Introduction

1.1 The Moorebank Intermodal Terminal (MIT) is currently under construction in the south-western Sydney suburb of Moorebank. The intermodal freight precinct includes an import-export (IMEX) rail terminal, interstate terminal and a significant warehousing footprint.

1.2 The Moorebank site is in close proximity to major road and rail infrastructure (the Southern Sydney Freight Line and the M5 and M7 Motorways). The MIT will manage freight containers carried by rail to and from Port Botany as well as freight containers carried on the interstate rail network. It is intended to increase the proportion of containerised freight carried by rail, in comparison to containers carried by truck.

1.3 The parcels of land that make up the precinct are owned by the Australian Government and the Sydney Intermodal Terminal Alliance (SIMTA). Of the 383 hectares allocated to the precinct, 241 hectares is developable land. The parties own 65.63 (158 hectares) and 34.37 (83 hectares) per cent of the precinct’s developable land, respectively. The remaining land is associated with the biodiversity offsets required to meet the New South Wales and Australian Governments’ environmental requirements, and was also contributed by the Australian Government.³ The land ownership is reflected in the map at Figure 1.1.

Project history

1.4 The project and its location were first announced in 2004 by the Australian Government. In 2010, a detailed business case was commissioned to examine the project’s economic merits.⁴ The results and recommendations from this business case were presented to the Australian Government in April 2012. This formed the basis of a decision to provide $887 million⁵ for the delivery of the project via a new Government Business Enterprise (GBE)—the Moorebank Intermodal Company Limited (MIC).

1.5 The land on which the MIT was proposed to be built is owned by the Australian Government, but was occupied by a number of the Department of Defence (Defence) units, including the School of Military Engineering (SME). In order to develop the MIT, these Defence units were required to relocate. The activities undertaken on the land by Defence for in excess of 40 years meant that substantial remediation work was required to be undertaken before the land could be developed.

Figure 1.1: Moorebank Intermodal Precinct land parcels

 

 

Source: MIC records.

Moorebank Intermodal Company

1.6 MIC was established in December 2012 to ‘optimise private sector development of an open-access terminal’. A large component of MIC’s first year was comprised of setting up its operations and considering the means of procuring, delivering and operating the terminal. This included establishing its Board; appointing a permanent Chief Executive Officer (CEO); and engaging a range of key advisory firms to support and commence the procurement process to find a private sector delivery partner.

1.7 MIC’s sole shareholder is the Australian Government, which is represented by two Shareholder Ministers: the Minister for Infrastructure and Transport⁶ and the Minister for Finance. The Shareholder Ministers’ departments⁷ are responsible for supporting their Ministers in this role.

1.8 To facilitate the delivery of the MIT, the Australian Government provided a 99-year lease over the parcels of ex-Defence land to the Moorebank Intermodal Development Investment Trust (MIDIT), a subsidiary of MIC.

1.9 The Commonwealth Procurement Rules (CPRs), which are issued by the Finance Minister, apply to all non-corporate Commonwealth entities. The CPRs can be applied to corporate Commonwealth entities but have not been applied to MIC.⁸ Rather, as is the case with most corporate Commonwealth entities, MIC develops and implements its own procurement policies and procedures. These policies and procedures are required to meet general obligations on the organisation that it promote proper use of resources and employ effective internal controls. The Joint Committee of Public Accounts and Audit has recently commented that ‘corporate Commonwealth entities not subject to the CPRs should more closely model their procurement arrangements on the CPRs as a matter of best practice’.⁹

Sydney Intermodal Terminal Alliance

1.10 SIMTA was formed in 2007 to develop an IMEX-only terminal and onsite warehousing at Moorebank. SIMTA had planned to build this on its freehold land that was purchased from the Australian Government in 2003 (the original purchaser was Westpac). The original sale was on a leaseback arrangement, where Defence immediately signed a 10-year lease (with two five-year extensions at Defence’s sole discretion) for the Defence National Storage and Distribution Centre’s (DNSDC) operations to remain on the site. The SIMTA site is situated directly across Moorebank Avenue from MIC’s land.

1.11 Initially formed as a joint venture, SIMTA’s owners were publicly listed companies: Stockland, Qube and QR National (rebranded as Aurizon in 2012). Since then, the ownership of SIMTA has changed twice, as shown by Figure 1.2.

Figure 1.2: Changes in SIMTA ownership between 2007 and 2016

 

 

Source: ANAO analysis.

1.12 Between 2010 and 2012, SIMTA asserted on a number of occasions that the Australian Government was acting in direct competition with SIMTA. This was on the basis that SIMTA’s request to build rail access to its site over adjacent Australian Government land (to the south of the SIMTA site) was denied. SIMTA claimed that its proposal was fully self-funded and would be in operation up to three years ahead of the project being developed by the Australian Government.

1.13 Following MIC’s establishment and a change of Australian Government in September 2013, SIMTA commenced lobbying activities in order to achieve its desired outcome. It purported that a ‘combined’ whole of precinct approach would lead to a more efficient and valuable intermodal facility. This combined approach involved the use of both MIC and SIMTA’s sites and was said to deliver substantial budget benefits to the Australian Government. SIMTA made direct contact between late September and early October 2013 with at least three new Ministers’ offices to discuss the abandonment of MIC’s upcoming tender process. In this respect, MIC advised the ANAO in September 2017 that it:

had discussions with SIMTA in September 2013 during the market soundings and subsequently. SIMTA indicated that it wanted to develop an IMEX terminal on the SIMTA land and MIC could develop an interstate terminal on the Commonwealth land.

MIC had made it clear to SIMTA that the only way SIMTA could proceed with any development would be to participate in MIC’s procurement process, or wait until MIC’s procurement process was completed.

1.14 MIC’s tender process proceeded, with a request for expressions of interest (EoI) issued in December 2013 to select a private sector partner to build and operate a terminal precinct that would deliver on the Australian Government’s project objectives (see paragraph 4.1). SIMTA was the successful party, with contracts exchanged in June 2015. Financial close was reached in January 2017. Figure 1.3 provides an overview of key milestones to date for the project.

Figure 1.3: Timeline of the Moorebank Intermodal Terminal milestones

 

 

Source: ANAO analysis.

Audit approach

1.15 The objective of the audit was to assess whether the contractual arrangements that have been put in place for the delivery of the MIT will provide value for money and achieve the Australian Government’s policy objectives for the project.

1.16 To form a conclusion against this objective, the following high-level criteria were adopted:

• Do the terms of the transaction represent value for money, including appropriate management of demand risk?
• Is non-discriminatory open access available within all aspects of the intermodal precinct?
• Does the project’s governance framework support achievement of the Australian Government’s policy objectives, including the planned future privatisation process?

1.17 The audit focussed on the arrangements that were negotiated between MIC and SIMTA.

1.18 To inform the examination of the arrangements, the audit scope also included the Shareholder Minister’s departments (DIRD and Finance).

1.19 The audit was conducted in accordance with the ANAO Auditing Standards at a cost to the ANAO of approximately $471,589.

1.20 The team members for this audit were Amy Willmott, Cherie Simpson, Joe Keshina Danielle Page, Emily Drown and Brian Boyd.

MIC use of non-government email services for official Australian Government business

1.21 Email communications are a widely used and accepted form of communication by and within the Australian Government. As such, they provide evidence of the conduct of government business and are important information assets. Guidance from the Australian Signals Directorate is that using non-agency-sanctioned webmail to conduct government business heightens the risk of the unauthorised disclosure of government information.¹⁰

1.22 In the course of this audit, the ANAO identified various instances of non-MIC corporate email services being used (including free web-based personal email accounts) for work purposes. This included instances where confidential documentation relating to the project was being transmitted (such as evaluation results, contracts, project valuation information, negotiation records including notes of meetings with SIMTA marked ‘confidential’ and a Shareholder Ministers’ letter). The security risks that come with using web-based email services are well known and have been publicised. These practices also represent a limitation on the scope of this ANAO performance audit as the ANAO is unable to be satisfied that all relevant email communications are captured in MIC records.¹¹

1.23 Further detail on this matter can be found in Appendix 2.

What was the policy rationale for the Australian Government’s development of the Moorebank Intermodal Terminal?

2.1 In 2012, the MIT was identified by Infrastructure Australia as one of the most important infrastructure projects in the country. This was primarily because the MIT was seen as the best way to substantially increase the proportion of Sydney’s container freight moved by rail—an important part of both Infrastructure Australia’s National Land Freight Strategy and the Australian Rail Track Corporation’s (ARTC) North-South strategy.

2.2 Supported by a detailed business case, an approach that involved a co-located import-export (IMEX) terminal, interstate terminal and onsite warehousing was considered the most efficient and commercially viable option for the delivery of the project.¹² Specifically, the business case indicated that the:

• MIT was expected to generate approximately $10 billion in economic benefits through improved productivity, reduced business costs, reduced road congestion (by reducing the number of truck trips in Sydney by 3 300 per day) and provide positive environmental outcomes;
• Australian Government’s involvement in the project was considered necessary to ensure the delivery of additional interstate freight capacity that will enable efficient freight movement between port, rail and road—and in the future—across a network of intermodal terminals; and
• School of Military Engineering (SME) site was considered optimal for the development of an intermodal terminal with an interstate freight component, due to its unique proximity to key rail infrastructure and its capacity to accommodate interstate trains of 1 800 metres.

2.3 Due to the significant national productivity benefits expected to be realised, as well as the strategic size and the location of the MIT, a consistent (and current) Australian Government objective for the project has been to ensure that the terminal will be operated on an open access and non-discriminatory basis (that is, available for use by other operators on a reasonably equal basis).

Was a competitive procurement process adopted?

2.4 Some 40 companies were consulted during the preparation of the detailed business case. It was concluded that their interest in participation in the project was ‘very strong’. The project’s business case considered that, to deliver value for money, it would be important to attract market interest through a competitive procurement process.

2.5 Consistent with the project’s business case, a competitive procurement process was designed by MIC.

Registration of interest

2.6 An open registration of interest (RoI) process was conducted between May 2013 and June 2013 to:

• encourage the development of a competitive field of tenderers with the required experience, capability and capacity; and
• establish a process for further interaction with select respondents, including market testing key commercial and design principles, processes and timing regarding project development and operations.

2.7 The RoI documentation noted that parties choosing not to participate in the RoI process (which included SIMTA) could participate in MIC’s later formal procurement processes commencing with expressions of interest.

2.8 In responding to the RoI process, parties were asked to provide information on their interest in and expectations of the project, comment on the concept design and identify factors likely to affect the successful delivery of the project. Nineteen parties responded, of which 16 were from the targeted group (of domestic and international organisations that operate within the freight and logistics industry; are involved in the development/management of warehousing and distribution centres; or own similar or related infrastructure).

2.9 MIC concluded from the RoI process that the number of serious bidders was likely to be limited to between two and four parties, and that the procurement process needed to recognise this and be effective at maintaining competitive tension.

Market sounding

2.10 Following the RoI process, in September 2013 MIC undertook some more targeted market sounding activities with selected parties. MIC’s Board was advised that this was to ‘seek input from selected market participants to inform the selection of a commercial structure and procurement process to meet the project objectives and maximise the commercial success of the project.’ The RoI documentation noted that MIC could, at its sole discretion, hold direct discussions with any party regardless of whether they had responded to the RoI.

2.11 MIC prepared a ‘Market Interaction Brief’ to provide to the selected parties. The brief outlined, amongst other things, a project description; proposed commercial principles; short listed IMEX terminal procurement models; and warehouse development options.

2.12 MIC wrote to three potential developers on 26 August 2013, inviting them to: review the brief after signing a confidentiality agreement; provide written responses to a set of 12 questions; and participate in a formal market sounding discussion with MIC and its commercial adviser. The brief was provided to each of the three developers (which included SIMTA). MIC and its commercial adviser also held an informal discussion with a container logistics company operating out of Port Botany on 2 September 2013.

2.13 In September 2017, MIC advised the ANAO that there were a further three parties that participated in market interactions with MIC regarding the project in August and September 2013. MIC further advised the ANAO that it provided the Market Interaction Brief ‘to all parties on 26 August 2013 with the same content’. The evidence did not support that all parties MIC engaged with as part of the market sounding received the same information. In particular:

• MIC’s records do not include any evidence of the brief being provided;
• there were no confidentiality agreements signed by four of the parties (the brief is identified as ‘MIC Confidential Information’ in the three agreements that were signed); and
• papers for one MIC Board meeting state that the container logistics company had not received the brief.

2.14 MIC’s approach in inviting a subset of potential developers to participate in the market sounding process gave rise to a risk of providing an unfair advantage to those parties that were invited to participate. This issue was raised with MIC by its probity adviser (Walter Partners) before it invited participants. MIC records did not include a response to the probity adviser or otherwise indicate that any action was taken by MIC in response to the concern that had been raised.

Expression of interest

2.15 MIC designed a competitive two-stage expression of interest (EoI) process. Responses to the first stage were to be used to shortlist at least two (but no more than three) respondents to proceed to the second (‘Project Development Request’ or PDR) stage. The second stage was to involve MIC working with shortlisted respondents to develop detailed and committed proposals from which a successful partner would be selected.

2.16 A public call for expressions of interest was made on 13 December 2013. The EoI document sought operators to lead the MIT development by establishing consortia with builders and financiers and submitting proposals to build and operate the terminal. The closing date for EoIs was 26 February 2014.

2.17 The first EoI stage was in two parts. The first part involved the public release of Part 1 of the Request for EoI document. The second part involved MIC admitting parties it assessed as qualified¹³ to a confidential data room with the information in the data room then to be used by admitted parties to develop their EoIs.

2.18 Admitted parties were also provided with the second part of the EoI document. This provided potential respondents with confidential information on various technical and business related aspects of the MIT including the:

• proposed allocation of risks;
• proposed approach to open access; and
• financial and other support MIC envisaged providing to the project.

2.19 A healthy level of market interest was generated by the EoI process. MIC admitted eleven parties to the data room. Five parties proceeded to submit EoIs.

Evaluation approach

2.20 The Request for EoI documentation outlined that MIC’s assessment process would involve:

• considering proposals as a group to first determine the optimal commercial structure for the project; followed by
• assessment of individual EoI responses and shortlisting of respondents based on MIC’s view of each respondent’s ability to satisfy the published project objectives, in the context of the selected commercial structure.

2.21 MIC’s approach allowed for it to select the best elements of the proposals put forward by EoI respondents for a commercial structure. But the approach also meant that MIC’s shortlisting of respondents would occur in the context of respondents not having had the opportunity to submit proposals directly responding to the commercial structure adopted by MIC. In this respect, a further stage of submissions addressing the optimal commercial structure was integral to maintaining competitive tension and achieving value for money. This was to occur as part of the planned second (Project Development Request) stage of the EoI process.

2.22 Consistent with good procurement practice, MIC prepared an EoI evaluation plan. Among other matters, the plan identified the assessment criteria that would be applied, the criteria weightings and the assessment scoring system to be employed. This plan was focused on the EoI process, with an additional evaluation plan to be prepared for the PDR phase prior to commencement of that phase of the procurement process.

2.23 The EoI Evaluation Panel was chaired by MIC’s Procurement Director with three other members (the MIC CEO, the MIC General Counsel/Company Secretary and MIC’s contracted Commercial Adviser from Macquarie Capital). The Panel was to assess EoI responses against each of the evaluation steps and report to an Implementation Committee (which was a committee of the MIC Board). The Implementation Committee’s recommendations would be considered by the full MIC Board.

Evaluation criteria and weightings

2.24 Part 1 of the EoI document outlined that MIC expected that the development of the MIT would be phased. It also set out five objectives for procuring the initial phase of the MIT. Those objectives were drawn from the Australian Government’s policy objectives for the project (outlined at paragraph 4.1).

2.25 Part 2 of the EoI document (provided to the parties admitted to the data room) included a section titled ‘Your response—what you need to tell us’. This identified 21 types of information that needed to be provided.

2.26 There were eight criteria used to evaluate the EoIs that were received. One of the criteria was described in MIC’s evaluation plan as being a ‘gateway objective’ and had a weighting of 25 per cent. To proceed to be evaluated against the other seven criteria a proposal was required to achieve a score of at least four out of ten against that criterion. The criterion was expressed as follows:

Provide certainty that those allocated with responsibility for development and operation of the IMEX Terminal and Interstate Terminal have the appropriate capacity, skills and industry knowledge to do so.

2.27 The other seven criteria were weighted at 7.5 per cent (one criterion), 10 per cent (four criteria), 12.5 per cent (one criterion) or 15 per cent (one criterion).

2.28 A shortcoming in MIC’s procurement process¹⁴ was that the EoI documentation provided to potential respondents did not identify the assessment criteria that MIC would apply in scoring the responses.¹⁵ The EoI documentation also did not identify that the criteria were weighted, or otherwise inform potential respondents as to those considerations that were of greatest importance to MIC.

Engagement with respondents and selecting the optimal commercial structure

2.29 As part of its assessment process, MIC engaged with each of the EoI respondents in respect to their proposals (see Table 2.1).

2.30 As noted at paragraph 2.20, the first assessment stage was to involve MIC considering proposals as a group to first determine the optimal commercial structure for the project. The optimal commercial structure for the project was identified by MIC taking into account a range of considerations. These included responses to the EoI and guidance from the Shareholder Ministers’ departments.

Table 2.1: Expressions of interest engagement with respondents and scoring of responses

Note a: Scores of four or higher were considered to have satisfactorily met the criteria. As Respondent E scored less than four on the ‘gateway’ criterion, it was not assessed against the remaining criteria and, as a result, there was no overall weighted score.

Note b: These interactions involved one interview for each respondent, with the remaining interactions via email.

Source: ANAO analysis of MIC records.

2.31 The commercial structure selected by MIC as optimal most closely resembled the EoI submitted by SIMTA. Therefore the SIMTA proposal scored significantly higher than the other proposals (see Table 2.1 above).

Assessment outcome

2.32 By April 2014, MIC had completed its assessment of the five EoIs received. After the results were presented to the MIC Board, MIC wrote to its Shareholder Ministers (the Minister for Infrastructure and Regional Development and the Minister for Finance) advising that it planned to change its approach to the next phase of its procurement process. In this latter respect, MIC’s advice to Ministers was that it:

[…] received five responses from potential operators. This was a strong response though the quality of responses varied substantially. One respondent’s submission was significantly stronger than the others, being willing to provide substantial capital and accept more risk.

Following lengthy and detailed deliberation (including taking the advice of our probity auditor), the board agreed to proceed to direct negotiations with one respondent.

2.33 The ANAO’s analysis is that MIC had not fully tested the extent to which respondents were ‘willing to provide substantial capital and accept more risk’, as the EoI process had only sought responses at a ‘conceptual level’. The EoI documentation had indicated that shortlisted respondents would be afforded a further opportunity through a subsequent Proposal Development Request (PDR) stage involving the development of fully detailed and committed proposals. The PDR process was to have outlined and sought direct responses to the key elements of the optimal commercial structure identified by MIC through the EOI process. In this respect, abandoning the PDR stage was inconsistent with maintaining competitive tension.

2.34 In late April 2014, the MIC Chair and CEO met with the Finance Minister and senior Finance officials to discuss MIC’s proposed approach. In May 2014, following receipt of additional details from MIC substantiating the proposed direct negotiations approach¹⁶, DIRD and Finance recommended that their Ministers provide MIC with the requested consent. This was based on advice from MIC that:

• the parties would enter into a Procurement Process Deed, which would set out:
  • a negotiation timetable, including ‘approval hurdles’ that needed to be met at each stage;
  • MIC’s plans to cease negotiations with SIMTA should it not be able to come to agreement on the commercial arrangements by 20 November 2014 (the deed’s termination date); and
  • the ‘clear commitments’¹⁷ proposed by SIMTA in its EoI submission;
• it could sustain competitive tension by SIMTA knowing that MIC could terminate the negotiations if hurdles were not met;
• it was open to MIC to re-engage with two other qualified respondents, who would be kept on stand-by during the exclusive negotiation period; and
• based on probity advice, there was no legal or probity impediment to proceeding to direct negotiations.

2.35 MIC and SIMTA signed the Procurement Process Deed on 22 May 2014, entering them into a six month period of direct negotiations. During the direct negotiation period, the parties were to have progressed through five ‘stages’ of negotiations, with the final stage being contractual close.

Were risks from adopting a direct negotiation process identified?

2.36 MIC’s decision to proceed straight to direct negotiations at the conclusion of the EoI stage effectively afforded SIMTA the opportunity it had unsuccessfully sought in late 2013 (see paragraph 1.13).

2.37 In the context of achieving value for money, entering into direct negotiations with one proponent can significantly impact the level and balance of competitive tension between the parties to the transaction. MIC’s Negotiation Strategy identified various risks relating to moving away from a competitive procurement process, as well as a number of mitigation strategies for each of these risks.

2.38 The risks from adopting a direct negotiation process were also raised in advice to the Shareholder Ministers by their respective departments in mid-April 2014. The departmental advice was informed by commercial and legal advice, which was provided to Ministers in full, and outlined that:

• given the proposal [is] for 6 months of negotiations, this assumes that there are a significant number of matters of substance to be agreed;
• whilst granting “Preferred Proponent” status is not unusual in commercial negotiations per se, it usually occurs after intense competition and the lodging of final and binding bids—namely bids capable of acceptance and the timeframe for discussion is usually days, not months. This process design ensures that other Respondents do not disengage during the period of negotiation;
• there is no certainty that the period of exclusivity will not be extended once MIC has spent 6 months negotiating with [SIMTA] (which may further diminish competitive tension). Such extensions are common in commercial negotiations once exclusivity is granted; and
• there would be real merit in issuing a Proposal Development Request (PDR) document (in the form contemplated by the Request for EoI)¹⁸ and seeking a formal response from [SIMTA] before progressing to negotiations. This is because:
  • a PDR document would establish a clear baseline of the Commonwealth’s objectives and preferences against which any final negotiated outcome with [SIMTA] could be objectively assessed (both by MICL and external stakeholders); and
  • a formal response provided by [SIMTA] should represent a substantially developed offer capable of acceptance by MICL and, provided the PDR document is appropriately framed, should also reduce the risk of [SIMTA] resiling from its formal offer on key issues during the course of negotiations.

2.39 MIC advised the Shareholder Ministers that ‘some competitive tension’ could be maintained through: the clear commitments given by the preferred respondent in its proposal; and the ability to fall back to a competitive process by keeping two other respondents on ‘stand-by’. The two respondents placed on stand-by were those that scored second and fourth highest. This reflected a request from the third ranked respondent that it not be shortlisted if there were other respondents that were willing and able to develop the MIT.

Were negotiation timeframe risks well managed?

2.40 On 16 May 2014, MIC informed SIMTA that it intended to continue the procurement process by undertaking direct negotiations with SIMTA ‘for a period of time’, subject to MIC and SIMTA agreeing on the terms of this negotiation. MIC’s Negotiation Plan envisaged that contractual close would occur 24 weeks after a Procurement Process Deed was signed with SIMTA. As noted at paragraph 2.34, MIC’s advice to decision-makers had been that risks associated with direct negotiations could be managed, in part, by MIC terminating the negotiations if timeframes were not being met and re-engaging with two other EoI respondents that would be on stand-by.

2.41 The Procurement Process Deed was signed on 22 May 2014, to govern the conduct of the negotiations. Also on 22 May 2014, MIC informed the two EoI respondents that were being placed on stand-by that:

• it was ‘deferring the commencement’ of a multi-proponent PDR phase ‘for a limited time’ while direct negotiations occurred with SIMTA;
• direct negotiations with SIMTA would be for a period of ‘up to six months’; and
• it ‘may’ seek to re-engage with those respondents ‘in due course’.

2.42 The Procurement Process Deed outlined that the successful completion of Stage 5 was to result in the production of a ‘Final Binding Offer’ (FBO)—synonymous with contractual close. The FBO was also to signify the determination of SIMTA as the ‘preferred proponent’ and the release of the remaining qualifying EoI respondents from stand-by. Consistent with advice to the Shareholder Ministers, a key condition of the deed was that if the parties failed to complete Stage 5 by the 20 November 2014 termination date, MIC would cease direct negotiations with SIMTA.

2.43 The effectiveness of this approach as a control in maintaining competitive tension during direct negotiations was reliant on timely achievement of the approval hurdle milestones; and ensuring that documentation forming the basis of the FBO was sufficiently detailed. Table 2.2 highlights that considerable delays occurred throughout the negotiations.

Table 2.2: Stages for direct negotiations between MIC and SIMTA

Source: ANAO analysis of MIC records.

2.44 In September 2014, MIC advised its Board that the MoU Agreement on Fundamental Matters discussions were far more detailed and lengthy than either MIC or SIMTA first contemplated, and due to this, the parties brought discussions for that stage to a conclusion by documenting the position on each fundamental matter whether agreed or otherwise. For matters yet to be agreed, the position of each party was recorded with a commitment to resolve the matter in Stage 2 (proposal negotiations). The MIC advice did not contemplate terminating negotiations and re-engaging with the two parties it had placed on stand-by.

2.45 The parties agreed an aggressive program to finalise the remaining transaction documentation, but were unable to make up for the time lost. This resulted in eight amendments to the Procurement Process Deed, each with the effect of extending the deed’s termination date. There was no evidence of MIC, prior to any of these amendments, contemplating the merits of implementing the planned risk management strategy of terminating negotiations and re-engaging with the two parties on stand-by.

2.46 Six months after entering into direct negotiations and shortly after finalising the detailed Term Sheet on 20 November 2014, media releases¹⁹ were published announcing that MIC and SIMTA had reached an agreement to develop the Moorebank project. As reflected in commercial and legal advice commissioned by DIRD and Finance, by this point in time and based on the process that had eventuated, MIC’s capacity to pursue an alternate process or new proposals had become limited and likely to carry substantial risk. On 11 December 2014, MIC wrote to the two other EoI respondents it had placed on stand-by thanking them for their time and effort in participating in the procurement process.

2.47 Contractual close was reached six months after the announcement was made, and more than six months later than had been intended when the decision had been taken to enter into direct negotiations.²⁰

Did negotiations secure the expected contractual commitments?

2.48 According to May 2014 departmental advice, and consistent with the approach suggested to the departments by their advisers (outlined at paragraph 2.38), the May 2014 Procurement Process Deed was to bind SIMTA to the ‘commitments’ expressed in its EoI submission. Similarly, in September 2017, MIC advised the ANAO that:

The first step in the direct negotiation was to secure SIMTA’s commitment to the key elements of its EoI response. This is recorded in Schedule 1 to the Procurement Process Deed executed by MIC and SIMTA on 22 May 2014.

2.49 The ANAO’s analysis is that the terms of the Procurement Process Deed did not involve MIC obtaining a commitment from SIMTA to key elements of its EoI response. Rather, the Deed set out the parties’ rights and obligations in relation to the conduct of the direct negotiations process. Further, the express purpose of Schedule 1 to the Deed was to ‘summarise the EoI response, including the respondent’s response to MIC’s written evaluation questions and the evaluation interview’. There was no commitment expressed in the Schedule, or elsewhere in the Deed, to the EoI response. The lack of any such commitment was consistent with:

• the EoI request having been issued by MIC on the basis that no legal or other relationship or obligations would arise between any Respondent and MIC unless and until binding legal documentation was signed, and that acceptance of any EOI response would not create a binding contract between MIC and the respondent; and
• responses to the EoI request not being in the form of binding bids (including clear commitments) that were capable of acceptance.

2.50 Key elements of the transaction changed significantly during the course of negotiations compared to the commercial arrangements envisaged by the EoI request and in SIMTA’s EoI response. The ANAO’s analysis is that the direct negotiations did not secure a contractual commitment to important elements of the Australian Government’s preferred approach to some matters (as articulated in the Request for EoIs); or to all key elements of SIMTA’s EoI response. This was the case in relation to:

• the Australian Government’s financial contributions and contingent liabilities increasing over the course of negotiations. For example, the successful EoI had indicated that no government subsidies would be sought to fund connecting rail infrastructure, or for the relocation of Moorebank Avenue.²¹ The Fundamental Matters MoU agreed in September 2014 stated that the Australian Government would fund a portion of the Southern Sydney Freight Line rail access and that SIMTA’s contribution towards relocating Moorebank Avenue would be capped at $20 million. The final contracted outcome reflected the same cap in relation to Moorebank avenue, but involved the Australian Government funding the entirety of the Southern Sydney Freight Line rail access²²;
• the Australian Government being prohibited from divesting its interests to rivals of the successful respondent,²³ as opposed to its original preference for an unfettered privatisation process;
• the mitigation of private sector exposure to demand risk. The successful EoI response had stated that the Australian Government (through MIC) would not be required to assume any demand risk for the project. The negotiated outcome maintained a position that demand risk is predominantly with the terminal operators but private sector exposure to demand risk is mitigated by the contractual arrangements:
  • providing a number of grounds on which terminal capacity is not required to be expanded even in circumstances where there is unmet demand; and
  • allowing the operator to set the prices it charges for terminal services and warehousing at market rates, without any reference to its costs with the contractual arrangements involving concessions from the Australian Government that reduce those costs;
• the value of land rent revenue streams from SIMTA diminishing progressively throughout negotiations from a starting position of ‘market value’ set out in the EoI response to a contracted position well below market rates;
• concerns raised by the Shareholder Ministers’ departments that the contractual arrangements should guard against the risk of the IMEX terminal being delivered, but not the interstate terminal. The contractual arrangements seek to address this issue, but there remain some circumstances under which the obligations to develop the interstate terminal to its ultimate capacity may be terminated, with SIMTA retaining its rights and obligations in relation to the IMEX terminal and rail access;
• MIC making a number of significant concessions in regard to warehousing development, most notably the granting of 99-year warehousing ground leases that will survive contract termination; and
• the contractual arrangements excluding certain aspects of terminal services that the EoI had identified would be captured as part of the Open Access Regime. In addition, the compliance arrangements for the Regime are not as strong as was envisaged in the EoI.

2.51 Details of the ANAO’s analysis are provided in Appendix 3.

Was probity in the procurement process well managed?

Probity framework

2.52 In May 2013, MIC appointed a probity adviser for the approach to the market. MIC did not conduct an open tender process for this role. Rather, it obtained and evaluated three quotes from firms recommended by its legal adviser (Herbert Smith Freehills). The contract specified a capped monthly fee of no more than $30 000 over a thirteen and a half month period representing a total potential fee value of $405 000. An engagement of this value should have been subject to an open tender under MIC’s procurement policy.

2.53 The statement of works for the probity adviser developed by MIC emphasised that its status as a GBE meant that it was not required to comply with Australian Government probity requirements. Rather, MIC was seeking to ‘work with the adviser to apply commercially appropriate and pragmatic probity practices for competitive procurement processes with a total project value of approximately $1 billion, and to implement good probity practices within its day-to-day business’. The adviser was paid a total of $54 130 for work undertaken between November 2013 and April 2015. Although the adviser was appointed in May 2013, no work was invoiced as having been undertaken prior to November 2013.

2.54 MIC also engaged a probity auditor (Risk Reward Pty Ltd)²⁴ for the EoI and the direct negotiations processes. The July 2014 engagement was through a non-competitive process of MIC’s legal adviser seeking a quote from a provider that had previously (in December 2013) been identified by MIC. In September 2017, MIC advised the ANAO that the firm had been ‘recommended by MIC’s former General Counsel’ and that ‘given the relatively small size of the consultancy (approximately $25 000), an open tender was not adopted’.²⁵

2.55 A probity plan was produced, although advice from MIC’s probity adviser had been that probity protocols would have been a better approach. The probity plan did not apply to the Registration of Interest process or the September 2013 market sounding exercise. The ANAO sought advice from MIC as to why a probity plan was not in place for the full extent of the engagement with the market. MIC’s advice to the ANAO in September 2017 was that:

The market sounding process was market research / information gathering for MIC. It was not proponent procurement or selection. The probity adviser reviewed and commented on the RoI documents and market sounding process, and his feedback was taken into account.²⁶

2.56 The appointment of a probity adviser and probity auditor, and the establishment of a probity plan also occurred after MIC had made its major adviser appointments.

EoI process

2.57 A draft report from the probity adviser on the EoI process was provided to MIC on 1 May 2014. MIC amended the draft report, prior to the probity adviser’s final sign-off, to state that the adviser had attended ‘key meetings’ and that he endorsed the proposed approach of entering into direct negotiations. Accordingly, the adviser’s report signed on 1 May 2014 stated that:

• the EoI processes had been conducted fairly and properly and in a manner consistent with all probity requirements and those of procedural fairness; and
• it supported the entering into of exclusive negotiations with the first-ranking respondent ‘given the clear gap between this respondent and the other respondents’.

2.58 The probity auditor’s September 2014 report on the EoI process concluded that, apart from three areas, it believed the probity requirements were met during the EoI phase, including in relation to evaluation of the bids and the decision to proceed with direct negotiations with SIMTA. The three areas of findings and related recommendations addressed: management of conflicts of interest; transparency and accountability matters; and access security over confidential data and documentation.

2.59 MIC’s response adequately addressed the findings and recommendation relating to access security. But its response did not adequately address each of the findings that underpinned the probity auditor’s recommendations in the other two areas (see Table 2.3).

Direct negotiation process

2.60 On 2 April 2015, MIC sought a sign-off from the probity adviser on the direct negotiations process. MIC informed the probity adviser that a final binding offer had been received that day from SIMTA, provided the adviser with the covering letters and outlined that the final binding offer would be available to view in MIC’s offices from 7 April 2015. On Saturday 4 April 2015, the probity adviser provided a sign-off that the probity adviser had:

• reviewed the final binding SIMTA offer²⁷;
• monitored the entire negotiation process and attended all²⁸ high level negotiation meetings to ensure that all probity requirements were met; and
• concluded that: ‘the process was conducted in a manner consistent with the Procurement Process Deed, principles of procedural fairness and all probity requirements and that, in view of the meeting of Commonwealth objectives with relatively low Commonwealth capital investment and SIMTA adopting the majority risk, value for money for the Commonwealth is able to be obtained’.

2.61 The probity auditor’s August 2015 report on the direct negotiation process stated that it was satisfied that the key controls put in place to mitigate the major probity risks to MIC were appropriate and operated effectively during the direct negotiation process.

What advice on the value for money of the project was provided to Shareholder Ministers?

2.62 Advice in respect to the project’s optimal delivery mechanism and its value for money has been provided to Ministers over a substantial period of time. Key advice was typically provided leading up to important project milestones, such as when the project’s detailed business case was finalised in February 2012; the selection of a preferred respondent in April 2014; and prior to the execution of the project contracts in June 2015.

Initial Australian Government approval

2.63 Initial Australian Government approval for the MIT was given in April 2012 and included $887 million²⁹ for the implementation of the project via a dedicated Government Business Enterprise.³⁰ The Government’s decision was on the basis of comprehensive departmental advice, which was underpinned by the project’s detailed business case.

2.64 A benefit cost ratio (BCR) was calculated for the MIT as part of its business case, in order to ensure the economic benefits outweighed the economic costs. This analysis indicated that the project showed a BCR of 1.72 and a positive net present value of $1 billion.³¹ This is the BCR referred to by Infrastructure Australia in its evaluation of the business case.³²

2.65 The BCR of 1.72 did not take into account the cost to the Australian Government for the relocation of the School of Military Engineering (SME) from the Moorebank site—which was explicitly linked to the project—as these costs were considered as part of a separate Moorebank Units Relocation (MUR) business case compiled by the Department of Defence. In considering the Defence-specific costs and benefits, the MUR business case:

• identified that 78 per cent of the total cost of the Moorebank Units Relocation project were directly attributable to the MIT—as at September 2013, these costs were in the vicinity of $517 million;
• noted that the MUR project was ‘driven by the Government’s need to develop an Intermodal Terminal on the Defence land at Moorebank that lies between Moorebank Avenue and the Georges River’; and
• did not calculate a BCR for the MUR project.

2.66 Department of Finance advice was that the BCR for the project was 1.27 taking into account the Defence relocation costs.³³

Advice provided throughout contractual negotiations

2.67 Following the September 2013 Federal Election, the new Shareholder Ministers approved the continuing operations and activities of the MIC in line with advice received from their respective departments.

2.68 This approval saw MIC continuing to be responsible for the procurement and, later, the contractual negotiations for the development of the MIT. The formal and informal governance arrangements between MIC and the Shareholder Ministers’ departments involved regular liaison between officials, and the seeking of approvals from the Ministers at key milestones. These milestones have included Shareholder Ministerial agreement that MIC:

• release its Request for EoI documentation in December 2013;
• depart from its published procurement process by entering into direct (one-to-one) negotiations with SIMTA;
• formalise high-level commercial arrangements via a ‘Fundamental Matters’ Memorandum of Understanding (MoU) with SIMTA in September 2014;
• accept a detailed Term Sheet via an offer made by SIMTA in November 2014³⁴; and
• execute the finalised Development and Operations Deed on 3 June 2015 to achieve contractual close.

2.69 These approvals were sought and received by way of letters between the MIC Chair and the Shareholder Ministers. Advice and recommendations from the two Shareholder Ministers’ departments were often accompanied by copies of advice from the departments’ legal and commercial advisers.

Advice on the negotiated outcome

2.70 In April 2015 MIC wrote to Shareholder Ministers on the outcome of the negotiations. The settled commercial and contractual arrangements for the delivery of the project included:

• MIC assuming a landlord role, with no investment in the development of the terminal, warehousing or precinct infrastructure;
• all land required for development of the intermodal terminal would be leased to a land holding entity (Land Trust), jointly owned by MIC and SIMTA in proportion to the areas of developable land contributed (with this proportion being 65.63 per cent from MIC and 34.37 per cent from SIMTA);
• Land Trust leasing its land to Precinct Developer Co (PDC, a wholly owned SIMTA/Qube subsidiary), which will:
  • develop and operate the interstate terminal, IMEX terminal, associated precinct infrastructure and warehousing for 99 years, subject to certain conditions; and
  • assume the demand risk for the project;
• MIC funding the provision of the rail connection between the Southern Sydney Freight Line (SSFL) and the terminal; and
• MIC entering into a monitoring and enforcement role in respect to PDC adhering to the contractual open access regime.

2.71 Figure 2.1 provides a simplified illustration of the contractual relationship between the parties to the transaction.

Figure 2.1: Simplified MIT transaction structure as at April 2015

 

 

Source: MIC records.

2.72 The Shareholder Ministers were advised by MIC that the following attributes of the commercial agreement that had been reached meant that the project represented ‘excellent’ value for money:

• SIMTA’s willingness to take the demand risk and to fund the majority of the investment required to develop the terminal. MIC suggested that the Australian Government’s contribution was limited to the land and up to $370 million in funds, which ‘was about $1 billion³⁵ less than foreshadowed in the 2012 business case’.³⁶ Further, the Australian Government would earn a real equity return on its contribution over the longer term;
• the size of SIMTA’s contribution—being its land, valued at $105 million, and $693 million of capital expenditure on terminals and precinct infrastructure, consisting of $448 million over the period 2016 to 2020 (primarily on initial terminal development and associated infrastructure) and $244 million over the period 2021 to 2027 (primarily on terminal expansion and associated infrastructure)³⁷; and
• SIMTA is obliged to develop and operate the intermodal terminal in accordance with contractual requirements that include development to an agreed master plan, and operation on principles of non-discrimination.

2.73 Separate but largely similar advice was provided to the Shareholder Ministers by their departments. Finance’s advice to its Minister was that ‘while there are trade-offs in the final negotiated outcome, MIC and SIMTA’s proposal represents a value for money proposition’. DIRD’s advice to its Minister was that ‘while there are trade-offs in the final negotiated outcome, we conclude that on balance, the MIC-SIMTA proposal represents a value for money proposition’.

Why is open access provided through contractual arrangements?

3.1 An Australian Government policy objective for the Moorebank Intermodal Terminal (MIT) is that it be a flexible and commercially viable common user facility that is available on reasonably comparable terms to all rail operators and other terminal users.

3.2 Part IIIA of the Competition and Consumer Act 2010 establishes a regime to facilitate third party access to certain services provided by means of significant infrastructure facilities. The Australian Competition & Consumer Commission (ACCC) is responsible for assessing Part IIIA access undertakings³⁸ put forward by owners/operators of infrastructure facilities, and also arbitrates access disputes. There are no intermodal facilities that have an access undertaking in place. The ACCC has accepted an access undertaking from ARTC for the Interstate Rail Network as well as another undertaking from the ARTC in relation to the Hunter Valley Rail Network.

3.3 The mechanism by which the open access principles would be administered was a point of difference between MIC and the Shareholder Ministers’ departments. The departments preferred an access undertaking approach with independent approval and oversight by the ACCC. MIC considered that an access undertaking, which is designed to prevent abuses of market power for services provided through facilities with natural monopoly characteristics, would undermine the ability of the MIT to compete with road transport and other intermodal terminals.

3.4 MIC’s view was that all concerns related to open access should be addressed through a contractually enforced regime. Notwithstanding that the preferred tenderer would gain exclusive access to a significant tract of Commonwealth land, MIC believed that an open access regime administered through contractual arrangements was the only mechanism that would attract private sector interest in the development of the MIT.

3.5 The approach to the market did not seek to test whether an access undertaking would deter private sector interest in the project. Rather, the EoI documentation outlined that MIC was seeking a contractual rather than a regulatory solution. The documentation also sought respondent feedback on the MIC’s preferred contractual Access Regime principles.

3.6 The approach to open access was re-visited during the direct negotiations with SIMTA. In particular, in September 2014, the Shareholder Ministers were advised that DIRD’s strong preference was for the MIT operator to develop an ACCC approved access undertaking given that:

• the Australian Government was making a significant monetary contribution to the project and therefore needed to ensure that all terminal users had access to the benefits of this public funding;
• there are currently no intermodal terminals in NSW that are regarded as truly open access; and
• there was a need to adequately regulate and ensure that terminal users are provided non-discriminatory access to onsite warehousing. Ministers were advised that warehousing is the most commercial aspect of the project and the merged precinct design proposed by SIMTA provided for a significantly greater warehousing capacity than was originally envisaged.

3.7 During the MIC and SIMTA negotiations period, DIRD noted that there was a risk that SIMTA’s negotiating capital may increase to the extent that it threatens to ‘walk away’ if the Commonwealth does not agree that a negotiated outcome would meet policy objectives. In September 2014, MIC conveyed to DIRD that this risk was likely to occur if the departments continued to advise against a contractual regime. Then, in early October 2014, Aurizon confirmed that SIMTA would ‘walk away’ from the project if an ACCC approved access undertaking was imposed.

3.8 Also in early October 2014, the Shareholder Ministers wrote to MIC to reiterate the importance of the Government objectives and to outline the features the Ministers considered were ‘non-negotiable’. Included in these features was the open and non-discriminatory access outcome that was intended to apply to all aspects of the development. The correspondence also drew MIC’s attention to a ‘light-handed’ access undertaking that would allay MIC’s concern regarding the imposition of monopoly price regulation while also providing assurance to terminal users in regards to SIMTA’s market power arising from the joint venture with MIC. This approach would have included independent monitoring by the ACCC, which had recommended the arrangement to the Shareholder Ministers’ departments as an alternative to the Part IIIA approach.

3.9 On 14 October 2014, senior SIMTA staff made direct contact with each of the Shareholder Ministers’ offices to arrange meetings to discuss ‘issues raised by the ACCC concerning the Moorebank Intermodal Facility’. These meetings took place in late October (separately, but on the same day) and did not include DIRD, Finance or MIC representation. SIMTA’s planned ‘primary messaging’(as it advised MIC)³⁹ for the meetings were as follows:

• SIMTA, being Qube and Aurizon, consider any ACCC intervention or oversight completely unnecessary.
• The Moorebank terminals, both IMEX and Interstate, will be adding very significant competition and capacity to the market and themselves will face extensive competition from road freight, and the terminals at Enfield and Chullora.
• This is a clear case of regulatory overreach which should not be entertained by the shareholder departments.

3.10 MIC provided SIMTA with the consent required under the Procurement Process Deed for these meetings on 15 October 2014 and the meetings between SIMTA and the Shareholder Ministers’ offices took place on 28 October 2014.

Are the key elements of the open access regime now in place?

3.11 Negotiations resulted in an ‘Open Access Regime’ (OAR) being set out within a schedule to the Development and Operations Deed (DOD) signed by MIC and SIMTA. There are separate but similar OARs for the IMEX and interstate terminals. A separate schedule, the ‘Open Access Reporting and Compliance Regime’ (Compliance Regime), also forms part of the DOD.

3.12 The stated purpose of the OAR is to provide a framework that facilitates the following policy objectives:

i. providing Third Party Operators open and non-discriminatory access to the terminal[s] in accordance with the open and non-discriminatory access obligations; and

ii. allowing Precinct Developer Co, to operate, through the appointment of an Approved Operator[/s], the terminal[s] in accordance with its commercial and operational judgment so as to promote efficiency, productivity and volume through the terminal[s].

3.13 Some of the terminology used within the OAR is subjective and open for interpretation. Specifically, no additional advice or guidance has been included to assist with determining whether discrimination is ‘unreasonable’, ‘materially detrimental to competition’ or to the ‘competitive detriment’ of third party operators (or who is responsible for determining that). In addition to being difficult to interpret and apply in practice, the onus is on MIC, or a complainant, to prove that the discrimination is unreasonable and materially detrimental to competition.

Documentation not yet developed

3.14 The OAR framework documentation is to guide the later drafting of more detailed and specific documentation. The responsibility for developing these documents rests with SIMTA. Specifically, there are 10 detailed documents that are not expected to be developed until around June 2018. Table 3.1 identifies which of these documents are to be subject to MIC approval (and the approval timeframes) as well as which are to be made publicly available.

3.15 MIC will have up to six months prior to the commencement of terminal operations to conclude consultation with potential access seekers (where required; Table 3.1 refers) and successfully negotiate the documents’ contents with SIMTA. If an extension to that timeframe is required due a dispute resolution process, this could result in documents not being finalised in time for the commencement of operations. In these circumstances, PDC will either:

• implement the documentation as originally submitted by SIMTA, pending the outcome of the dispute resolution process; or
• where consultation with potential access seekers has taken place, and MIC and SIMTA cannot agree the changes that have been made as a result of that consultation, PDC will implement the documentation that was initially approved prior to the commencement of the consultation process, pending the outcome of the dispute resolution process.

Access protocol

3.16 The Access Protocol will be a particularly important document in ensuring that access seekers are treated fairly.⁴⁰ For that reason, in November 2014, MIC sought an oversight role so that it could ensure that the protocol remained consistent with the project’s open access and non-discrimination objective.

3.17 In practice, the oversight role that MIC secured through the June 2015 OAR provides MIC with a limited role in the development of the protocol. Its role is to involve:

• reviewing the initial protocol developed by SIMTA within the six week review period, requesting amendments where relevant;
• granting final approval where agreement can be reached (otherwise, matters of disagreement can be referred for dispute resolution);
• consulting with ‘access seekers’ and ‘potential access seekers’⁴¹ after the final protocol has been approved (with the result that this feedback may be incorporated into the protocol). Other stakeholders with an interest in the protocol (such as the Shareholder Ministers’ departments) are not identified as being parties that can be consulted; and
• negotiating in good faith with SIMTA anything arising from consultation submissions (noting that where agreement to changes cannot be agreed, the matter can be referred to dispute resolution).

Is the open access regime comprehensive in its coverage?

Terminal services

3.18 The EoI outlined that the OAR was to apply to all of the terminal services provided by the successful proponent. The EoI defined terminal services to be covered by the OAR as including the following (either individually or in combination):

a) rail transportation of containers between the Moorebank Intermodal Terminal, Port Botany and other locations (i.e. haulage services to the extent to which access can be obtained to the below rail service);

b) provision of rail access to the Moorebank Intermodal Terminal for train services provided by others;

c) management of trains on railway lines and sidings within the Moorebank Intermodal Terminal (including the movement of trains, shunting and attaching or detaching rolling stock);

d) train loading and unloading (including access to specialised equipment, as required);

e) transfer of containers between loading/unloading facilities and storage areas;

f) container storage;

g) truck management (including turnaround times); and

h) ancillary administrative and customer interface services.

3.19 The OAR implemented through the contractual arrangements applies to reference and ancillary services at the IMEX and Interstate terminals. Reference services include: rail terminal access service; rail terminal loading and unloading service; and truck terminal access service. An ancillary service is a non-reference terminal service that is to be provided at commercially determined prices subject to available capacity.

3.20 The open and non-discriminatory access obligations of the OAR regime mean that (subject to the terms, access and operating arrangements of the OAR and having regard to capacity constraints) the approved operator must:

• permit access at the terminal for third party operators;
• not unreasonably discriminate against third party operators to their competitive detriment in favour of an operator associated with PDC in providing reference or ancillary services; and
• offer to provide access in relation to reference services on transparent and published terms and conditions and in accordance with published reference prices.

3.21 Services that are not considered reference or ancillary services include the: port shuttle service, transport of containers to or from the terminal (including by internal transfer vehicle), and refuelling services. The regime requires that, where refueling services are made available to Associated Operators, that refueling is also made available to Third Party Operators at the same published price.

3.22 The non-discrimination principle of the OAR does not apply to the port shuttle or internal transfer vehicle (ITV) services.⁴² This is at odds with the EoI which identified that the access regime would apply to the rail transportation of containers between the terminal and Port Botany⁴³ as well as the transfer of containers between loading/unloading facilities and storage areas. Instead, the OAR requires:

• spare capacity on the port shuttle⁴⁴ to be made available to potential users at a price which either recovers ‘efficient costs’⁴⁵ and includes a commercial return, or is competitive with a road transport alternative. These pricing conditions apply until a competitor third-party port shuttle service alternative is operational; and
• in circumstances where PDC chooses to make an ITV service available to a Precinct Customer who is deciding between the services of a Third Party Operator or an Associated Operator, PDC must offer the same standalone price for the ITV service to the Precinct Customer regardless of which operator they choose to transport containers to or from the precinct.⁴⁶ Even if there is available capacity, there is no requirement that PDC must offer these services to the Precinct Customer.

Warehousing

3.23 The availability of onsite warehousing at the MIT is expected to improve logistics efficiency by eliminating additional road/truck movements from the terminal. Under the contractual arrangements, an additional warehousing footprint of approximately 580 000m² has been made available to SIMTA (as compared with the footprint anticipated by SIMTA in its original IMEX-only project on its own freehold land).

3.24 The EoI did not propose that the OAR apply to warehousing. SIMTA’s EOI response from February 2014 outlined that:

• sufficient warehousing and cross docking facilities will be essential to support and enhance the terminal’s rail based transportation service for both the IMEX and Inter/Intrastate Terminals;
• SIMTA’s modelling shows that warehousing services for forwarding and distributing products are very important to the success of the project;
• effective linkages between the intermodal terminals and warehousing within the precinct will be the key to offering a highly efficient, integrated warehousing solution for freight customers to drive modal shift for their logistics operations more effectively than competing road based freight solutions; and
• the appetite in the market well exceeds the supply currently available for premium warehousing product. The amount of warehouse stock unlocked through the integrated precinct approach will only partly satisfy the extent of demand currently in the market.

3.25 During the course of negotiations, the Shareholder Ministers’ departments raised concerns about warehousing not being included in the OAR. The contracted outcome was that there are no open access obligations in relation to warehousing. MIC advised the ANAO in August 2017 that:

[t]he regime was designed as a traditional access regime, with a focus on access to the terminal. Throughout the negotiations, it was very clear that SIMTA is very focussed on developing the warehousing. The companies that will be interested in using the warehousing will be sophisticated entities who will be able to negotiate effectively with SIMTA, including in relation to ongoing arrangements following making the initial investment. MIC was more concerned to ensure that access to the terminal was provided fairly to all parties seeking access regardless of whether or not they were using warehousing provided by SIMTA.

Is an effective compliance regime in place?

3.26 The request for expressions of interest issued by MIC informed potential respondents that:

The Successful Proponent will be required to make agreed payments to compensate for breaches of the Access Regime by the Successful Proponent. The amount of the payment required will vary depending on the nature and scale of the breach as well as the Successful Proponent’s prior history of compliance under a performance regime (i.e. a minor initial infringement will attract a lesser payment than a more serious infringement which is part of a history of non-compliance).

3.27 Under the contractual arrangements that have been finalised, SIMTA is responsible for ensuring that the approved terminal operator complies with all aspects of the IMEX and Interstate Terminal OARs. The Open Access Reporting and Compliance Regime (Compliance Regime) outlines the consequences for failing to comply with the obligations of the OAR. MIC is responsible for monitoring and enforcing the Compliance Regime. The Compliance Regime adopts terminology that has not been defined, similar to that within the OAR (see paragraph 3.13).

3.28 There are two types of non-compliance; ‘minor’ and ‘major’. Minor non-compliance relates to a breach of the obligations set out in the OAR. A major non-compliance relates to systematic and repeated material non-compliances which can ultimately lead to a PDC Operational Event of Default.

Minor non-compliance

3.29 Minor breaches of the OAR incur demerit points, which are accounted for under 11 categories of minor non-compliance (or ‘demerit point categories’, listed in Figure 3.1). There are three demerit point thresholds which impose increasing reporting and external audit requirements as each threshold is reached. The heaviest consequences involve the submission of monthly compliance and performance reports and quarterly external audits of compliance.

3.30 There are no financial penalties to be applied. This approach is inconsistent with the EoI documentation. Specifically, the Request for EoI outlined MIC’s intention that financial penalties would be imposed for all non-compliance, with the amount to vary.

3.31 The quantum of demerit points accrued depends on which of the 11 categories of minor non-compliance is breached. Breaches and respective demerit points are set out in a ‘Table of Demerit Points’ in the Compliance Regime.

Figure 3.1: Major non-compliance scenarios

 

 

Source: ANAO analysis of the OARCR.

3.32 In January 2015, MIC calculated the number of breaches required to reach the first demerit point threshold (up to 11 in five years). This analysis was in respect to a draft of the regime. The scenario calculated by MIC involved breaches of a category for which the most demerit points would be incurred (that is, a category of higher importance). MIC noted:

The examples … look at how hard it is to get to the first reporting threshold of 60 points. Based on these examples, I don’t think we should agree to any change to the demerit point levels or the thresholds for extra reporting.

3.33 Subsequent amendments to the Compliance Regime were agreed.

3.34 The ANAO replicated MIC’s analysis against the amended June 2015 Compliance Regime. This analysis identified that up to 15 breaches can occur before reaching the first threshold, and up to 49 breaches can occur before reaching the third and final threshold (over five years). This range demonstrates the number of breaches that can occur when PDC ‘self-identifies’ instances of non-compliance. To qualify as a self-identified non-compliance, the breach must be reported before MIC issues a notice of suspected non-compliance. Table 3.2 sets out how many of these breaches are required to meet each threshold over five years.

Table 3.2: The number of ‘self-identified’ minor non-compliances against the open and non-discriminatory access obligation required to reach each threshold

Source: ANAO analysis.

Major non-compliance

3.35 There are two ways in which a finding of major non-compliance can be made against the approved terminal operator under the Compliance Regime, being:

• systematic repeated non-compliance within a single demerit point category; or
• non-compliance with the open and non-discriminatory access obligations of the OAR.

3.36 There are no penalties or consequences related to individual findings of major non-compliance, but if there are enough major non-compliances within a certain timeframe, a PDC Operational Event of Default can be triggered.

3.37 MIC may choose to issue a major non-compliance notice if:

• there is repeated (at least three within two years) ‘material’⁴⁷ minor non-compliances against a single demerit point category;
• a Remedy Plan is implemented (Remedy Plans are only required if MIC chooses to request that one be developed by way of a Remedy Plan Trigger Notice); and
• the Approved Operator of the terminal repeatedly fails to comply with that Remedy Plan (this process is illustrated in Figure 3.1). In this regard there are only two scenarios for declaring major non-compliances:
  • three non-compliances against three separate Remedy Plans within two years; or
  • three non-compliances against the same Remedy Plan within two years.

3.38 This restrictive design excludes other non-compliance scenarios, such as three non-compliances against two separate Remedy Plans. It also requires the non-compliances to be considered ‘materially’ detrimental to competition. The number of material minor non-compliances that can occur before a PDC Operational Event of Default is triggered ranges between 18 and 60.

3.39 Alternatively, a major non-compliance notice can be issued for non-compliance with the open and non-discriminatory access obligations of the OAR provided that such non-compliance:

• is ‘material’ having regard to the policy objectives in the OAR and that the non-compliance is ‘unreasonable’ and ‘materially detrimental’ to competition for the transport of containerized freight;
• was not caused by or materially contributed to by the customer; and
• was not outside of the Approved Operator’s control, providing all reasonable steps to minimize the occurrence of the non-compliance have been taken.

3.40 MIC must first issue a draft Major Non-Compliance Notice to PDC and the Approved Operator and provide reasonable opportunity for responses to be submitted to MIC outlining why the notice should not be issued. MIC may then issue a Major Non-Compliance Notice or may exercise discretion to not issue the notice if the non-compliance is resolved in a timely manner. If a notice is not issued the non-compliance is considered to be a minor non-compliance for which demerit points will be accrued and a Remedy Plan Trigger Notice may be issued. In the event that a notice is issued, a PDC Operational Event of Default is triggered where:

• three Major Non-Compliance Notices are issued with a period of one year; or
• five Major Non-Compliance Notices are issued with a period of five years.

Pricing and Revenues

3.41 During negotiations SIMTA expressed a strong opposition to the publication of prices, other than reference services, on the grounds that it would place them at a competitive disadvantage. The only prices required to be published under the OAR are reference and refueling prices. This means that non-standard reference pricing principles, and prices for ancillary, port shuttle, and ITV services are not made publicly available. This differs to the more comprehensive approach anticipated by MIC for pricing matters. Specifically, Request for EoI documents stated that:

• prices for Terminal Services⁴⁸ must be published on the Successful Proponent’s website; and
• the the complaints mechanism for Third Party Operators and Access Seekers was to encompass the port shuttle and ITV services.

3.42 In this latter respect, the final OAR does not provide customers with the right to dispute pricing. Complaints may be referred to MIC regarding the pricing of reference and ancillary services in relation to compliance with the non-discrimination principle. But, there is no avenue to dispute or raise a complaint regarding the pricing of the shuttle service or internal transfer vehicle services as the non-discrimination principle does not apply to these services. Similarly, there is no avenue to address warehouse pricing as this service is not captured by the OAR. MIC advised the ANAO in September 2017 that:

It was not considered appropriate nor desirable to include warehousing in the OAR, noting that the warehousing will be developed by private sector tenants under commercial agreements for lease, with SIMTA paying ground rent for 99 years to Precinct Land Trust. To extend the OAR to the warehouse space is not appropriate and would be near impossible to monitor and enforce.

3.43 The contractual arrangements also allow SIMTA to use multi-part pricing and price discrimination to encourage volume and efficient utilization of the terminal. The inclusion of this clause provides the opportunity for the Terminal Operator to enter long term contracts for reference services in favour of associated customers, thereby reducing or eliminating the opportunity for third party customers to access the terminal. In response to ANAO’s September 2017 request to advise how this risk is managed, MIC advised that:

Both Qube and any competitors will be constrained by the road price of moving a container from the port to Moorebank. Noting the underlying economics of road and rail over short distances, MIC considers it very unlikely that rail will earn significant margins given it must match road prices (after taking into account any quality differences in the services). While we note that the OAR is not intended to set prices and there is no right to dispute prices for terminal services in the dispute resolution process, clause 2.2 of the OAR prohibits hindering access. A breach of the OAR has consequences for SIMTA under the transaction documents, with termination being the ultimate sanction.

3.44 The OAR includes a clause for the recovery of accrued early losses. This is on the basis that at the commencement of operations, there will not be sufficient demand or volume to recover costs or to achieve a commercial return.⁴⁹ In order to encourage demand and volume, the regime is designed to allow PDC to set reference prices at a level below that required to fully recover costs, or to achieve a commercial return.

How is oversight of open access and other oversight responsibilities to be resourced?

3.45 MIC’s responsibilities to date have focused on managing the procurement and negotiations to contract for the delivery of the MIT.

3.46 The contractual arrangements mean there will be a longer term oversight and enforcement role (the lease arrangement is for 99 years) in relation to the OAR as well as, for example, the capacity expansion provisions. The ANAO queried whether MIC has quantified and costed the resources that are expected to be required to discharge the Australian Government’s ongoing oversight role under the contractual arrangements. MIC advised that this:

has not been costed in any detail. However, MIC envisaged and discussed with its shareholder departments that long term oversight could be transferred to another government entity following the divestment of MIC’s subsidiaries. No decision needs to be made at this stage.

Were the Australian Government’s policy objectives clearly identified?

4.1 MIC’s constitution sets out the objectives for the company which incorporate the broad objectives for the project, as follows:

• To facilitate the development of an intermodal freight terminal at Moorebank including an import/export facility, interstate freight terminal capable of catering for 1,800 metre trains and ancillary facilities by optimising private sector investment and innovation in the development, construction and operation of the intermodal terminal.
• To facilitate the operation of a flexible and commercially viable common user facility which shall be available on reasonably comparable terms to all rail operators and other terminal users.
• To ensure the intermodal terminal operates with the aim of improving national productivity through an efficient supply chain, increased freight capacity and better rail utilisation.
• To operate on commercially sound principles having regard to the Commonwealth’s long-term intention to sell its interest in MIC.
• Upon notification by the Commonwealth Shareholder, provide assistance as required to facilitate a sale of the Commonwealth’s interest in MIC.

4.2 Similar project objectives were articulated by MIC when it approached the market in 2013 for registrations of interest for a private sector party to work with it to develop and operate the intermodal terminal.⁵⁰ The contractual framework also recognised these objectives.

Do the contractual arrangements facilitate the development of an intermodal freight precinct at Moorebank?

4.3 The contractual arrangements entered into by MIC and SIMTA provide reasonable assurance for the delivery of the initial stages of each terminal; and options for increasing the capacity of the terminals to their ultimate capacities. The project’s stages are defined within the ‘Expansion Master Plan’ (Exhibit 6 to the Development and Operations Deed, or DOD). This plan contains a conceptual level of detail and was initially agreed at contractual close in June 2015. SIMTA may revise this plan from time to time with MIC’s approval.⁵¹ The deliverables of each stage are outlined by Table 4.1.

4.4 SIMTA is to ‘use its best endeavours’ to deliver Stages 1 (for the IMEX terminal) and 2 (for the interstate terminal) by the target dates for completion defined by the DOD. These dates represent the anticipated time required to complete detailed design, construction and commissioning of the respective terminals. Specifically, these dates are:

• two years from when financial close was achieved for completion of the first stage of the IMEX terminal; and
• four years from when financial close was achieved for the completion of the second stage of the interstate terminal.

4.5 Each of these target completion dates also represent the dates on which the payments for ground rent must commence for the respective terminal land. Failure to develop the terminals by the relevant completion dates is an event of default by Precinct Developer Co (PDC, a wholly owned SIMTA/Qube subsidiary), which triggers a cure plan. The completion dates are immediately followed by a further two-year ‘sunset’ period. If the breach remains uncured and PDC fails to complete the development of a terminal by the relevant sunset date, this may lead to a termination event. Figure 4.1 illustrates the sequencing of these dates.

4.6 In addition to these obligations, under the DOD, PDC provided a warranty that Qube, Aurizon or their related parties will transfer a specified amount of their current intrastate freight volumes to the Moorebank interstate terminal.

4.7 MIC’s financial model forecasts (finalised in March 2015) anticipate the interstate terminal volume will reach 120 000 TEU in its first year of operation. MIC advised the ANAO in October 2017 that, of the 120 000 TEU:

80,000 is likely to be source [sic] from transfer of Qube’s “Regional Volume”, and 40,000 TEU was transfer [sic] of “Aurizon Existing Volume”.

4.8 In July 2016, MIC was advised of Aurizon’s intention to sell its shares in SIMTA to Qube.⁵² Given Aurizon’s proposed exit from the arrangements, MIC held concerns about the surety of the interstate container throughput volumes it had secured via the PDC warranty. It therefore sought a direct warranty from Qube for the transfer of this freight. This is because there was no specific remedy available to MIC if PDC did not meet its warranty. MIC was unable to secure the commitment it sought. In this context, the ANAO sought advice from MIC as to whether it plans to enforce the warranty provided within the DOD. MIC confirmed in October 2017 that it ‘intends to enforce the contractual provision in respect of Qube in clause 20.5(b)(2)(B) upon completion of the Interstate Terminal.’

4.9 The completion and sunset dates can be extended in specified circumstances. Where termination occurs, a termination payment would need to be made by the Australian Government. In terms of how it monitors completion of project milestones such as planning approvals and construction activities relating to the project, in August 2017 MIC advised the ANAO that:

MIC undertakes only limited tracking of progress as time is PDC’s risk under the terms of the DOD, subject to any limited ‘Relief Events’ entitling an extension to the ‘Sunset Dates’.

Figure 4.1: Project timeline and sunset dates

 

 

Source: DIRD records.

Terminal capacity expansion

4.10 The contracted ultimate capacity of the IMEX terminal is 1.1 million TEU per annum⁵³, and the interstate terminal 500 000 TEU per annum with a capability of accommodating 1 800 metre long trains.

4.11 Development of the terminals from their initial contracted capacities to their potential ultimate capacities (see Table 4.1) is governed by a heavily conditioned Capacity Expansion Regime. This regime:

• is based on the agreed expansion master plan and demand-driven capacity expansion triggers (rather than fixed dates). Capacity expansion is only triggered where:
  • there has been a bona fide request for access which has been refused on the basis of insufficient available capacity; or
  • utilisation exceeds 90 per cent of capacity on an annualised basis; and
• provides that capacity is not required to be expanded in a number of circumstances, including when:
  • the anticipated incremental revenue from expansion is insufficient to cover the incremental cost of expansion plus a ‘reasonable commercial return’;
  • insufficient rail and port interface capacity is available; or
  • the costs of expansion are unable to be financed at a ‘commercially acceptable rate’.

4.12 The Capacity Expansion Regime was agreed by MIC and SIMTA in all material aspects at the Term Sheet stage in November 2014. The design of the regime has resulted in the ultimate decision to expand the terminals’ capacities resting with SIMTA (through PDC). Advice provided to the Shareholder Minister’s departments indicated that a number of the conditions⁵⁴ required to trigger future expansions of the terminals’ capacities are designed such that if PDC prefers not to pursue expansion, that it would likely be able to manufacture a reason not to do so.

4.13 Nevertheless, the departments’ advisers subsequently concluded that SIMTA is likely to be economically incentivised to expand the terminals, provided there is sufficient available demand. This is because SIMTA is entitled to all of the related profits, with the exception of a small increase in the revenue paid to MIC via its interest in the Land Trust. This increase is linked to the annualised throughput at each terminal.

Southern Sydney Freight Line capacity constraints

4.14 Included among the factors that could impact the future expansion of the MIT is the capacity of the Southern Sydney Freight Line (SSFL). MIC’s direct negotiations with SIMTA were informed by the results from an assessment of the SSFL capacity in July 2014. With specific regard to the capacity sought for the MIT, the report advised that the:

• SSFL, at that time, had the capacity to accommodate an additional 493 000 TEU up to about 2021;
• addition of a passing loop at Warwick Farm and the extension of an existing loop at Leightonfield would increase the capacity to 1.046 million TEU up to about 2024⁵⁵; and
• Inland Rail line between Melbourne and Brisbane has the potential to release capacity of up to eight train paths per day in each direction. If the MIT was able to utilise this capacity it would provide an additional 400 000 TEU (approximately) beyond 2024.

4.15 This assessment was undertaken prior to Pacific National’s announcement (in 2015) that it would double its Chullora terminal capacity from 300 000 to 600 000 TEU. This is significant because the Chullora terminal is also situated along the SSFL and will compete for train paths with the MIT.

4.16 Subsequent to contractual close, in October 2015 the ARTC produced its 2015–2024 Sydney Metropolitan Freight Strategy. The ARTC strategy was based on MIT throughputs of 1.05 million TEU of IMEX freight and 500 000 TEU of interstate freight per annum, and the expansion of Chullora from 300 000 to 600 000 TEU per annum. The ARTC’s strategy concluded that a number of projects would be required to be undertaken to increase the capacity of the rail network to accommodate this and other expected increases to rail traffic. This means that additional Australian Government expenditure will be required (specifically, for the passing loop at Warwick Farm) for the MIT to achieve the full extent of the outcomes envisaged by the 2012 MIT business case.

Warehousing

4.17 The contractual framework does not prescribe any target dates for the development of warehousing. Rather, the development of warehousing is at the discretion of PDC, with an expectation that this will be principally driven by demand for warehousing facilities. MIC’s financial modelling for the precinct indicates that it expects warehousing operations to be highly profitable (warehousing is not subject to the Open Access Regime).

4.18 The land identified within the Precinct Master Plan for warehousing has been divided into 10 lots.⁵⁶ Under the contractual arrangements, PDC can access these lots under a licencing arrangement with the Land Trust. Upon completion of construction of the warehousing, a rent holiday period commences for that particular lot. PDC is to commence paying ground rent at the end of that holiday period.

4.19 While there are strong commercial incentives to the contrary (that is, the potential profitability of the warehousing development), there is a risk that PDC could choose not to access any of the lots allocated for warehousing. This would result in no ground rent being earned for some 150 hectares of the warehouse land within the precinct. To mitigate this risk to some extent, the contractual arrangements require that PDC commences paying ground rent as follows:

• ten years from the date of financial close, PDC must commence paying ground rent on 50 per cent of the warehousing land (unless it has developed more than 50 per cent, in which case it must pay ground rent on that actual amount); and
• fifteen years from the date of financial close, PDC must commence paying ground rent on 100 per cent of the warehousing land.

4.20 MIC advised the ANAO in September 2017 that ‘[t]hese provisions where intended to cap MIC’s exposure to demand risk, which is reflected in the pace of warehouse development’. The ANAO notes that the provisions, once enacted, may also incentivise SIMTA to develop the land on which it is already paying rent.

4.21 Until the threshold 15 years from financial close, PDC’s warehousing development rights are ‘at risk’, and unexercised warehousing development rights are forfeited upon a termination.⁵⁷ After year 15, the warehousing development rights do not terminate, provided that PDC continues to pay the ground rent.

Will the contractual arrangements facilitate operation and use of the terminals?

4.22 The contractual arrangements, and the ANAO’s analysis of financial modelling for the MIT, support a conclusion that the project is commercially viable. The contractual arrangements also provided flexibility in terms of the pace with which the intermodal precinct is developed having regard to demand and other factors.

4.23 Figure 4.2⁵⁸ illustrates the revenues (and anticipated costs for PDC) predicted by MIC’s financial model (as at contractual close).

Figure 4.2: Forecast project revenue and net profit for MIC and PDC as at contractual close

 

 

Source: ANAO analysis of MIC records.

4.24 Whether the MIT is made available to all rail operators and other terminal users on reasonably comparable terms will depend to a significant extent on the implementation of the open access regime discussed in Chapter 3, and whether that regime is effective (both in its design and its administration). This will also impact significantly on the extent to which the MIT improves national productivity through an efficient supply chain, increased freight capacity and better rail utilisation.

Are arrangements in place to enable a future privatisation?

4.25 The contractual documentation separated MIC’s oversight role from its commercial role. This was achieved by creating two trust vehicles owned by MIC. One trust (MIC’s land trust) holds MIC’s units in the (jointly-held) Land Trust and the other (MIC’s rail trust) funds the rail spur construction, and is entitled to receive the Rail Access Charges through the Rail Access Deed. It was envisaged that a future privatisation could occur by:

• selling the units in the land trust and/or the rail trust;
• transferring MIC’s ongoing oversight functions to another public sector entity; and
• abolishing MIC.

4.26 In June 2017, Finance and DIRD obtained advice on the likely optimal timing for a privatisation (15 years after financial close as a sustainable positive cash flow would not be visible earlier) as well as potential impacts on demand for a privatisation:

The Land Trust rental stream and Rail [Access] Charge should be reasonably predictable cashflows, particularly 15 years after Financial Close. Assuming that the market for real estate and infrastructure assets which exists today exists at the time of sale, then there should be a reasonable number of potential investors that could compete for the assets. However:

• The transaction structure creates a passive investment privatisation opportunity given the returns which are constrained, but reasonably predictable as outlined above. Accordingly, what can be privatised is a stable cash flow and not a business which could be subjected to value creative innovation by a purchaser. Accordingly, the potential purchasers will be passive real estate and infrastructure investors and not operators of businesses.⁵⁹
• The Land Trust units are held in a joint venture with SIMTA and this may limit the number of prospective purchasers, and hence constrain the sales price, if investors did not wish to be a passive investor alongside the operator. However, the asset is more likely to appeal to passive investors by its nature. The cashflows should be transparent and reasonably predictable allowing appropriate due diligence and assurance as to reliability. Accordingly if there is no capacity to “game” the returns, then potential purchasers should not be concerned about the co-investment with the operator. Finally, SIMTA might dispose of its interests in either the Land Trust or PDC, which would alter this balance.

4.27 There are also contingent liabilities embedded in the Rail Trust that may be unattractive to future buyers (these liabilities are outlined in Appendix 3).

Appendix 1 Entity responses

 

 

 

 

a As outlined in Chapter 2 of the audit report, between the commencement of direct negotiations and the final contracted outcome, MIC agreed to arrangements that have increased the Australian Government’s financial contributions and contingent liabilities (as compared with those proposed within the successful proponent’s EoI).

b While MIC is paying for construction of the rail connection, it will not have full ownership (it will not own the component of the spur line that traverses the Glenfield Waste Site). MIC paying for the rail spur is inconsistent with SIMTA’s EoI response and follow-up responses by SIMTA to questions from MIC during the EoI process.

 

 

 

 

c See paragraph 2.50 and Appendix 3, paragraphs 1 to 10.

 

 

d The MIC comments in this section addressed only positive aspects of the contractual outcome that it negotiated with SIMTA. The ANAO audit report outlines the key terms of the contractual arrangements, including analysing how value for money progressively eroded during the negotiation of the contractual arrangements (in comparison both to the terms of the request for expressions of interest issued by MIC, and statements made by SIMTA in its EoI response).

 

 

e The MIC comments do not address the shortcomings identified by the ANAO in the conduct of the EoI process. See, for example, paragraph 2.28.

f See paragraphs 2.31 and 2.33.

g See paragraphs 2.43 to 2.47 (including Table 2.2).

h See paragraphs 2.39, and 2.48 to 2.50.

 

 

 

i See paragraphs 2.28, 2.33 and 2.49.

j Transparency over when and why MIC agreed to key aspects of the negotiated outcome has been impeded by its approach to managing probity. See paragraphs 2.52 to 2.61.

 

 

 

k See the last cell in the second row of Table 2.3.

l See Note (a) to Table 2.3.

 

 

 

m See paragraphs 3.14 to 3.17, including Table 3.1.

n See paragraphs 3.43 and 3.44.

o See paragraph 3.22.

 

 

 

p See paragraph 3.26. The request for EoI issued by MIC proposed a graduated regime of financial penalties in response to non-compliance.

q Section 50 prohibits acquisitions that would have the effect, or likely effect, of substantially lessening competition in a market. For the Moorebank project, the ACCC review of the likely effect on competition was conducted prior to Term Sheet stage. The ACCC subsequently wrote to MIC and informed MIC that the Commission remained of the view that a purely contractual access regime may not be adequate to address potential competition issues that could arise over the term of the lease.

 

 

 

 

 

r See paragraph 4.26.

s The conclusion against the audit objective is outlined at paragraphs 7 to 10.

t The matters raised by MIC were considered in accordance with Section 37 of the Auditor-General Act 1997.

 

 

 

 

 

 

 

1 The matters raised by SIMTA were considered in accordance with Section 37 of the Auditor-General Act 1997.

2 In accordance with Section 19 of the Auditor-General Act 1997, SIMTA was afforded 28 days to provide the ANAO with comments on the proposed report. The ANAO had three telephone discussions with SIMTA during this 28 day period. SIMTA was asked to provide the ANAO with details as to those parts of the report SIMTA considered incorrect or to contain errors, as well as those parts of the report where SIMTA considered the ANAO’s understanding would benefit from SIMTA’s observations. SIMTA did not provide any details to the ANAO in respect to those matters.

 

 

 

 

 

 

 

1 The final report no longer makes the comparison referred to by Macquarie Capital in these comments. Rather, the final report outlines that the negotiated amounts for ground rent (including warehousing) were significantly below market rates. In particular, the final rate agreed for warehousing ground rent was half MIC’s original expectation (based on advice to MIC from its commercial adviser).

2 Paragraph 4.13 recognises that there is a small increase in the revenue paid to MIC via its interest in the Land Trust that is linked to the annualised throughput at each terminal. Forecast project revenue and net profit for MIC, including the effect of rental indexation, is reflected in Figure 4.2.

3 See paragraphs 2.50; 4.3 to 4.9; and Appendix 3 paragraphs 23 to 24.

 

 

 

 

 

 

 

Appendix 2 Use of non-government email services for official Australian Government business

1. Email communications are a widely used and accepted form of communication by and within the Australian Government. As such, they provide evidence of the conduct of government business and are important information assets.

2. The Australian Government Protective Security Policy Framework (PSPF) states that agencies must implement policies and procedures for the security classification and protective control of information assets (in electronic and paper-based formats) which match their value, importance and sensitivity. In addition, the Australian Government Information Security Manual (ISM) is to be used for the risk-based application of information security controls. It draws attention to the security risks that come with using web-based email services. These risks are well known and publicised, for example, a 2012 speech by the then Defence Signals Directorate (DSD) to the Parliamentary Library notes that:

We hear reports of hacking in the media every day. Almost all government and large private sector organisations have been affected by cyber security incidents …

DSD strongly advises against using webmail, such as Hotmail or Gmail, for work. The use of such services may bypass some of the security measures that have been put in place to detect, and respond to malicious activity.⁶⁰

3. Similarly, current guidance from the Australian Signals Directorate is that using non-agency-sanctioned webmail to conduct government business heightens the risk of the unauthorised disclosure of government information.⁶¹

4. While it is considered good practice for wholly-owned Commonwealth companies under the Public Governance, Performance and Accountability (PGPA) Act 2013 (such as MIC) to apply the PSPF and ISM, it is not mandatory. In this respect, MIC advised the ANAO in September 2017 that ‘MIC does not hold ‘classified’ information but applies an ICT Security Policy that has been developed and made fit for purpose for an organisation of MIC’s size and risk profile.’

5. In March 2013, the MIC board resolved that an interim solution to password protect future electronic Board communications until a longer term solution was identified and implemented. The ANAO’s analysis identified that while MIC implemented password protection of its Board papers, it also has a practice of sending the respective passwords to the same email address that the password protected papers were sent to. MIC advised the ANAO in September 2017 (more than four years after the interim solution had been adopted) that a longer term solution has not yet been identified.

6. In the course of this audit, the ANAO also identified various instances of non-MIC corporate email services being used (including free web-based personal email accounts) as shown in Table A.1.

Table A.1: Examples of private email accounts used

Note a: Of the other two, one requested for all MIC correspondence to be sent to their MIC email address, and the other has received emails at both their MIC and private email addresses. The ANAO has identified that all directors have been issued with MIC email addresses, with the exception of the most recent appointee who used a personal email address initially, then shortly after his appointment changed to a private organisation email address. MIC advised the ANAO in September 2017 that ‘directors prefer to use personal email addresses to avoid management of multiple email addresses’.

Source: ANAO analysis of MIC email records collected for the audit. Due to the above practices, this analysis is limited to the extent that not all emails associated with the delivery of the project may have been captured into MIC’s corporate records.

7. The Information and Communications Technology (ICT) Security Policy was first approved by the MIC Board in September 2015 and was updated in February 2017. The purpose of the policy is ‘to ensure that appropriate measures are in place to protect corporate information and the ICT systems, services and equipment of MIC and associated infrastructure.’ These policies were informed by specific testing of MIC’s ICT security vulnerabilities and reflect the importance of securing the corporate information MIC holds in its systems.⁶²

8. The 2015 and 2017 ICT Security Policies include provisions for the creation, modification and disabling of email accounts on MIC’s system but does not address the desirability of, or potential need to recover, information/documents sent to external web-based email services outside of MIC’s control.

9. In early 2017, MIC sought to procure broader insurance cover for cyber enterprise risks. In response to an ANAO query in September 2017, MIC advised that its insurance broker was not informed that non-MIC email addresses are used by directors (and occasionally by staff). The board resolved not to take up additional cyber security insurance.

Appendix 3 ANAO analysis of direct negotiations

Australian Government financial contributions and contingent liabilities

1. Originally, $887 million had been identified as the expected cost of the Australian Government delivering the first phase⁶³ of an intermodal terminal at Moorebank. At the conclusion of negotiations, the Australian Government expected to contribute land valued at $95.4 million with equity contributions totalling $370 million expected to be required.

2. The number of items for which a financial contribution would be required from MIC increased progressively throughout negotiations. The EoI from SIMTA had stated that MIC would not be required to contribute any capital nor provide any financial support other than with respect to the remediation of the MIC site. Further, no government subsidies would be sought to fund development of the project and it was ‘envisaged’ that connecting rail infrastructure, the terminals and warehousing developments would be funded through various (and predominantly private) sources.

3. The Term Sheet was agreed in November 2014 and included some significant additional financial contributions from MIC. Namely, a portion of the costs of the Moorebank Avenue works and the entirety of the costs of the Southern Sydney Freight Line rail access.⁶⁴

4. A significant termination payment to SIMTA was also factored into the contractual arrangements at this stage. Under the arrangements, an obligation to make a termination payment will arise in the event that SIMTA’s development rights for the MIT are terminated. The payment would compensate SIMTA for this loss and, while currently unquantifiable, would be material in size.⁶⁵

5. MIC’s advice to the Shareholder Ministers between November 2014⁶⁶ and April 2015 was that the termination payment should not be disclosed within the annual financial statements as a contingent liability⁶⁷. This advice was incorrect, and the Shareholder Ministers were advised by their departments in April 2015 that the termination payment would need to be disclosed as a contingent liability. Accordingly, the termination payment was included in DIRD’s 2016–17 Financial Statements and in the Statement of Risks in the Australian Government’s 2017–18 Budget Papers.

6. Ministers were also advised in April 2015 that the Australian Government’s ongoing responsibility for removal of latent contamination, via MIC, constituted a contingent liability. This was in respect of the land it was contributing to the Precinct Land Trust.

7. Advice to Ministers was that the risks presented by the contingent liabilities would be ‘appropriately mitigated by various obligations within the contractual documents and due to SIMTA’s commercial incentives to develop the [MIT]’.

8. MIC had included $119.6 million in its June 2015 budget for the land preparation activities required to remediate the land to the condition agreed with SIMTA. Following contractual close, MIC’s planning activities revealed the existence of perfluorinated alkyl substances (PFAS) contamination on the MIC site.⁶⁸ MIC advised the ANAO in September 2017 that the budgeted land preparation costs will be exceeded as a result of the contamination. Remediation of the contamination may also require an ongoing and annual monitoring and maintenance cost. MIC advised the ANAO in September 2017, that it was not yet in a position to reliably estimate the likely cost overruns resulting from the discovery of contamination on the site. A detailed risk assessment and a biota study in the Georges River must first be undertaken (in the 2017–18 summer) before MIC can determine how to manage the associated risks.

9. Two days prior to contractual close in June 2015, Ministers were advised by their departments of ‘new material risks’ that had been introduced within the final contracts. Specifically:

• MIC (through the Rail Trust) will be liable to fund the reconstruction of the rail spur if it is damaged as a result of an uninsurable risk. It is not entitled to recover those costs by increasing the rail access charges;
• MIC (through the Rail Trust) will be required to fund contract price variations under the rail spur construction contracts in limited instances;
• the Australian Government will be required to indemnify the Glenfield Waste Site (GWS) for any losses caused by the Australian Government or its agents, throughout the term of the project (arising out of the grant or breach of the contractual arrangements for the rail access easement over its land); and
• the Rail Access Deed—governing funding to construct the rail spur and collection of the Rail Investment Access Charges—contains no right of recourse for non-payment of those charges except through the courts.⁶⁹

10. In the context of a future sale, potential future liabilities may negatively impact the amount potential buyers are willing to pay. This was a particularly late stage at which to raise such risks, and in particular, ones that have potential adverse effects on the future privatisation value of the Rail Trust revenue stream.

Restrictions on future privatisation

11. The SIMTA EoI response had stated that the proposed joint venture would provide MIC with liquidity should it wish to divest or downsize its stake in the joint venture at any time in the future. To further enhance the attractiveness of this proposal, SIMTA stated that it would underwrite the value of MIC’s equity stake should MIC seek to divest its interests in the joint venture entity in the short term.

12. The November 2014 Term Sheet, as well as the contractual documentation signed in June 2015, introduced restrictions on the privatisation process. Specifically, MIC is prevented from selling its subsidiary units to a direct rival to Qube or Aurizon’s Australian intermodal freight logistics or container freight logistics business.

Allocation of demand risk

13. Demand forecasts underpinned the business case for the MIT. In terms of those forecasts, MIC advised the ANAO in August 2017 that:

MIC had expected the forecasts in the Demand Refresh Study to be part of the tender process with short-listed operators. SIMTA’s proposal included SIMTA taking most of the demand risk, so in the end the Demand Refresh Study was used to check SIMTA’s demand assumptions, which were more conservative (i.e. slower ramp-up) than MIC’s.

14. As part of the EoI data room, MIC provided potential respondents with preliminary information on demand estimates. Part 2 of the EoI document had outlined that a major consideration in the planned PDR phase was to be the degree to which each shortlisted proponent would reduce potential Australian Government exposure to demand risk and funding.

15. The negotiated outcome maintained a position that demand risk is predominantly with the terminal operator. As a result, in the event actual usage of the MIT is less than forecast, the Australian Government is not contracted to underwrite either throughput or related project revenues. But private sector exposure to demand risk is mitigated by the contractual arrangements:

• providing a number of grounds on which terminal capacity is not required to be expanded even in circumstances where there is unmet demand (see paragraph 4.11); and
• allowing the operator to set the prices it charges for terminal services and warehousing, without any reference to its costs. In terms of the cost base:
  • the amount that is paid for the use of land for terminals and warehousing has been set through the contractual arrangements at a low fixed rate;
  • the ‘Rail Access Charge’ is contractually fixed on the basis of CPI plus a fixed percentage per annum of the actual capital cost for the development of the necessary rail access spur;
  • rent holidays were agreed that had not been foreshadowed in the EoI response; and
  • no rent is payable in the first 10 years on undeveloped⁷⁰ land that has been allotted for warehousing. On the tenth anniversary of financial close (24 January 2027)—regardless of actual development—ground rent must be paid for 50 per cent of the land allocated for warehousing.⁷¹ On the fifteenth anniversary, 100 per cent of warehouse ground rent must be paid.

16. In August 2017, in response to questions from the ANAO about how the ground rent price and the rail access charge was negotiated, MIC advised that in both cases, they were solved to target internal rates of return.

Pricing of ground rent

17. The likely value of land rent revenue streams from SIMTA diminished progressively throughout negotiations.

18. Between February and May 2014 the project documentation indicated that both parties anticipated that the pricing for the Land Trust rent revenue would be set at market rates as a minimum. This was subsequent to SIMTA formally stating in its EoI submission that it did not require the Australian Government (through MIC) to assume any demand risk for the project. Specifically, MIC’s evaluation of the SIMTA EoI response stated that the:

• land lease payment would be at ‘market’ (undefined) and incorporate a return to JV Co that also covers the cost of providing other enabling infrastructure (although note that this does not include rail connection to the SSFL, which is covered separately); and
• [proposal was for a] joint venture for a ‘whole of precinct’ development which would not require MIC to assume any demand risk and, prima facie, would limit MIC’s contribution to the joint venture to the MIC site (remediated to a condition suitable for industrial development).

19. To support the negotiation of rent prices at market rates, MIC sought advice from its commercial advisers. ANAO’s analysis of MIC’s records indicates that:

• SIMTA provided MIC with a copy of its financial model for the project in July 2014, which envisaged ground rental rates being provided at substantially higher rates than those agreed in November 2014;
• between August and November 2014, the parties continued to discuss ground rent rates, variable components of rent (as a means for MIC to share in upside revenues) and periodic rental increases;
• in October 2014, MIC’s commercial adviser provided a ‘for discussion’ rent summary for MIC’s proposal to SIMTA. It was designed to include a ‘base rental’; and
• in November 2014, MIC received independent land valuation advice.

20. The final negotiated outcome was significantly lower than market rates. The amounts payable for the IMEX terminal, interstate terminal and warehousing were set at the same fixed per square metre rate. For example:

• the rate for the IMEX terminal was less than half the rate included by SIMTA in the financial model it provided to MIC in July 2014 (this was the first time a rate was quantified); and
• the final rate agreed for warehousing was half MIC’s original expectation (based on advice to MIC from its commercial adviser).

Location of the terminals

21. SIMTA had originally suggested there were two options for the positioning of the terminals:

• Option 1 involved the IMEX terminal on the SIMTA site and interstate terminal on the MIC site; and
• Option 2 involved both terminals on the MIC site, with the SIMTA site to be used for warehousing.

22. Both options were included in the Procurement Process Deed. In finalising the September 2014 MoU, MIC agreed to adopt the scenario under Option 1 for the Initial Precinct Master Plan. The EoI submission, while suggesting Option 2 was viable, clearly identified that Option 1 was strongly preferred by SIMTA. The submission stated that:

• Option 2 abandons the considerable benefits of utilising current (and ongoing) work undertaken by SIMTA in obtaining planning consent to develop and operate an IMEX facility on the SIMTA site. As a result Option 2 does not facilitate the expedient delivery and speed to market operations for Phase 1⁷² that are available with Option 1;
• Option 2 does not permit the most efficient use of developable land for warehousing and reduces the material efficiencies that are available in Option 1; and
• Locating the Phase 1 works on the MIC site exposes the project’s delivery to risks which include remediation, rezoning, planning approvals, and other environmental impacts. These risks have already been addressed in the SIMTA planning approvals process (nearing completion), utilised within Option 1. Our assessment demonstrates that by deploying Option 2 the Terminal Operations cannot be delivered by the MIC target date of 2017.

23. A concern expressed by the Shareholder Ministers’ departments throughout negotiations has been that the contractual arrangements entered into by MIC and SIMTA needed to be able to sufficiently mitigate the risk of the interstate terminal not being built. That is, the contractual arrangements need to prevent SIMTA from walking away from its obligations under the DOD following the successful delivery of the IMEX terminal. This is a particularly important concern when considered in the historical context of SIMTA’s original plans for its site. These plans were reflected in the planning approvals referred to in SIMTA’s EoI and involved the development of an IMEX terminal alone—being the significantly more profitable terminal. In November 2017, MIC commented to the ANAO that these concerns were dealt with through a combination of:

• the sunset dates and the termination regime;
• the dates for completion and the timing of charging ground rent; and
• the holding of all land in Precinct Land Trust.

24. If there is a Termination Event solely related to the interstate terminal after the Cross-Default End Date⁷³, then PDC’s rights to develop and operate the IMEX terminal and the rail access under the DOD do not terminate. Nor does PDC’s obligation for the operation and maintenance of the rail access.

25. The extent of MIC’s recorded rationale for agreeing to the IMEX terminal being built on the SIMTA site was recorded in its July 2014 Board papers:

SIMTA has shown MIC the various layout options it considered and the pros and cons of each option. The assessment has concluded:

• The interstate terminal needs to be on the [MIC] site to accommodate the 1800 m rail sidings.
• The location of the IMEX terminal on the SIMTA site appears to maximise the development area for warehousing⁷⁴

26. In regards to the delivery timing benefits outlined by SIMTA’s EoI through adoption of Option 1, the planning approvals referred to related to concept approval, which was granted in September 2014. This planning approval did not allow for the IMEX construction activities to commence. The approval for Stage 1 construction activities (for the SIMTA site) required a more detailed submission and was granted by the NSW Planning and Assessment Commission (PAC) in December 2016. By that time, both the concept and Stage 1 approvals for the MIC site had been submitted and obtained.⁷⁵ These approvals for each respective parcel of developable land to the Land Trust were identified as ‘conditions precedent’ to financial close between MIC and SIMTA, which occurred on 24 January 2017.

27. There has already been a request from SIMTA to the Australian Government to amend the terms of a 99-year rail access easement granted by the Australian Government (also identified as a condition precedent). The Australian Government was one of three parties from which SIMTA obtained landowners consent for the construction of the rail link from the terminals to the Southern Sydney Freight Line. Without rail access, the ANAO’s analysis is that SIMTA’s site would remain landlocked without rail access, a situation to the Australian Government’s advantage in both negotiations as well as in ongoing management of the fulfilment of the contracted development and operation obligations.

28. In March 2017, SIMTA requested that this easement be granted in perpetuity, rather than for 99 years. This request was made just two months after the achievement of financial close. If granted by the Australian Government, MIC’s ability to enforce the arrangements in the DOD would be significantly impaired. With ongoing rail easement rights not attached to the success of the MIT as a precinct there would be an increased risk of the interstate terminal not being developed, or not being fully developed.

Warehousing development

29. The warehousing component of the MIT precinct is expected to be highly profitable. MIC’s understanding of this was reflected in July 2014 correspondence with SIMTA. Specifically, MIC stated that it:

recognises that the returns on the land held in the land [trust] may be low over the longer-term, so is seeking to participate in the warehousing development to ensure a commercially defensible return.

30. The results of subsequent negotiations did not result in MIC participating in the warehousing development. MIC records outline that:

During negotiations MIC made a number of significant concessions in regard to the warehouse development concept in order to support private sector development of the precinct warehousing, most notably the granting of 99-year warehousing ground leases which would survive a terminal termination event.

Open access arrangements

31. The EoI had outlined that the Open Access Regime was to apply to all of the terminal services provided by the successful proponent. The contractual arrangements exclude certain aspects of terminal services that the EoI had identified would be captured as part of the Open Access Regime. The regime does not apply to warehouse operations and partially applies to the:

• rail transportation of containers between the terminal and Port Botany (called the port shuttle service); and
• internal transfer vehicle services within the intermodal precinct.

32. In addition, the compliance arrangements for the Open Access Regime are more lenient than was envisaged in the EoI (see Chapter 3).