describe what is the "capacity" of "this kind of industrial setup" and moreover, "this capacity limitation was not a key factor in the decision making" (T, p 1290, lns 1-2) [emphasis added].
2175 That response led to this question (T, p 1290, lns 4-14):
Q Well, let's be clear, then ... It was not a key factor in the decision making process that additional-capacity from Millmerran might be needed to meet current or future demand in south-east Queensland; correct?
A I want to be precise here. If we had only Millmerran, I think we might have run into issues regarding volume. Not even knowing about the quality ... I think the volume of raw ash was in the range of 1 million tonne, so extracting up to 400,000 tonnes of concrete-quality ash was not obvious. So I think Millmerran alone could have been a problem. Regarding Tarong … I don't know what this potential capacity could be, but it did not come as a constraint [upon] our decision to go after Millmerran.
[emphasis added]
2176 Mr Arto was then taken to ATB 4.36 which contains Pozzolanic's assessment of the SEQ flyash market for the years 2001 to 2009 inclusive, set out in a table and a bar chart. Mr Arto said that he had never seen these figures prior to the Board meeting in September 2002 and when asked whether he had seen any figures for forecast demand in concrete grade flyash in SEQ prior to the September 2002 Board meeting, Mr Arto said he could not remember specifically but he thought that by September "we already had our finplan forecast, and I must have seen this finplan forecast by then" (T, p 1290, lns 25-31).
2177 Mr Arto accepted that the figures he saw on the FINPLAN forecast were the figures set out in the table and the bar graph which represented a numerical version of the data in the graph contained in Pozzolanic's tender document as earlier discussed with Mr Arto, except that Mr Arto noted that the FINPLAN contains a projection over only five years. Thus, Mr Arto thought that he could have seen only the first five years of the forecast demand data. As to the data over the years 2001-2009, the base year is 2001 which suggests an SEQ flyash market of 280,000 tonnes. The projection assumes "a variation" of a 5.7% increase on that year for the following year resulting in a market in 2002 of 296,000 tonnes. The projection assumes a 10.1% increase on the 2002 figure resulting in a market in 2003 of 326,000 tonnes. Each year then makes an adjustment for the particular variation. In the period between 2007 and 2008, the market projection declines from 387,000 tonnes to 352,000 tonnes and declines again in 2009 by 5%.
2178 Mr Arto had previously indicated that two power station sources would not be needed for approximately the first five years but that an additional source might be needed after that. Mr Arto said that that was not exactly his view. His view was that "our preferred power station was Tarong because of larger volume, [it was] the existing installation and … location". Mr Arto said that "We thought we would have a better network and a better backup in terms of volume, quality, logistics, service, interruptions, having another power station, and that's the basis of the decision made (T, p 1290, lns 43-47).
2179 Mr Arto accepted that the basis for the decision was that having a second source was "a better backup" for the reasons Mr Arto had identified. Mr Arto understood that Millmerran would provide a minimum volume of 135,000 tonnes. Tarong had no minimum volume ascribed to it but an annual payment based on "about 10.00 to 11.00 or 12.00 dollars per tonne" meant that the "expected volume minimum from Tarong would be around 200, 220 or [230] thousand [tonnes]" (T, p 1291, lns 2-7). Mr Arto explained that (T, p 1291, lns 7-10):
... basically, the level of Tarong was very close to the level we had overall in 2001 - 2000, 2001, I think - and Millmerran was bringing additional volume [that] we could see from the demand going into 2003. So both power stations were contributing to this volume for the following years.
2180 Mr Arto was asked how he was able to formulate those views without knowing the production capacity of Tarong. Mr Arto said that the ash flows continuously at the power stations and Pozzolanic captures maybe 50% of it. Mr Arto said that in a perfect world Pozzolanic would capture all the ash all the time, storage would be greater and trucks would be available to move it, all the time. However nobody can ever achieve that position, in any practical or operational sense, and power stations usually sell up to 25% to 30% of their total available flyash.
2181 A proposition was then put to Mr Arto that he did not seek information from management about either the theoretical capacity or, alternatively, the practical capacity for the production of flyash from Tarong or Swanbank prior to the September Board meeting. Mr Arto responded (T, p 1291, lns 25-26):
We did not have an analysis and any number describing the capacity of these power stations.
2182 The following exchange then occurred.
Q And you didn't ask for any number, either theoretical or practical, did you?
A I did not - this was not a key element of the discussion. I think occasionally we had some shortage from time to time but I did not have data to analyse this issue.
Q All right, so let's be clear. You didn't have any data about overall capacity, either theoretical or practical, correct?
A The data I had was the capacity of the total amount of fly ash.
Q That is the total amount produced by the power stations?
A Produced by the power station. I did not have the data regarding the potential maximum production of concrete fly ash from each power station.
Q And you did not have the data about the practical maximum production of fly ash from each power station either, did you?
A That's right.
Q And you didn't ask for it because you did not regard it as being of any relevance to your decision making process, correct?
A As I said, it was pretty obvious that Millmerran did not have the capacity to satisfy all our needs regarding Tarong. We did not discuss this capacity because Tarong was already supplying and I didn't know how much more potential Tarong actually had.
Q All right. And do I understand you to say you had no data about what the shortfall was from short term occurrences; is that right?
A That's right.
Q You did not ask anybody within management questions such as: "How often do we have a shortfall?" or "How big is the shortfall?" or "What problems does such a shortfall create?" Correct?
A I don't remember asking these questions.
Q All right. I take it, it follows that you didn't regard the answers to those questions as being of any relevance to the decision to enter into these contracts, correct?
A Again, our primary objective was to keep Tarong and we had these two bidding prices so again, Millmerran was not enough. Tarong was probably enough for a few years and this is how we made our decision.
Q Yes. And you didn't make your decision by reference to the question "Do we need Millmerran to cover the temporary shortfalls?" Did you?
A We discussed Millmerran as bringing additional benefits in terms of backup, logistic[s], [and] quality to serve the market.
[emphasis added]
2183 As to back-up, Mr Arto observed that the power stations are large industrial units which sometimes have breakdowns and which undertake maintenance programmes that can extend for a few weeks. However, the construction market requires concrete all the time. Mr Arto therefore thought it "a good idea to have an alternative flyash source in case of such interruption[s]" (T, p 1292, lns 20-24). Mr Arto accepted that in this context it would be interesting to have information about how often shortfalls had occurred. Mr Arto accepted it might possibly be necessary to know the size of the shortfalls if they had occurred, and it would be part of the analysis to know how in the past Pozzolanic had dealt with shortfalls, in deciding whether it was a good idea to secure an alternative source to deal with interruptions.
2184 Mr Arto accepted that he had not asked whether there had been shortfalls in the past.
2185 Mr Arto was asked whether he agreed with counsel for the Commission that "no part of the decision making process to enter into the Millmerran contract … was justified by the need to meet shortfalls". Mr Arto said (T, p 1293, lns 42-46):
I agree with [you] that we did not do any - probably enough thorough analysis of all these factors. It was relatively obvious to all of us that having two locations would provide, in the end, a better flexibility, a better backup, better opportunities to face shortfall[s] because bringing fly ash from Gladstone is more expensive than bringing [it] from Millmerran to go to Brisbane. So it was relatively obvious that it was better having the two sources. We did not do an extensive analysis as you suggest.
2186 Mr Arto added "again, we wanted to have one and we had to chase two and the first we got was Millmerran" (T, p 1294, lns 6-7).
2187 Counsel for the Commission put to Mr Arto that from at least March 2002, the Board decided to enter into both contracts. Mr Arto accepted that the Board wanted Pozzolanic to go after both contracts. However, at March 2002, Pozzolanic did not know the conditions of each contract and thus at this point, there was no approval to sign both contracts. It was a direction "to go after both contracts".
2188 Mr Arto was asked about the role of quality considerations in determining whether to enter into a contract to acquire a particular flyash source, whether Millmerran or Tarong or otherwise. Mr Arto accepted that he did not seek any information from anybody within QCL or Pozzolanic about whether, in the foreseeable future, there was likely to be an issue about the quality of Tarong flyash. Mr Arto said that concrete producers want a consistent flyash product and they assume that it is easier to secure consistency by seeking flyash from the same source. Mr Arto said that different power stations have different operations and different coal sources and therefore the flyash produced will exhibit different characteristics, "but that's the essence of our business: to use different sources - different limestone, different ash - to at the end offer a good product for the customers".
2189 Mr Arto was asked about transport costs.
2190 Mr Arto said that he could not recall having any discussions with management about questions such as what the natural market for flyash from Millmerran might be. Mr Arto said that, for him, the respective volumes under each contract were allocated on the footing that Millmerran would provide flyash for about one-third of the market demand represented by allocating 135,000 tonnes to Millmerran, and having regard to the fixed annual payment to be made to Tarong divided by the cost, the volume allocated to Tarong was about 220,000 tonnes which represented "two-third/one-third in the way the volume would be allocated to the market".
2191 Mr Arto said that, after eight years, he could not recall a discussion with anyone in management, at any time before the September 2002 Board meeting, of the question of whether there was a saving in transport costs in using Millmerran flyash in any part of the SEQ market. Mr Arto was taken to the map at ATB 4.15 (Annexure D to these reasons). Mr Arto said that looking at the map and not being extremely familiar with the roads and the logistics, "I just thought that having two locations would offer more potential for optimisation than just one". Mr Arto said that he did not have specific numbers for this view (T, p 1296, lns 3-5). Mr Arto did not recall asking anybody in management "to produce numbers showing comparative transport costs".
2192 Mr Arto was asked whether his view, that it was a good thing to have two contracts, was based upon an intuitive feeling, absent the numbers, that there might be some savings in transport costs. Mr Arto said that his view was based on a little bit more than intuitive feeling. Mr Arto said that the experience of bulk transportation is that the transport costs are probably 25% or 30% of the delivered cost to customers. Mr Arto said (T, p 1296, lns 16-18):
So if we have two locations instead of one, if we could organise the backhauling of fly ash against cement deliveries, from my experience, there should be some logistic benefits.
[emphasis added]
2193 Mr Arto was asked what experience enabled him to say that there would be some logistic benefit by using Millmerran ash for part of the market as compared with Tarong ash. Mr Arto said this (T, p 1296, lns 22-27):
The plain experience that having several locations allowed [us] to organise deliveries and transportation in a more efficient way than just having one. As an example, if we had only the Millmerran contract going to Noosa, it takes 100 kilometres more than coming from Tarong. So obviously this area of the market is best served by Tarong. I'm assuming there are other areas of this market which are best served by Millmerran versus Tarong.
2194 Mr Arto was asked this question:
Q Well, in order to make a decision to enter into a contract costing you $1.3 million a year, if any part of that decision was based on the notion you'd have transport cost savings, you'd want the numbers in detail, wouldn't you?
A I don't think this was part of the business case to make the decision. I think the business case is reflected by the paper submitted to the Board in March and September, respectively, and this business case is already convincing enough that we didn't have to go through extensive calculations of - regarding other potential benefits which appeared to be real and were already intuitively convincing.
[emphasis added]
2195 Mr Arto was then asked:
Q Now, the other potential benefits, as I understand you, are the benefits of covering potential shortfalls, this transport cost saving benefit, something to do with quality, is that it? Is that the other benefits?
A That's it. The backup in case of quality issues, the logistic optimisation, backup in case of shortfall resulting from overhaul or maintenance or power station stopping for some time, as it happens. So it was intuitively better to have more sources than less.
2196 Mr Arto was asked whether he had discussed these potential benefits with anybody else on the Board in the course of the decision-making process in September 2002. Mr Arto could not recall any specific discussions although he assumed that he would have discussed the "geographical set up" with Mr Ridoutt. Mr Arto thinks he discussed these benefits with Mr Ridoutt before the Board meeting but he has no specific recollection. Mr Arto recalls that he discussed "the benefits of having these two contracts" but he does not have a specific recollection.
2197 As to backhauling, Mr Arto accepted that the notion of backhauling cement from Brisbane after delivery of Tarong or Millmerran flyash into Brisbane, at points along the way of the return journey to Tarong or Millmerran, was "not part of the business case which was analysed and presented [to the September 2002 Board meeting], this was an additional benefit" (T, p 1297, lns 22-24; 38-41).
2198 Mr Arto was taken to his earlier evidence that Millmerran was about 100 kilometres closer to the south-end of Brisbane and the Gold Coast than Tarong. Mr Arto accepted that the difference between the two is negligible. Mr Arto was asked to identify the basis on which he thought that there was $7 to $8 per tonne cost saving in transporting flyash from Millmerran to the Gold Coast as opposed to transporting it from Tarong to the Gold Coast. Mr Arto accepted that he probably made an incorrect estimate to make the point he was seeking to develop.
2199 Mr Arto was asked that given his realisation of the mistake about distances, is it the case that there were no transport logistical benefits in taking ash from Millmerran as compared with taking ash from Tarong.
2200 Mr Arto said that some markets are closer to Millmerran than Tarong and certainly Swanbank is closer, and there may also be markets in New South Wales which may be accessible in a better way for Millmerran ash than Tarong.
2201 A proposition was then put to Mr Arto that in order to determine transport logistic benefits, it is not sufficient to just consider distances. It is necessary to consider the allocation of vehicles within the logistics system. Mr Arto said that many factors had to be considered: "including distance, traffic, road, type of roads and the freight management and whether we deliver [to] our customers or whether our customers pick up in locations, it's a very complex topic".
2202 Mr Arto was then asked:
Q And you couldn't possibly base a decision on a transport logistics saving without doing that very complex analysis, could you?
A Yes, and I said that this was not a critical element of the decision, just a perceived additional benefit from having another source in a different location.
[emphasis added]
2203 However, Mr Arto said that his view was that "having a power station 200 kilometres south from Tarong would put us closer to New South Wales and give us new market opportunities" (T, p 1299, lns 39-40). Mr Arto said that this was simply his "personal understanding" of the opportunity presented by a new location. Mr Arto accepted that "we did not have an analysis of the logistic[s], of the market we could access from here, in New South Wales. But … it seemed to me that it was in a better location than Tarong to go into this market". Mr Arto accepted however that QCL did not undertake any analysis at the time of what parts of New South Wales might be opened up by having a contract with the Millmerran Power Station.
2204 On the question of profitability, Mr Arto believed that the two Board papers demonstrated that already in 2003 based on the forecast volume, even with the new fees or royalties paid to the power station, QCL was able to maintain its level of profitability in the flyash business. Mr Arto said that he could not recall a document where "we have the proper cashflow forecast and internal rate of return as we normally do for a capex decision". Mr Arto said that the Board had a forecast for 2003 showing that even with the new conditions with the power stations which were required to obtain the contracts, QCL would be able to "more or less" maintain its level of EBIT in the flyash business. Mr Arto said he had in mind the two Board papers, in making these observations.
2205 In relation to QCL's position in the market, in the context of the merger discussions, described as "Project Jacaranda" with Hanson and Rinker, Mr Arto was asked whether it was part of his reasoning process that he needed to make QCL an attractive merger proposition for the other parties. The proposition was put that part of the attraction of QCL from the perspective of Hanson and Rinker was that QCL had the flyash business in Queensland and it was very much the dominant supplier of flyash throughout Queensland. Mr Arto said this (T, p 1301, ln 43 to p 1302, ln 2):
I'm careful using the word "dominant" because I know it has a legal sense, but in the sense I am familiar with, which is high - very high market share above a certain threshold, I think you can characterise QCL as being dominant, although - I mean, yesterday I referred to the pricing level of fly ash compared to cement. This pricing level was 50 per cent [below] cement because we also had fly ash from New South Wales competing, or potentially competing, in our market.
[emphasis added]
2206 Mr Arto accepted that the SEQ portion of the market was the largest portion of the Queensland flyash market. Mr Arto described the position confronting QCL if either one of the two contracts was lost, in these terms (T, p 1302, lns 18-26):
If we lost Tarong to [FAA], for example, that would be probably the most dramatic scenario, so this is why we were really trying to do our best in terms of the offer to Tarong. If we had lost Millmerran [to FAA], maybe the consequences would have been less. If we lost either contract to another competitor or a new entrant in the business, we could make scenarios regarding the potential impact on volume or price. At the end of the day, in the worst case scenario, we were talking of $6 million of EBIT versus [$100 million], so it was a significant part of QCL and we wanted to keep it ...
2207 Mr Arto accepted that if FAA won one of the contracts, and primarily the Tarong contract, and to a lesser extent the Millmerran contract, they would be in a position to supply themselves, and this would be a negative factor in terms of the attractiveness of QCL in the merger discussions.
2208 Mr Arto accepted that QCL's absolute primary objective was to win the Tarong contract.
2209 Mr Arto was asked to describe his recollection of the Board discussion of 9 September 2002 concerning whether the Millmerran contract was likely to be profitable to Pozzolanic. Mr Arto thought that the discussion recognised that QCL had to pay a higher price for procuring flyash, on average about $7 or $8 more per tonne than QCL had previously paid, as Mr Arto recalled it. The question for the Board was whether QCL would be able to maintain its profitability by increasing the price in the market. There were two considerations taken into account in the discussion. The first was the short-term situation in the market reflecting, approximately a 15% increase in demand during the 2002 year. This was, in Mr Arto's view, reflecting a very strong market. This was a positive signal that price increases would be possible.
2210 The second consideration was the competition for flyash from New South Wales. Mr Arto believes that the two largest power stations in Australia, Bayswater, and another, were basically giving away flyash for free to avoid stockpiling flyash. The price of this flyash was just a matter of a couple of dollars of processing and then the addition of the transportation costs. Mr Arto says this factor mostly determined QCL's price of flyash in the Brisbane market. So, for Mr Arto, it followed that QCL was not absolutely certain that it would be able to recover the additional price paid for the flyash but "we thought" that given the short-term good market perspective, QCL had some room to increase the price. The Directors told Ian Ridoutt that his team would have to work on the price to try to recover the additional cost of the flyash. Mr Arto said that the Board recognised that there was an additional cost to be paid to the power station to achieve each contract and asked management to do its best to try to maintain the profitability of the company. The discussion was about recognising an additional cost. Management had submitted an increased price going out to 2003 to support their proposal. The Directors challenged Ian Ridoutt as to whether he thought it possible to achieve the proposed price increase adopted in the 2003 forecast to mitigate the impact of the additional cost of flyash on QCL's profit and loss statement (T, p 1303, lns 41-47; p 1304, lns 1-28). Mr Arto said it was his personal view that the short-term situation was "rather positive" in achieving some price increase. However Mr Arto was not at all certain that QCL could achieve full recoupment of the additional cost it had to pay for the flyash. Mr Arto's view was that the Board could not conclude that this was something "anybody could guarantee" (T, p 1304, lns 46-57; p 1305, lns 1-3).
2211 Mr Arto was asked whether he had formed a view that it was likely that QCL could partly recoup the additional cost of flyash by increasing prices. Mr Arto said that at this time, QCL had announced in April 2002 price increases in cement. QCL had experienced a strong demand. Mr Arto thought that QCL could probably achieve some price increase in flyash. However QCL had some information that some customers were buying flyash from Bayswater. Mr Arto said that he thought that achieving a price increase was a difficult task and that the sales team would have to deal with the price increase, customer by customer, in the field (T, p 1305, lns 16-21). Mr Arto explained that in the course of discussions in the September 2002 Board meeting concerning the profitability of the Millmerran contract, the Directors were trying to maintain or improve QCL's profitability "and we said that an important part of that task would be for the sales team to try to increase the price in the following years". Mr Arto said that such a discussion took place with Mr Ridoutt at the Board meeting (T, p 1305, lns 27-34, 36-37). Mr Arto did not accept that the discussion involved the notion that in order for the sales team to be able to increase prices, it was necessary for Pozzolanic to enter into the Tarong contract. Mr Arto said that "we actually entered into the Millmerran contract without having the certainty of closing the Tarong contract, which took a lot of commercial discussion and many months to be finalised" (T, p 1305, lns 41-44). Mr Arto said that increasing the price in the following years was not linked to securing the Tarong contract.
2212 This exchange occurred (T, p 1306, lns 14-41):
Q Did it occur to you, when you were talking about price increases, that if you failed to enter into the Tarong contract, bringing about a price increase would be more difficult?
A Absolutely, yes … Well, it's a possibility, definitely.
Q Was it your assumption that Pozzolanic would enter into the Tarong contract and therefore that prospect was irrelevant?
A … Maybe I want to come back on this previous point. If [FAA] was the winner of the Tarong bid, the obvious option would have been for them to supply themselves. It was not obvious that they would supply third parties in the market. … Because in this competitive relationship … when a competitor takes an initiative in our market, we tend to prepare a counter-response somewhere else in their market, or we react on the price ... so there are many competitive behaviours we can imagine which would have taken place in [these] circumstances.
Q … Was the discussion [about the profitability of entering into the Millmerran contract] can we increase prices whilst maintaining our present market share?
A I think the situation was that we were ready to close the Millmerran contract. We were still fairly positive on the possibility that we might close the Tarong contract as well, and, subject to … the final discussions, obviously. And assuming that we would have closed the Tarong contract, we would recognise that - we were recognising the additional cost on our fly ash, and naturally said to the sales team, as a challenge ... your job in the next few years will be to try to recover this in the market.
[emphasis added]
2213 In terms of the probabilities, Mr Arto said this (T, p 1306, lns 44-46) when the proposition was put to him that his final answer suggested that part of the assumption he made was that Pozzolanic and QCL would have the Tarong contract:
Well, in terms of likeliness, I cannot give you a number, but we were more confident that we would close the contract than anxious that we would not, even though there were still a number of roadblocks on the way.
2214 Mr Arto explained the factors which suggested to him that Pozzolanic enjoyed a preferred position with the power stations. At (T, p 1307, lns 19-29), Mr Arto said this:
... the Tarong contract was our first priority and in the process we had to tender for both contracts to increase our chances to at least get one, … on the power station side, actually both Millmerran and Tarong wanted us. I mean, we were very quickly recognised as their preferred partner, because beyond the concrete fly ash they saw us as having more potential to handle and manage their maintenance with [MPA], as having more potential to develop other utilisations for non-concrete quality fly ash, as being able to use our waste management business to use their bottom fly ash, which is contaminated waste. So they were more supportive of us as a bidder than other competitors. So this is why we felt that we had this unofficial, at the time I think unofficial preferred status with Tarong, subject to the actual final discussion and closing.
[emphasis added]
2215 Mr Arto was asked whether it was right to say that as at September 2002 the negotiations between Pozzolanic and Tarong were about the topic of which clauses could be inserted into the contract to protect Pozzolanic's investment in Tarong so far as the possibility of third parties taking ash was concerned. Mr Arto said that he thought that, by then, the key terms concerning volume and cost per tonne were more or less defined but the transaction could not be completed because the lawyers had said, on both sides, that although they understood what the parties were trying to do in terms of the "very simple" transaction Mr Arto had earlier described, the lawyers had said it could not be done "like this because this nice partnership you have together has to be open to third parties" (T, p 1307, lns 38-39). The negotiations concerning securing a position that reconciled the mutual interests of both parties in circumstances where at any time a third party could enter, reach agreement with a power station, plug in, get the ash and make concrete grade flyash, involved extensive negotiations.
2216 Mr Arto was asked further questions about the September Board paper.
2217 Mr Arto was asked whether the paper went to the September Board meeting as justification for the decision to enter into the Millmerran contract. Mr Arto said he thought that was correct. He could not say whether the paper went to the QCL Board meeting. He could not recall whether the paper was put before the Pozzolanic Board, with a summary of it put to the QCL Board, or whether it went to both Boards. On p 2 of the September Board paper, the observation is made that negotiation of the Millmerran Ash Purchase Agreement is complete and is being prepared for signing. The key elements of the agreement are set out in a letter from Clayton Utz is attached. The paper tells Directors that if an agreement is not signed by Pozzolanic with Millmerran, Millmerran will negotiate an agreement with Transpacific which is "particularly keen to re-enter the ash market in Queensland, and will with all probability match our offer". Mr Arto says that he saw the September paper during the Board meeting. Mr Arto was asked whether he saw the paper before it went to the Board meeting and approved it. Mr Arto said (T, p 1309, lns 32-34): "I certainly saw the paper during the board. I cannot recall - you know, Ian Ridoutt was a member of this Board. He would present the document, maybe [he sent] it to me the day before … in any case, I accept the paper as it is".
2218 Mr Arto was asked:
And you regard it as being a relevant fact in the decision-making process that if Pozzolanic did not enter the agreement it was likely that Transpacific would enter an agreement with Millmerran. Is that right?
2219 Mr Arto explained the relevance of the observation as being "information" provided to the Board by Ian Ridoutt that in the eventuality that QCL or Pozzolanic at the last minute walked away from Millmerran, Millmerran would have to find somebody else, and Transpacific is one possibility, as the Directors knew that FAA had already walked away from the Millmerran contract. The proposition was put to Mr Arto that the statement in the Board paper was more than that Millmerran would have to "find somebody else", it was a statement that if Pozzolanic or QCL passed up entering into a contract, it was likely that Transpacific would enter into the contract.
2220 Mr Arto accepted that that was the information Ian Ridoutt was providing.
2221 Mr Arto was pressed to say whether he regarded that fact as "relevant" to the decision-making process concerning whether Pozzolanic should enter into the Millmerran contract. Mr Arto said that he regarded the statement as "information, among others, which was submitted to our board, yes" (T, p 1310, lns 2-4).
2222 Page 3 of the September Board Paper contains some observations on the topic of "Loss of Tarong". It says that if the Tarong contract is not secured it will go to FAA and thus sales of flyash to Boral, CSR and Pioneer in the SEQ flyash market will go to FAA. The paper notes that those three buyers account for 72% of that market. The paper notes that the available market left would be 85,000 tonnes of which 40,000 tonnes would most probably be supplied from Swanbank with the result that securing a contract at Millmerran as a source of flyash for servicing 45,000 tonnes of market demand per annum "would be marginally profitable". On the calculation at Point 4 of the paper, the margin would be $2.99 per tonne assuming a price of $65.00 per tonne based on next best available pricing of Bayswater flyash. The assumed volume is 45,000 tonnes and the profitability analysis takes no account of any contribution to overhead costs. Total costs would be, on the analysis, $62.01 per tonne which includes a royalty paid to Millmerran of $30.73 per tonne which essentially assumes a royalty payment of $1.353M distributed over 45,000 tonnes. The total value of the contract to Pozzolanic and QCL would be a $135,000, represented by a margin of $2.99 per tonne across 45,000 tonnes ($134,550.00), which represents a margin return of 4.82% on the listed total costs per tonne of $62.01.
2223 Mr Arto did not accept that the profitability analysis arising out of an assumed loss of the Tarong contract meant that Pozzolanic should not enter into the Millmerran contract, standing alone, without the Tarong contract. Mr Arto said that the Millmerran contract was "less interesting" than Tarong "because of the location", and in the end, Tarong would have to find somebody to take care of the ash. Mr Arto said that "at least having Millmerran [meant] we could stay in business as a starting point with a source of flyash, otherwise we would just walk away from both contracts, which was never, obviously, an option we would be agreeable to" (T, p 1310, lns 17-23) [emphasis added]. Mr Arto said that as to the costs, QCL treats overhead costs as fixed costs and does not take them into account in making decisions on specific items of the business.
2224 Mr Arto was asked about the implications, for decision-making by Pozzolanic and QCL on entering into the Millmerran contract, of the contribution Pozzolanic had agreed to make in cross-subsidising the reduction in price given by MPA Energy to Millmerran of $1,080,000.00, under MPA's contract. If Pozzolanic entered into the Millmerran contract, it would pay a total of $900,000.00 over seven years to MPA Energy as compensation for MPA's price reduction with Millmerran. That amount amortised over the seven years of the Millmerran contract would amount to $128,571.00 each year which, if taken into account in a profitability analysis, would reduce the annual value of the Millmerran contract from approximately $135,000 to $6,429 per annum or $0.14c per tonne (over 45,000 tonnes) rather than $2.99 per tonne, assuming a straightforward calculation adjusting the profitability table at Point 4 of the September 2002 Board paper, absent any other consideration.
2225 Mr Arto said (T, p 1311, lns 9-12):
Okay, so we are saying this Millmerran contract was marginally profitable, assuming we would still keep the Swanbank Power Station contract and in the same Board paper we say we are still fairly confident that we can proceed with the Tarong contract, it's still the same scope.
[emphasis added]
2226 Mr Arto was asked whether, taking into account the compensation payment to MPA Energy, the dollar profit per year justified an expenditure of more than $1.3M per annum. Mr Arto said this (T, p 1311, lns 18-22):
That would be a low profitability deal, I would accept that. If, as a standalone deal, assuming the price of fly ash does not increase, assuming the market does not increase, assuming our market share does not increase. I mean, all these assumptions being made, you have a very low profitability case with a standalone contract, it seems.
[emphasis added]
2227 Mr Arto was then asked:
And of course, to get any profit at all, one has to assume that the price of $65 a tonne can be maintained, correct?
2228 Mr Arto agreed and said that "many parameters come into play for sure" (T, p 1311, ln 25). That exchange led to this question and response (T, p 1311, lns 27-32).
Q Is it the case, then, that the decision to enter into this contract, the Millmerran contract, was always on the basis that [Pozzolanic] would enter into the Tarong contract?
A We did not have a 100 per cent guarantee because the contract was not closed. We had a good level of confidence that, subject to final negotiations, we would be able to enter the contract because basically, both parties, Tarong and ourselves, had an agreement in principle to finalise this contract.
[emphasis added]
2229 Mr Arto was then taken to the letter attached to the September Board paper from Clayton Utz to Mr Wilson dated 3 September 2002 (Ex-35A, PPAA-3). The letter notes that significant discussions had taken place between Pozzolanic and Millmerran in relation to securing the supply of ash, particularly concrete grade flyash, in favour of Pozzolanic whilst still enabling Pozzolanic to compete with lower priced ash should that occur in the future. The letter then notes that during the negotiations Millmerran had said that it was extremely sensitive to any provisions that might be seen to have any trade practices implications and, as a result, Millmerran would not contemplate an exclusive arrangement over the seven year term of a contract in relation to concrete grade flyash. The letter notes that a number of options were discussed with Millmerran each of which were rejected by Millmerran. The letter notes that after an intensive one day negotiation session, the parties reached a position reflecting, at least as described in the letter, two elements. First, Pozzolanic could terminate the agreement at any time after 31 December 2006 on 60 days' notice, or Pozzolanic could reduce its minimum quantity of concrete grade flyash required to be taken, also on 60 days' notice (although the letter does not recite the event which would give rise to an entitlement in Pozzolanic to exercise the termination right). Second, if Pozzolanic terminated the agreement, it would be required to pay $50,000 per month for the balance of the term less a pro rata of any lump sum payment made for the relevant operating year.
2230 As to the reference in the Clayton Utz letter to Millmerran's refusal to contemplate an exclusive arrangement for concrete grade flyash over the seven year term, Mr Arto was asked these questions (T, p 1312, ln 41 to p 1313, ln 12):
Q You understood, as at the September board meeting; that Pozzolanic had proposed an exclusive arrangement with respect to concrete-grade fly ash, didn't you?
A I understood that, up to some points, the negotiations were done without any legal considerations or support, and later on, we also received advice from Clayton Utz regarding the terms of the contract. So I don't know at what point we actually - or the negotiating team realised that what they had in mind as a simple deal that they might have called exclusive was not something which was achievable as being legally compliant.
Q Well, you understood that Pozzolanic had wanted an exclusive deal didn't you?
A Up to some point, I understood that the Pozzolanic team wanted to have a simple contract, and I don't know if - when the "exclusive" word appeared. I haven't read the tendering [and] I haven't seen the [draft] version of the contract.
Q And you understood, at least as at the date of the September board meeting, that Millmerran had refused to contemplate any form of exclusive arrangement, didn't you?
A Absolutely.
[emphasis added]
2231 Mr Arto was then asked about the three options set out in the Clayton Utz letter canvassed with Millmerran in light of its refusal to accept an exclusive arrangement, all of which were rejected by Millmerran. Mr Arto could not recall whether, before the September Board meeting, he was aware of whether those three options had been discussed with Millmerran and rejected by their negotiators. This matter was a task for Mr Ridoutt and his negotiating team.
2232 Mr Arto said that he did not tell or instruct Mr Ridoutt of the "commercial objective" he wished Mr Ridoutt to achieve in the negotiations with Millmerran. Mr Arto said that he "left it completely up to [Mr Ridoutt]". Mr Arto said: "I delegated to him the negotiation of this contract. And he had done this since the beginning, and he was in charge of closing this contract in acceptable terms" (T, p 1313, lns 19-24; 31-32; 34-36).
2233 Mr Arto was asked the following questions and responded as follows (T, p 1313, lns 38-42; p 1314, lns 5-9):
Q And did you understand that the commercial objective that he was trying to achieve was the closest practical equivalent to express exclusivity?
A No, this is not how I understood it, because if we look at what was actually implemented, there is nothing which suggests any exclusivity. It's basically a revision of either the duration of the penalty for early termination.
Q In any event, you say you were unaware that these options had been canvassed with Millmerran; is that right?
A Not any more than what's in the document. I know they had day-long meetings covering many options on both sides and it was delegated to Ian Ridoutt to negotiate.
2234 Mr Arto said that his understanding of cl 5 of the Millmerran Ash Purchase Agreement was that Millmerran had to make available ash to enable Pozzolanic to take 135,000 tonnes of ash during the year and that, effectively, Pozzolanic could choose when throughout the year it took ash making up that total (T, p 1314, lns 26-34). Mr Arto accepted that, potentially, Pozzolanic could take ash one month and then no ash the next month and so on, although Pozzolanic would need to take account of supply obligations to customers who might have difficulty switching from one flyash source to another.
2235 A proposition was put to Mr Arto, standing in the shoes of a second potential off-taker for Millmerran ash, that if the potential second off-taker knows that Pozzolanic has a contract which obliges the power station to give Pozzolanic access to ash to make 135,000 tonnes of flyash, and Pozzolanic might take all the ash one week and none the next, and so on, it would be practically impossible for a second off-taker to conduct its business relying on supply from that power station. Mr Arto said this (T, p 1315, lns 1-6):
I don't believe so. I believe that the flow of ash coming out of the power station is a daily flow. The annual .. quantity was .. over a million tonnes, so .. we were only taking a small part of the ash flowing out of the power station, even if we were on the 135,000 tonnes level so from my view, technically, that's why it was possible for another party to have a significant amount of ash every month.
2236 The following exchange then occurred (T, p 1315, lns 8-27):
Q You knew, didn't you, that the fly ash supply business required the capacity to make regular supply to customers.
A Yes.
Q The fly ash supply business was not practicable if, for example, for two weeks at a time, the supplier had no access to fly ash to be able to supply customers, correct?
A It would be more difficult but I don't see how this could happen.
Q Well, it could happen if you were second in line at a power station and the first in line took all the ash for two weeks, couldn't it?
A In theory it could but I don't think we had the capacity to take 100 per cent of the ash. If I think in terms of annual volume, we could take it monthly with the same reasoning. We were ... planning on selling 135,000 tonnes, assuming a yield of 50 per cent [which] means that we need twice this volume to sieve out the biggest fraction of the ash. That would still be 260,000 tonnes out of a million or more, so we would only take 25 per cent of the flow of ash in our process. So it would mean that to take the whole quantity for a given week or a given month, we would have to take four times this amount … and ensure we could physically process and store the amount of ash to be able to do that, so I don't think this was a practical obstacle to a third party being able to treat the ash.
2237 Mr Arto accepted that a third party would need to install a classifier at Millmerran as a second off-taker to be able to sell flyash into the concrete market or take Millmerran ash to a grinding station. Mr Arto accepted that such a person would need to establish loading silos and a weighbridge and incur capital expenditure of at least $2M, at about the same order of magnitude as Pozzolanic would incur. Mr Arto did not accept that a second off-taker would be dependent upon notice from Pozzolanic about how much flyash Pozzolanic would be taking as first off-taker, in order to be able to conduct business as a second off-taker in the production of concrete grade flyash. Mr Arto said that Pozzolanic could not physically take 100% of the ash coming out of the power station and he rather thought that a third party would be able to secure access to an outlet valve at the station.
2238 Mr Arto was then taken to the Tarong contract which he signed.
2239 Mr Arto said that he had read some of the specific clauses and he had browsed through the entire document. Mr Arto had visited the station but did not recall the configuration of the Tarong Power Station. Mr Arto did not recall that Pozzolanic took ash from Zones 1, 2 and 3 of the 6 zones with respect to each of the four generating units. Mr Arto was not familiar with the physical organisation of the generating units and related hoppers. Nor did Mr Arto understand that it was only from Zones 1, 2 and 3 that flyash was extracted from Tarong Power Station for sale to the concrete market. Mr Arto did not see Pozzolanic's position as one in which it had first access to all flyash from the power station which was usable for the production of concrete grade flyash. Notwithstanding how Pozzolanic's rights might be described or characterised, Mr Arto said, "but in any case, we were looking at 200,000 tonnes of concrete quality flyash which may [require] 400,000 tonnes of raw flyash out of a total of two million, so this is only 20 per cent of the whole flyash flowing from the power station, if I remember correctly."
2240 Counsel for the Commission put the second off-taker hypothesis to Mr Arto in relation to Tarong, in these terms. If, standing in the shoes of a second off-taker, a first off-taker has first right of access to all ash which is usable to make concrete grade flyash, it makes it a very unattractive financial proposition to attempt to run a fly ash supply business as a second off-taker at Tarong. Mr Arto's view was this (T, p 1317, lns 2-7):
I don't know about that. I think again, the volume of fly ash we were processing here was only a small part of the volume of fly ash available. If you look at the contract itself, I think in this one there is a scale of considering up to 500,000 tonnes of fly ash in terms of annual feed back to the station, so we were only planning on taking 250,000 tonnes at this point. So I think, based on the quantity, it was possible for a third party to have access to the source.
2241 Mr Arto accepted, as making sense, the notion that Pozzolanic's physical operation on the Tarong site involved employees of Pozzolanic determining on a daily basis which hoppers would be used to produce flyash based upon assessments of quality and that Pozzolanic employees would choose the flyash which was most suited to processing in making concrete grade flyash. Mr Arto was asked whether these circumstances would give rise to an obvious disadvantage for a second off-taker in respect of all four generating units. Mr Arto took the view that if the power station really wanted to have a third party, it could give access based on the existing contract. Mr Arto accepted that practical arrangements would have had to be addressed with two operators running on the same site but nothing in the contract suggested that this would have been impossible (T, p 1317, lns 23-28).
2242 Mr Arto was asked about his understanding of the effect of cl 7 and whether it operated in this way: a third party wishing to secure access to ROS flyash had to obtain that ash through Pozzolanic, and Pozzolanic was only required to use its best endeavours to supply it rather than assume an obligation to supply it.
2243 Mr Arto regarded a best endeavours clause as a demanding clause but said that he had not gone through the technical operation of the clause in any detail. Mr Arto observed that in respect of both Millmerran and Tarong, the spirit of the agreement from Mr Arto's perspective, was that both sides wanted to have an agreement which was legally compliant so if there was "some trick played in the subclause of the document", Mr Arto said he was not aware of it and that was never part of his objective. Mr Arto said that he was relying upon Mr Ridoutt and Mr Wilson to develop the contract. Mr Arto was focussing on the commercial terms and the legal advice in developing the contract (T, p 1318, lns 10-15; 18-20; 24). The negotiating team of Mr Ridoutt and Mr Wilson were dealing with the commercial objectives of volume, price and minimum annual payments. As to security of supply, Mr Arto said that the duration of the Tarong contract had to be re-negotiated and "We decided to [take] it down to five years to reduce our exposure to the risk of having a third party developing new operations on the site.
2244 Mr Arto was asked about cl 12.3 of the Tarong contract which Mr Arto described as "a very critical clause". Mr Arto was asked whether there was a draft of the Tarong agreement, which included cl 12.3 in the form of the final agreement, at the time that Mr Arto signed the Millmerran Agreement on 30 September 2002. Mr Arto said that his level of understanding of the terms was captured in the Board documents in the summary table describing the contract with the result that in September 2002 the term was a fixed payment (of $2.6M per annum indexed to CPI). Mr Arto accepted that cl 12.3, in part, provided that Pozzolanic was required to pay $2.4M to Tarong whether it took 150,000 tonnes or 350,000 tonnes. Mr Arto was asked these questions and responded in the following way (T, p 1319, lns 13-29):
Q … So if one is looking at having the Tarong and Millmerran contract, the sort of range of concrete grade fly ash you're [taking] to supply the south-east Queensland market was within that range, wasn't it, 150,000 to 350,000 tonnes?
A It was in the top of that range, in the range of [330,000] or plus forecasted for three and the following years, yes.
Q And did you understand this to be the case: that, in effect, every tonne you supplied from Millmerran was a tonne you didn't supply from Tarong?
A Yes there was a total volume which had to be shared between the two stations, yes.
Q So that [for] every tonne you supplied from Millmerran, the cost per tonne from Tarong increased. Do you understand that?
A Yes, I see your point. We have basically more or less a fixed fee in Tarong, which is marginally reduced depending on the quantity. So it makes the average cost for the quantity lower, depending on the total volume, and we have a cost per tonne with a minimum volume in Millmerran. So the two are linked, and probably along the lines you described before.
2245 Mr Arto was asked whether at any time before he signed the Millmerran contract, he discussed that concept with Mr Ridoutt and Mr Wilson. Mr Arto thought that the concept was coming mostly from the power stations. Tarong was focussed on the revenues. Millmerran was more focussed on securing a minimum amount of flyash off-take. Mr Arto said that he did not discuss, with Mr Ridoutt and Mr Wilson, the notion that a tonne of flyash sold from Millmerran was a tonne not sold from Tarong with the consequence previously mentioned. Mr Arto said that it was obvious that a tonne sold by one station was not a tonne sold by the other and at September 2002 the information available to Mr Arto "was basically [the information] which was presented to the Board meeting [of] an annual fee and this can be also seen as an incentive to increase the volume from Tarong" (T, p 1319, lns 45-47).
2246 Mr Arto was asked whether he agreed with the proposition that he did not think entering into the Millmerran contract could be financially justified by any profit that might be made from the sale of non-concrete grade flyash. Mr Arto said: "I think this was a marginal consideration in making the decision to enter into the Millmerran contract" (T, p 1320, lns 23-24). Mr Arto accepted that "We were not anticipating or - we were not including benefits from this secondary activity in our business case" (T, p 1320, lns 31-32).
2247 Mr Arto accepted that in considering any justification for entering into the Millmerran contract, he did not take into account the notion that one day there might be a drought in Queensland which might have had some effect on the availability of flyash and so therefore Pozzolanic and QCL should "have the Millmerran contract". Mr Arto said that he had never heard about that prospect in any of "our" reasoning.
2248 Mr Arto was taken to para 23 of his affidavit of 17 February 2010 (Ex-35A) in which he says that he recalls participating in the Board's decision to approve entry into the Millmerran contract "on the basis that it would be a sensible way to grow Pozzolanic's business by providing an additional source of flyash". Mr Arto was pressed with the notion that the statement was not true and that he did not regard entry into the Millmerran contract as a sensible way to grow Pozzolanic's business. Mr Arto said that this was only part of the reasons considered at the time. It contributed to Pozzolanic's options to grow the business. Mr Arto observed: "I think there were other reasons also behind our decision" (T, p 1321, ln 28).