FEDERAL COURT OF AUSTRALIA Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 38 TRADE PRACTICES – exclusive dealing – contract arrangement or understanding substantially lessening competition – abuse of market power – statutory port authority – grantor of licences for provision of towage services in port – current regime involving non-exclusive licence – tenders called for exclusive licence for fixed term with maximum price schedule – whether purpose, effect or likely effect of substantially lessening competition in a market – nature of market – market for provision of towage services or right to provide towage services in regional port – natural monopoly – whether contestable market – barriers to entry – sunk costs – capital costs – costs of displacing incumbent – competitive process in tendering for exclusive licence – no substantial lessening of competition – no exercise of market power in statutory function – no proscribed purpose in exercising statutory function. Bunbury Port Authority Act 1909 (WA) Port Authorities Act 1999 (WA) ss 32, 33, 34, 35 Trade Practices Act 1974 (Cth) ss 45, 46, 47 Prices Surveillance Act 1983 (Cth) J Fenwick & Co Pty Ltd v Adelaide Steamship Industries Pty Ltd (1976) ATPR 35-200 cited Howard Smith Industries Pty Ltd (1991) ATPR (Com) 50-511 cited Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) 64 FLR 238 applied Outboard Marine Australia Pty Ltd v Hecar Investments No 6 Pty Ltd (1982) 44 ALR 667 cited Eastern Express Pty Ltd v General Newspapers Pty Ltd (1991) ATPR 41-128 cited Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd (1982) 44 ALR 557 cited Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union (1979) 42 FLR 331 cited Sodastream Ltd v Electronics (Broken Hill) Pty Ltd (1985) 60 ALR 427 applied John S Hayes & Associates Py Ltd v Kimberly-Clark Australia Pty Ltd (1994) ATPR 41-318 cited Plume v Federal Airports Corporation (1997) ATPR 41-589 cited OD Transport Pty Ltd v Western Australian Government Railways Commission (1986) 13 FCR 270 cited STIRLING HARBOUR SERVICES PTY LTD, ADSTEAM MARINE LTD v BUNBURY PORT AUTHORITY W89 of 1999 FRENCH J 28 JANUARY 2000 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W89 OF 1999 BETWEEN: STIRLING HARBOUR SERVICES PTY LTD First Applicant ADSTEAM MARINE LTD Second Applicant AND: BUNBURY PORT AUTHORITY Respondent JUDGE: FRENCH DATE OF ORDER: 28 JANUARY 2000 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The application is dismissed. 2. The Applicants are to pay the Respondent's costs of the application. 3. Liberty to apply for directions in relation to the basis for taxation of costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W89 OF 1999 BETWEEN: STIRLING HARBOUR SERVICES PTY LTD First Applicant ADSTEAM MARINE LTD Second Applicant AND: BUNBURY PORT AUTHORITY Respondent JUDGE: FRENCH DATE: 28 JANUARY 2000 PLACE: PERTH REASONS FOR JUDGMENT Introduction 1 On 17 July 1999 the Bunbury Port Authority ("BPA") called for tenders for the grant of an exclusive licence for a term of five to seven years to provide towage services to shipping operators using the Port of Bunbury. The present incumbent under a non-exclusive licence is Stirling Harbour Services Pty Ltd, a subsidiary of Adsteam Marine Ltd ("Adsteam"). Those companies claim that the BPA is engaging in anti-competitive conduct by entering upon this process and have commenced proceedings in this Court under Part IV of the Trade Practices Act 1974 (Cth) to prevent it from continuing the tender award process. The Bunbury Port Authority 2 The BPA was originally established as an incorporated body under the Bunbury Port Authority Act 1909 (WA). That Act was superseded by the Port Authorities Act 1999 (WA) and the BPA established under s 4 and Schedule 1 of that Act as a body corporate with perpetual succession. The functions of port authorities under the Port Authorities Act include: (a) facilitating trade within and through the port and planning for its future growth and development; (b) undertaking or arranging activities that will encourage and facilitate development of trade and commerce generally for the economic benefit of Western Australia through the use of the port and related facilities; (c) controlling business and other activities in the port or in connection with its operations; (d) responsibility for the safe and efficient operation of the port; (e) doing things that the Board determines to be conducive or incidental to the performance of these functions. The Act also provides that each port authority has exclusive control of its port, subject to any direction of the Minister (s 32) and is to perform its functions in accordance with its strategic development plan and statement of corporate intent as existing from time to time (s 33). Each port authority must act in accordance with prudent commercial principles and endeavour to make a profit (s 34). It may arrange for port services to be provided, including towage (ship handling, tugboat operations) (s 35(2)(d)). Each port authority may issue licences and administer licence schemes for activities and things in accordance with the regulations (s 35(2)(o)). Before issuing a licence giving a person exclusive right to provide port services of a particular kind, the authority must obtain the Minister's approval (s 35(4)). It is a condition of such approval that the Minister considers that the public benefits of exclusivity exceed the public costs. On providing such approval, the Minister must table in Parliament, within fourteen days, full reasons for his decision to grant an exclusive licence (s 35(5)). 3 The Port of Bunbury consists of an inner and outer harbour. There are two berths in the outer harbour and four berths in the inner harbour. Service facilities and activities available at the Port include towage services which are in private hands under a non-exclusive licensing arrangement between the BPA and the service provider. Facilities and services are provided for vessel movements into, out of and within the Port, cargo handling, land transport and general port services by the BPA, the State Government and by private service providers. The BPA provides, and is responsible for, the provision of navigation aids such as shipping channels, fairways, breakwaters and similar works, turning basins and common user wharves, navigation information and radio telephone services. Since 1 October 1999 it has been responsible for navigation aids which were previously a State Government responsibility. Pilotage services are provided by the BPA and a private operator. Towage, mooring, provisions and stores and bunkering are private operations. Cargo sheds and silos, stacking areas, cranes and handling appliances and wharves are provided by the BPA and by private authorities. Stevedoring and the provision of tank farms for liquid cargoes are private operations. 4 Users of the Port of Bunbury pay to the BPA charges for navigation services, pilotage, berth hire, waste disposal, electricity and water. Infrastructure services are paid by cargo owners per tonne of cargo. 5 Towage services include the use of tugs to assist ships in entering and leaving the harbour, pushing them sideways for berthing and unberthing, for turning and other necessary manoeuvres. Ordinarily ships entering the harbour are required to do so with the assistance of two tugs. This is a general requirement of the Harbour Master, whose responsibility at the Port includes controlling the movement and mooring of vessels in the Port. Ordinarily he requires that two tugs be used for each ship movement unless he gives permission for a master to enter or depart or move within the Port without tug assistance or with only one tug. The number of tugs to be used is based upon considerations of safety, protection of the environment and infrastructure services. Some ships require less tug assistance than others. Ships which have bow thrusters, which are propulsion units near the bow, may be able to berth, unberth and turn with less assistance than ships without bow thrusters. Ships with twin screws have more manoeuvrability for limited sideways movement, by use of one or other of the screws, than single screw ships. About 15% to 20% of ships using the Port have bow thrusters. In normal berthing, unberthing and turning processes tugs take up station forward and aft of the vessel. It is possible for some smaller vessels, less than 100 metres in length, to berth and unberth without tug assistance in some circumstances. Whether they are permitted to do so will depend upon weather conditions, the volume of shipping in the Port, the degree of difficulty of manoeuvring within the Port and tying up to a particular berth and the draft of the vessel. No more than five to eight per cent of shipping movements are permitted without the assistance of tugs. Of the 583 shipping movements at the Port in 1998-1999, about 573 required the assistance of one or two tugs. The Current Agreement for Towage Services 6 On 1 July 1986, the BPA made an agreement with Elder-Prince Marine Services Pty Ltd ("EPM") for the provision of tugboat services at the Port for a term of fourteen years. The agreement could be determined upon two years notice by either party. It replaced an earlier agreement between the BPA and EPM which was made in July 1977 and under which the company provided tug services at the Port using the ship handling tug "Capel". In 1986 there were two ship handling tugs stationed at the Port, namely the Capel and the Geograph. The 1986 agreement provided for the Geograph to be replaced by the Elkin, a tug then under construction for EPM. The Elkin and the Capel were to be stationed at the Port to provide towage assistance and other services, including fire-fighting services within the Port. Arrangements under the 1977 agreement whereby the BPA subsidised EPM in respect of the operation and management of the Capel and Geograph were discontinued. The 1986 agreement was for a period of fourteen years commencing from the commissioning date of the Elkin and continuing from the expiry of that period subject to determination by two years written notice. EPM was obliged to, inter alia: "[i]n accordance with all reasonable requests and demands of owners or masters of ships entering or leaving within the Port or the reasonable requirements of the Authority provide such tug services as are required to be provided by the Authority for the Port." The agreement provided for the rates that could be charged for services. They were to be determined from time to time by EPM and approved by the BPA and structured so as to reimburse EPM in full for all operating costs of the tugs which were defined in the agreement (cl 5.1). The rates would be reviewed in the months of April and October in each year, subject to approval by the BPA (cl 5.2). In the event of disagreement on rates which could not be resolved, they would be determined by arbitration (cl 5.3). 7 EPM was acquired by Stirling Harbour Services in 1986. That company is owned, as to fifty per cent each, by wholly owned subsidiaries of each of Adsteam and Howard Smith Ltd. After EPM was acquired by Stirling Harbour Services, its name was changed to Stirling Marine Services Pty Ltd ("SMS"). The 1986 agreement is administered by Stirling Harbour Services on behalf of SMS. Since the execution of the 1986 agreement, SMS has been the sole provider of towage services at the Port. Those services have, pursuant to the agreement, been provided using the Elkin and the Capel, which are 42 tonne bollard pull tugs. Bollard pull is the maximum pull in tonnes that a tug can generate. The present day cost of replacing these tugs is estimated at $5.8 million for the conventional twin screw, which is the Capel and $6.8 million for the Z-peller type, which is the Elkin. Towage services at Bunbury – Volume and Rates 8 Quantitative features of the provision of towage services at Bunbury were set out in an Agreed Statement of Facts. The numbers of vessels using the Port since 1990 were as follows: "Commercial vessels 90 91 92 93 94 95 96 97 98 99 252 242 247 257 258 273 274 273 294 275 Other vessels 90 91 92 93 94 95 96 97 98 99 16 4 5 4 4 6 4 6 8 6" Both tugs have been on call twenty four hours a day each day of the year. 9 Bunbury's principal exports are alumina, mineral sands, woodchips, silica sand and spodumene. Its principal imports are caustic soda, phosphate rock, mineral sands, petroleum coke and methanol. The nearest ports are Fremantle and Kwinana, both of which are within the boundaries of the Fremantle Port Authority. These are 100 nautical miles north with a round trip steaming time of about twenty hours plus time in port required to carry out specified jobs. The next closest port is Albany, 250 nautical miles to the south and east with a round trip steaming time of about two days plus time in port to carry out specified jobs. It is common ground that it is not feasible to use tugs stationed at Bunbury to service other ports or for tugs stationed at other ports to service Bunbury because of the distance from alternative ports and the need for tugs to be on two hours' notice. The high cost of fuel and additional regulatory crew for ocean passage would require high towage tariffs and price services to other ports out of the market. 10 Rates for towage at Bunbury are calculated by reference to particular ranges of vessels' Gross Registered Tonnage (GRT) so that rates increase in accordance with ranges of GRT increases. The rates charged by SMS since 1 November 1993 are as follows: RATE PER TUG ORDERED Vessel GRT In & Out One way Port (tonnes) $ Only Movements $ $ Under - 3000 1,834 1,348 876 3001 - 5000 2,170 1,624 1,064 5001 - 7000 2,553 1,879 1,249 7001 - 9000 2,935 2,209 1,436 9001 - 11000 3,378 2,524 1,643 11001 - 13000 3,861 2,891 1,895 13001 - 15000 4,329 3,276 2,126 15001 - 17000 4,963 3,693 2,424 17001 - 20000 5,445 4,087 2,658 20001 - 25000 5,705 4,338 2,794 25001 - 30000 6,128 4,614 2,994 30001 - 35000 6,556 4,909 3,231 35001 - 40000 7,069 5,224 3,590 40001 - 50000 7,562 5,564 3,710 Over - 5000 8,120 5,967 3,955 *Shifting from Inner to Outer Harbour or In and Out Rates Apply vice versa Vessels Not Using Their Own Main 50% surcharge on schedule Engines rates (per tug) Waiting Times $881 per hour per tug – after first two hours Cancellations/Deferrals Orders & Cancelled/Deferred in Overtime $881 per tug Hours Attending vessel & not required 50% of schedule rates 11 In the financial years 1988-89, 1994-95 and 1998-99 the ranges of GRT of vessels using the Port of Bunbury were as set out in the following table: Range of GRT ('000) Under 3 5 7 9 11 13 15 17 20 25 30 35 40 Total 3 to to to to to to to to to to to to to Per 5 7 9 11 13 15 17 20 25 30 35 40 50 Year Fin Yr Number of Ships in Each Range 88/ 5 14 7 16 7 10 22 43 74 10 18 17 243 89 94/ 5 16 4 7 8 10 5 25 27 74 30 30 39 280 95 98/ 3 5 12 9 5 4 8 17 23 42 50 21 75 6 280 99 Total 13 35 16 23 29 21 23 64 93 190 90 69 131 6 803 Per Range 12 Since 1988 there have been no increases in the nominal rates charged by SMS for the provision of towage services in the Port of Bunbury. It appears to be common ground that this represents approximately a thirty per cent reduction in the real value of the rates albeit mitigated by an increase in the volume of towage services required at the Port. Notwithstanding this, in January 1997, the Chief Executive of the BPA, Domenico Figliomeni, wrote to SMS expressing concern on behalf of the BPA that despite an increase in shipping movements in the Port, there had been no price reductions for towage services considered or discussed. Figliomeni said in evidence that he had been informed that Adsteam had reduced its charges for its towage services at Fremantle. He received no reply to his letter although he raised the matter verbally with Alan Perkins of SMS and Clayton Frederick, the Chief Executive Officer of Adsteam, on a number of occasions. Figliomeni contended in his letter of 16 January 1997 that towage is a significant component of port operating costs and it was necessary that while the rates be maintained at levels sufficient to give SMS an adequate return, it was equally necessary that they be set at a level which would allow Bunbury to compete with other ports. Termination of the Current Towage Agreement 13 On 24 February 1998 a meeting of the Board of the BPA was held. The tug services agreement which was due to expire on 30 June 1999 was discussed at that meeting, the Board being aware that two years' notice of termination was required if the agreement were to be ended. The Board resolved in the following terms: "that Stirling Marine is given the appropriate two-year notice in accordance with the tug contract, advising expiry of the contract on 30 June 2000 and that tenders will be advertised for the service." At that meeting also the Board discussed the desirability of importing performance criteria into its future towage contracts and making continuity of service an essential element of them. Early in March 1998, Figliomeni informed SMS of the decision to terminate the tug services agreement and to call tenders. This was confirmed in writing on 16 March 1998. 14 On 26 August 1998, the Board met in a strategic planning session to consider its implementation of the policy of the Minister for Transport of the West Australian Government which was summarised in a Statement of Vision for Port Reform throughout Western Australia, including the following elements: "the function of public sector port authorities should become focussed on maintaining the strategic direction of Ports. These functions include: . Preservation of the value of (State-owner) assets . Facilitation of trade . Statutory responsibilities/duties; and . Contract management The contracting out of the management and operations of regional ports remains a priority." The meeting produced a document setting out options and issues for future planning, including what were described as "Key Issues for Contracted Services". These related to key requirements to be addressed in developing invitations to tender. One of those, under the heading "Monopolies/Income", involved the proposition that exclusive contracts should be awarded to successful contractors on terms of three years with two year options. The Proposal to Grant an Exclusive Licence for Towing Services 15 Inquiries were made with the ACCC before the Board decided to proceed with calling tenders for an exclusive licence for the provision of towage services. The decision does not appear to have been recorded with clarity, but the minutes of the Board's meeting held on 30 March 1999 include the following: "Towage Members were advised that a project scope requesting tenders for the provision of towage services will be prepared and that a number of issues need to be considered. Members indicated that a licence fee should be paid and that continuity, performance indicators and proposed pricing are integral and must be included in the tender document. The proposed contract would be for a five year period commencing 1 July 2000 with an option for a two year extension. ACTION: General Manager" Figliomeni prepared tender documents comprising a Tug Contract Project Scope and a Towage Licence Agreement. He used a Stevedoring Licence, previously granted by BPA, as the basis for the Towage Licence Agreement. Members of the BPA Board were provided with copies of these documents on 11 May 1999. On 13 May 1999, the proposed request for tender was sent to the Australian Chamber of Shipping, Worsley Alumina and Alcoa, the latter being major port users. Their comments on the document and "its suitability or otherwise together with any amendments…necessary to increase the efficiency in the Bunbury Port" were sought by 10 June 1999. No replies were forthcoming. On 13 July the Board met again and agreed that when tenders were received a copy of the draft agreement should be made available to members for further discussion and consideration. 16 In the course of the Board's discussion factors relevant to the proposed grant of an exclusive licence were considered. They included the following: (a) That the low number of vessels visiting the Port was insufficient volume to justify more than one towage service provider. (b) That the capital cost of providing suitable tugs was estimated to be in excess of $4 million each. (c) The necessity to allow a sufficient period for capital recovery by the successful tenderer. (d) That any purported competition from a non-exclusive licence would not be real or result in sustainable reductions in price or improvement in efficiency due to the low volume of shipping movements. (e) That the public interest in efficiency and reasonable price levels be maintained, and an exclusive licence would provide the BPA with the ability to ensure these objectives by way of key performance indicator assessment and a maximum price cap on towage charges. (f) That tenders for an exclusive licence on a relatively short term and regular basis would ensure the most efficient and competitive service for the Port. (g) That allowing more than one provider would increase prices and may compromise Port efficiency if the tugs were not capable of performing the task, or there was insufficient business to enable two separate tug operators to trade profitably. (h) That there is only sufficient wharf space available at the Port to moor two tugs. (i) That if two providers were allowed with one tug each, one or both would fail because operations with one tug only would not be viable given the number of shipping movements at the Port. (j) The need to ensure that price increases reflect real cost increases. (k) The need to ensure a low cost efficient service. (l) Providing some degree of certainty of towage charges to Port users over the term of the licence to ensure that the Port remains competitive with other ports. (m) That it is in the public interest that an operator with an exclusive licence not be able to charge monopoly prices to the detriment of the Port and the users of its facilities and services." 17 The tender was advertised on 17 July 1999 nationally and internationally. The advertisement elicited eleven expressions of interest. Each party was sent documents comprising the Tug Boat Project Scope and the draft Towage Licence. The Tender Documents 18 Prospective tenderers received from the BPA a document entitled "Tug Contract Project Scope" and another entitled "Port of Bunbury Towage Licence Agreement". The Project Scope document gave a general introductory statement about the nature of the BPA and a description of the Bunbury Port which was said to be "primarily a bulk cargo port". The berths comprising the Port were described and the objectives of the Authority in operating the Port. Clause 3 of the Scope document said: "The successful tenderer will be offered a five year exclusive Licence Agreement to provide towage services in the Bunbury Port. An option for a two year extension subject to key performance indicators (KPIs) and licence requirements being achieved will also be possible if agreed by the parties." In relation to the draft Towage Licence Agreement document, respondents were told that if they wished to alter any of the terms of the draft licence they should clearly state which term they would wish to alter and provide a reason for the alteration together with suggested alternative wording. The BPA reserved the right to change any of the licence terms at any time until final agreement had been achieved (cl 3.1). The payment of a licence fee was required and the amount of the licence fee offered by the tenderer would be weighted for the purposes of the tender evaluation. Clause 3.3, relating to pricing requirements, provided: "It is the Authority's expectation that prices for the provision of towage services in the port will reduce from those currently available. The Licensee will be required to provide competitively priced services to port users throughout the term of the Licence and the extension option if exercised. The respondent must include in their submission the prices that will be charged throughout the term of this Licence. Prices included with the submission are the maximum prices that may apply during the term of the Licence. In seeking any price increase beyond the tendered maximum the Licensee will be required to submit a proposal to the Authority Board for its review and consideration. The Board may or may not give approval for the price increase to take effect. Submissions that do not include the pricing schedule will be non conforming tenders and not considered further." 19 The Project Scope document set out evaluation criteria, each of which was to be weighted for the purpose of evaluation. These were as follows: ". Amount of licence fee payable to the Authority (10% weighting) . Prices charged for towage services (50% weighting) . Provision of substitute tug (5% weighting) . Qualitative services (35% weighting)" Tenders that did not meet the required guaranteed continuity of services, provision of a substitute tug to guarantee availability of a minimum of two appropriate tugs or which could not provide services twenty four hours a day, 365 days per year would be declared non-conforming tenders and omitted from further consideration. 20 The qualitative evaluation criteria which attracted the 35% weighting were elaborated in cl 7.1 of the Project Scope document as follows: "For qualitative services tenders will be assessed on the basis of: . Relevant experience and corporation capacity (5% weighting) . Continuity of towage services (20% weighting) . Provision of services 24 hours per day 365 days per year (10% weighting) To meet the requirement of continuity of towage services respondents are to provide the required services details and copies of agreements which commit the Licensee and its employees to the provision of services at all times." 21 The operative clause of the draft Towage Licence Agreement relating to the grant of the licence was in the following terms: "2.1 The Authority: (a) appoints the Licensee to provide the Towage Services in the Port during the Term and, subject to the terms of this Licence, agrees that the Licensee will be the only provider of Towage services in the Port during the term; (b) grants to the Licensee the right to enter the Port to such extent as is necessary to provide Towage Services; (c) grants to the Licensee the right to use the designated Port Authority wharves for the purpose of mooring the tugs but the Licensee accepts that the tugs will be required to be moved from time to time to accommodate shipping and Port needs." 22 The term of the licence was expressed to begin on the commencement date and continue "(unless terminated earlier) until 30 June 2005" (cl 3.1). If the licensee wished to extend the term for a further two years then no earlier than twelve months and no later than six months before the end of the term, the licensee was to deliver to the BPA a written request for extension of the term. (cl 3.2) The BPA's consent to an extension of a term would only be given if the licensee had met all of the Key Performance Indicators (KPIs) and licensee obligations but would not unreasonably be withheld. 23 Clause 11 of the Towage Licence Agreement provided for payment of a licence fee to the BPA throughout the term of the licence. Clause 12, relating to performance audits and KPIs, was in the following terms: "12.1 The Licensee will maintain accurate and complete records on all KPIs so that it can be determined the extent to which KPIs have or have not been met. These records are to be audited on an annual basis by an independent auditor. 12.2 The Authority may contact users of the Towage Services throughout the Term to confirm the Licensee's compliance or non-compliance with the KPIs. 12.3 (a) The Licensee will have failed to meet the KPIs if an operational audit by the Authority discloses that the Licensee has not met each and every KPI which is critical to this Licence; (b) The onus of satisfying the Authority that the Licensee has met the KPIs during any period rests with the Licensee and it will be reasonable for the Authority to conclude that the Licensee has failed to meet the KPIs if the Licensee fails to provide sufficient information requested by the Authority to demonstrate compliance." There was provision in cl 12.4 for the BPA to give the licensee notice stating whether or not it had met the KPIs during the preceding period. The Key Performance Indicators set out in Schedule 1 of the Towage Licence Agreement were as follows: 1. Demonstrated continuity of towage services – this was designated as critical. 2. Reduction in the level of costs to Port users. 3. Number of verified complaints made by customers of the licensee to the Authority. 4. Improving and enhancing the existing quality standard in the provision of Towage Services to Port users. 5. Compliance with all operational and safety requirements. 6. Co-operation with the management of the Authority. 7. Fulfilling all of the obligations and undertakings required under the Licence. 24 In relation to the pricing of towage services, this was governed by cl 13 in the following terms: "13.1 Subject to the Regulations and paragraph 14.2 [this should have been a reference to 13.2], the maximum amount that the Licensee may charge for each Towage Service is specified in Schedule 3 ("Maximum Charges"). 13.2 The Licensee may submit a proposal to the Authority for consent to increase the Maximum Charges. Approval of the proposal may or may not be given by the Authority and in any event will be subject to the requirements of legislation in force from time to time. 13.3 The Licensee agrees that charges will be reviewed within 12 months from the commencement date of this Licence to determine the possibility of reducing charges." There was no mechanism set out for resolving any dispute about the reduction of charges. 25 Termination of the agreement was covered by cl 17 which provided for notice of default to be given if there were an "Event of Default by the Licensee". This covered events relating to insolvency, the failure of a licensee to make any payment required under the licence within seven days after notice of failure to pay and the "failure of the Licensee to perform, keep or fulfil any of the other terms of the Licence, including failure to meet a critical KPI and the continuance of that default, subject to the provisions of clause 17.2, for a period of 7 days after notice of failure to perform." Clause 17.2 provides the notice of default and the possibility of the licensee curing the default. Adsteam's Reaction to the Exclusive Licence Proposal 26 In August 1999 the Board received representations from Frederick strongly critical of the terms of the proposed licence document. These representations included a letter dated 20 April 1999. In the letter Frederick criticised the tender proposal on commercial grounds relevant to the interests of Adsteam. He also asserted that the proposal would be "in breach of several sections of the Trade Practices Act" and "contrary to the National Competition Policy". There was a thinly veiled threat of legal action. He attached an agreement which Adsteam had been prepared to sign with the Port Kembla Port Corporation. That agreement had also been adopted by the Newcastle Port Corporation. 27 The BPA sought legal advice from their solicitors, Mallesons Stephen Jaques. On 27 August the Western Australian State Committee of the Australian Chamber of Shipping wrote to the BPA expressing concerns raised by "a number of Chamber Members…about the Bunbury Port Authority tender for towage services." The letter requested the BPA to reconsider "the apparent exclusivity of the contract term". In response Figliomeni wrote to the Chamber advising that change to the tender was not possible at that late stage given that the closing date for tenders was 9 September. The letter stated, inaccurately, that SMS had had an exclusive licence for the provision of towage services in the Bunbury Port for about fourteen years. It went on: "At no stage did this exclusivity arise as an issue, and in the Authority's view, the exclusivity has best served the interests of port users. It is therefore necessary to continue with this approach as it gives port users the opportunity to benefit from productivity and efficiency gains." In truth the position was that there was no express exclusivity in the licence granted under the 1986 agreement and the tender proposal represented a departure from past practice in that regard. It was an illuminating slip for it may well have represented Figliomeni's perception of the reality of Adsteam's incumbency. This is related to the notion of a de facto exclusivity attached to non-exclusive licences discussed later in these reasons. 28 On 30 August 1999, Freehill Hollingdale & Page, Solicitors, wrote to the BPA on behalf of SMS enclosing a copy of a letter written to the Minister for Transport. They also threatened proceedings in the Federal Court unless an undertaking was given by the BPA to take no further steps in relation to the request for tender and that any tenders received should be returned unopened to the tendering party by post accompanied by notification of the terms of the undertaking. The BPA Board met on 1 September 1999 and resolved: "1. The Port Authority continue with the exclusive tender process for the provision of towage services in the Bunbury Port, subject to there being no legal impediment. 2. That it is necessary to ensure that the best result is obtained for the port and port users." Following the meeting of the Board, Figliomeni instructed Mallesons, Stephens Jaques on 6 September 1999 to inform Freehill Hollingdale & Page the BPA would not give the undertaking requested in the Freehill's letter. By the closing date of 9 September, tenders had been received from six parties. One of these was Stirling Harbour Services, the applicant in these proceedings, albeit under protest. Of the other five tenderers the following were prepared publicly to disclose their identities in the Court: 1. Total Marine Group 2. Brambles Marine, a division of Brambles Ltd 3. River Wisj Pty Ltd, set up as a joint venture company by Riverside Marine Transport Co Pty Ltd, trading as Riverside Marine and Wisjmuller International Towage BV. 4. Mackenzie Tug Services Pty Ltd Commencement of Proceedings 29 On 6 September 1999 an application was filed in this Court by Stirling Harbour Services and Adsteam, claiming relief under ss 80 and 87 of the Trade Practices Act 1974 (Cth). They sought a declaration that the letting of the proposed tender would be contrary to law in that it would involve a contravention by the BPA of ss 45, 46 and 47 of the Trade Practices Act and of the Competition Code. Declarations were also sought impugning the decision to issue the request for tender as beyond power and an improper exercise of power and similarly impugning prospectively any decision to let the tender. Injunctive and interlocutory relief was claimed. Undertakings were subsequently given by the BPA effectively freezing the tender process pending the hearing and determination of these proceedings. The Statutory Framework – The Trade Practices Act 1974 30 The applicants rely upon ss 45, 46 and 47 of the Act to support their claims for relief. It is convenient, at this point, to set out the relevant parts of those sections. 31 Section 45 in the relevant parts provides: "45(2) A corporation shall not: (a) make a contract or arrangement, or arrive at an understanding, if: (i) the proposed contract, arrangement or understanding contains an exclusionary provision; or (ii) a provision of the proposed contract, arrangement or understanding has the purpose, or would have or be likely to have the effect, of substantially lessening competition; or (b) give effect to a provision of a contract, arrangement or understanding, whether the contract or arrangement was made, or the understanding was arrived at, before or after the commencement of this section, if that provision: (i) is an exclusionary provision; or (ii) has the purpose, or has or is likely to have the effect, of substantially lessening competition. 45(3) For the purposes of this section and section 45A, "competition", in relation to a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding, means competition in any market in which a corporation that is a party to the contract, arrangement or understanding or would be a party to the proposed contract, arrangement or understanding, or any body corporate related to such a corporation, supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the provision, supply or acquire, or be likely to supply or acquire, goods or services. 45(4) For the purposes of the application of this section in relation to a particular corporation, a provision of a contract, arrangement or understanding or of a proposed contract, arrangement or understanding shall be deemed to have or to be likely to have the effect of substantially lessening competition if that provision and any one or more of the following provisions, namely: (a) the other provisions of that contract, arrangement or understanding or proposed contract, arrangement or understanding; and (b) the provisions of any other contract, arrangement or understanding or proposed contract, arrangement or understanding to which the corporation or a body corporate related to the corporation is or would be a party; together have or are likely to have that effect." 32 Section 46 in the relevant parts provides: "46(1) A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of: (a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market; (b) preventing the entry of a person into that or any other market; or (c) deterring or preventing a person from engaging in competitive conduct in that or any other market." 33 Section 47 provides in the relevant parts: "47(1) Subject to this section, a corporation shall not, in trade or commerce, engage in the practice of exclusive dealing. . . . (4) A corporation also engages in the practice of exclusive dealing if the corporation: (a) acquires, or offers to acquire, goods or services; or (b) acquires, or offers to acquire, goods or services at a particular price; on the condition that the person from whom the corporation acquires or offers to acquire the goods or services or, if that person is a body corporate, a body corporate related to that body corporate will not supply goods or services, or goods or services of a particular kind or description, to any person, or will not, or will not except to a limited extent, supply goods or services, or goods or services of a particular kind or description: (c) to particular persons or classes of persons or to persons other than particular persons or classes of persons; or (d) in particular places or classes of places or in places other than particular places or classes of places. . . . (10) Subsection (1) does not apply to the practice of exclusive dealing constituted by a corporation engaging in conduct of a kind referred to in subsection … (4)…unless: (a) the engaging by the corporation in that conduct has the purpose, or has or is likely to have the effect, of substantially lessening competition; or (b) the engaging by the corporation in that conduct, and the engaging by the corporation, or by a body corporate related to the corporation, in other conduct of the same or a similar kind, together have or are likely to have the effect of substantially lessening competition. . . . (13) In this section: (a) a reference to a condition shall be read as a reference to any condition, whether direct or indirect and whether having legal or equitable force or not, and includes a reference to a condition the existence or nature of which is ascertainable only by inference from the conduct of persons or from other relevant circumstances; (b) a reference to competition, in relation to conduct to which a provision of this section other than subsections (8) or (9) applies, shall be read as a reference to competition in any market in which: (i) the corporation engaging in the conduct or any body corporate related to that corporation; or (ii) any person whose business dealings are restricted, limited or otherwise circumscribed by the conduct or, if that person is a body corporate, any body corporate related to that body corporate; supplies or acquires, or is likely to supply or acquire, goods or services or would, but for the conduct, supply or acquire, or be likely to supply or acquire, goods or services; …" 34 It is also necessary to refer to the definition of "services" in s 4 which, in the relevant parts, provides: ""services" includes any rights (including rights in relation to, and interests in, real or personal property), benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce, and without limiting the generality of the foregoing, includes the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under: (a) a contract for or in relation to: (i) the performance of work (including work of a professional nature), whether with or without the supply of goods; (ii) the provision of, or of the use or enjoyment of facilities for, amusement, entertainment, recreation or instruction; or (iii) the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction; . . . but does not include rights or benefit being the supply of goods or the performance of work under a contract of service." 35 Reference was made by the BPA to ss 2B and 2C which provide in the relevant parts: "2B(1) The following provisions of this Act bind the Crown in right of each of the States, of the Northern Territory and of the Australian Capital Territory, so far as the Crown carries on a business, either directly or by an authority of the State or Territory: (a) Part IV; . . . (c) the other provisions of this Act so far as they relate to the above provisions. . . . 2C(1) For the purposes of sections 2A and 2B, the following do not amount to carrying on a business: (a) imposing or collecting: (i) taxes; or (ii) levies; or (iii) fees for licences; (b) granting, refusing to grant, revoking, suspending or varying licences (whether or not they are subject to conditions). . . . 2C(2) Subsection (1) does not limit the things that do not amount to carrying on a business for the purposes of sections 2A and 2B." 36 Section 2C(3) includes a number of definitions for the purposes of the section. In particular, the word "licence" is defined as: "means a licence that allows the licensee to supply goods or services". The Applicants' Allegations 37 Although the applicants provided particulars of their allegations that the BPA had contravened various provisions of the Trade Practices Act and the Competition Code, the way in which they put their case of contraventions of the three relevant statutory provisions is best set out in their written closing submissions. 38 Section 47 was put at the forefront of the applicants' case. It was said that the right to provide towage services in the Port of Bunbury to be granted under the Port of Bunbury Towage Licence Agreement to the successful tenderer is a right, benefit or facility which is a service or services within the meaning of s 4 of the Trade Practices Act. In responding to the Request for Tender in accordance with its terms, the tenderers have offered to acquire the services (that is, the right to provide towage services) on the condition that BPA not provide that right to any person other than the successful tenderer, the licence being exclusive. And in entering into the licence agreement pursuant to the Request for Tender, the successful tenderer would acquire the services on the condition that BPA not provide that right to any other person. For this reason, it is contended, that the offer made by the BPA and the making of the contract on that condition is exclusive dealing within the meaning of s 47(4). The prohibition which this alleged exclusive dealing attracts does not apply unless the conduct has the purpose or is likely to have the effect of substantially lessening competition in a market. The applicants contend that the engaging by BPA and the successful tenderer in that conduct would have the relevant purpose, effect or likely effect. In contending that there is a substantial lessening of competition the applicants rely not only upon the formal exclusivity of the licence but say that it is relevant to take into account the combination of that condition with the substantial length of the licence term and the existence of price caps. 39 Turning to s 45, the applicants say that contrary to the prohibitions in ss 45(2)(a)(ii) and 45(2)(b)(ii), the Towage Licence Agreement, if made and given effect to, would be a contract, arrangement or understanding which would have had the purpose, or would have or be likely to have, the effect of substantially lessening competition. Reliance is placed upon the price schedule provisions in the agreement. The relevant effect complained of is the rigidity induced by the circumstance of a "price cap" combined with the practical likelihood of no reduction in prices. What the applicants contend is happening is interference by a regulator in the contractual relationship between towage operators and shipping operators when there is no evidence that it is needed. The prohibitions in s 45 are said not to be excluded for present purposes by the provisions of s 45(5)(c)(iii). Accepting that s 45(5) in effect, calls for resale price maintenance to be governed solely by s 48 and Part VIII of the Trade Practices Act, the resale price maintenance prohibition applies only to minimum resale price maintenance. A maximum resale price maintenance is not prohibited. The conduct complained of here is said not to constitute either minimum or maximum resale price maintenance, but rather the creation of price rigidity. The relevant conduct is the grant of a right (a "service" within the meaning of s 4 of the Trade Practices Act). There is "no resupply of a service" in this case. The service supplied by towage service operators to shipping operators is a completely different service. The Trade Practices Act overcomes the concept of a service being resupplied by the definition in s 4C(f). Neither subparagraph (f)(i) or (f)(ii) apply in this case. The original services are not being resupplied and they are not "other services that are substantially similar to the original services". Accordingly, the provisions of s 45(5)(c)(iii) are said not to apply to exempt the schedule of price provisions in this case from scrutiny under the competition test in s 45. 40 The applicants maintain that although s 45 does not itself proscribe exclusivity, the provisions of the tender proposal which will or will be likely to substantially lessen competition are those which would result in the fixing of prices for a set period, exacerbated by the circumstance that their effects cannot be ameliorated by the entrance of a challenger or the existence of a potential competitor as the arrangement is an exclusive one. 41 The s 46 case asserts that by reason of the exclusive right that BPA has pursuant to s 32 of the Port Authorities Act 1999, a substantial degree of power in the Bunbury towage services market. It is said also to have such power in the market for the "right to provide towage services" in Bunbury. The BPA is said to have classical indicia of market power indicated in the very conduct complained of in this case, namely "the power to control prices or exclude competition". Reference is made to United States v EI du Pont de Nemours & Co 351 US 377, 391 (1977). 42 The statutory power granted to the commercialised BPA is said to give market power. The BPA is said to be acting in a way in which it would not and could not act if it did not have the exclusive right to offer as a towage service provider, that is, if it had competitors in the provision of those services. In effect, it is contended, that the BPA is leveraging its market power into the Bunbury towage services market. It is taking advantage of its market power in issuing a licence, particularly an exclusive licence, in that this is conduct it can only engage in by reason of its market power and is not conduct it would or could engage in if it were otherwise subject to the constraints of competition. The provisions of the licence sought to be introduced relating to exclusivity, time periods and price schedules, effect a mechanism of deterrence or prevention both jointly and severally. Unsuccessful tenderers and other potential entrants it is said will be deterred from engaging in competitive behaviour by being precluded from providing towage services for the period of the licence regardless of how competitive a package of services they would be willing to offer. The successful tenderer will be deterred from engaging in competitive conduct, namely, freely setting prices and terms in its dealings with its own customers. Shipping operators will be deterred from engaging in competitive activity in that they will be precluded from acquiring towage services from alternative providers for the period of the licence. They cannot integrate vertically. The conduct of the BPA is said to be being engaged in for the purpose of deterring or preventing persons from engaging in that competitive conduct in the Bunbury towage services market. The purpose of the conduct, it is said, can be inferred from the conduct of the corporation and, in this respect, reliance is placed upon s 46(7). The objective of the BPA in this case is said to have been to bring about a state of affairs which it is contended will substantially lessen competition in the sense previously described. Industry Evidence – Towage Services 43 Wide ranging industry evidence was given relating to the provision of towage services in ports around Australia. There are in excess of fifty ports in this country. For most of them there are no significant, regulatory or licensing requirements to be met by towage services providers. They are, in the words of Clayton Frederick, "open". There are a few major operators who provide towage services around the country. They are: Adsteam Marine Pty Ltd Howard Smith Ltd BHP Transport Pty Ltd Brambles Australia Hamersley Iron (through sub-contractors) Woodside Petroleum Stannard Marine Services 44 Adsteam provides towage, shipping agency and related services to shipping companies in ports in Australia and overseas in its own right and in joint venture arrangements with Howard Smith Ltd, either directly or through their wholly owned subsidiaries. These activities are conducted at the following Australian ports: Port Marine Towage Shipping Agency Related Services Darwin x x Cockatoo Island x x Port Hedland x Dampier x Geraldton x x Fremantle x x Kwinana x x Bunbury x x Albany x x Esperance x Port Pirie x x Whyalla x x Port Lincoln x Port Bonython x Thevenard x Port Giles x x Wallaroo x Port Ardrossan x x Port Adelaide x x Port Stanvac x x Melbourne x Geelong x Hastings x Portland x Launceston x Eden x x Port Kembla x x Port Botany x x Port Jackson x x Newcastle x x Brisbane x x Bundaberg x x Gladstone x x Rockhampton x Mackay x x Abbott Point x x Townsville x x x Lucinda x x Mourilyan x x Cairns x x x 45 Adsteam provides towage and related services either on a job-by-job basis or pursuant to customer towage agreements. It has entered into contractual agreements with certain shipping companies for the provision of towage services in various Australian ports in which Adsteam and/or Howard Smith provide towage services. These include Bunbury. It is a term of the towage agreements with shipping companies that Adsteam or Howard Smith, as the case may be, will pay or procure the payment of a rebate to the shipping companies calculated on the basis of total annual amount paid to the companies through which Adsteam or Howard Smith provide towage or related services. 46 No other provider of towage services in Australia approaches Adsteam or Howard Smith in its coverage of Australian ports. Adsteam/Howard Smith interests operate all twenty two tugs available at New South Wales ports, eighteen of the twenty two tugs available at Queensland ports and ten of the thirty tugs available in Western Australian ports. Adsteam interests operate twelve tugs at South Australian ports and three of the five tugs available at Northern Territory ports. Howard Smith interests operate twelve tugs available at Victorian ports. Brambles' interests operate all ten tugs at Tasmanian ports, Bernie, Bell Bay, Devonport and Hobart. It also operates at Portland in Victoria, which is its only towage location on the mainland. Stannard Marine Services carries on business at Darwin and South Australian ports being Wallaroo, Sevenard, Port Pirie and Port Lincoln. 47 In 1995 the ACCC, reporting on its Inquiry into the Harbour Towage Declaration under the Prices Surveillance Act 1983, described "the market", in the sense of the national market for towage services as "..highly concentrated with Howard Smith Industries Pty Ltd and the Adelaide Steamship Company Ltd supplying about 80% of towage services". In that respect the position does not appear to have changed significantly. Exclusive Licensing Initiatives in Australian Ports 48 Exclusive licences have been granted in Townsville and Geelong. The Townsville licence was granted pursuant to a ten year contract entered into in January 1994. Under that contract a sum in excess of $1 million was provided by way of investment in infrastructure (tug berths) for the port authority. The Geelong agreement entered into in 1994 has expired. Geelong is a small regional port linked to nearby Western Port. The companies which operate Western Port and Geelong, namely Toll Transport Pty Ltd (trading as Toll Western Port) and Geelong Port Pty Ltd (trading as Toll Geelong Port), have a common general manager, Vincent Tremaine. He pointed out there has been only one towage operator, namely Howard Smith, in both ports and there are two tugs currently at each of them. Both ports are in competition with the Port of Melbourne. In the last financial year about 658 vessels used the two ports resulting in about 1,316 shipping movements. Towage services are not provided pursuant to an exclusive licence but in the past there has been a maximum price tariff agreement to ensure pricing certainty and to avoid monopoly pricing. Victorian Government policy however, encouraged an open market regime and agreements that were in place have lapsed. No-one has as yet tested the right to re-regulate the towage industry by offering towage contracts or undertaking a tender process. However, Toll Western Port is considering the possibility of issuing an exclusive licence to a towage operator to ensure certainty of service levels and costs and, in particular, to maintain its ability to perform the obligations of the State of Victoria under the Esso State Agreement. There is an obligation on the part of the State under that agreement to maintain, repair and operate tugs and small craft sufficient and adequate to provide normal harbour services at all times. Absent any form of agreement with the current service provider, Howard Smith, it could discontinue the service with no warning leaving Toll Western Port in breach of its contract with the State of Victoria. In respect of these ports, as with other regional ports, Tremaine said: "…the reality is that there is insufficient work to justify two operators." I accept Tremaine's evidence in relation to the ports at Geelong and Western Port and his description of the regulatory and commercial setting. 49 The Port of Gladstone has had one towage operator for the last ten years. There are currently three tugs at the port, each with a 50 tonne bollard pull. The Port Authority has issued only one licence in respect of towage services at the port since 1 July 1990. It was not an exclusive licence but provided for a maximum scale of charges which could only be raised with the consent of the Gladstone Port Authority. A sole operator licence however has been offered for a towage operator to provide services in the port from 1 July 2000. In that case notification of the proposed exclusive licence was given to the ACCC under s 93 of the Trade Practices Act. According to Ian Bailey, the Special Projects Manager at the Gladstone Port Authority, it has "obtained approval from the ACCC in respect of its notification". The decision to offer an exclusive licence followed a meeting with port users who, according to the unchallenged evidence of Bailey: "…expressed a preference that a sole towage provider with adequate service level would be in the best interests of the Port." By way of comparison with Bunbury, there were 866 ship visits to Gladstone Port in the year ended 30 June 1999. There are no other ports within a 210 nautical mile radius. Howard Smith and Adsteam have bid for the Gladstone Port Authority exclusive licence on the basis of notifying Gladstone of their opposition to such licences. Competition and Entry Costs for Provision of Towage Services in Australian Ports 50 It was common ground that the relevant market was the market for the provision of towage services and for the right to provide such services at the Port of Bunbury. That question will be considered again later in these reasons. But assuming the relevant markets, for comparative purposes, are to be defined by reference to the provision of towage services or the right to provide them at ports in Australia, port by port, then they are for the most part markets in which the cost of entry and operation and the volume of services required are such that they will support only one provider of the relevant services. Broadly speaking, this can be equated for present purposes to the economic concept of a natural monopoly. Professor Robinson, a witness for the applicants, described the concept of natural monopoly in a generic sense as "…used to describe a method of production in which it is cheaper for one producer to produce the total industry output than would be the case with any other means of production." One example of an attempt at competition in the provision of towage services at an Australian regional port was canvassed in evidence and demonstrated the character of markets for such services as supporting natural monopolies. The port in question is Newcastle. There, Adsteam has operated through joint venture operations for more than fifty years. Immediately prior to June 1999 it was supplying towage services through a joint venture company with Howard Smith called Waratah Towage Pty Ltd. In March 1994, BHP Transport began supplying towage services at Newcastle in competition with Waratah Towage as part of a consortium with four Japanese shipping operators, joined later by a fifth. The towage operation was established through the vehicle of Hunter Towage Services Pty Ltd (HTS). In 1996, HTS was providing about sixty per cent of towage services and Waratah Towage was providing about forty per cent of towage services at Newcastle. Waratah had a policy of not cross-hiring tugs with HTS. In 1998, against a background of losses suffered by both Waratah and HTS, and BHP's policy of disposing of underperforming assets, a proposal was put by Waratah to BHP Transport to acquire HTS. Subject to undertakings given pursuant to s 87B of the Trade Practices Act that Waratah Towage would not, for a period of three years, increase its effective prices for towage at Newcastle it entered into an agreement with BHP Transport on 2 December 1998 and with the five Japanese shipping operators to acquire all the issued shares in HTS and the HTS tug "Ballina". Since the acquisition of HTS, Waratah Towage has been the sole provider of towage services at Newcastle. 51 The ACCC considered the entry of BHP Transport into Newcastle port in its Inquiry into Harbour Towage Declaration, the report of which was published in December 1995. The ACCC prophesied at par 6.1, correctly as it turned out: "If the history of entry and exit into the towage industry is any guide, it is likely that some form of rationalisation will occur. It is likely that one operator will exit or will form a joint venture/co-operative arrangement with its competitor. The history of market conduct demonstrates that there is little evidence of open rivalry even in ports where there are two operators." It should be emphasised at this point that there were special circumstances associated with the Newcastle case which do not warrant reliance being placed upon it as an indication of the contestability of markets for the provision of towage services generally. In that case the new entrant was effectively a vertically integrated shipping operator. BHP Transport and its Japanese associates accounted for the demand for more than fifty per cent of towage business in the port. The market for towage services in Newcastle, which is considerably larger than that at Bunbury, could be said to have been contestable because of that circumstance albeit it lapsed back into a single operator represented by the original incumbent. 52 Plainly enough, the size of a port and the volume of shipping that passes through it will affect its ability to support more than one towage service. The Port of Fremantle has some five towage operators, two of whom are related companies, being Stirling Harbour Services and SMS. The other three are Total Marine Services, Southern Ocean Maritime and Defence Maritime Services. P & O Towage also provided services until 1997 when it was taken over by Stirling Harbour Services. The Port of Fremantle comprises Fremantle Harbour itself (the inner harbour) and Kwinana (the outer harbour). It had 1,887 vessel visits in 1998/99. There are eleven tugs registered with the Fremantle Port Authority with bollard pulls varying from ten to sixty tonnes. It may also be the case that a cluster of ports close to one another may define a single geographic market capable of supporting more than one operator where there is substitutability of towage services between ports. 53 There was evidence of competitive interest in the provision of towage services at Kwinana from Daryl Monson of Monson's Agencies, a shipping agent which, in 1986, had purchased Ball & Sons, a launch and small tug operator in the Port of Fremantle and subsequently expanded its business by purchasing the tug "Sacramento" with which it performed more tug movements in Kwinana and Fremantle. The feasibility of entry into the field was for Monson, critically dependant upon his ability to strike an agreement with the Maritime Union of Workers' of Australia which would enable provision of a superior service at a cost structure which he regarded as appropriate. In the event, agreement was unable to be reached and the launch and tug business was sold in January 1998. The company to which it was sold was West Coast Marine and Towage Pty Ltd. Monson retained an interest through a fifty per cent shareholding in that company. The company engaged a maritime consultant, Ronald Fletcher, a former General Manager of Stirling Harbour Services, in 1997 and before that General Manager of P & O Maritime Services Pty Ltd (Towage Division) to assist in the expansion of the business in any way he could. One proposal which he explored in early 1999 was the possibility of a consortium arrangement between West Coast Marine and Towage Pty Ltd and a Singaporean company, Sembawang, to provide towage services in direct competition to Adsteam/Howard Smith at Kwinana. This was against the background that the government was proposing a private port facility at Kwinana which would be operated by a private company, Kwinana Ports Pty Ltd, as a vehicle through which towage services, inter alia, would be contracted. On Fletcher's assessment, the feasibility of the project was critically dependent upon adopting an industrial relations strategy that would give the new entrant a commercial advantage and competitive edge over Adsteam. Sembawang had indicated that it would be reluctant to commit to such a venture unless it could see "tangible savings over Adsteam". It had consistently questioned the labour expense, according to Fletcher. When earlier exploring the possibilities of expanding the tug business in Kwinana and testing the reaction of shipping companies around the world to a proposed schedule of prices and conditions, it appears that Monson had found some resistance which was not price dependent but rather based on the factor that: "…nobody wants to use you first when you are trying to break into a new business, especially in the port situation around Australia." (T219) 54 The evidence elicited in cross-examination from Monson, tended to demonstrate the difficulty of new competitive entry notwithstanding that it was concerned with a port which, if Fremantle and Kwinana are taken together, offer greater possibilities for new entrants than a smaller regional port. What I would describe as "client inertia" reflecting perhaps the transaction costs of switching from one towage operator to another, is a factor which has to be overcome by any new entrant. Those transaction costs may have a quantitative aspect and qualitative elements involving the severing of established and convenient relationships and loss of mutual understanding of the systems and processes of client and providers which facilitate dealings. 55 Adsteam's case rested in part upon the propositions that although it may be, in a commercial sense, a natural monopoly in terms of inability to support more than one operator, the market for the provision of towage services in the Port of Bunbury is contestable and dynamic. Frederick contended that the provision of towage services in Australian ports generally is contestable. By this he meant that there are very low barriers to entry and exit. In support of his argument he made the following points: 1. Tugs are readily available to be utilised in competition in any port because: (a) towage service operators can build boats within a period of about twelve months; (b) towage service operators can buy boats from anywhere in the world; (c) there are brokers who specialise in facilitating the sale of tugs in Australia and overseas and many other general shipping brokers who also sell tugs; (d) there are many second-hand tugs available for sale – in this respect he produced a copy of a typical broker's listing; (e) towage service operators can readily charter tugs if they need to – in this respect he referred to Adsteam itself having over the previous nine months chartered three tugs from a Singaporean operator for use in Sydney harbour and BHP Transport in Newcastle obtaining a tug by charter within a matter of weeks of first commencing operations. 2. There are many towage service operators in ports around the world who are seeking to expand their business and enter markets outside their home states. A recent example was the Dutch company, Wijsmuller Towage, which announced its intention to commence operations in Australia. This was a reference to a media interview given by Michael Wijsmuller, the Managing Director of that company. Frederick also referred to the BPA's own witness, Ronald Fletcher, who had been involved in evaluating the market in Fremantle and Kwinana for overseas interests. 3. There are many companies who are potential suppliers of towage services into ports including: (a) international towage service operators who are able to provide services in any port; (b) shipping operators able to vertically integrate the provision of towage services into their operations; (c) users of ports able to vertically integrate provision of towage services; (d) other towage service providers easily able to provide towage services on a commercial basis such as Defence Maritime Services, which in 1997 acquired non-combat vessels of the Australian Navy including tugs used by the Navy and which provide towage services to the Navy and have four tugs for that purpose; (e) port authorities who can provide towage services directly. 4. Entry into the market involves low sunk costs because: (a) there is an active international market for the sale of tugs; (b) there are no "tug specifications" precluding their sale; (c) comparatively low cost penalties are suffered on termination of leases; (d) redundancy payments and other costs for exit from the industry are comparable with those of other industries in Australia. They can be mitigated or eliminated by reaching an agreement with a new entrant. 5. There are other indicia of increased contestability including: (a) technological developments, including two man tugs with lower capital and running costs; (b) labour market changes including: (i) elimination of Maritime Union of Australia control on labour supply; (ii) elimination of specific manning levels from awards; (iii) increased access to contract labour and less restrictive Australian Workplace Agreements. Frederick contended that market practices that have and will continue to increase contestability have emerged significantly in the last three years. 56 It was Frederick's evidence that Adsteam was, in 1992, and continues to be under considerable pressure from its shipping operator customers to reduce the effective costs of towage services. Typically its customers are global operators with extensive experience of ports and towage providers worldwide. They maintain comparative records of service and costing levels and use those to place pressure on Adsteam to reduce the cost of towage and to improve service levels. In some cases, they have towage operations in their home countries. In Frederick's opinion, the capacity exists within many of them to establish their own towage operations in Australian ports if there were an incentive to do so. He is conscious of their knowledge of international prices and service levels when negotiating with them in relation to prices to be charged by Adsteam. Indeed shipping representatives will make references to prices charged by other ports in the context of such negotiations. He is also aware that these customers receive regular inquiries from other towage service providers. 57 I do not doubt the correctness of Frederick's evidence generally in this regard so far as it applies to the national and global environments in which Adsteam, as a major player in Australia, must operate. There is however an air of unreality about its application to the regional Port of Bunbury. The idea that Adsteam would consider, as a factor relevant to its pricing for the Port of Bunbury, the probability that one of its shipping customers might place a tug in that port is, having regard to the evidence I have heard about that port, improbable. That is not to say that a falling out between Adsteam and one of its large customers might not have strategic consequences in other Australian ports. Adsteam's strategic concerns at the national level are well reflected in the volume rebate agreements it has with a number of the shipping operators who are its customers and in its efforts to maintain and improve efficient delivery of services. 58 The characterisation of sunk costs as low may be correct in a relative sense when considering entry by a large player into a market with significant volume of service to be provided. I am not persuaded on the evidence that sunk costs, particularly in relation to the acquisition of tugs, could be so characterised in respect of entry into small regional ports such as Bunbury. Having regard to the history of absence of new entries into such ports around Australia and the evidence of various of the tenderers, I am not satisfied that these costs and their recovery is not a substantial consideration against entries into the field of providing towage services in small volume regional ports. I am strengthened in that want of satisfaction by the ACCC's Inquiry into the Harbour Towage Declaration exhibited to Frederick's affidavit which concluded that a significant proportion of the capital expenditure of a new entrant into a towage services market in Australia is likely to be lost as sunk costs in the event of failure and that this is a risk perceived by potential entrants as representing a barrier to entry. (Report par 6.3) 59 Frederick gave, as an example of Adsteam's "response to the competitive pressures to reduce towage costs" endeavours to bring in technological innovation to that end. In 1992 his company sought to convince pilots of ships that they could effectively and safely use fewer tugs than the number to which they had been accustomed. The hypothesis that this was possible was supported by certain tests and computer models. These however had not been conclusive because they were based on assumptions relating to tug power that had not been empirically confirmed. Static tests of bollard pull did not necessarily provide valid measurements for tugs across a range of operational manoeuvres. Adsteam funded a study undertaken by Doctor Paul Brandner of the Australian Maritime College in Launceston, in relation to the "Performance and Effectiveness of Omni-Directional Stern Drive Tugs". The study concerned the effect of various tug deployments on ships manoeuvring in confined waters. Its purpose was to identify ways in which Adsteam could reduce the cost of towage services to shipping operator customers and at the same time satisfy the safety concerns of pilots. It involved the construction of scale models of Z-peller (Omni-Directional) Tugs and extensive tank testing. Figures derived from tests of thrust under simulated working conditions were fed into computer simulation models. Calculations were made about the number of tugs needed for the effective and safe towage of ships. The results were demonstrated by Adsteam to pilots, tug masters and port authorities to show the system of work in operation. As a result, according to Frederick, these stakeholders were persuaded of the effectiveness and safety of the new working method. According to Frederick the results of this research enabled harbour pilots to achieve a reduction in the number of tugs utilised in towing particular ships by a factor of up to fifty per cent depending on the size and suitability of the ship. The innovation has been introduced into ports in Townsville, Gladstone, Newcastle, Port Kembla, Port Jackson, Port Adelaide and Fremantle. It has also been adopted by BHP Transport in Port Hedland. Despite the innovation, the cost to Adsteam of providing towage services has not decreased. This is because, although fewer tugs were used for any particular ship, Adsteam was required to keep the same number of tugs in port to service the largest size of vessel likely to call. 60 The "competitive pressures to reduce towage costs" reflected in this innovative behaviour again are likely to exist at a strategic or national level but do not, in my opinion, impact significantly upon the question of the contestability of the market for the provision of towage services at the Port of Bunbury or the question whether the grant of an exclusive licence will have an adverse effect upon competition. 61 The prices which Adsteam is able to charge for the provision of towage services in a port is, in part, driven by the volume of shipping in the port. In general, prices have been reduced in ports where there have been volume increases and have increased only where there have been volume decreases. Frederick produced tables showing volume and price changes for three classes of port which he designated respectively: 62 1. Port Authority price regulated ports – those where, pursuant to a licence issued by the relevant port authority, there is some form of control on the prices charged for towage. 2. ACCC price regulated ports – those which have been subject to a declaration pursuant to s 21 of the Prices Surveillance Act 1983. 3. Non-price regulated ports – ports in which there is no external regulation of the prices charged for towage services. Volume and price changes in various port types Port authority price regulated ports Port 1993 jobs 1998 jobs volume change price change prior increase Cairns 237 231 -3% +23.9% Townsville 1233 1576 28% + 10.3% MacKay 462 445 -4% +21.6% Albany 188 480 155% -5.0% 1990 Bunbury 1048 1086 4% no change 1988 Geraldton not known 1017 not known 1991 ACCC price regulated ports Port 1993 jobs 1998 jobs volume change price change prior increase Brisbane 3815 5401 42% -3.0% Newcastle 6052 7594 25% -10.0% 1990 Port Jackson 2545 2959 16% +15% Port Botany 3362 4287 28% no change 1990 Melbourne 4740 4887 3% +10% Adelaide 1953 2421 24% no change 1992 Fremantle 2163 3066 42% -6.7% 1992 Non price regulated ports Port 1993 jobs 1998 jobs volume change price change prior increase Mourilyan 96 90 -6% no change 1991 Lucinda 59 51 -14% no change 1991 Abbot Point 304 432 42% - 17.5%* Gladstone 2274 2963 30% -14.3% Bundaberg 64 100 56% -7% Port Kembla 2928 2778 -5% +9.7% Whyalla 430 450 5% no change Port Pirie 99 128 29% no change Kwinana 1989 2294 15% no change 1987 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. Economic and Other Expert Evidence 86 Ross Robinson, who was called as an independent expert by the applicants, is Associate Professor and Director of the Centre for Maritime Studies and Intermodal Systems at the Macquarie Graduate School of Management, Macquarie University. He has written and advised on issues related to ports and shipping, most recently having been employed as a Senior Advisor to the Port Services Pricing Review conducted by the Office of the Regulator-General of Victoria for August to December 1999. 87 Professor Robinson's report included considerable general discussion about the concepts of markets and market structure, efficiency in markets and contestability. The consideration of contestability arose in this case because of the character of regional ports as giving rise to natural monopolies in the provision of towage services. Absent "on the water" competition, Adsteam's focus was on what Professor Robinson described as "…the incentives to produce competitive outcomes with which contestable market theory is concerned". He put it thus: "In a perfectly contestable market comprising one or a small number of firms it is the threat of entry – the potential for competition – which will provide the stimulus for competitive outcomes and discipline in the market. Incumbent firms will adjust prices, output and quality of service on the basis of the threat of entry from potential entrants; and such a threat is sufficient to eliminate monopoly rents (profits earned from prices in excess of the competitive price." On Professor Robinson's view, the definition of a contestable market rests on four limiting assumptions which, in summary are: 1. free entry to and costless exit from the market; 2. no sunk costs; 3. all firms having access to the same technology which is used efficiently and all firms producing a homogeneous product; and 4. firms and consumers in the market having perfect information and complete demand information. These assumptions are rigorous and, as he conceded, like the model for perfect competition, may not reflect real world conditions. Thus, in recognition of the limitations of the model of the perfectly contestable market, real life markets are referred to as "weakly or poorly contestable" or "strongly contestable" or similar expressions depending upon the degree to which they comply with the limiting assumptions. 88 Professor Robinson described the term "natural monopoly", when properly applied, as describing: "…a method of production in which it is cheaper for one producer to produce the total industry output than would be the case with any other means of production." He said that the existence of a natural monopoly of itself says nothing about competitive outcomes in the market. I see the force of that proposition but perhaps more cautiously would proceed for present purposes on the basis that a natural monopoly is not necessarily definitive of competitive outcomes. I accept his proposition that in a contestable market, the presence of natural monopoly characteristics does not mean that the firm serving the market is earning monopoly rent. Professor Robinson also referred to sunk costs as a barrier to entry. He described sunk costs as "non-recoverable, market-specific costs". I consider that an appropriate working definition for present purposes. 89 Professor Robinson argued that where a market is contestable there is no need for regulation because where its incumbent is earning monopoly rents firms are attracted who would seek to earn a part of those monopoly rents for themselves. Entry will occur up to the point where those monopoly rents are competed away. In the context of the provision of port services where the market is contestable, there is no need to regulate for competition reasons as either the threat of entry, or actual entry, will produce competitive outcomes. The extent to which regulation is required will depend on the extent to which the market is characterised as a pure monopoly. This is in turn linked to the existence of a single operator providing services in the market where the operator is able to exercise market power. 90 Where there are sunk costs in a market characterised by economies of scale, ie a natural monopoly, regulation may be an appropriate option to avoid excessive investment in sunk costs and to ensure efficient pricing and adequate returns to market players. In Professor Robinson's opinion, however, the presence of sunk costs in an industry is neither a necessary nor a sufficient reason for regulation. There are large sunk costs in numerous large industries and they do not preclude a competitive market place. Regulation is not required where there are no sunk costs and the threat of entry acts to appropriately constrain the behaviour of the sole (efficient) operator. Where there is market failure, however, external regulation must be designed so that it: "(a) preserves the production efficiencies that are associated with a single producer because of its capacity to operate at or near to MES [minimum efficient scale, that is the minimum scale of production necessary to achieve maximum efficiency]; and (b) produce outcomes that are consistent with competitive price outcomes." Professor Robinson's propositions relating to regulation and regulatory regimes are derivative of the primary issues which face the Court in this case, that is to say, whether or not there is in prospect a contravention of one or other of ss 45, 46 and 47 of the Trade Practices Act. To the extent that his discussion of the appropriateness of such regimes is underpinned by a consideration of their impact on the competitive process it is that consideration and that impact which is relevant rather than the question of the preferred policy choice to be made by the market regulator or in this case the port authority. 91 Professor Robinson identified what he called two generic models of regulation relevant to the present case: 1. A "franchise bidding" model by which he meant a model in which a firm bids for the "right to serve the market" for a period of time and if successful delivers services in accordance with the requirements set by the body making that right available. (in the present case the port authority) 2. The non-exclusive model, being a form of non-exclusive licensing arrangement for a period. This model, as Professor Robinson said, can take a number of different forms and can have built into it some of the features of the franchise bidding model such as key performance indicators. On the franchise model, which includes the BPA exclusive licence tender process, competitive outcomes are prescribed or sought within the contract entered into as a result of the bidding process rather than through the operation of market forces. So the right to serve the market is contestable and numerous potential entrants may bid. However, once the bid is accepted and the contract entered into, the winning firm faces no ongoing competitive threat during the period for which the right is granted. The terms of the contract offered are critical in any assessment of the likely competitive or anti-competitive effects of this model. Contractual terms are likely to play a greater part in affecting the state of competition, than is the case with ordinary commercial contracts. This is because they do not have just the possibility of interfering in the competitive outcome, they must actually determine that outcome. In Professor Robinson's opinion, the request for tender issued by the BPA appeared in form to be a version of the franchise bidding model in that it involves tenderers competing for the right to serve the shipping operators using the Port of Bunbury. 92 A non-exclusive model, on the other hand, would allow the regulator to rely on three mechanisms to secure competitive outcomes: 1. The dynamics of the market place – the incumbent operator being exposed to the threat of entry from competitors if the incumbent were to resort to monopoly rent seeking behaviour. 2. The ability of the regulator to seek other operators – this, it was accepted, is not a preferred option given the high transaction costs of recontracting and the preference for stability in the market place. However, according to Professor Robinson, in a competitive market place the potential for the incumbent to lose preferred status in the following or sequential tendering processes will act as an inducement for efficient and competitive behaviour. This is particularly so when the tender period is relatively short. That is an observation which seems to me equally applicable to the franchise bidding model where sequential tendering processes can provide the kind of inducement of which Professor Robinson speaks. 3. The ability of the regulator to require specified levels of performance. Benefits of the non-exclusive model advanced by Professor Robinson were: 1. The model does not prejudge at the beginning of the contract period any particular price or quality outcome in the market for the future. 2. It is responsive to the need in a rapidly changing and transforming market place for firms to be able to adjust rapidly to change. 3. Competition policy and the globalisation of markets – distribution as well as production – are opening formerly parochial markets to international exposure. The evidence, not only of Professor Robinson but other witnesses, failed to some extent to come to grips with what is meant by a non-exclusive licence and the variety of formal licence conditions which might fall within that general description. Of equal importance is the variety of informal arrangements and understandings and, short of understandings, the commercial settings in which such licences may be granted. A non-exclusive licence may be granted in circumstances where there is a reasonable expectation that the issuing authority will not, in the ordinary course grant a second licence while the first licensee is performing satisfactorily. Indeed, given the character of regional ports such as Bunbury as natural monopolies in relation to the provision of towage services it is difficult to see why any rational port authority would want to grant a second licence except in the case where it was experiencing substantial difficulty with the first licensee. In that event there are provisions whereby the first licence could be terminated for non-performance. But, absent such a case the risk of pressure upon the incumbent and possible compromise of services simply to achieve a temporary reduction of prices until one or other of the competitors failed or one acquired the other, is not likely to be regarded with equanimity by an authority charged with the provision of reliable, efficient and continuing services. It is to be borne in mind that the functions of port authorities under the State legislation which were referred to earlier, are concerned with the facilitation of trade and commerce generally for the economic benefit of Western Australia within and through their ports. The provision of towage services is an aid to the achievement of that primary objective. It is not an end in itself. 93 It may well be the case that for most practical purposes the provision of towage services under a non-exclusive licence in a small regional port would be difficult if not impossible to distinguish from their provision under an exclusive licence in such a port. This observation, of course, is subject to other factors affecting prices and level of services which may derive from a competitive bidding process where, as is apparent from industry evidence, an exclusive licence is likely to attract more potential entrants than the grant of a non-exclusive licence. 94 Professor Robinson maintained that sunk costs are minimal and significantly less important in the towage industry than other industries. This impacts on amortisation requirements which, in turn, impact on the appropriate length of a service agreement. Changes in port legislation have underlined efficiency requirements and the need for competitive positioning and induced port authorities to require a competitive market for port services. Performance-based contracts are therefore appropriate measures within a broader competition enhancement policy framework. The critical dependence of these conclusions upon underlying factual assumptions is discussed below. 95 Specifically in relation to the market for the provision of towage services in Bunbury, Professor Robinson asserted that it is contestable and perhaps even strongly contestable. It was said by him to exhibit the following characteristics: 1. There is a credible and on-going threat from potential entrants. 2. There are significant competitive pressures on any incumbent operator from potential entrants, shipping operators, the general regulatory constraints (the ACCC) and from port authorities. 3. Prices for towage services have declined in real terms over the last decade or more indicating a responsiveness to particular conditions in particular ports. 4. There are very low sunk costs with effective secondary markets and the ability to rapidly source and dispose of vessels. Sunk costs have become progressively less important as an entry barrier to the towage market over the last decade. 5. There are many other firms who can access the same technology as the current towage operators providing services in Australia. 6. Although there is no direct evidence that leads to cost reduction, the existence of the significant competitive pressures suggest that the incumbent firm might be operating at cost effective levels. 7. There have been concerted efforts to drive innovative changes in the towage industry. 96 Turning to the BPA's tender process, Professor Robinson said that although it involves open bidding for the right to provide towage services it also results in only one such operator in the port for a period of up to seven years. That provider would face no market-based competition for that period and would effectively be locked away from market forces for the period of the contract. Competitive outcomes in a franchise bidding model of the kind adopted by the BPA depend critically on the terms of the contract entered into. Although the request for tender issued by the BPA resembles the franchise bidding model, Professor Robinson did not observe any significant attempt to spell out in the contract which would be issued pursuant to the request for tender, the criteria for competitive outcomes. He was of the opinion that the contract which would be issued would not deliver those competitive outcomes. The request for tender was in a form which did not take into account the dynamic nature of the market for the provision of towage services. A non-exclusive licence model on the other hand would have significantly greater potential to expose towage service operators to the market place and the increasing forces of contestability. 97 While the conceptual and theoretical elements of Professor Robinson's testimony were not significantly controverted, their application to the provision of towage services in the Port of Bunbury was. His conclusions about that market were critically dependent upon their factual supports, particularly on the issue of contestability and the underlying assumptions about sunk costs. Professor Robinson could not identify any particular feature of the Port of Bunbury to support the conclusion at par 9.5 of his report in the section headed "Application of Conceptual Framework to Port of Bunbury" where he said: "In my opinion the market for the provision of towage services is contestable, perhaps even strongly contestable." He accepted in cross-examination that this conclusion was reached from what he called generic considerations. These were derived from his own knowledge of the nature of the towage markets around Australia. He accepted in cross-examination that his fundamental approach was that contestability of a market could produce a competitive outcome and that the integrity of this conclusion depended upon the assessment of the degree of contestability. He accepted also that the process he had to undertake was to assess the degree of contestability in the relevant market, albeit he could seek to draw inferences by comparing the relevant market with others. 98 As cross-examination proceeded, Professor Robinson did make reference to the existence of bidders for the exclusive licence as an indication of potential entrants into the market. His theory of contestability however required not only the existence of evidence to support a threat of entry, but an assessment of the degree of the threat. Not all threats of entry would produce the competitive outcomes upon which he sought to rely in his report. He accepted that he had no evidence to suggest whether some of the operators who had applied for the exclusive licence could be regarded as constituting a threat of entry under a non-exclusive model. 99 The only barrier to entry he considered was that of sunk costs. He reached the conclusion it wasn't a significant barrier in reliance upon Frederick's evidence that there is a significant secondary market in tugs so that "in effect sunk costs were pretty much a non issue"" (T71) His conclusion that there are no significant sunk costs as a barrier to entry was a conclusion about costs relevant to owning a tug, having to buy one and then perhaps suffering a loss on resale. In this respect there was some support from the testimony of Professor Williams, called as a witness for the BPA. But in each case their conclusions were based upon factual evidence as to the state of the market in secondhand tugs and related issues which neither was in a position to judge. There were other barriers to entry put to Professor Robinson, including the irrecoverable loss suffered by a new entrant during the period of contest with the incumbent and the extent to which the incumbent had deployed other competitive tools to entrench its position with its customers. He had not considered these factors in reaching his conclusion about the contestability of the market for the provision of towage services in Bunbury, but accepted that any sound theory of contestability in reflecting the extent of a threat must take into account considerations which would persuade or dissuade a potential competitor from entering. He tended to discount the significance of the rebate agreements between Adsteam and the shipping companies it serviced. 100 In making a general comparison between the franchise bidding process and the non-exclusive licence model, Professor Robinson said: "There are two quite distinct processes involved in this so that competition for the market is competition competing up to the point where the bid is awarded and sometimes that is talked about as being the right to serve the market. The quid pro quo for winning that bid is in fact to be able to serve that market exclusively. That is always the characteristic of a franchise bidding process. The other process is a tender process which can look similar, has many similarities, in fact, but in fact does not require an exclusive licence. The port or the regulator leaves open the potential for another entrant. The competition takes place within that framework. In the franchise bidding model the competition process – the competition takes place in actually bidding for and to the point of the award of the bid and at that point." (T75) He accepted that there are competitive outcomes in each process but they may be different outcomes. The general observation quoted does not indicate that there is likely to be a substantial lessening of competition associated with the franchise bidding model. The competitive process is located, under that model, at the point of bidding and associated negotiations. 101 The BPA called two economist witnesses. One was Professor Philip Williams, Professor of Law and Economics at Melbourne University, Business School. Professor Williams concluded that the provision of towage services in the Port of Bunbury is a natural monopoly, consequentially those services are provided in what he described as "a fundamentally non-competitive environment". In his opinion new entrants are unlikely to enter such a market environment to offer a competitive alternative to the incumbent, or if entry does occur its likely to be unsustainable as demonstrated by the case of BHP's entry into towage services in the Port of Newcastle. Where there are significant economies of scale in relation to the size of the market as is the case in towage services, the port operator, in Professor Williams' opinion, has few options for addressing the adverse consequences of monopoly supply. One solution involves the awarding of a monopoly franchise for a defined period of time to the firm offering the best "lowest price" terms. The port operator locks in the competitive benefits through the terms of the contract which would specify among other things the prices or maximum prices which the winning bidder will charge the customer. This was what Professor Williams saw as the avenue taken by the BPA compared to the alternative of monopoly provision an administrative oversight competition for the market is pro competitive and offers the prospect of substantially improving services to port users. It is also pro competitive for the BPA to limit the licence to a single operator as it provides the BPA, through the competitive tendering process, the opportunity to realise economies of scale in towage services. 102 Professor Williams referred to an argument in the economic literature that the success of competitive tendering in driving efficiency can be limited by the presence of significant sunk costs where they are incurred by an entrant and cannot be recovered if the operator subsequently withdraws from the towage market. The argument ran that the competitive benefits of competition for the market may be overstated. Where sunk costs are involved, the incumbent will have sizeable advantages over potential rivals when contracts are retendered thus diminishing the intensity of the rivalry between competitors. I take this to amount to the proposition that there are significant advantages attached to incumbency whether considered in the context of a tendering process or in the context of unregulated entry by a competitor. Professor Williams opined in his report that the largest relevant investment is in tugs but it would appear that the tugs specified for the Bunbury contract could be deployed elsewhere if the contractor were not successful in winning a second round bid (that is, after the expiry of the initial contract term). In this respect he relied upon Frederick's contentions in his affidavit material which were at odds with the ACCC view in its 1995 report that there are significant sunk costs involved in towage services. Relying upon what Frederick said, Williams concluded that the potential limitation to competition for the market based on sunk costs and the advantages of incumbency did not apply. On the other hand if sunk costs were significant it would be expected that potential entrants would be unable to match the bid of the incumbent. In this case the advantage would accrue to the incumbent. In a supplementary report by way of comment on Professor Robinson's testimony, Professor Williams pointed to: 1. The high costs associated with recontracting. 2. The time lag between charging of a higher than competitive price and the actuality of entry in a non-exclusive or unregulated market. The franchise bidding model, he suggested, is more likely to constrain prices charged by an incumbent than a non-exclusive licence. 103 In addressing the question whether an exclusive licence would be anti-competitive, Professor Williams noted that SMS enjoys a de facto monopoly on towage services in Bunbury and that the introduction of a competitive bid for a limited period exclusive contract could be seen as a mechanism for introducing competition to this market. In his opinion, tendering for the provision of the towage services at the Port of Bunbury would be pro competitive. The likely implication of the tender process is that towage charges will fall as tenderers compete for the right to the market. 104 An important point made by both Professor Williams and Professor Kolsen, the other economist called by the BPA, was that there is a difference between the competitive prices that might be charged as a result of direct and open competition and those that would be charged in order to deter a new entrant into a market characterised by natural monopoly. I accept that the barriers to entry, at the very least the cost of fighting the entry battle with a determined incumbent, provide the basis of a margin of support for a higher than competitive price to be charged by the incumbent which may nevertheless be sufficient to deter entry. 105 The second economist called by the BPA was Emeritus Professor Helmut Kolsen, formerly Professor of Economics at the University of Queensland. It was Professor Kolsen's view that competition "in" the towage market in the Port of Bunbury would not be possible. Competition in that market could not therefore constrain the behaviour of the supplier protected by conditions of natural monopoly. The alternative selected by the BPA was to enforce competition "for" that market by offering an exclusive licence to the tenderer which is the successful bidder in the competition. The offer of exclusive supply was necessary to encourage tenderers to bid because considerable investment in specific assets is required. Exclusivity for a time of sufficient length to enable such assets to earn a return to justify investment in them is required. This greatly increases the number of potential bidders and would therefore increase the level of competition for the exclusive contract. 106 Professor Kolsen said that all attempts to constrain monopoly power have deficiencies. There is no perfect way of inducing those with monopoly power to act as if they are in a highly competitive market. The competitive tendering process adopted by the BPA, given the alternative available and the characteristics of the market, must be regarded as pro competitive. He accepted that franchise contracts will not necessarily be perfect in ensuring the achievement of their objectives. Technically they will be incomplete. There are problems with determination of the length of time to which they apply, the extent of their completeness in prescribing terms and conditions, the reality of competition between tenderers and the costs of monitoring. He put it thus: "The question to be answered is whether a particular franchise contract provides the best outcome, compared with available alternatives, in a market with particular characteristics. Any attempt to describe all the possible circumstances which could arise merely results in the conclusion that any one measure may or may not be appropriate under some circumstances. It is thus necessary to examine the question in the context of the industrial activity to which the contract is to apply." 107 Professor Kolsen readily conceded that he had not himself done any fundamental research into the towage industry. He relied fairly heavily on what the ACCC had previously said in its 1995 report. Based on that report he observed that in providing towage services in the Port of Bunbury capital costs represent a high proportion of total costs. That is not controversial and I accept that to be the case. For as he said, the acquisition of two large tugs is a minimal requirement. He went on to say that Australian tugs are built for Australian conditions and resale would incur a loss. However there was no direct factual evidence on that issue. I would not therefore rely upon Professor Kolsen's observations in that regard to support a positive finding in those terms. I accept, however, as he said, that establishment costs are high and that exit from the market would not enable such costs to be fully recovered. In so saying I have regard to the losses associated with the cost of competition against a determined incumbent with interests which transcend its immediate interests in the Port of Bunbury and include strategic concerns related to its position throughout Australia and perhaps even globally. In Professor Kolsen's opinion the absence of competition for towage in the Port of Bunbury after the award of the tender would differ little from what effectively existed before. The exclusive right to supply would bring with it a need to prevent excessive prices for towage services which the combination of inelastic demand with absence of alternative sources of supply makes possible. He referred to the ACCC's observation that: "The issue of an exclusive licence may be necessary in smaller regional ports to ensure the continuous provision of a satisfactory standard and level of towage services as, for example, in the port of Albany." Professor Kolsen found some similarities in the supply of pilotage services with which he had had some direct experience. A report by KPMG, published by Queensland Transport in September 1998, concluded that the broader community's best interests would be served by maintaining only one provider of port pilotage in each port. As a result it would be necessary for the legislation to prohibit any entity other than that contracted to the port authority in a particular port, from establishing port pilotage operations and competing in the market. In a review of marine pilotage legislation by Queensland Transport in connection with its Competition Impact Statement, published in June 1999, there was a discussion of exclusive contracts in relation to the provision of pilotage services. There it was concluded, inter alia: "It is considered possible to achieve a level of contestability and innovation in respect of the cost of pilotage and quality of pilotage services provided by allowing port authorities the autonomy to determine the most appropriate service delivery for their ports. Options available to Port Authorities would include direct employment of pilots, tendering for a single service provider or contracting an associated company." 108 Professor Kolsen concluded that the characteristics of the market for towage services in the Port of Bunbury do not allow effective competition "in" that market. Competition "for" the exclusive right to supply such services for a period of time of sufficient length to allow depreciation of the required capital assets is, under the circumstances, the most appropriate way to achieve the BPA's objectives of efficient and cost effective supply. The Market 109 The applicants identified six possible markets relevant to the provision of towage services in Australia. The six possible markets were set out in the applicants' closing submissions thus: "1. Bunbury towage services market. The market for the provision of towage services in the Port of Bunbury (that is, the market in which the successful tenderer would supply towage services to shipping operators in the Port of Bunbury); 2. Australian towage services market. The market for the provision of towage services in Australia (that is, the market in which towage service providers supply towage services to shipping operators in Australian ports); 3. Bunbury port facilities and services market. The market for the provision of port facilities and services in the Port of Bunbury (that is, the market in which Port of Bunbury Authority supplies services to towage services providers and other users of port facilities and infrastructure in the Port of Bunbury); 4. Australian port facilities and services market. The market for the provision of port facilities and services in Australia (that is, the market in which port authorities supplies services to towage services providers and other users of port facilities and infrastructure in Australian ports); 5. Bunbury right to provide towage services market. The market for the right to provide towage services in the Port of Bunbury (that is, the market in which the right to provide towage services in the Port of Bunbury is supplied exclusively by Bunbury Port Authority and acquired by towage services providers); 6. Australian right to provide services market. The market for the right to provide towage services in ports in Australia generally (that is, the market in which the right to provide towage services Australian ports are supplied by port authorities and acquired by towage service operators." 110 In the event, all parties agreed that the relevant geographic market was that of the Port of Bunbury. There was no viable basis for substituting towage services in Fremantle or Albany for those in Bunbury. The relevant product market was defined by towage services. There was an acceptance that the market could be considered at two functional levels – the supply of towage services to shipping operators and the provision of the right to supply such towing services. The latter function encompasses the grant by the BPA of towage licences whether exclusive or otherwise. 111 Absent concessions there might be a case for a broader definition of the relevant market. There have been various views expressed by the Trade Practices Commission (as it was) and the Trade Practices Tribunal since the enactment of the Trade Practices Act. So in the authorisation case of J Fenwick & Co Pty Ltd v Adelaide Steamship Industries Pty Ltd (1976) ATPR 35-200, the relevant geographic market encompassed ports of Sydney, Botany Bay, Newcastle and Eden in New South Wales. That no doubt related to the opportunity for substitutability of services from one port to another in that cluster. On the other hand, in Howard Smith Industries Pty Ltd (1991) ATPR (Com) 50-111, the Trade Practices Tribunal held that the ports in Australia for the most part defined the geographical limits of the markets of which they were part. In its 1995 Inquiry Report, the ACCC considered there was a national market for the provision of towage services in Australia in which each port represents a sub market within the broader Australian market. 112 The parties have chosen to formulate the geographic market narrowly. On the face of it, the formulation reflects the relevant commercial realities. I therefore proceed to deal with the case on that basis. And having regard to the conclusions I have reached on the basis of that market formulation, resort to a larger geographic market would not alter the result. Substantial Lessening of Competition 113 It is critical to the applicants' case under s 47 and s 45 that they show the conduct complained of on the part of the BPA and/or its successful tenderer has the purpose, or has or is likely to have the effect, of substantially lessening competition in the relevant market. In determining whether the proposed conduct has that purpose, effect or likely effect, the Court is not required to consider the present state of competition in the market against its projected state in the event the conduct occurs. It is rather a matter of considering the future state of competition in the market with and without the impugned conduct – Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) 64 FLR 238 at 259; Outboard Marine Australia Pty Ltd v Hecar Investments No 6 Pty Ltd (1982) 44 ALR 667 at 669-670. This does not prevent reference to the present state of competition to illuminate the future state of the market where there may be a range of possibilities absent the impugned conduct. 114 The concept of "substantially lessening" competition is evaluative. There is only limited assistance to be derived from replacing the words with other phrases. The term is not defined in the Act and has not received extensive judicial exposition – Eastern Express Pty Ltd v General Newspapers Pty Ltd (1991) ATPR 41-128 at 52,905 (Wilcox J); Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd (1982) 44 ALR 557 at 564 (Lockhart J); Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union (1979) 42 FLR 331 at 348, the latter on the meaning of "substantial" in the collocation "substantial loss or damage" under the old s 45D. In my opinion the phrase sets a standard for judicial intervention in respect of the classes of anti competitive conduct to which it applies. It requires, before that intervention can be invoked, that there be a purpose, effect or likely effect of the impugned conduct on competition which is substantial in the sense of meaningful or relevant to the competitive process. There is, of course, a certain circularity in these attempts at exposition. It could be said that a substantial lessening of competition describes a purpose or outcome of conduct which is deserving of the intervention of the Court in the protection of the competitive process according to law. So to say, is to identify the functional character of the statutory standard. 115 In the present case, there is a number of considerations which lead to the conclusion that the conduct of the BPA in granting an exclusive licence with or without a price cap does not have the purpose and will not have nor is likely to have the purpose or effect of substantially lessening competition in the relevant market. In addressing these considerations I do so on the basis that it is for the applicants to demonstrate that the conduct they complain of has the requisite purpose or effect or is likely to have the requisite effect. That is so whether the case is proposed under s 47 or s 45 – Sodastream Ltd v Electronics (Broken Hill) Pty Ltd (1985) 60 ALR 427 at 430 (Beaumont J); John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) ATPR 41-318 at 42,237 (Hill J). 116 The first consideration is that the market for the provision of towage services at Bunbury is a natural monopoly in the sense discussed earlier in these reasons in relation to the economic evidence. The volume of towage services required at the Port is historically relatively stable and unlikely to undergo any significant increase in the foreseeable future. That volume is incapable of supporting more than one towage operator having regard to the costs of establishing and operating towage services at the Port. There is therefore no competition "in" the provision of towage services which would or could be affected by a decision of the BPA to issue an exclusive licence with a price cap. Nor was the case fought upon that basis. 117 The applicants' case rests critically upon the proposition that absent an exclusive licence the market is contestable. Upon the grant of an exclusive licence it ceases to be so for the period of the licence. In my opinion however, the applicants have failed to show that the market is other than weakly contestable at most. I am not persuaded by the assertion of low sunk costs in relation to the capital outlay involved in the acquisition of tugs. That assertion was dependent upon the proposition that tugs, new or second hand, acquired for such a purpose could readily be resold on the international market at little or no loss. I accept that there is an international market for the sale of second hand tugs. That is not to say that such sales are easily made, that there is not a risk of significant loss or substantial transaction costs associated with such resales. I note, notwithstanding Frederick's evidence on the point, the conclusion of the 1995 ACCC Inquiry into the Harbour Towage Declaration which was exhibited to his affidavit and which he debated in his evidence: "The initial capital cost of entry is estimated to be at least $20 million excluding overheads. This is on the basis that a potential entrant would require at least two large tugs which cost approximately up to $10 million each. With a significant proportion of such expenditure likely to be lost as sunk costs in the event of failure will be perceived by potential entrants as representing a barrier to entry." (Report par 6.3) The Report went on to state that the evidence to the Inquiry suggested there are limited opportunities in the second hand tugs market in Australia. Over and above that potential barrier to entry which may be mitigated by the use of second hand or chartered tugs, there is the significant disincentive to entry, of the losses likely to be incurred in providing a service in direct opposition to a powerful determined and well established incumbent. That such losses are likely to be incurred is emphasised by the clear determination of Adsteam to protect its position in the market. Its ability to do so is enhanced not just by the absence of a sunk cost component to its competitive resistance but also its established connection with shipping operators particularly through its volume rebate agreements. 118 Assuming, on a pessimistic view, no pro competitive benefit arising from the grant of an exclusive licence with a price cap, the applicants have failed to show any substantial lessening of competition if the BPA were to follow that course. 119 The assumption made above is in my opinion too pessimistic. The process of calling for tenders for an exclusive licence with or without a price cap is likely to have a pro competitive effect in relation to the market for the right to provide towage services. It removes or reduces a disincentive to new entrants bidding for the licence in that the successful tenderer will be assured of a degree of security of tenure to enable entry barriers by way of sunk costs including the costs of "on the water" competition which it would otherwise face in head to head competition with a natural monopolist, to be avoided or reduced. There is, of course, a competitive process associated with the grant of the exclusive licence. That process encourages competitive price and service proposals from new entrants. As Professor Williams said, it is likely to have a competitive effect which survives the tender process in that the tenderer is tied to the prices and services proposed and cannot increase prices without the consent of the BPA. There are also termination provisions for failure to perform in accordance with the requirements of the agreement. Moreover, there is an incentive to reduce costs and increase efficiency even under a fixed price regime in order to increase returns. 120 The initial competitive impulse generated by the tendering process should be supported at a later stage during the term of the licence by commercial pressure on the successful tenderer to continue to look more attractive to shipping operators and the BPA than any other likely bidder upon the renewal or regrant of the licence. 121 The applicants have failed to show that there is a substantial lessening of competition associated with the BPA tender process. In so concluding I have regard to the criticisms of the drafting of the tender documents and the evaluation criteria which were made in cross-examination. To the extent that these criticisms reflect constraints upon the competitive process engendered by the content of the tender documents, they will be mitigated by a degree of flexibility in settling the final terms of the agreement. The conclusion on the issue of substantial lessening of competition disposes of the applicants' cases under ss 47 and 45 of the Trade Practices Act. Brief reference is made to each of those cases below. The Section 47 Case 122 Section 47 prohibits the practice of exclusive dealing. It is not necessary for present purposes to revisit in detail the applicants' submissions as to the various elements of the section and how they are said to apply to the conduct of the BPA. They were set out in detail earlier in these reasons. In short, the BPA is said to be liable accessorially for a prospective contravention of s 47 by the successful tenderer. This is on the basis that the right to provide towage services is itself a service which the successful tenderer will acquire on condition that BPA will not offer that right, ie provide that service, to any other person. Section 47(10) requires the applicants to show, as they contend, that the conduct of BPA and the successful tenderer has the purpose or has or is likely to have the effect of substantially lessening competition in the market. For the reasons outlined in the previous section, that has not been shown and the s 47 case fails. The Section 45 Case 123 In their s 45 case, also outlined in more detail earlier, it is said for the applicants that the towage licence agreement, if made and given effect to, would be a contract, arrangement or understanding within the meaning of s 45(2)(a)(ii) and 45(2)(b)(ii) of the Trade Practices Act. The schedule of price provisions, in the context of an exclusive licence, would have the purpose or effect or likely effect of substantially lessening competition in the market. Again, this aspect of the applicants' case is critically dependent upon demonstrating a prospective substantial lessening of competition. Here, the anti competitive effect is linked to the price schedule rather than to the exclusivity of the proposed licence. The schedule prices are maxima. The licensee can reduce prices at any time. There is a twelve month review, albeit not resolvable by any arbitral process, to determine if prices can be reduced. In my opinion the pro competitive effect of the tendering process has its impact upon pricing at the point of bidding and negotiation such that there is a greater prospect of more competitive pricing being obtained than under the current regime. In the end, the competitive effect of the pricing schedule cannot be isolated from the impact of the exclusive tendering process. There is also the commercial pressure on a licensee which is likely to increase as the term of the licence proceeds, to consider the extent to which its ability to reduce or not increase prices will have a bearing upon its prospects of obtaining a new licence against other potential entrants at the expiry of its term. In so saying, I make no assumption as to whether at the expiry of the term the BPA would stay with an exclusive licensing process or return to an non-exclusive licensing process or de-regulate the Port. But in my opinion the earlier analysis in this case of whether there is a substantial lessening of competition by reason of exclusive tendering leads to the same conclusion in relation to the application of s 45 to the pricing schedule. For this reason the s 45 case also fails. The Section 46 Case 124 It has been said that the exercise of a statutory power in the public interest is not the exercise of market power which is necessarily economic in nature or origin – Plume v Federal Airports Corporation (1997) ATPR 41-589 at 44,131 (O'Loughlin J). That is to be distinguished from the case where economic power derives from a statutory monopoly – OD Transport Pty Ltd v Western Australian Government Railways Commission (1986) 3 FCR 270. In my opinion the BPA contention is correct that the exercise by it of a statutory power to licence the provision of towage services in the Port of Bunbury is not an exercise of market power but rather the discharge of a regulatory function conferred upon it by the legislature in the public interest. That said, the fact that the conduct of a statutory body is supported by statutory authority will not necessarily take it out of the scope of s 46. Without exploring the limits of the exempting characteristic it is sufficient in my opinion to say that the grant of a statutory licence under an express power granted by the Parliament is well within it. 125 If that conclusion be incorrect, then the BPA is in any event not in this case offering an exclusive licence for any of the proscribed purposes under s 46. Its plain objective is to encourage a range of competitive responses from tenderers who would otherwise be unlikely to seek to enter the market. The s 46 case fails. CONCLUSION 126 These proceedings have involved the contention by the powerful and well entrenched incumbent of the market for the provision of towage services in the Port of Bunbury, that the BPA is engaging in anti-competitive conduct by calling tenders for an exclusive licence for a term to provide those services. The evidence points in the opposite direction. The present position which the applicants seek to preserve is one in which there is very little prospect of competitive activity except that which is mandated by their strategic concerns. The tendering process offers the promise of competitive responses. The application is dismissed with costs. I certify that the preceding one hundred and twenty six (126) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French. Associate: Dated: 28 January 2000 Counsel for the Applicant: Mr S Finch SC and Mr P D Evans Solicitor for the Applicant: Freehill Hollingdale & Page Counsel for the Respondent: Mr C L Zelestis QC and Mr P Stevenson Solicitor for the Respondent: Mallesons Stephen Jaques Date of Hearing: 14, 15, 16, 17 and 20 December 1999 Date of Judgment: 28 January 2000