Australian Competition and Consumer Commission€¦ · hypothetical division of wharf centres at the Port of Gladstone, including projected vessel and tug movements, total tug steaming

Gladstone Ports CSummary of Towage MMarch 2009

NOTE: THIS REPORT HAS BEENMODIFIED TO EXCLUDECOMMERCIALLY SENSTITIVEINFORMATION.

THIS REPORT VERSION DOES NOTCONSITUTE THE ENTIRETY OFPWC’S REPORT AS PROVIDED TOGPCL.

orporationarket Analysis

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PricewaterhouseCoopersABN 52 780 433 757

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Direct Phone +61 7 3257 8851Direct Fax +61 7 3031 9400

Mr Michael GaltChief Financial OfficerGladstone Ports CorporationPO Box 259Gladstone QLD 4680

5 March 2008

Dear Mike

Economic analysis of towage services at Port of Gladstone

Please find attached a summarised version of our final report which sets out our key findingsin relation to the cost efficiency of a single towage provider versus dual towage providers atthe Port of Gladstone.

As you are aware, we have relied upon information provided to us by Gladstone PortsCorporation (GPCL) and Maunsell AECOM (Maunsell) in preparing our report. Our findingsshould be interpreted having regard to the assumptions presented in Section 4 andAppendix B.

Please feel free to contact me should wish to discuss any of the matters set out in is reportsummary.

Yours sincerely

Craig FentonPartner, Advisory

Gladstone Ports Corporation

Summary of Towage Market Analysis

Contents

1 Executive summary 1

Executive summary 2

2 Background and scope 4

Background 5

Scope and methodology 5

3 Market characteristics 7

Port and towage overview 8

Towage business cost structure 11

Towage in other ports 11

4 Analysis 14

Methodology 15

Assumptions 16

Analysis – vessel waiting times & minimum tug requirements 19

Analysis – cost impacts 25

Conclusions 28

Appendices

Appendix A Port rules 31

Appendix B Assumptions 32


Summary of Towage Market Analysis PricewaterhouseCoopers | 1

1Executive summary

Executive summary



Executive summary

Towage services at the Port of Gladstone (“the Port”) currently are provided by a single servicesprovider, Svitzer Australia Pty, under an exclusive licence arrangement. The original licence wasgranted as part of a competitive tender process in 2000 and was extended in 2006 following theACCC’s extension of legal immunity in respect of third-line forcing conduct. The term of the currentexclusive licence is to expire on 30 June 2010.

This report considers whether or not the introduction of an additional towage service provider at thePort of Gladstone is likely to increase the cost of towage services to Port users, and if so by whatamount.

Broadly, this analysis is based on a comparison of the economic cost of towage services under a singletowage provider arrangement vis-à-vis two towage providers servicing separate parts of the market.Based on advice from GPCL, the towage market was segregated to two ‘non-competing’ groupings ofwharves, with a single towage provider servicing each group separately. This structure was basedbroadly on an actual alternative proposal received by the Port and therefore no alternative marketstructures were considered. Specifically, this proposal did not include any ‘head to head’ competitionbetween the two proposed service providers and hence our modelling and conclusions do not accountfor possible competition-induced dynamic efficiency benefits, if any.

In the dual market or ‘franchise’ scenarios, the wharf allocation resulted in an approximate two thirds /one third split of total vessel movements between the two tug fleets. We then compared the number oftugs (and corresponding cost) required to service all of the wharf centres with a single tug fleet with thenumber of tugs (and cost) required to service the wharf groupings separately.

In conducting the analysis, we considered:

the outputs of harbour modelling undertaken by Maunsell AECOM (Maunsell) in relation to ahypothetical division of wharf centres at the Port of Gladstone, including projected vessel and tugmovements, total tug steaming time and vessel waiting times

the cost structure of a hypothetical towage service provider based on data provided by GPCL andbenchmarked against the cost structure of the existing incumbent towage services provider andother sources

a near- and medium-term forecast of demand for towage services, and

the spatial distribution of vessel movements across the Port’s various wharf centres and includingthe potential impact of the proposed Wiggins Island Coal Terminal and Gladstone Pacific Nickeldevelopments (but excluding the effect of prospective LNG developments at the Port).

Our analysis suggests that, on a full economic-cost basis, the separation of towage service providersimposes a cost efficiency penalty on port users collectively, and users of towage services at each of thetwo wharf centre groupings separately.

As demonstrated by the table below, this cost penalty is in the order of 50% on an average cost pervessel basis, depending on the growth scenario modelled. The precise distribution of costs betweenusers of different wharf centres differs depending on the allocation of vessels between tugs fleets andthe particular tug configuration. In the scenarios considered (ie, where there was an unequaldistribution of vessel movements between the two tug fleets), the cost penalty incurred by port userscomprising the smaller vessel fleet exceeded that incurred by users of the larger fleet.

A summary of our analysis is provided in the table below:

Executive summary



Table i: Inputs and results of analysis (Source: Maunsell, GPCL, PwC analysis)

Base case demand scenario Demand growth scenario

Single Operator Dual Operators Single Operator Dual Operators

Vessel movements 1,486 1,486

(985 and 501)

1,937 1,937

(1,317 and 620)

Tug fleet size6 9

(5 and 4)

8 12

(7 and 5)

Cost of towage $28.2m $42.4m $36.9m $55.9m

Cost increase per vessel - 50%

(31% and 82%)

- 52%

(32% and 90%)

In addition, due to the indivisibility of tug vessels – the Port cannot have a fraction of a vessel – theexact maintenance of ‘base case’ vessel waiting times (and hence implied demurrage costs) is notpossible. Therefore either additional tug capital/operating costs to exceed base case vessel waitingtime performance or additional indirect demurrage costs must be incurred. In the scenario analysed,this was particularly relevant for the larger market segment, where for certain separate provider tugcombinations, the modelling simulation suggested a significant increase in vessel waiting times. Thisincrease in waiting times may translate into a demurrage cost penalty, which is not included in our costanalysis.

Our findings are necessarily qualified by the assumptions set out in this report and the nature of theparticular scenarios modelled. The findings do not provide a universal basis on which to suggest that aseparated towage market, in any configuration, would impose a cost penalty on port users in the orderof that estimated above. However, the scale of the cost differential does strongly suggest that provisionof towage services by two or more providers would result in additional economic costs, and thereforewould need to be clearly demonstrated as providing other (non-cost) benefits to port users.



2Background and scope

Background and scope



Background

Towage services at the Port of Gladstone (Port) are currently provided by a single services provider,Svitzer Australia Pty, under an exclusive licence arrangement. The original licence was granted as partof a competitive tender process in 2000 and was extended in 2006 following the ACCC’s extension oflegal immunity in respect of third-line forcing conduct. The term of the exclusive licence is to expire on30 June 2010.

GPCL wishes to consider whether it is efficient to vary the current exclusive licence structure.PricewaterhouseCoopers was engaged by GPCL to analyse the efficient cost structure for the deliveryof towage services at the Port of Gladstone, as determined by the ‘safe, economic and efficient’passage of vessels and usage of tugs for the whole port. This analysis is on the basis of a definedallocation of tug calls to two hypothetical towage service providers, as compared to a single towageprovider servicing all vessel movements at the Port.

Scope and methodology

We have constructed a financial model which demonstrates the fundamental economic costcharacteristics of the market for towage services at the Port of Gladstone, under certain definedscenarios. We have used this model to analyse the potential financial effect of issuing a non-exclusivelicence in the Port of Gladstone, based on a defined hypothetical division of the market between twonon-competing franchises as advised by GPCL. This structure was based broadly on an actualalternative proposal received by GPCL and therefore no alternative market structures were consideredin this analysis.

Our analysis includes consideration of a possible minimum economic scale for the provision of towageservices and the impact of dual towage providers on whole-of-port services. We have not considered indetail the effect of issuing non-exclusive licences to more than two towage operators. We have alsoassumed, based on discussions with GPCL, that there are no cross-hiring arrangements between thetwo towage providers – each operator must have exclusive access to sufficient tugs to service itsproportion of vessels using the Port. In effect there is no competitive rivalry between the two providersas they each service their own market segment, nor cooperation in servicing peak towage demand.

Our model and corresponding analysis has been informed by:

the outputs of harbour modelling undertaken by Maunsell AECOM (Maunsell) in relation to ahypothetical division of wharf centres at the Port of Gladstone, including projected vessel and tugmovements, total tug steaming time and vessel waiting times

the cost structure of a hypothetical towage service provider based on data provided by GPCL andbenchmarked against the cost structure of the existing incumbent towage services provider andother sources

a near- and medium-term forecast of demand for towage services

the spatial distribution of vessel movements across the Port’s various wharf centres and includingthe potential impact of the proposed Wiggins Island Coal Terminal and Gladstone Pacific Nickeldevelopments (but excluding the effect of prospective LNG developments at the Port), and

a pre-determined allocation of wharfs and vessel movements across two hypothetical towagefleets, as advised by GPCL.

The projected vessel and tug movements which inform the demand assumptions utilised in our analysisare based upon Port forecasts, though continued uncertainty surrounding the global seaborne coalmarket and markets generally for commodity exports need to be taken into account when considering

Background and scope



these forecasts. These vessel forecasts should not be relied upon by third parties as an accuraterepresentation of future operations at the Port.

We have not explicitly considered the physical and operational interrelationships between towageservices, maritime vessel movement regulation and the provision of ‘commercial’ port services (wharffacilities and stevedoring).

However, from discussions with representatives of the GPCL and Maunsell, we understand that theharbour model developed by Maunsell, and therefore the towage scenarios tested by Maunsell for thepurpose of this analysis, assumes a continuation of current port ‘rules’ in relation to safety, vesselmovements and queuing (see Appendixes A and B), and minimum operating standards. Our costmodelling, therefore, is predicated on the maintenance of these current minimum acceptable standards.

For the purposes of this report, we have relied on information and forecasts provided to us by GPCLand the outputs from Maunsell’s harbour model, with some limited benchmarking to external sources.We have not sought to audit or otherwise verify the accuracy of that information.



3Towage market characteristics

Towage market characteristics



Port and towage overview

The Port is owned by GPCL, a corporatised entity with shares held by various Ministers on behalf of theQueensland Government. GPCL also owns and operates a number of cargo handling facilities in thePort.

Towage services are provided to Port users by Svitzer Australia Pty Ltd. There are five tugs currentlyavailable within the Port:

Tom Tough – 46 tonne bollard pull

Wistari – 46 tonne bollard pull

Beltana – 62 tonne bollard pull

Bullara – 62 tonne bollard pull

Clontarf – 62 tonne bollard pull (details provided by GPCL).

Demand for towage services is distributed across Port users and across various wharf centres. Theoperational wharves are set out in the table below.

Table 1: Current wharf centres and corresponding users (Source: GPCL)

Wharf Centre Wharves User

Boyne Smelter Wharf Boyne Wharf BSL

South Trees Wharf South Trees East

South Trees West

QAL

Barney Point Terminal Barney Point Multi-User facility

Auckland Point Wharf Auckland Point 1

Auckland Point 2

Auckland Point 3

Auckland Point 4

Multi-user

GrainCorp

Multi-user

Multi-user

RG Tanna Coal Terminal Clinton Wharf Multi-user facility

Fishermans Landing Fishermans Landing 2

Fishermans Landing 4

Fishermans Landing 5

Rio Tinto Yarwun Alumina

Refinery/Multi-User

Multi-User

Multi-User

The average number of tugs required per vessel across all wharf centres at the Port is approximately3.8 - calculated as the total number of tug jobs (for both inbound and departing vessels) divided by thetotal number of vessels. The number of tugs required per vessel varies according to a number offactors, including manoeuvrability of the vessel, cargo, and vessel size. Forecast data provide by GPCLreflects the range of vessel characteristics across wharf centres. For example, vessels originating orbound for RGTanna, Wiggins and Fisherman’s Landing 2 terminals may require up to five tugs pervessel, whereas Auckland Point, Fisherman’s Landing 4 and Fisherman’s Landing 5 generally requireonly two tugs per vessel. Some vessels do not require towage services at all.

There are currently five tugs in use at the Port, with at least one additional tug expected to be needed toaccommodate forecast growth to 2015.




Figure 1: Forecast total vessel numbers & tonnage at the Port of Gladstone (Source: GPCL 2008)

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2008 2009 2010 2011 2012 2013 2014 2015

Tonnes ('000)

-

500

1,000

1,500

2,000

2,500

Vessel Numbers

Tonnes Vessel Numbers

Figure 2: Forecast total vessels and towage jobs (Source: GPCL 2008)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2008 2009 2010 2011 2012 2013 2014 2015

Tug Jobs

-

500

1,000

1,500

2,000

2,500

3,000

Vessel Numbers

Tug Jobs Vessel Numbers

Existing towage charges are scaled on the basis of vessel size, with differential charges per tugaccording to the Gross Registered Tonnage (GRT) of the vessel to be serviced. This size-basedcharging structure is common to many major Australian ports (but with some variation in the scale ofGRT denominations).




Table 2: Towage charges at the Port of Gladstone (charges for FY2008-09) (Source: GPCL 2008)

GRT Range General Tariff – GST Exclusive Coal Tariff – GST Exclusive

Tugs x 1 Tugs x 2 Tugs x 3 Tugs x 4 Tugs x 1 Tugs x 2 Tugs x 3 Tugs x 4

1 – 10,000 $1,379 $2,758 $4,137 $5,516 $1,600 $3,200 $4,800 $6,400

10,001 – 20,000 $1,807 $3,614 $5,421 $7,228 $2,096 $4192 $6,288 $8,384

20,001 – 30,000 $2,210 $4,420 $6,630 $8,840 $2,564 $5,128 $7,692 $10.256

30,001 – 40,000 $2,573 $5,146 $7,719 $10,292 $2,985 $5,970 $8,955 $11,940

40,001 – 50,000 $2,997 $5,994 $8,991 $11,988 $3,477 $6,954 $10,431 $13,908

50,001 – 60,000 $3,366 $6,732 $10,098 $13,464 $3,905 $7,810 $11,715 $15,620

60,001 – 70,000 $3,575 $7,150 $10,725 $14,300 $4,148 $8,296 $12,444 $16,592

70,001 – 80,000 $3,703 $7,406 $11,109 $14,812 $4,296 $8,592 $12,888 $17,184

80,001 – 100,000 $3,875 $7,750 $11,625 $15,500 $4,496 $8,992 $13,488 $17,984

100,001 and over $4,057 $8,114 $12,171 $16,228 $4,707 $9,414 $14,121 $18,828

Note: This table reproduces the full schedule of charges. Some combinations will not occur in practice (eg 4 tugs

servicing < 10,000 GRT vessels)




Towage business cost structure

Economic costs for towage business typically comprise:

operational costs, such as crewing costs, fuel and oil, maintenance, berth leasing andadministration costs, and

capital costs, including a return on assets and depreciation.

Of total annual costs, capital costs account for approximately 40% and operational costs approximately60%.

Figure 3: Capital and operating costs (Source: GPCL 2008; Svitzer 2005; other public sources)

Operating

Costs

Capital Costs

Towage capital costs are largely fixed with respect to the number of tugs. Crewing costs are alsolargely fixed in the short-run, and are closely linked to the number of tugs. Of the variable costsassociated with towage businesses (eg fuel, maintenance and berth leasing), fuel costs are the mostvariable, however these costs are not precisely correlated to the number of tug jobs, as the amount offuel used depends on the intensity of tug task, steaming and waiting time, weather and other factors.

Towage in other ports

Harbour towage services are provided at 51 Australian ports. One hundred and twenty tugs are basedat 45 of these ports, with the remaining six ports serviced by tugs from ports nearby (Source: IBISWorld Industry Report, Navigation, Towage and Other Services to Water Transport in Australia: I6629,October 2007).

Towage charges across Australia are variable. A Meyrick and Associates study conducted in 2007 forthe Victorian Essential Services Commission estimated that average towage charges for certain drybulk vessels ranged from $6,500 at Newcastle to $17,000 at Townsville. While Gladstone was found tohave relatively high average port charges (driven largely by harbour dues), the Port’s average towagecharges were roughly comparable with other commodity export terminals, but towards the lower end ofthe scale1.

1Meyrick and Associates’ report suggested that, on a weighted average charge basis ($/revenue tonne), Gladstone had the third

highest (average) port charges behind Port Kembla and Geraldton Port (see p45). For towage charges, see Figure 4-8 Concessional

Dry Bulk Vessel Visit Costs Detail. Meyrick and Associates, Benchmarking of Port Prices in Australia, April 2007




Towage is provided by either single or multiple towage providers, largely depending on the scale andcomposition of vessel movements at the port. Port towage providers operating in a sample of Australianports are outlined in Table 3 below.

Table 3: Towage providers in Australian Ports (Sources: various Port authority websites (accessed during

October/November 2008)

Port Towage Providers

Freemantle Port Adsteam Marine Ltd2

and Total

Marine Services Pty Ltd

Port of Melbourne Svitzer and PB Towage (Formally

AMS)

Port of Newcastle Svitzer

Port Botany Svitzer and PB Towage (Formally

AMS)

Port Kembla Svitzer

Dampier Port Rio Tinto Iron Ore

Geraldton Port Svitzer

Port Waratah Svitzer

Geelong Port Svitzer

Minimum economic scale for towage services

The Productivity Commission Inquiry Report into Economic Regulation of Harbour Towage and RelatedServices (2002) indicated that economies of scale for a single operator tug fleet may be limited forvolumes above 8,000 tug jobs per year. The Report also noted that that returns to scale may notdecrease until much higher volumes are reached, suggesting that 8,000 tug jobs per annum mayrepresent a minimum range for the introduction of a second towage provider.3

In its discussion of minimum economic scale, the Commission drew upon broad consensus insubmissions,4 international examples such as Singpore where 6 licences were in place to service84,000 tug jobs (ie 14,000 tug jobs per licence), and the prevalence of single provider-arrangements inmost Australian ports at that time. Several Australian ports now have dual towage providers, though themajority of bulk commodity export terminals have only one towage provider (see Table 3, above).

In FYE 2008 at the Port of Gladstone there were approximately 1,370 vessels calls and 5,360 tug jobs.

2Adsteam Marine Limited was acquired by Svitzer in March 2008, however the Freemantle Ports website

(www.freemantleports.com.au) still uses the Adsteam Marine Limited name.

3Economic Regulation of Harbour Towage and Related Services, Productivity Commission Report (2002), page XXVI (Overview). “Tug

jobs” refers to the number of tug calls on an individual tug basis (eg, if a vessel requires two tugs to berth and two tugs to depart the

port, this is classified as 4 tug jobs).

4The Commission specifically referred to Dale Cole & Associates’ submission which cited 8,000 tug jobs as the limit below which

towage was likely to be a natural monopoly, though also noted that ‘many participants’ argued that Australian ports had too few vessel

movements to allow sustainable competition through introducing a second operator.




The Commissions’ report concluded that at the scale of operations in 2002, “most if not all Australianports can efficiently support only one towage service provider in the longer term” (Finding 6.1). Insupport of this conclusion, the Commission cited:

indivisible investment (ie, indivisibility of minimum economic fleet size)

economies of scale (eg, due to spare capacity in existing fleet)

economies of scope (eg, salvage and fire-fighting services).

The report also noted, however, that the cost of largely idle additional tug capacity is relatively smallcompared to the costs of delays caused by waiting for tugs (ie, demurrage costs). Minimum fleet sizestherefore typically account for both a projected number of ships and some latent capacity toaccommodate short-notice user and port requirements.

Though now somewhat dated, studies conducted by the (then) Bureau of Transport andCommunications Economics (1989), the (then) Prices Surveillance Authority (1990) and the AustralianCompetition and Consumer Commission (1995) similarly concluded that one towage provider wasefficient in most, if not all, Australian ports. While the size and characteristics of several ports havechanged since these studies were published, the basic principle remains – that is, the pseudo-naturalmonopoly characteristics of towage mean that unless the market is sufficiently large to accommodatetwo fleets at or above a minimum economic fleet size, then a single towage provider may be the mostefficient structure.

In its 2006 submission to the UK Competition Commission in respect of the proposed acquisition ofAdsteam Marine Limited by Svitzer5, Dale Cole & Associates cited the Newcastle towage market as anexample of unsustainable competition as a result of insufficient vessel movements. This example wasalso raised in a number of submissions to the Productivity Commission’s 2002 Inquiry6. From 1995 to2000, competition between two towage operators (BHP and Adsteam) was reported to have resulted inlosses for one operator and a breakeven result for the other –largely due to a duplication of capital andsome operating costs (eg, crewing costs) without a significant increase in vessel calls to support theadditional duplicated investment. In this instance, the two operators did not implement tug sharingarrangements and thus both fleets were maintained at the size required to carry out all towageoperations. Ultimately, Adsteam acquired BHP’s towage operations and Newcastle Port returned to asingle-provider arrangement.

Dale Cole & Associates also noted in their (separate) submissions to the UK Competition Commissionand Australian Productivity Commission that they had conducted studies in to the possibility of anoverseas operator entering the market at a number of ports where the number of tug jobs ranged from5,000 – 6,500 per annum. Ultimately they concluded that Australian ports could not commerciallysustain competition in towage services unless the total number of tug jobs exceeded 8,000, with eachoperator servicing 50% of the market. In its Inquiry Report, the Productivity Commission appeared tobroadly support this conclusion.

5Letter from Dale Cole & Associates to the UK Competition Commission, 2 October 2006

6See, for example, the Association of Australian Ports and Marine Authorities supplementary submission (22 July 2000)



4Analysis

Analysis



Methodology

Based on advice from GPCL, the towage market was segregated to two ‘non-competing’ groupings ofwharves, with a single towage provider servicing each grouping. This structure was based broadly onan actual alternative proposal received by the Port. The wharf groupings were allocated to twohypothetical towage providers (denoted in this section as Wharf Grouping A, Wharf Grouping B,Towage Provider A; Towage Provider B; Fleet A; Fleet B). We then compared the number of tugs (andcorresponding cost) required to service the wharf groupings separately with the number of tugs (andcost) required to service all of the wharf centres with a single tug fleet.

Our framework for assessment of cost-effectiveness of single towage provider versus dual towageproviders is summarised as follows:

Figure 4: Stylised assessment methodology

# tugs

Avg

.ve

sse

lw

aitin

g(h

rs)

6

Target vesselwaiting time

XY

# tugs

Avg

.ve

sse

lw

aitin

g(h

rs)

6


XY

# tugs

Avg

.ve

sse

lw

aitin

g(h

rs)

6


XY

# tugs

Avg

.ve

sse

lw

aitin

g(h

rs)

6


XY

1. Maunsell harbour model and

advice from GPCL used to

determine the optimum number of

tugs for a single-operator towage

operation.

Based on this number of tug

vessels, a target vessel waiting

time (considering both waiting

time at anchor and at berth) is

determined based on simulated

Port operations and vessel

movements.

Avg

.ve

sse

lw

aitin

g(h

rs)

XY A

vg.

vesse

lw

aitin

g(h

rs)

XYA

vg.

vess

el

wa

itin

g(h

rs)

XY A

vg.

vesse

lw

aitin

g(h

rs)

XY

XY A

vg.

vesse

lw

aitin

g(h

rs)

XY

2. Target vessel waiting time used to

determine the required number of

tugs for Wharf Grouping A vessels

(TA) and for Wharf Grouping B

vessels (TB), assuming that each

wharf grouping is serviced

separately.

3. PwC modelling of cost penalty

incurred by Port users due to an

increased number of tug vessels,

including tug capital costs,

crewing cost, fuel (steaming time),

duplicated fixed costs, (eg tug

wharf, administration) and

potentially increased average

vessel waiting time (demurrage

cost), if any.Tota

lC

ost

(Sin

gle

)

Additio

nal

Opera

ting

Costs

Additio

nal

Capital

Costs

Tota

lC

ost

(Dual)

TA TB

Analysis



Assumptions

Demand and operational assumptions

Maunsell provided us with data in relation to vessel numbers and spatial distributions, tug utilisation andsteaming time at the Port of Gladstone, based on defined scenarios. The scope of the Maunsell harbourmodel used for producing this data includes detailed shipping operations for all primary commercialberths in the Port of Gladstone and considers ship loading rates, channel occupancy, pilotrequirements, tug requirements and restrictions and the effect of tides and UKC restrictions in the Port.The physical scope of the model includes the anchorage, channels and all primary commercial berths,but does not include landside operations past the berth.

The scenarios and corresponding assumptions used by Maunsell in producing these data outputs areshown below:

Table 4: Demand scenarios for analysis

Demand scenarios

Base case demand Ship movements include: existing trades, and; RGTCT at full 4 berth, 3 shiploader

operation.

Growth scenario Ship movements include: existing trades; RGTCT at full 4 berth, 3 shiploader

operation; Wiggins Island stage 1; Gladstone Pacific Nickel trade; FL 1 berth

operational for alumina refinery.

Table 5: Assumed vessel numbers for demand scenarios (Source: Maunsell, GPCL 2008)

Base Case Growth Scenario

Single Provider Dual Providers Single Provider Dual Providers

Wharf Grouping A n/a 985 n/a 1,317

Wharf Grouping B n/a 501 n/a 620

Combined 1,486 n/a 1,937 n/a

Total 1,486 1,486 1,937 1,937

The vessel forecasts used in our analysis represent a ‘snapshot’ of demand and therefore do not reflectchanges in vessel mix and size over time. For instance, we have not explicitly considered the trendtowards larger ships with fewer port calls, which has been observed in other ports, or technologicaladvancements which may decrease the required number of tugs per vessel over time (eg bow andstern thruster and rudder technology).

The demand assumptions used in our analysis are broadly consistent with projected demand at thePort for 2009/10 (base case) and 2013/14 (growth scenario).

Analysis



Figure 5: Forecast total vessels and towage jobs, including assumed vessels for no-growth and growth scenarios

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2008 2009 2010 2011 2012 2013 2014 2015

Tug Jobs

0

500

1000

1500

2000

2500

3000

Vessel Numbers

Tug Jobs Vessel Numbers

No Grow th Scenario

(1,486 Vessels)Grow th Scenario

(1,937 Vessels)

Cost assumptions

For the purposes of this analysis, the assumed cost profile of a towage operator was based onbenchmark cost data provided to us by GPCL. We conducted a limited benchmarking exercise basedon known costs for the incumbent towage service provider as well as other public domain sources toconfirm the overall ‘reasonableness’ of this data, and applied some minor adjustments to reflect aconservative view of potential cost impacts.

The cost categories included in our cost model (and, where relevant, the basis of any assumption) areset out below7:

Annual operating costs:

– Crewing costs (per vessel)

– Fuel and oil costs (per tug hour)

– Maintenance (per tug)

– Other administration costs etc (annually per towage provider)

– Berth leasing (depending on the scenario - annually, for the existing tug berthing facilityOR; annually, including an allowance for expansion of the existing facility to accommodategreater than 5 tugs, incl. return on assets + depreciation assuming total capital cost of $5mat a 12% rate of return and 20 year asset life)

Annual capital costs:

– Return on assets (annual cost per tug, assuming $10m tug cost at 12% p.a. pre-taxnominal rate of return)

– Depreciation (annual cost per tug, based on straight line depreciation assuming a 20 yearasset life)

7 The precise values of the cost inputs to the model are not for public disclosure. Historic operating cost data was escalated, where

necessary, to reflect nominal $2010 values, using various cost inflation parameter estimates.

Analysis



Our modelling assumes a static cost comparison between a single towage provider and the alternativeof two towage providers, each servicing a particular market segment or ‘franchise’ area. This scenarioenvisages no ‘head to head’ competition between the two service providers and hence we have notmodelled any dynamic efficiency benefit in the form of a competition-induced improvement in operatingcost efficiency or similar. Nor have we considered whether the separation of the towage market wouldproduce any benefits or disbenefits at the time the Port re-tendered for towage providers.

Analysis



Analysis – vessel waiting times & minimum tug requirements

To analyse the comparative tug requirements for a single towage provider versus the two hypotheticaltowage providers, Maunsell provided us with data in relation to simulated vessel waiting times.

We firstly determined a target vessel waiting time for a single towage operator and the correspondingnumber of tugs, and then determined the required number of tugs for each of Fleet A and Fleet B tobroadly maintain this target vessel waiting time.

The selection of number of tugs ‘required’ in each scenario is somewhat subjective, as it is based solelyon the number of tugs required to reproduce a simulated vessel waiting time broadly equivalent to thedefault single-provider comparison scenario. To address this, in all scenarios we have considered thelikely economic cost of towage services where the simulated vessel waiting times deteriorate. Ourselection of tug numbers for the ‘A’ fleet, ‘B’ fleet and combined fleets is based on our view of the ‘bestcase’ number of tugs required to broadly maintain benchmark waiting times.

The data provided by Maunsell shows that, generally, as more towage vessels are simulated as beingavailable, the average waiting time (both at anchor and at berth) declines. Typically, where anadditional tug vessel is simulated as being available for one market segment, the improvement invessel waiting times in that market segment is greater than in the other market segment, and viceversa.

However, there are a number of instances in which average vessel waiting times – for particular tradesonly - actually increase when additional tug vessels are made available. There are a number of factorsat play here:

differing shipping characteristics and corresponding towage requirements for different types oftrade at the Port.

A particular size tug fleet will enable particular concurrent operations, which, in some cases, maydisadvantage certain trades, leading to increased vessel waiting times on average. An example ofthis is the case where a typical manoeuvre for a large trade (trade X) leaves sufficient tugavailability for one trade (trade Y) but not another (trade Z). Trade X manoeuvres may thencreate a window of opportunity for trade Y to complete manoeuvres. If increasing the size of thetug fleet allows concurrent manoeuvres for trades X & Z, then trade Y may experience areduction in simulated vessel movement opportunities and increases delays as a result. Tugallocation effects such as these may lead to counterintuitive delay results for some trades, insome scenarios.

some inherent randomness in the dataset used in the simulation modelling.

The Maunsell model uses pseudo-stochastic generation techniques to create a dataset forsimulating port operations over a defined period, generally 20 years. The effect of this techniqueis that there is some inherent variation to simulation results, although the effect of this is reducedby using a simulation period which is (generally) long enough to allow for key performancemetrics to converge to a stable level. The effect can also be addressed by using different randomnumber seeds.

This means that modelling results should be interpreted as being with a small confidence intervalof approximately ±5%– two simulation results of, for instance, 50 and 52 hours vessel waitingtime, should be interpreted as being equal.

Analysis



The Maunsell model was validated against 3 years of historical data for a range of performance metrics,including vessel waiting times8. This validation showed a high correlation between the model’ssimulated outputs and historical data for all performance metrics, suggesting a high level of confidencein the model’s capacity to accurately simulate port performance, under normal operating conditions(Source: Maunsell).

Base case scenario – single towage provider

A ‘base case’ scenario was determined using a single towage provider and a demand profile of existingtrades at the Port of Gladstone and additional trades from RG Tanna operating at full four berth,three shiploader capacity (per assumptions outlined on page 15).

Under this scenario, a target vessel waiting time (total anchor time) of approximately 48 hours per shipwas simulated with 6 tugs. There was a 27% improvement in vessel waiting times when tug numberswere increased from 5 to 6 tugs, with only a 19% improvement from 6 to 7 tugs. The improvement inwaiting times became negligible for greater than 8 tugs.

Table 6: Average vessel waiting times for tug configuration scenarios (single operator) (Source: Maunsell)

Number of Tugs 3 Tugs 4 Tugs 5 Tugs 6 Tugs 7 Tugs 8 Tugs 9 Tugs

Average waiting time at

anchor per vessela b 65 48 39 36 36

% improvement - - - 27% 19% 7% 0%

Average waiting time at

berth per vesselc

41 38 37 37 37 37 37

a Simulation results indicate insufficient tugs to meet minimum requirements for certain vessel manoeuvres.

b Simulation results indicate insufficient tugs to meet overall Port vessel movements, without excess queuing.

c Simulation results show a small improvement in waiting time at berth (see Figure 8, below) but results are rounded to the

nearest hour in this Table.

The availability of tugs generally affects time at anchor and time at berth. The incremental impact of an additional tug on

anchor and berth times is shown in the Figures below:

Figure 6: Average vessel waiting time at anchor for tug configuration scenarios (single operator) (Source: Maunsell)

0

50

100

150

200

250

300

350

400

3 Tugs 4 Tugs 5 Tugs 6 Tugs 7 Tugs 8 Tugs 9 Tugs

Ave

rag

ew

aitin

gtim

ep

er

sh

ip(h

ou

rs)

8Validated against historic data or 2000- 2003. See Appendix B for more detail in relation to Maunsell model assumptions and

limitations.

Analysis



Maunsell’s modelling showed significant variability in waiting times between different trades – forexample, with five tugs, waiting times at RG Tanna are around 80 hours, while for Fisherman’s Landing4 Export waiting times are less than 20 hours, with an average for the whole Port of 65 hours. It alsoshows that the introduction of an additional tug vessel has a disproportionate impact on waiting times atcertain wharf centres; generally those where vessel movements are tidally-constrained. Despite thisvariability, the overall trend in waiting times (displayed by the general shape of the graph set out inFigure 6) was reasonably consistent across all wharf centres.

Figure 7: Average vessel waiting time at berth for tug configuration scenarios (single operator) (Source: Maunsell)

34

35

36

37

38

39

40

41

42

3

Tugs

4

Tugs

5

Tugs

6

Tugs

7

Tugs

8

Tugs

9

Tugs

Ave

rage

waitin

gtim

eper

ship

(ho

urs

)

The Port currently operates with 5 tugs, however we selected a 6 tug operation as ‘baseline’ as itimplies a more reasonable vessel waiting time when additional trades from full RGTCT capacity areadded to current trades, and also implies a more conservative basis for cost comparison (ie, baselinecosts are higher, thereby limiting the potential for overstatement of cost increases associated with aseparated towage market).

Base case scenario - separate towage providers

Maintaining the same demand profile assumption as for the previous scenario but splitting two tugfleets, a total of 9 tugs (5 Fleet A tugs and 4 Fleet B tugs) are required to maintain similar averagevessel waiting times as compared to the benchmark (ie, 48 hours). Maunsell’s results indicated that:

With only three tugs for either Fleet A or Fleet B, vessel waiting times are unrealistically high. Thisindicates an inability to service concurrent manoeuvres at certain wharf centres, some of whichrequire 2 tugs for manoeuvres.

Increasing both tug fleets to four allows concurrent operations between wharf centres/differenttrades to occur. The addition of a fifth tug to Fleet B in these scenarios does not have asignificant impact as it is used for less than 1% of tug manoeuvres. A reduction in delays from 3to 4 tugs is evident in both queuing time at the anchorage and particularly in the reduction in timeat berth.

Thus, a minimum of five Fleet A and four Fleet B tugs are required to avoid a significant deterioration inaverage vessel waiting times. This configuration yields an average simulated vessel waiting time of 44hours per ship.

We also considered the 4:4 tug configuration, however while this option reduces the overall tugrequirement (and therefore cost), it also implies a 61% increase in average vessel waiting times (andtherefore implies a significant potential demurrage cost). A 5:5 tug configuration gives a simulatedaverage vessel waiting time closer to 48 hours (45 hours) however is uneconomic as it requires a

Analysis



further increase in the number of tugs (compared to the 5:4 configuration) but with no materialcorresponding improvement in waiting times.

Growth parameter scenario – single towage provider

Under a limited growth scenario, an average vessel waiting time at anchor of 53 hours was simulatedfor a single towage operator using eight tugs. Waiting times significantly increased when six tugs wereused and even more significantly when five tugs were used (see table 10 below). As per theassumptions outlined on page 16, the demand profile in this scenario included existing trades, RGTCTat full four berth, three shiploader operation, Wiggins Island stage 1 trade, Gladstone Pacific Nickeltrade, and FL 1 alumina refinery trade.

Table 8: Average vessel waiting times (single operator with growth parameter) (Source: Maunsell)

Number of Tugs 4 Tugs 5 Tugs 6 Tugs 7 Tugs 8 Tugs 9 Tugs

Average waiting time per

vessel at anchora b 109 68 53 54

% Improvement - - - 38% 21% -2%

Average waiting time per

vessel at berthc 40 39 39 39 38 39

a Simulation results indicate insufficient tugs to meet minimum requirements for certain vessel manoeuvres.

b Simulation results indicate insufficient tugs to meet overall Port vessel movements, without excess queuing.

c Simulation results generally show a small improvement in waiting time at berth (see Figure 8, below) but results are rounded

to the nearest hour in this Table.

Figure 8: Average vessel waiting time at anchor for tug configuration scenarios (single operator with growth parameter)

(Source: Maunsell)

0

50

100

150

200

250

300

5 Tugs 6 Tugs 7 Tugs 8 Tugs 9 Tugs 10 Tugs

Ave

rag

ew

aitin

gtim

ep

er

ship

(ho

urs

)

Under this scenario, a baseline eight tug operation also provides a conservative basis for comparison(higher cost base) to avoid any overstatement of cost impacts associated with putting on more tugs toaccommodate a separate towage provider.

As with the ‘base case’ scenario, there is significant variability in vessel waiting times across the Port’sdifferent wharf centres/trades. The Maunsell data suggested that certain wharf centres are significantlyaffected by the addition of two extra tugs, whereas for others the impact is negligible. In effect, the

Analysis



average waiting time impacts are driven by the changes at wharf centres such as RG Tanna, whichconstitutes both a majority of Port trade and has the largest impact of additional tug services.

Figure 9: Average vessel waiting time at berth for tug configuration scenarios (single operator, growth)

(Source: Maunsell)

38

38

39

39

40

40

41

4 Tugs 5 Tugs 6 Tugs 7 Tugs 8 Tugs 9 Tugs

Ave

rage

wa

itin

gtim

epe

rsh

ip(h

ou

rs)

Figure 11 shows that adding more tug vessels has a (small) impact on average vessel waiting time atberth – although this improvement is smaller than for average waiting time at anchor, the average againmasks similar variability between different wharf centres.

Growth parameter scenario – single towage provider

Maintaining the same vessel/towage demand profile assumption (ie growth parameter scenario) butsplitting two tug fleets between Wharf Grouping A and Wharf Grouping B, the closest vessel waitingtime to target (53 hours per vessel) requires a minimum of seven tugs for Fleet A and five tugs for FleetB. This yields a simulated average combined vessel waiting time of 49 hours per ship, with an averageof 55 hours for vessels at Wharf Grouping A and 38 hours for vessels at Wharf Grouping B (Source:Maunsell).

Because some vessels require 3 tugs and others require two tugs, a five tug fleet allows concurrentmanoeuvres for large vessels and other trades. For this reason, an increase from four to five tugs had asignificant effect on queuing time, particularly for large-vessel wharves where manoeuvres can occur atthe same time as those for other trades.

Average waiting times for vessels destined for Wharf Grouping B were only minimally impacted byfurther increases in the tug fleet. Six tugs are required for less than ~0.2% of concurrent Fleet B tugmanoeuvres. However, for Fleet A, any decrease in tug numbers below 7 resulted in a materialdeterioration in simulated average vessel waiting times.

Analysis



Summary of Tug Requirements

Based on our analysis of simulated vessel waiting times, the required number of tugs for each of thehypothetical scenarios analysed is outlined in the summary table below.

Table 9: Summary of tug requirements

Single Provider Dual Providers Single Provider Dual Providers

No Growth (Base Case) Growth

Combined Fleet 6 Tugs - 8 Tugs -

‘A’ Tug Fleet - 5 Tugs - 7 Tugs

‘B’ Tug Fleet - 4 Tugs - 5 Tugs

Total Tugs 6 Tugs 9 Tugs 8 Tugs 12 Tugs

In both demand scenarios, an increase in the number of tugs across the Port is required to maintain asclosely as possible the vessel waiting times simulated for a single towage provider.

Analysis



Analysis – cost impacts

The annual economic cost associated with towage services comprises:

operating costs (crewing costs, fuel & oil, maintenance, administration and berth leasing)

capital costs (return on capital and depreciation)

An indirect cost may also be incurred where vessel delays in or out of the Port are caused by theunavailability of tugs at the time of arrival or departure. We have not explicitly included demurrage costsin the following cost analysis. Although there are generally accepted ‘benchmarks’ for demurrage costson a per-vessel daily basis (historically in the order of $US30,000/day, though currently much lowerthan this due to the effect of the global financial crisis on shipping), differences in vessel charteringarrangements means that it is difficult to determine whether a simulated vessel delay will directly resultin a demurrage cost impact. Different vessel chartering arrangements, for instance, may provide fordifferent vessel lay-days and a delay at anchor may simply absorb some of this notional vessel waitingtime already factored into the charter.

However, given the size of the simulated vessel delays using the tug combinations we have selected, itis likely that there would be a demurrage cost impact. This would tend to increase the cost penalty onthese shippers from having a separate towage provider. This cost penalty is not included in the costanalysis below.

Cost Impacts – Base case demand scenario

The economic cost of a six-tug single towage operator was estimated at approximately $28.2m p.a.This includes operating costs of approximately $18m and capital costs of approximately $10.2m. This isequivalent to around $19,010 per vessel (for both arrival and departure paths – refer to the costassumptions provided earlier).

The annual economic cost impact of moving from a single towage provider with six tugs to separatetowage providers with a total of nine tugs (5 Fleet A tugs and 4 Fleet B tugs) is presented in thediagram below.

Figure 10: Annual economic cost – aggregate cost increases (comparing 6 to 5:4) (Source: PwC analysis, Maunsell and

GPCL data)

42,402

28,244

-

10,000

20,000

30,000

40,000

50,000

Tota

lC

ost

(Sin

gle

)

Additio

nal

Opera

ting

Costs

Additio

nal

Capital

Costs

Tota

lC

ost

(Dual)

($'0

00)

Analysis



Where the number of tugs in the Port increases from six to nine (5:4) there is an aggregate cost penaltyof approximately $14.2m p.a (50% increase) including $9.1m of additional operating costs and $5.1m ofadditional capital costs.9

The average per vessel cost increase associated with moving from a six tug single towage provider toseparate towage providers, with separate fleets of five and four tugs respectively, is approximately$9,500 per vessel.

The aggregate increase by category of port user (vessels using Wharf Grouping A versus vessels usingWharf Grouping B) is shown in the Figure below.

Figure 11: Distribution of total costs (single v dual towage providers) (Source: PwC analysis, Maunsell and GPCL data)

A FleetA Fleet

B Fleet

B Fleet

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Total Cost (Single) Total Cost (Dual)

($'0

00)

The cost per vessel is shown by the table below:

Table 10: Approximate cost per vessel, Scenarios 1 & 2 (Source: PwC Analysis)

Single Provider Dual Providers

Tug # 6 5 4 9

Combined Fleet A Fleet B Average

Approx cost per

Vessel

$19,000

$21,700 [Fleet B]

$17,500 [Fleet A] $23,000

$39,400

$28,500

Approx % increase

(from Scenario 1)- 31% 82% 50%

Note: Costs per vessel have been rounded to the nearest $100. Average costs for the combined scenario for each of Wharf

Grouping A and Wharf Grouping B vessels have been calculated using the simulated distribution of tug jobs between each of

Fleet A and Fleet B.

9If the total number of tugs were reduced to eight (eg, 4:4), the aggregate cost penalty reduces to approximately $10.9m p.a.

Analysis



Cost impact – demand growth scenario

The economic cost associated with an eight-tug single towage provider is approximately $36.9m p.a.including operating costs of $23.3m and $13.6m of capital costs.

The associated cost penalty associated with a 7:5 tug configuration is demonstrated by the followingFigure. The distribution of costs between Fleet A and Fleet B in the combined (single) scenario havebeen calculated using the simulated distribution of tug jobs between each of these fleets (ie, using thesame proportions as in the dual scenario).

Figure 12: Distributed incremental costs from 8 to 7:5 (Source: PwC analysis and GPCL data)

A Fleet

A Fleet

B Fleet

B Fleet

-

10,000

20,000

30,000

40,000

50,000

60,000

Total Cost (Single) Total Cost (Dual)

($'0

00)

This indicates a cost penalty of approximately 52%, bringing the total cost to $55.9m p.a. This includesan increase in annual capital costs from the addition of 4 tugs (approximately $6.8m p.a. increase) anda significant increase in operating costs, including additional crewing, berth leasing and maintenancecosts (approximately $12.3m p.a. increase).

A summary of the per-vessel cost increase for the growth scenarios is provided in Table 11 below:

Table 11: Approximate cost per vessel, Scenarios 3 and 4 (Source: PwC Analysis)

Single Provider Dual Providers

Tug # 8 7 5 12

Combined Fleet A Fleet B Average

Cost per Vessel $19,000

$20,300 [Fleet B]

$18,400 Fleet A] $24,300

$38,600

$29,000

% increase (from

Scenario 3)- 32% 90% 52%

Note: Costs per vessel have been rounded to the nearest $100.

Analysis



Conclusions

Our analysis of a hypothetical example of a dual-towage market at the Port of Gladstone suggests that,given the particular scenario modelled, on an economic-cost basis the separation of towage serviceproviders imposes a cost efficiency penalty on port users.

The particular dual-market structure and wharf allocation used in our analysis (ie an approximate twothirds / one third split of total vessel movements between the two tug fleets) was based broadly on anactual alternative proposal received by the Port. This proposal did not include any ‘head to head’competition between the two proposed service providers and hence our conclusions do not account forany potential dynamic efficiency benefit in the form of a competition-induced improvement in operatingcost efficiency.

For the scenarios explored in this report, additional tug vessels are required for each scenario in whichseparate tug fleets service vessels allocated to two separate wharf groupings. These additional tugvessels impose a significant additional capital cost. In the base case scenario (ie no significant growth)three additional tugs are required to maintain service standards across the Port. In the second case (iesome port growth from the addition of extra wharves) four additional tugs are required.

It is plausible that a lesser number of additional tug vessels could be required, even with separatetowage providers, though the simulation modelling suggests that this would be associated with asignificant increase in vessel waiting times and hence demurrage costs.

Due to the indivisibility of tug vessels – the Port cannot have a fraction of a vessel – the exactmaintenance of ‘base case’ vessel waiting times (and hence demurrage costs) is not possible, thereforeeither additional tug capital/operating costs or additional indirect demurrage costs must be incurred.This is particularly relevant for the larger fleet where the separate provider tug combinations modelledshow, for certain scenarios, a significant increase in vessel waiting times. This increase in waiting timesmay translate into a demurrage cost penalty, which is not included in our analysis.

For the purposes of this analysis, we adopted a ‘closest to base case’ approach to selecting therequired number and configuration of tugs vis-à-vis vessel waiting times, having regard to thereasonableness of any trade-off between increased vessel waiting times and increased tug numbers.

The cost penalty associated with the additional tug requirement is in the order of 50% on an aggregateand per vessel movement basis (for port users collectively) depending on the growth scenariomodelled. The precise distribution of costs differs depending on the allocation of vessels between FleetA and Fleet B tugs and the particular tug configuration. However, in both the base case and growthscenarios used in our analysis, the cost penalty incurred by the smaller fleet (Fleet B) exceeds that ofthe larger fleet (Fleet A).

Although we only undertook detailed modelling for limited scenarios, and therefore the magnitude of thepotential cost penalty associated with other market configurations is unclear (eg, for example, differentdivision of the market between two providers, or a market with three towage providers), generalconclusions may be drawn in relation to the indivisibility of capital for any split of the market. Theindivisibility of capital means that, when the towage market is separated, more tugs will generally berequired to service the same level of demand. The relatively small scale of the Port of Gladstonecompared to benchmarks such as the Productivity Commission’s reference point of 8,000 tug jobs peerannum as a minimum economic scale for consideration of two towage providers reinforces this view.

Operating costs are also closely linked to tug numbers (eg crewing costs and maintenance costs). A setnumber of crews are required to man each tug, with limited opportunity disperse crew costs across alarger fleet. The addition of a second towage provider/tug fleet involves the replication of other fixedoperating costs such as berth leasing and administration costs. Operating costs, therefore, increasesignificantly with the addition of new tugs to the port.

Analysis



Operationally, two towage providers may address indivisibility by implementing ‘borrow and loan’-typearrangements. This type of strategy would require detailed consideration of operational issues andexisting port rules, including priority issues.

These conclusions are necessarily qualified by the assumptions set out in this report and the nature ofthe particular scenarios modelled. Our findings do not provide a universal basis on which to suggestthat a separated towage market, in any configuration, would impose a cost penalty on port users in theorder of that estimated above. However, the scale of the cost differential (ie, 50%) does stronglysuggest that provision of towage services by two or more providers would result in additional economiccosts, and therefore would need to be clearly demonstrated as providing other (non-cost) benefits toport users.



Appendices



Appendix A Port rules

The vessel waiting times presented in Section 4 of this report assume the continuation of current Port‘rules’ in relation to safety, vessel movements and queuing. Use of the Port is subject to compliancewith GPCL’s published rules. These formal rules include:

1 Vessels departing the Port at critical maximum draft will be given priority use of the Port’sChannels to ensure their safe an effective passage to the Fairway Buoy. Where two or morevessels of a similar critical maximum draft wish to depart the Port at the same time then thepriority to be afforded to each vessel shall be determined at that time by the Ports Authorityhaving regard to what it considers necessary to maximise the safe, secure or efficient operationof the Port.

2 The priority given to vessels arriving to use the Port’s Channels will be determined by the arrivaltime of the vessel at the Port. The arrival time will be determined as from when the vesselcrosses a four nautical mile radius from the Fairway Buoy.

3 In order to maintain the safe, secure and efficient operation of the Port, the priority of shipmovements and the movement of critical maximum draft vessels may be varied or amended by adirection of an authorised officer of the Ports Authority or his delegate. (Source: CQPA PortNotice No. 1/05)

The rules are also subject to the powers of the harbour master under the Transport Operations (MarineSafety) Act 1994 and any directions issued pursuant to Regulations 17 and 18 of the TransportInfrastructure (Ports) Regulations 1994.

The harbour master has powers to ensure the safe passage of vessels at the Port, including directionsrelated to:

The operation of a ship in relation to a marine incident area

The operation of ship in relation to a pilotage area

Areas in or adjacent to a marine or pilotage area, for the purposes of allowing a ship to gainaccess, be berthed, or be removed

Construction work in or near a marine incident area or pilotage area to light or mark the works ina specified way, and

Lights, signs, signals, electrical equipment etc which may interfere with the proper operation ornavigation of a ship.

Assumptions



Appendix B Assumptions

Maunsell harbour model assumptions

The scope of the Maunsell harbour model includes detailed shipping operations for all primarycommercial berths in the Port of Gladstone and considers ship loading rates, channel occupancy, pilotrequirements, tug requirements and restrictions and the effect of tides and UKC restrictions in the Port.The physical scope of the model includes the anchorage, channels and all primary commercial berths,but does not include landside operations past the berth.

The model steps through time with probabilistic events and logic governing interactions in the model. Allship operations from arrival at the anchorage to the departure of the ship past the fairway buoy aremodelled. While delays and other effects of landside operations on berthing time are included in themodel, no landside operations are modelled explicitly. Tides at various locations in the Port are takeninto account and ship movements are constrained by under keel clearance, tide direction, occupation ofthe channels and tug resources. No constraints have been placed on pilotage resources.

All ship movements in the port are scheduled, allowing for priority levels to be assigned to shipmovements. Priority rules included in the model were based on the Port Information Handbook 2004and subsequent discussions with GPCL and pilotage staff.

The model has been validated against three years of historical data for the port (1 July 2000 to 28 June2003). Validation includes comparison of KPIs such as ship sizes, berth times and waiting times (arrivalto berth time, time at berth, berth utilisation). The nature of shipping operations at the Port is assumedto be unchanged from this time.

The model is a discrete event simulation model written in the SLX simulation language. The model wasdeveloped to simulate shipping operations at the Port of Gladstone to a sufficient degree of accuracy toallow quantitative comparisons between various development alternatives and stages with a highdegree of confidence. The model is used primarily in a “what if” manner as a tool to analyse shippingoperations given a series of different operating scenarios.

For the purposes of the outputs used in this report, tug configurations and are assumed as an input,rather than optimised as part of the modelling. Additionally, the time taken for tugs to move directly fromone berth entry or exit manoeuvre to another berth entry or exit manoeuvre is based on estimated tugtransit times from John Wilson Maritime Safety Queensland. The tug steaming time used in the modelis calculated using a constant speed and set distance and is independent of the state of the tide.

Maunsell has advised that the model experiences some instability in certain scenarios. As the capacityof the port to service ships is reduced to close to the arrival rate (such as by restricting the number oftugs), the queue size becomes unstable (ie, in some runs the vessel queue increases over thesimulation period, rather than converging to a constant level). Since time at anchorage is an integral ofqueue size, the time at anchorage also becomes unstable. This means that the variability in the resultsfor a simulation run increases as the system reaches capacity. Variability from run to run is generallyonly excessive in impractical port operating ranges, but needs to be taken into consideration wheninterpreting simulation results.

In cases where scenarios have the port operating with excessive delay times, Maunsell has generallyaddressed the variability in model output by increasing the length of the simulation run time and byrunning the same scenario multiple times with different initial conditions. For particular scenarios whereaverage time at anchor is greater than 200 hours, there may be increased variability in the results. Inthese cases, the results for the scenario should be interpreted as "the port is not meeting demand andexperiencing excessive delay times". In the cost analysis presented in Section 4, no cost comparisonswere made for tug configurations with vessel waiting times of greater than 66 hours.

Assumptions



As noted in Section 4 (page 16), Maunsell also advised that scenarios in which an increase in tugnumbers resulted an increase in vessel waiting times may be a result of a number of factors, includingthe differing shipping characteristics and priorities associated with vessels for different types of trade. Alimited tug fleet restricts concurrent ship manoeuvres to those where the sum of tugs required is equalto or less than those available (although this is complicated by tug transit time between manoeuvres).A particular size tug fleet will enable particular concurrent operations.

In some cases, increases in the size of the tug fleet may disadvantage particular trades. An example ofthis is the case where a typical manoeuvre for a large trade (trade A) leaves sufficient tug availability forone trade (trade B) but not another (trade C). Trade A manoeuvres may then frequently create awindow of opportunity for trade B to complete manoeuvres. If increasing the size of the tug fleet allowsconcurrent manoeuvres for trades A & C, then trade B may experience a reduction in opportunities andincreases delays as a result. Tug allocation effects such as that described in the example may lead tocounterintuitive delay results for some trades in some scenarios.

Cost assumptions

Cost assumptions are set out in Section 4 of this report.

Vessel forecast assumptions:

The base case vessel forecast is based generally on current port operations, with RGTCT at full 4berth, 3 shiploader operation. The growth scenario adds to this Wiggins Island stage 1 coal trade,Gladstone Pacific Nickel trade, and FL 1 berth operational for the Comalco alumina refinery.

For the growth scenario the vessels forecasts assume a continuation of coal shipments through theexisting Barney Point Coal Terminal. This reflects an assumption that Wiggins Island stage 1 will haveinsufficient spare capacity (and given RG Tanna is assumed to be fully contracted) to allow for theclosure of this wharf centre. The vessel forecasts include 58 vessels to Barney Point, or just less than3% of the total vessel movements at the Port.

© 2008 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCpartnership formed in Australia or, as the context requires, the Pricewaterfirms of the network, each of which is a separate and independent legal e

pwc.com/au
NOTE: THIS REPORT HAS BEENMODIFIED TO EXCLUDECOMMERCIALLY SENSTITIVEINFORMATION.
THIS REPORT VERSION DOES NOTCONSITUTE THE ENTIRETY OFPWC’S REPORT AS PROVIDED TOGPCL.

oopers” refers to PricewaterhouseCoopers, ahouseCoopers global network or other memberntity.

2 October 2006

The Inquiry Director United Kingdom Competition Commission Victoria House Southampton Row London WCIB 4AD United Kingdom

Attention: Mr Anthony Pygram

Dear Sir

Re: Proposed Acquisition by SvitzerWijsmuller A/S of Adsteam Marine Limited

I refer to your e-mail dated 28 September 2006 regarding the above. Dale Cole & Associates Pty Ltd (Dale Cole & Associates) has previously provided advice on harbour towage issues to:

> Australian Commonwealth and State Governments;

> Overseas towage operators;

> Australian based towage operators;

> Australian Port Authorities;

> Overseas Port Authorities;

z Australian Productivity Commission (APC); and

> Australian Competition and Consumer Commission (ACCC).

Our advice mostly focuses on financial modelling, forecasting profitability, tender preparation for exclusive towage licences and reviewing tender submissions.

The Authors o f this Letter

This letter has been prepared by Dale Cole of Dale Cole & Associates and Roger Ward a consultant to Dale Cole &Associates.

Both Roger Ward and Dale Cole would be available to assist the United Kingdom Competition Commission (the Commission) should the Commission think that this assistance would be of material benefit.

The curriculum vitae of both Roger Ward and Dale Cole are available on request.

Towage Arrangements in Australia:

Until recently (1998) towage operations were provided by towage operators who determined the parameters and the price (except for capital city ports) for the services they provided. Since 1998 some port authorities have commenced a tendering arrangement for towage services where price and KPls have been the contractual determining factors. These contracts are usually valid for seven (7) years.

Since 2002 the ACCC has ceased to monitor prices at capital city ports leaving price outcomes to countervailing forces and serial competition at the ports of Brisbane. Port Botany and Melbourne and to competition "for the port" (exclusive licences) at Bunbury. Weipa, FremantlelKwinana and Gladstone. Most of the remaining 64 Australian ports are unlicensed with respect to harbour towage operations.

Competition at Australian Ports

Prior to 1995 four ports in Australia (Newcastle, Port Jackson, Port Botany and Port Kembla) operated under a competitive towage arrangement. This competition was benign. The two competing operators had similar tariffs, shared towage jobs and covered for breakdowns, survey and slipping absences. The customer's only real choice was their preference for funnel colouring.

In 1994 a new towage operator entered the harbour towage market at Newcastle (NSW). This operator was partly owned by Australia's biggest company, which had an interest in at least sixty per cent (60%) of all cargo entering or leaving Newcastle.

The arrival of the new operator resulted in a far more aggressive form of competition with one of the towage operator's refusing to share towage jobs, crews or relief tugs (during down time). At the commencement of towage contestability at Newcastle the total tug jobs were approximately 6,750 per annum. When contestability ceased some five years later total tug jobs were approximately 7,250 per annum.

The aggressive approach to competition at Newcastle led to both operators having similar tug fleets (in numerical terms) and tug crews resulting in the capital value of the tug fleet doubling along with crew numbers. This situation coupled with a relatively small increase (growth) in tug job resulted in significant losses for one operator and a breakeven result for the other.

Obviously this situation could not continue and eventually one operator purchased the assets of the other.

What lessons were learnt from the Newcastle Experience?

In the relatively small towage market contestability will not provide an acceptable rate of return if operators compete independently of each other. In this situation each entrant will have to supply similar plant (tugs) and crewsto meet the demands of the entire market.

In Australia there is an added complication that the crews are paid the "port" rate irrespective of their employers' market share.

Between 2000 and 2003 Dale Cole 8. Associates reviewed the possibility of an overseas operator entering the market at a number of ports on a contestable basis. These ports were the larger Australian ports, in tug job terms, with tug jobs at each port being between 5,000 and 6,500 per annum.

We factored into our models a drop in prices, to achieve market share, and paid crews on the basis of performance. These models clearly demonstrated that the markets in Australia cannot commercially sustain a contestable towage service unless the total number of tug jobs exceeded 8.000 and the work is shared on a 50 : 50 basis.

As a consequence of this modelling, we are of the opinion that ports in Australia are natural monopolies for towage operators.

Whilst we have put the number at 8,000 tug jobs in Australia, we concede that this number may vary in the United Kingdom depending on each port's tariff and labour costs. This number could be confirmed by modelling and the use of what the ACCC defines as an acceptable rate of return on equity (12.3%).

Barriers to Entry:

In Australia, and we suspect the same is true in the United Kingdom, the barriers restraining sustainable entry into a port's harbour towage market are:

1. Market size i.e. number of tug jobs.

2. Capital investment.

3. Operating costs e.g. crew wages.

4. Rebate arrangements with large international ship operators.

During our modelling exercises we model crew wages on the basis of a competitive wage offer - remembering that crew's wages account for over 65% of an operator's operating costs. The conclusion we have come to is that towage companies may be artificially increasing wages in an effort to raise one of the barriers to entry.

Towage Monopolies and Competitive Tension:

In Australia, the lack of competitive tension in harbour towage was an issue of concern for regulators and stakeholders and allowed towage operators to adopt a myriad of inefficient operational practises.

As a consequence. Australia developed its competition "for the port" or exclusive licence model. This model is designed to retain the important ingredient of competitive tension without handicapping the port with an unstainable contestable regime.

Alternative Approach:

Through local and international maritime journals, Dale Cole 8 Associates is aware of the towage competition concerns at Livelpool expressed by the Office of Fair Trading has been referred to United Kingdom Competition Commission.

Australia was faced with a similar situation at its ports when the ACCC removed regulatory oversight from the country's major ports. In response, the APC recommended that ports should consider introducing competition "for the port", or exclusive licences. In an ideal world this competition would be transparent with the operator offering the most competitive prices (tariffs) becoming the exclusive licensee for the port. The APC recommended that the length of these contracts should be seven (7) years and to date the contracts let have largely followed this recommendation.

In Australia we still have some fine tuning to do to reach the final product. Dale Cole 8 Associates are strongly of the view that for an exclusive licence process to be relevant the authority conducting the process must be able to refer to the port's towage model. It has taken Australian authorities a while to get to this position. The next three Australian exclusive licence offers will be supported by financial models prepared by Dale Cole & Associates.

What are the benefits of competition for the port?

1. The process is transparent and competitive.

2. Capital expenditure is only expended by the successful tenderer.

3. Stakeholders have confidence in price (tariff) transparency with tenders being asked to commit to a fixed tariff and triggers that will lead to increases or decreases in the tariff should ship visits either decline or inflate.

4. Enables port authorities/regulators to set operational KPls that are designed to improve operational efficiency.

5. Commit operators to an ongoing consultative process with the port's stakeholders.

Financial Modelling:

Dale Cole & Associates have spent six (6) years developing their models. We are now comfortable that their relevance and accuracy has reached the point where they cannot be challenged on technical or financial grounds. Obviously there are input issues that have to be sourced externally i.e. tug jobs, rates of pay, fuel prices, docking costs etc, but we believe the finished product is accurate to within 5 three per cent (3%) of actuals.

Conclusion:

Dale Cole & Associates is firmly of the view that sustainable competitive tension through a contested towage market is not sustainable in Australia if the annual number of tug jobs in a single port is less than 8.000. We suspect the same number would be approximately applicable in the United Kingdom, but would need to model the port or ports to confirm this observation.

Yours faithfully For Dale Cole &Associates Pty Ltd

Dale Cole Director

Documents

Australian Competition and Consumer Commission€¦ · hypothetical division of wharf centres at the Port of Gladstone, including projected vessel and tug movements, total tug steaming