Stirling Harbour Services Pty Limited (ACN 008 767 600) v Bunbury Port Authority

SUBSTANTIAL LESSENING OF COMPETITION - SS 45 AND 47 OF THE ACT

Whether the primary judge applied the wrong test 89 The appellants contended that the learned primary judge erred because there was no support in the evidence or in logic for the proposition that Adsteam (a term which I shall use to refer to one or both of the appellants and to Stirling Marine Services Pty Ltd the company which has for many years provided towage services in the Port of Bunbury) would be the incumbent in the market if the respondent were to put a non-exclusive licence up for tender. 90 In fairness to Adsteam, I think that it is reasonably clear that it made similar submissions to the primary judge - see, for example, AB 468 line 41 to 469 line 12. 91 However, in my view, his Honour did not fall into the error alleged. The key part of his Honour's reasoning can be seen at para 117 where, for the reasons which he there summarised, he found, contrary to Adsteam's assertion, that the market was at most "weakly contestable". It is true that, earlier in his reasons, his Honour had made that assessment principally on the basis of a rejection of the evidence of Mr C J Frederick (Chief Executive Officer of Adsteam) on this point, and an analysis of what had happened in the market to date. But nowhere in para 117 does his Honour assume that if a non-exclusive licence were put up to tender, Adsteam would be the successful tenderer. In my opinion, his Honour was correct in assessing the degree to which the market was a contestable one by referring to what had happened in the past and what was happening at the time of his judgment. As Mr S G Finch SC, senior counsel for Adsteam, observed in argument before us, "one of the most reliable touchstones to the future without [without the exclusive arrangement] is the present". 92 I accept that Adsteam sought to persuade the primary judge (as it sought to persuade us) that there were less restrictive alternatives to the proposed exclusive arrangement - see AB 470-471. 93 However, as the respondent submitted to us, there was no evidence led by Adsteam as to what was likely to occur, either from a regulatory point of view or in the way of future market changes if a non-exclusive licence were offered. In particular, there was no evidentiary basis for suggesting that an alternative form of regulation to that which had applied for the past 16 years might be implemented or that the degree of competition in the market would change. 94 In my view, it was clearly open to his Honour to assume that, in the absence of the exclusive arrangement, there would continue to be only one provider of towing services in the market and that the market was at best only weakly contestable. If his Honour assumed, which I doubt, that Adsteam would, in those circumstances, continue to be the incumbent, then I think he was entitled to do so. The weight of the evidence from the would-be competitors was that it was the prospect of obtaining an exclusive licence which caused them to be interested in tendering. His Honour reviewed this evidence in paras 71 to 82 of his reasons. Mr Hugh Mackenzie of Mackenzie's Tug Services Pty Ltd, whom he described as "an impressive witness", swore to the effect that his company would not be able to enter the market unless there was an exclusive deal. In my view, the most telling single piece of evidence was the fact that for 14 years no firm had applied for a non-exclusive licence to provide towage services in the Port of Bunbury. 95 It may be useful, in the context of contestability, to make a few brief comments about competition. In Adamson v West Perth Football Club (Inc) (1979) 39 FLR 199 at 225 Northrop J held (and I respectfully agree with him) that the term competition when used in s 45 of the Act, is used in a commercial or economic sense. I do not see any basis for suggesting that when the term is used in s 47 of the Act it is used in any other sense. The decision of the Trade Practices Tribunal in Re Queensland Co-operative Milling Association (1976) 25 FLR 169 continues to provide guidance about the meaning of competition. Relevantly for present purposes, the Tribunal explained that competition was a device for controlling the disposition of society's resources, it is a mechanism for firms to discover the services which the community wants and the manner in which they may be supplied in the cheapest possible way. Competition is a dynamic process, a mechanism of enforcement which expresses itself as rivalrous market behaviour. There is a range of competition with perfect competition at one end of the range and undue market power at the other. Effective competition, also known as workable competition, is a situation where rival sellers, whether existing or new potential entrants to the field, keep the market power of the seller or sellers in the market in check by offering or threatening to offer effective inducements. Competition is a process and whether firms compete is very much a matter of the structure of the markets in which they operate. On the subject of market structure, in a passage quoted with approval by Northrop J in Adamson, the Tribunal described the condition of entry as being the most important element of market structure. In a now famous passage the Tribunal explained (at 189): "… it is the ease with which firms may enter which establishes the possibilities of market concentration over time; and it is the threat of the entry of a new firm or a new plant into a market which operates as the ultimate regulator of competitive conduct." 96 Burchett and Hely JJ, in their reasons for judgment, have explained how economists regard contestability in relation to a market which is a natural monopoly. 97 It seems that contestability in that context is a description used by economists to describe the degree to which there are competitive outcomes in a market which has only one supplier and is only likely, in the relevant time-frame, to have one supplier. 98 In my view, and with all due respect to those who hold differently, it is not helpful when applying the provisions of the Act in the context of a natural monopoly, to distinguish between competition for a market and competition in a market. Where there are credible threats of entry by potential competitors, those threats should be regarded as factors operating in the market. The threat of entry operates in the market as a regulator of competitive conduct, as the Tribunal explained in QCMA. The Act is concerned about a substantial lessening of competition (whether in purpose or effect) in a market and it is an unnecessary distraction, in that context, to talk about competition for a market. 99 In the present case, competition "on the water" is really not, in my view, so different from contestability. Occasional competition on the water, though the theory of contestability does not depend on actual competition, would strengthen the case for contestability 100 Adsteam mounted two inter-related challenges to his Honour's findings. First, his Honour was said to have erred in drawing a distinction between the degree to which there may have been contestability at the global and national levels of the towage services market and the lack of such contestability in the Bunbury market. 101 As Burchett and Hely JJ point out, there was ample evidence to support his Honour's findings. Those findings were closely related to his Honour's findings that there were significant barriers to entry into the Bunbury market. It is not necessary for me to refer to all of the evidence summarised in the reasons for judgment of Burchett and Hely JJ. However, I would refer to four matters. The first is Professor Robinson's expert evidence. Professor Robinson (who was called by Adsteam) relied upon Mr Frederick's evidence about the extent to which Adsteam's market conduct was constrained by the perceived threat of entry. But the primary judge did not accept Mr Frederick's evidence on that point. In those circumstances Professor Robinson's evidence on this point simply falls away. 102 Secondly, I think that Adsteam's response (or rather the lack of it) to the respondent's call for Adsteam to consider a reduction in prices is illuminative. On 16 January 1997 Mr D Figliomeni (Chief Executive Officer of the respondent) wrote to Adsteam expressing the respondent's concern that, despite an increase in shipping movements in the port, there had been no price reductions for towage services considered or discussed. Mr Figliomeni swore that he wrote to Adsteam because he had been informed that Adsteam had reduced its charges for towage services at Fremantle. In the letter, Mr Figliomeni asked Adsteam to let the respondent know whether a price reduction was forecast "… given the adequacy of the return demonstrated in the financial statements provided". The letter requested an early response. There was no response and no explanation given for Adsteam's failure to respond to that letter. Mr Frederick's evidence was that prices were not reduced at that time because the increase in volume through the port was not sufficient to justify reductions. 103 Thirdly, the supposed existence of a threat of competition or a perception of such a threat could well be discounted by many years of non-appearance of any such competitor. In some 14 years no competitor had emerged. It was quite clearly open to his Honour to disbelieve Mr Frederick's evidence that Adsteam was constrained in its behaviour in the Port of Bunbury by the perception of threatened competition, when so much time had passed without the threat becoming a reality. 104 Fourthly, the appellants challenged his Honour's conclusions about the sunk costs of an unsuccessful competitor on departure from the market. The appellants submitted that there was no evidence to support his Honour's findings that there was a risk of significant loss or substantial transaction costs associated with resale of tugs on the international market for second-hand tugs. His Honour relied on part of a conclusion of the Australian Competition and Consumer Commission's 1995 Inquiry into the Harbour Towage Declaration which had been exhibited to Mr Frederick's affidavit. The relevant conclusion was in these terms: "With a significant proportion of such expenditure [on tugs] likely to be lost as sunk costs in the event of failure, risks perceived by potential entrants represent a barrier to entry." [I have edited the quotation in paragraph 117 of the primary judge's reasons and paragraph 6.3 of the Commission's Report, which appears at AB 781, to reflect what I think was intended.] 105 The Report also stated that evidence given to the Inquiry suggested that there were limited opportunities in the second-hand tugs market in Australia. 106 Senior counsel for the appellants contended that his Honour's conclusion was not supported by any evidence. In my view, his Honour was entitled to rely upon the conclusion drawn by the Australian Competition and Consumer Commission which was put into evidence by Adsteam. Counsel urged upon us Mr Frederick's evidence to the effect that although the ACCC Report reflected the truth as at 1995, things had changed. That is true, but Mr Frederick's evidence about things changing since the Commission's Report (see AB 505) was in relation to volume discounts. Mr Frederick (see AB 869) did not say that things had changed in the market for second-hand tugs since 1995. He simply challenged, as being wrong, that portion of the Commission's Report which referred to a limited second-hand tugs market in Australia. 107 In my view, it was open to the primary judge to find, as he did, that there was a risk of significant loss or substantial transaction costs if an unsuccessful entrant had to dispose of its tugs. Indeed, as counsel for the respondent suggested to us, the existence of such a risk is a matter of commonsense, hardly needing evidence. 108 I will make two further comments about barriers to entry. Adsteam submitted that the primary judge had erroneously identified the following matters, namely, sunk costs, high capital costs, an incumbent's preparedness to compete aggressively and what it described as a "supposed gap between an entry deterring price" and the competitive price, as barriers to entry. This was because, on Adsteam's submission, sunk costs can only constitute a barrier to entry when they must be incurred by an entrant, but not by an established firm. A similar submission was made in relation to the other costs. In my view, this is too restrictive a definition of what constitutes an entry barrier for the purposes of the present case. As I have said, this is a special case. In my opinion, when assessing the degree of competition in this market, and particularly when assessing entry barriers, it would be appropriate to regard anything which impedes ready entry into the market as being a barrier to entry. The term "entry barrier" is only a label for use when assessing the degree to which firms are able to enter or are likely to enter the relevant market. 109 The very fact that the market is a natural monopoly itself provides a barrier to entry in the sense that the contest is not to enter the market and secure a viable part of it; an entrant has to be prepared to win the whole market from the incumbent. In other types of market an entrant may make a successful entry by securing a lesser market share. 110 The fact that the tender process for an exclusive licence provides an opportunity for a competitor to enter the market and for the buyers in the market (the ship operators) to be able to contract with a new tug service proprietor is, in my opinion, an indication of competition being enhanced rather than lessened substantially. 111 It should be noted that the Act has a relevant ambulatory effect. In the case of engaging in the practice of exclusive dealing, [I focus on this in view of the provisions of s 45(6)], the ongoing provision by the respondent of the benefits of an exclusive towage licence, whether during the term of the initial licence or subsequently, will continue to be assessed in terms of whether, for example, it has or is likely to have the effect of substantially lessening competition in a relevant market. Much will depend, of course, on the degree to which the structural or behavioural characteristics change over time.

SECTION 46 - WHETHER THE RESPONDENT EXERCISES MARKET POWER WHEN GRANTING AN EXCLUSIVE LICENCE 112 I differ, respectfully, from the views held by the primary judge and by Burchett and Hely JJ to the effect that the respondent, when granting the exclusive licence, is exercising regulatory power, rather than market power. The question arises because, when s 46(1) is read with s 46(4)(a), the proscription of that section is the misuse of a substantial degree of market power. The term market power is not defined in the Act. However, s 46(4)(c) relevantly provides that a reference to power in relation to a market is a reference to power in that market either as a supplier or as an acquirer of goods or services in that market. It is true that the respondent neither supplies nor acquires towage services. However, the parties are agreed (and the primary judge accepted) that the market could be considered at two functional levels. One of those functional levels was the provision of the right to supply towage services. That is the relevant market in which to assess whether the respondent has market power. 113 The evidence suggests that the respondent intends to extract a premium for the grant of the exclusive licence. In the document known as the "Project Scope", that premium was described as a "licence fee" (see AB 1261). In the evaluation of tenders, the amount of licence fee payable to the respondent was given a 10% weighting compared, for example, to a 50% weighting for the proposed prices for the towage services. In my opinion, the respondent was a supplier of services in the relevant market and it had near-absolute power as a supplier of those services in that market. I think that when the respondent grants an exclusive licence to a successful tenderer it will be exercising a substantial degree of market power in the relevant market. The fact that the eventual source of such power may be statutory does not, in my view, preclude it from being market power. The proscribed anti-competitive purposes may relate to the market in which the market power exists or any other market - see s 46(1)(a), (b) and (c). 114 However, I agree with the conclusions of the primary judge and Burchett and Hely JJ (and their reasons for those conclusions) that the respondent is not offering an exclusive licence for any of the purposes proscribed by s 46.

FURTHER EVIDENCE 115 I agree with Burchett and Hely JJ that the reasoning in Duralla Pty Limited v Plant (1984) 2 FCR 342 will have to be reconsidered at some time in the light of the two High Court authorities referred to in paragraph 76 of their reasons. For the reasons which their Honours give at paragraphs 80 and 81 I agree that the appellants' motion that the Court should receive further evidence should be dismissed. Furthermore, I think that the risks of injustice to the appellants by our refusal to receive such evidence are minimized by the matters to which I refer in paragraph 26 above. 116 The appeal should be dismissed with costs. I certify that the preceding eighty-five (85) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Carr.

Counsel for the Appellants: Mr S G Finch SC with Mr P D Evans

Counsel for the Respondent: Mr C Colvin with Mr C Stevenson

Solicitor for the Respondent: Messrs Mallesons Stephen Jaques