63 Prices increased in Townsville notwithstanding an increase in volume because they are governed by a formula in the contract with the Port Authority. They increased in Port Jackson notwithstanding the increase in volume because the operations of Adsteam at that port had for several years been unprofitable and would have continued to have been so in the absence of a price increase. There was no change in the prices charged in Bunbury, Port Botany, Adelaide, Whyalla, Port Pirie and Kwinana notwithstanding an increase in volumes. In real terms, however, the price of towage in the Port of Bunbury has fallen about thirty two per cent. A chart representing the adjustment of real pricing by inflation as measured by the CPI All Groups Index - Perth was reproduced in Frederick's affidavit and is set out below:
64
Similar reductions of prices in real terms have taken place in the other ports in which prices have not increased. There are no ports in which prices have increased in real terms.
65 Frederick noted that prices have increased in Melbourne, despite a modest increase in volume because of a significant improvement in service by the towage service operator, for example, moving to a twenty four hour "on call" service with commensurate cost increases. Prices were not increased in Mourilyan and Lucinda despite drops in volume because of Adsteam's reluctance to increase prices when the port in those cases was only marginally attractive as a port to shipping operators. A price increase would have risked diverting ships to other ports.
66 Prices can be decreased in conjunction with volume increases because of the essentially fixed cost basis for the provision of towage services. The main components of towage costs are:
(a) operating costs;
(b) capital costs;
(c) crew costs;
(d) indirect costs;
(e) other costs.
The only significant costs which vary with capacity are fuel costs.
67 Adsteam's view is that it cannot sustainably increase prices for towage services, notwithstanding falling revenue, by any substantial amount without placing its "competitive position" at risk. According to Frederick, Adsteam is adopting a number of strategies which include the expansion of its towage service operations geographically to obtain economies of scale and scope, the acquisition or development of businesses relating to its core towage businesses and the reduction of costs where it can. Similar strategies are being adopted by towage service operators elsewhere in Australia and internationally. So far as it applies to the position of Adsteam nationally and in the global market place, I accept Frederick's evidence. As already noted, while it may have a bearing on Adsteam's behaviour in the Port of Bunbury, I am not satisfied of its weight in the assessment of actual or prospective competitive processes in that Port and the impact upon them of local decisions about exclusivity and pricing. Adsteam, it should be added, has an extensive agency network in Australia, New Zealand, Hong Kong, China, Papua New Guinea and Fiji. It contemplates the acquisition of Burns Philp Agency business in India. It has actively sought to establish additional towage businesses in those countries.
Contestability and Competition in Relation to the Port of Bunbury
68 There was ample evidence, and no dispute, that the Port of Bunbury can only support one provider of towage services. Ronald Fletcher, the consultant used by Monson's company, West Coast Towage Services, was of that view. Export and import statistics for the period 1990-1998 demonstrated that the Port of Bunbury did not have the trade to sustain more than one towage operator equipped with two designated tugs. Commercial ship numbers visiting the Port were low and did not even average one a day over any twelve month period since 1990. The number of tugs used to service each ship visit would be one or two depending upon variable factors such as ship size, bow thruster configuration, environmental factors and the requirement of the pilot and the ship's master.
69 Figures exhibited to Mr Fletcher's affidavit show the import tonnage of various commodities, largely chemicals, timber and petroleum products, to have been 812,784 tonnes for the year ended 30 June 1988 rising to a high of 929,878 tonnes to 30 June 1990 and 759,000 tonnes for the year ended 30 June 1999. Export tonnages were 4,385,727 tonnes to 30 June 1988, comprising largely alumina, mineral sands and woodchips, rising to 8,221,599 tonnes for the year ended 30 June 1999. The number of commercial vessels using the Port varied little during this period, being 229 for the year ended 30 June 1988 and 275 for the year ended 30 June 1999.
70 Clayton Frederick said in his oral evidence:
"…it is very difficult to split the market between more than one operator, given that each operator has to gear up to provide the service to the entire port." (T 21)
He agreed that in the long term it is commercially and economically impossible for two operators to survive in the Port of Bunbury. The object of any new entrant would have to be to displace the incumbent.
71 There are entry costs associated with the provision of towage services in any port. Eric Shortland, the Operating Manager of Total Harbour Services Pty Ltd, which is part of the Total Marine Services group of companies, gave evidence in this regard. The Total Marine Group is a tenderer for the Bunbury licence. The tender was prepared by Shortland and submitted to the BPA. His Group, he said, had not the opportunity to consider operating at the Port because of the entrenched position of SMS and because the Port could not sustain more than one operator. In so saying he referred to a capital cost of $6 million each for tugs and the ongoing cost of providing a twenty four hour service as required by the tender, including maintaining a crew to man the tugs on that basis. Total Marine Group's principal reason for submitting a tender was that the exclusive licence would enable capital expenditure to be recouped with the added benefit of being able to provide an efficient service at a reasonable price.
72 Shortland asserted that Total Marine Group had been providing towage services at numerous Australian and overseas ports for the past ten years. However, in cross-examination it appeared that he was not aware of any port at which the Group provided towage services as a matter of regularity other than Fremantle. There they have three small tugs used mostly on smaller ships. If awarded the tender, the Group would build the necessary tugs which he expected would take six to nine months. If they were not complete by the commencement of the contract, tugs would be brought in, by charter, from Singapore. He had not investigated the availability of such tugs. Shortland agreed with the proposition, pressed upon him in cross-examination, in advancement of Adsteam's contestability argument, that there was a well established international market for tugs. His knowledge of the towage services industry was, as it emerged in cross-examination, quite limited and I was able to place little weight upon what he said in that respect. His involvement seemed to have been limited to the preparation of a tender for the Bunbury licence. He had not made the decision to submit the tender. That had evidently been made by a superior in the company. The most I can take from Shortland's evidence is that there was a perception on his part, evidently reflecting that of the Group, that the provision of towage services in Bunbury was not viable except under an exclusive licence. That was a conclusion based upon what could best be described as a broad brush view of the market. It was not grounded upon any detailed analysis or knowledge. For that reason it can be discounted. Nevertheless, it remains the perception of a potential competitor that there are high barriers to entry only able to be mitigated by an exclusive licence.
73 Despite the slender empirical foundation for Shortland's broad perspective it was supported by that of another tenderer, Brambles Ltd. James Riordan, the Group General Manager of Brambles Marine, a division of Brambles Ltd, had management responsibility for Brambles Shipping, North Western Shipping and Towage and Jardine Shipping. North Western Shipping and Towage has provided towage services in Queensland, New South Wales, Victoria and Tasmania over the last thirty years. Because SMS had been the only towage operator in the Port of Bunbury for a long time and because of the limited shipping movements at that Port, Brambles Marine had not been interested, until now, in starting a competing towage service at the Port. The major reason for Brambles Marine submitting a tender was that it would be an exclusive licence for at least five years. This would enable capital expenditure on the required tugs, each costing about $3 million, to be substantially recouped.
74 According to Riordan, an exclusive licence, in the relatively low throughput regional port that is Bunbury would allow the BPA to secure the technology and the service it requires at a competitive price through the economies of scale offered to a single operator exclusively performing all the towage services. To enable the BPA consistently to meet service expectations of the Port users in the safest possible environment, the Port must seek, he said, to engage the most modern technology it could afford given the low throughput. His reference here was to propulsion and steering systems which have undergone significant improvements over the last decade. In his opinion the Port could not support a newly built tug. Nevertheless the tender process would provide it with the opportunity to secure relatively young tugs with relatively up to date technology.
75 Commenting generally upon the exclusive licence proposal, Riordan said that the BPA would have the ability to negotiate openly with the successful tenderer and where efficiency gains could be identified benefits could be passed on to Port users through rebates or price adjustments. So if the Port throughput and associated revenue were to exceed the base used in the initial price calculation any associated benefit achieved by the towage operator could be established and shared on an agreed basis. Under an open arrangement between the BPA and an exclusive operator the Port user has the best opportunity to achieve the most cost effective rates. By an "open arrangement" in this context, Riordan meant an arrangement under which labour or productivity efficiencies achieved by the towage operator would be disclosed to the BPA to allow adjustment of rates where cost components of the rates were able to be varied.
76 In elaborating upon his company's willingness to tender for an exclusive licence in Bunbury, Riordan acknowledged that his company had been prepared to submit tenders for a non-exclusive licence at the Port of Geraldton. That, however, was a different set of circumstances. He thought they might have been able to structure a bid giving them the ability to secure the necessary revenue stream. In the event they were unsuccessful in so doing so they didn't enter that port.
77 It was put to him in cross-examination that it was simply easier to have an exclusive licence for five years because the operator would be protected from competition for that period. Riordan said:
"I don't know about easier, but again if there is not some sort of arrangement - whether it be licence, contractual, whatever - or some structure that allows you to support an investment, then you won't undertake that venture or, talking about Brambles, we won't undertake that venture, so I don't know about being easier. It is either we've got a revenue stream or we haven't."
Without the ability to provide the requisite equipment and to meet the associated costs and then to recoup the costs across the available business, life would be "very difficult and it wouldn't make a lot of commercial sense to go into that operation". (T238) When asked whether Brambles was only prepared to bid for exclusive licences, Riordan said it would be either an exclusive licence or a contractual arrangement so structured with a port that they could secure the necessary revenue stream. He accepted that absent an exclusive licence it was hard to get absolute guarantees but the element of risk had to be diminished rather than just having an open port situation before they would tender.
78 Riordan's evidence was impressive and based on evident industry knowledge. It indicated a practically based concern about the necessity of any new entrant to recover costs out of a secure revenue stream if entry barriers were to be overcome.
79 Another tenderer, Riverside Marine, took a similar view of the opportunity offered by the exclusive licence proposal at the Port of Bunbury. Jeffrey Weber, its Manager - Operations, said that his company was keen to tender because the exclusive licence for the period of at least five years would enable it to supply new tugs into the Port based on a reasonably predictable revenue stream and to recoup its costs of capital and the running costs, while providing good, prompt and efficient towage services at the Port at a reasonable price. He said:
"Although Riverside Marine accepts that there will always be a risk associated with the revenue stream in terms of the number of vessels using towage services in the Port, no company, in my view, could commercially justify capital expenditure in excess of $10m in a port where even a 50% market share would result in significant losses. Moreover, it would be difficult to achieve even 50% market share since Stirling Marine has links with one of the major agents in the port who actually books the tugs and relationships with shippers through their operations in other ports throughout Australia."
He saw the request for tender as providing an opportunity for any towage operator to compete on a reasonably equal footing to obtain an exclusive licence with the incumbent having the distinct advantage of knowing precisely the revenue and operating costs whereas they must be estimated by other tenderers. He did not see the maximum price cap in the licence agreement as a major disadvantage if an escalation formula could be agreed. A maximum price cap would ensure that the operator under the exclusive licence continued to provide efficient towage services at a reasonable and competitive price in the absence of on the water competition. He said:
"Riverside Marine is prepared to submit to an open competitive tender such as the BPA tender process, bringing cost benefits and more modern tugs to the port only if there is some certainty about the commercial viability of the towage operation in the Port."
80 While there had been some consideration by Riverside Marines of bids for non-exclusive licences in other ports, the particular ports considered were not seen as able to support competition. While accepting that he had not been able to identify with particularity features of the Australian towage market, Weber did say, and I accept:
"But those things are irrelevant when it comes to the commerciality. What I do understand is the commerciality and what I am saying here is that if you're an incumbent, then the possibility of another operator coming in is very, very low on a non-exclusive basis."
As he put it, an incumbent seeing a new operator coming over the horizon can instantly drop its prices. The reality is that the Australian market is so stable now that nobody actually comes over the horizon because most of the ports are non-exclusive. (T 264) It was put to Weber by the Court that if incumbency itself conferred the kind of security he had spoken of there seemed little difference between having an exclusive or non-exclusive licence. (T266) He did not answer that proposition particularly convincingly. He reasserted his belief that having exclusivity for a period would allow for a competitive situation where a number of operators could bid at the end of that period. But that, it could be said, is equally true of a situation in which a non-exclusive licence is granted and the incumbent's licence not renewed. It was indeed a difficulty of some of the evidence that the term "non-exclusive licence" was used without being assigned a unique meaning. The issue of the de facto exclusivity of non-exclusive licences is discussed further in connection with the evidence of the economic witnesses.
81 Evidence was also given by Hugh Mackenzie of Mackenzie's Tug Services Pty Ltd, which presently provides towage services at the Port of Esperance and has done so for twenty seven years. His company was interested in responding to the request for tenders at Bunbury because it wanted to expand its operations. He believed he could offer a more cost effective operation than is available at present in Bunbury using new vessels to increase operating efficiency to provide ship owners with the most competitive price possible. Mackenzie said in his evidence-in-chief:
"Until now it was not a viable proposition to consider providing towage services at the Port due to the entrenched position of Stirling Marine at the Port and that, in my view, having regard to there being less than 300 shipping movements per year…the Port is not busy enough to sustain more than one towage operator with two tugs."
Mackenzie briefed Fletcher to advise his company on the economic feasibility and viability of providing towage services in the Port and upon receiving Fletcher's advice asked him to assist the company in preparing a tender which was submitted before the close of tenders. His company would not of lodged a tender if the licence were not exclusive due, he said, to the high capital cost of tugs and the low volume of shipping. In his opinion, his company would not be able to achieve the cost savings and efficiencies the Port was looking for unless it had an exclusive licence.
82 Mackenzie was an impressive witness. In cross-examination he distinguished Bunbury where an exclusive licence is on offer from Esperance where he operates under a non-exclusive licence. Esperance has about 120 ship movements annually. At Esperance Port he is only a very small operation. The potential investment in the Port of Bunbury would be very large by comparison. On that basis his company was looking for as much security as it could get and with Bunbury, as he put it:
"…it would either have to be an exclusive deal or it would have to be some sort of contractual arrangement where we would be the sole operator in the port. We just couldn't afford to do it because of the huge investment involved." (T212)
His company is prepared to go into Bunbury with new tugs constructed for the purpose because they would provide a competitive advantage in terms of more cost effective operation than available from the use of secondhand vessels. He accepted that other competitors might have been prepared to bid for a non-exclusive licence at Bunbury on the basis of a lower capital outgoing and perhaps the use of secondhand tugs. Nevertheless, Mackenzie's evidence was, in my opinion, a weighty indication of the extent to which the offer of an exclusive licence for a term would be attractive to a wider range of potential tenderers than would be the case with a non-exclusive licence.
83 Adsteam's attitude to its market position in Bunbury, as everywhere, could be described as strongly protective. Frederick accepted in cross-examination that most aspiring competitors would regard Adsteam as "a fairly effective competitor and wouldn't expect an easy competition". (T30) They would see Adsteam or Stirling Harbour Services as a vigorous competitor and would be in for a fight.
84 Frederick maintained, against contrary suggestions in cross-examination, that there are competitive strategies which could see the Bunbury incumbent displaced. He said:
"It would be very easy to do that. This business depends very much on service and price and if a competitor were able to come in more effectively than we are, more efficiently, with an equivalent or better service at a lower price, it would be extremely difficult for us to compete. I think one of the misconceptions in all of this is that people look at the market share that they would have to sustain for a period as, say, fifty per cent. What is not recognised, I think, in any of the papers that I have seen - that simple mathematics suggest that if that was the case then we would be at fifty per cent as well. We would be in exactly the same position as that new entrant and it would then come down to whoever was the better competitor under the circumstances."(T31)
I do not accept this as a plausible exposition. It fails to acknowledge what, in my opinion, is the real weight of incumbency in a port like Bunbury. The incumbent is protected not only by costs of entry, to which reference is made elsewhere, but also by the capacity, which must be considered by any entrant, of the incumbent to charge lower prices at a level calculated to deter entry but nevertheless higher than prices which might be charged in a fully competitive market.
85 Frederick maintained that he could envisage circumstances in which Adsteam could be displaced from the Port of Bunbury, other than by the grant of an exclusive licence and saw such possibilities every day of the week, "not only in Bunbury, but also in other ports". He described this as driving Adsteam's competitor strategy. He said:
"If we believed that we are invulnerable as you are suggesting, then most of the competitive activities that we undertake would be unnecessary and in fact quite stupid."
Notwithstanding that observation, which may well have application in the larger arena in which Adsteam operates, I do not consider that Adsteam's competitive activities at that national level would be compromised by the grant of an exclusive licence in Bunbury, whether to Adsteam or any other party.