ESC savages monopoly power given to Port of Melbourne

Privatisation provided poor constraints on landlord power, watchdog says

ESC savages monopoly power given to Port of Melbourne
The ESC makes the case that Melbourne port tenants are being gouged


Victoria’s Essential Services Commission (ESC) has laid bare an original sin of port privatisation there – the lack of monopoly-power protection.

In its Port of Melbourne – Market Rent Inquiry 2020 pubic report for the period 2015-16 to 2018-19, the ESC finds the Port of Melbourne operating entity and supplier of port land "has not been effectively constrained by the market".

"While the Port of Melbourne’s power is not unconstrained, which reflects a mix of market characteristics and legislative and contractual arrangements, we consider it retains a significant degree of control in relation to setting and reviewing rents," the report finds.

"Most existing tenants have limited ability to switch or credibly threaten to switch to non-port land.

"Many tenants are ‘locked in’ to the Port of Melbourne due to significant sunk costs, and long lead times and large investments needed to explore and secure alternatives.

"Particularly for stevedore tenants, there is no suitable alternative provider of equivalent access to land for supplying Australia’s second largest city, or to facilitate exports.

"These factors limit the bargaining power of tenants."

Critics of port privatisation generally in Australia, including stevedores, marked the start of unregulated landside charging of road and rail transporters for terminal entry to the ‘infrastructure surcharges’, which have since  morphed into ‘container access charges’, imposed to make up for significant rent hikes that stevedores were unable to resist.

On the injection of costs to consumers that has subsequently arisen, the ESC refers to the Victorian Department of Transport, Independent review of the Victorian Ports System: Discussion Paper.

"Demonstrating broader harm, a common theme raised by the stevedores in the Victorian Government’s Port Pricing and Access Review was the impact of rapid recent increases in land rentals on their cost base and the need to increase landside charges, at least in part, to recover these costs," the ESC notes.

The ESC finds that while the port deed the Port of Melbourne agreed to with the government offers potential constraints, these were reduced due to:

  • Not having been made the deed available and ignorance and uncertainty on how its clauses operate
  • Allowing ratchet clauses, which, when combined with fixed annual rent escalations, may result in an ongoing upward rent bias for future rent
  • The ability of the port to to set and review associated payments, such as management or other fees which may be set without reference to their costs, effectively leading to increased rental costs for tenants.

Read about the Victorian ports review paper launch, here

It also finds the port unreasonably refusing to share valuation advice with tenants, making insufficient adjustments in the process for reviewing and setting rents and reinforcing the strategies identified by strategically sequences market rent reviews to its benefit by targeting certain high valuation agreements to negotiate first, rather than progress reviews in parallel.

"The port has then placed excessive weight on the outcomes of these higher value sites to flow rents to lower value land uses (resulting in rents not being at their efficient levels)," the ESC states.

In 2015-16, the Port of Melbourne generated income of $53.8 million from rents and licence fees.

By 2018-19, ‘property revenue’ earned by the Port of Melbourne was $193.7million.

"We understand that there was a general acceptance from stakeholders that rents prior to privatisation were too low and would need to increase over time," the ESC says.

"However, we consider the prevalence of rent increases rising by more than double are significant, and unlikely to match stakeholder expectations.

"They are also likely to reflect the impacts of the Port of Melbourne exercising its monopoly power during the inquiry period."

Meanwhile, average rent per square metre in 2018-19 rose 15 per cent in Melbourne compared with 3 per cent in Sydney  and 2 per cent in Brisbane and around the same the previous year.

In a recommendation somewhat at odds with the Deloitte Access Economics rejection of regulation in its Port Pricing and Access Review report, the ESC calls for it explicitly.

"Further economic regulation is justified to ensure there is mitigation of the ability of the Port to exercise power through rent seeking," it advises, though with "a relatively light touch approach".

The port operator defends itself.

"Port of Melbourne disagrees with the findings of the Essential Services Commission’s Market Rent Inquiry," it says.

"We hold the firm view that our activities in leasing port land have been undertaken in accordance with usual market practice and consistent with our obligations.

"We take our stewardship of the port very seriously and we have invested more than $280 million over the past four years.

"Our ongoing investment program has focused on creating a more productive and efficient port for tenants, which ultimately delivers significant benefits to the Victorian community and the wider economy.

"Although there is clear evidence that the system of rent-setting at the Port is working as intended,

"Port of Melbourne will consider additional ways to improve information and processes to assist in rent and lease negotiations."

Shadow ports minister Roma Britnell describes the report as damning of the state government’s failure to properly regulate port pricing, with the opposition saying: "The report shows that if the status quo continues these rental increases will severely impact on Victorian consumers, driving up the price of everyday items, at a time when Victorians can least afford it."

The ESC report is dated August 14 and its recommendations are being put to assistant treasurer Danny Pearson, whose response ATN has sought.

The ESC public report can be found here.


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