Purpose of cl 26.2(a)
101 The primary judge's construction of cl 26.2(a) was supported by an analysis of the surrounding circumstances of the Leases, which were relevant to identifying the commercial purpose of that clause: Judgment [222]-[229]. For the reasons stated at [83]-[89] above, we consider that it was appropriate for the judge to have regard to surrounding circumstances in construing cl 26.2(a). It was common ground before the primary judge that cl 26.2(a) was included in the Leases pursuant to the principles of competitive neutrality. We agree with the primary judge's conclusion that, at the time the Leases were entered into, competitive neutrality had no relevance or application to the provision of aeronautical services and facilities at the Airport Sites. This is because there was no relevant market or competitor for those services: Judgment [222] and [224].
102 We reject the Councils' submission that the CPA and CNPS do not support the primary judge's construction of cl 26.2(a).
103 At the time that the Leases were entered into, cl 3(1) of the CPA stated that the objective of competitive neutrality was to eliminate resource allocation distortions arising out of the public ownership of entities engaged in significant business activities, and to ensure that "[g]overnment businesses do not enjoy any net competitive advantage simply as a result of their public sector ownership". Clause 4(3) dealt with structural reform of public monopolies. As noted at [23] above, at the time, the Airports were public monopolies. Clause 4(3)(b) provided that, before introducing competition into a market traditionally supplied by a public monopoly, the parties to the CPA would undertake a review into "the merits of separating potentially competitive elements of the public monopoly". Clause 4(3)(b) thus expressly referred to a separation of contestable and non-contestable elements of a public monopoly, such as the Airports.
104 The CNPS, which was also issued prior to the parties' entry into the Leases, also emphasised the importance of fair competition specifically where governments provide services "through market based mechanisms that allow actual or potential competition from a private sector provider" (emphasis added). It is true, as the Councils submit, that, in the CNPS, the FAC was categorised as a "Government business enterprise," and consequently the FAC was characterised as having the "principal function of selling goods and services in the market for the purpose of earning a commercial return". However, critically, the CNPS acknowledged that government agencies were involved in both business activities and non-business activities. It made clear that competitive neutrality principles would be applied only to those parts of government business activities which "meet the business criteria" (that is, it would not be applied to the non-business activities of government agencies). The business criteria included that "there must be an actual or potential competitor (either in the private or public sector)".
105 It is thus clear from a review of the CPA and the CNPS that, at the relevant time, the concept of competitive neutrality was intended to apply to "contestable" activities. In the case of the Airports, which were public monopolies, this required inter alia that there be an "off-airport site" competitor for the services supplied on the Airport Sites.
106 It is thus necessary to consider whether the activities undertaken in the Disputed Areas - namely, aeronautical services within the common user services and facilities - were contestable. We find no error in the primary judge's conclusion that they were not.
107 We accept the Lessees' submission that there cannot be relevant competition as between the aeronautical services and facilities that are provided at the Airports and any analogous services provided on land that is not owned by the Commonwealth. Aeronautical services are thus distinct from the facilities and services provided by car parks, retail outlets and concessions, to which the principles of competitive neutrality readily apply. The rationale underlying cl 26.2(a), objectively assessed, is to promote competitive neutrality between businesses operated on and off the Airport Sites. It therefore does not apply to aeronautical services and facilities. Those services and facilities cannot be carried out on "off-airport sites", so that the Lessees do not enjoy any corresponding competitive advantage over businesses operated on private land.
108 Nor was there any satisfactory evidence before the primary judge that, at the time of entry into the Leases, the parties considered that the Lessees' provision of aeronautical services and facilities would be contestable. The only evidence of potential relevance was given by Michael Cullen, Manager, Commercial & Business Development at APAL. Mr Cullen was not, however, qualified to give expert evidence as to the contestability of the aeronautical services provided at the Launceston Airport. In cross-examination at trial, counsel for the Councils put to Mr Cullen that, if Launceston Airport were able to attract an airline or to introduce a new airline service to the airport, that would consequently mean another airport would lose that service or potentially lose the frequency of a service that it otherwise had. Appropriately, he responded by stating that he did not know how airlines made network decisions: Mr Cullen, Trial Transcript 188.14-33. Similarly, when it was put to him that the Launceston Airport was in competition with other airports for the business of airlines, he stated: "I don't know whether I call it competition. Certainly, at the moment there's a finite number of aircraft to attract additional flying": Mr Cullen, Trial Transcript 188.35-38. Subsequently, Mr Cullen accepted that the Bass Strait Ferry was a "potential … diverter of passengers from" the Launceston Airport: Mr Cullen, Trial Transcript 194.29-39. He also stated that a proportion of the market for discretionary travellers, who could choose to fly into the Launceston Airport or the Hobart Airport, "would be contestable", however, this statement was not supported by any further analysis or explanation: Mr Cullen, Trial Transcript 194-5.46-12. Mr Cullen's limited remarks would not have supplied an evidentiary foundation for the primary judge to conclude that aeronautical services and facilities provided by the Airports were contestable.
109 The conclusion that the aeronautical services and facilities supplied at the Airports were not regarded by the parties at the time of contracting as contestable is reinforced by the surrounding circumstances known to the Lessees and the Commonwealth.
110 At the time of entry into the Leases, the provision of aeronautical services and facilities was the subject of a specific regulatory regime which had the features referred to at [47]-[57] above. As noted by the primary judge at Judgment [226], that regime included:
(1) the power of the ACCC to regulate charges for aeronautical services, including by imposing price caps;
(2) Direction 14, which directed the ACCC to undertake monitoring of "aeronautical related services" at the Airports, including monitoring prices, costs and profits relating to the supply of such services;
(3) reg 7.03(1)(b) of the Airports Regulations, which required the lessees to prepare consolidated financial statements reflecting financial details specifically relating to the provision of "aeronautical services" and, separately, "non-aeronautical services". Notably, reg 7.03(4) defined "aeronautical services" as encompassing runways, taxiways, aprons, and roads (all of which were expressly identified as exclusions to "trading or financial operations" in cl 26.2(a)(ii) of the Leases). It also defined "aeronautical services" as encompassing services and facilities in relation to "the embarkation or disembarkation and temporary accommodation of passengers" (such as, for example, toilets and departure lounges) and "the administrative processing of passengers" (such as, for example, check-in facilities). These services and facilities, which were specifically identified as separate from "non-aeronautical services", encompassed the range of services and facilities referred to in the Disputed Areas;
(4) an access regime under the Airports Act, which required the Minister under the Act to make a determination in respect of the Airports as soon as practicable after the 12-month anniversary of their privatisation, making it a "declared service" for the purposes of Part IIIA of the Trade Practices Act;
(5) the power conferred on the ACCC under s 155 of the Airports Act to monitor and evaluate the quality of airport services and facilities, including by reference to performance indicators relating to, among other things, runways, taxiways and aprons (all of which were expressly identified as exclusions to "trading or financial operations" in cl 26.2(a)(ii) of the Leases).
111 It may be accepted that, in some circumstances, the existence of a separate regulatory regime "is not inconsistent with the application of competitive neutrality principles". The relevance of the distinct regulatory regime applying to aeronautical services and facilities set out above, which was known to the parties at the time of entry into the Leases, was that the Commonwealth, via the ACCC, separately regulated the price and quality of aeronautical services and facilities. Such oversight was necessary because the Airports were not meaningfully in competition with one another, nor were they competing with any other modes of transport. So much was expressly acknowledged in the GIM, which was issued in connection with the sale of ten airports, including the Airports. The GIM stated, in section 1.3.4, that the Government had established a framework for economic regulation to apply to core regulated airports, overseen by the ACCC, whose key features included a price cap applicable to aeronautical charges: see at [44(1)] above. The GIM further stated, in section 9.2, that the Government intended to apply a pricing policy with respect to aeronautical charges, whose objectives included protecting airport users from "abuse of market power by airport operators": see at [44(3)] above. This reinforces that such services were not regarded as contestable, and thus could not have been regarded by the parties to the Leases as services to which the principle of competitive neutrality would apply.
112 Similarly, the IMs that were provided to bidders prior to the execution of the Leases drew a clear distinction between "trading" activities and "airport operations": see at [41(2)] above. The Airports' "airport operations" and "trading" activities were separately described under sections 4 and 5 of the IMs respectively: see at [420], [42(5)] above. This contextual material provides strong support for the proposition that, objectively understood, the parties to the Lease understood the concept of "trading" to be distinct from the provision of aeronautical services and facilities.
113 In our view, taken together, the textual and contextual matters referred to above lead inextricably to the conclusion that the phrase "trading or financial operations" in cl 26.2(a)(ii) does not, and was not objectively intended to, extend to the provision of aeronautical services and facilities. The primary judge was correct to so conclude.