DP World wins rent battle with Port of Melbourne

The Port of Melbourne will forego tens of millions of dollars in annual revenue after abandoning a 750 per cent rent increase for DP World Australia and accepting price rises a tiny fraction of that amount.

The agreement clears uncertainty surrounding the $6 billion privatisation of the port and enables bidders to put a more accurate value on the port, which handles more than one third of Australia’s container trade.

The Port of Melbourne Corporation, which is owned by the Victorian Government, wanted to increase DP World’s annual rent to as much as $60 million annually from about $8 million ahead of its privatisation, which will fund a large part of the state Labor’s election promises.

Sources said DP World will now pay about $20 a square metre under the new deal, which has been the source of a bitter dispute between the stevedoring industry and the port, and threatened to drive up the cost of sea-born trade.

DP World previously paid about $16 to $18 a square metre. The Port of Melbourne’s proposed increase would have taken this up to $120 a square metre – an increase of 750 per cent..

The new lease gives DP World a 50-year tenure to 2065, and requires it to meet key performance indicators and efficiency incentives. It includes incremental rent increases over the 50-year tenure starting with inflation-linked increments in 2015 and 2016 to nominally $45 by 2023, and agreed escalations to 2028.

The first market rent review will take place in 2028 and subsequently every five years.

“With a longer period between rental reviews, the new lease takes uncertainty out of the container market,” said DP World’s chief executive, Paul Scurrah.

Nick Easy, chief executive of the Port of Melbourne Corporation, said the lease would ensure the port remained competitive with estimated rent costs at other Australian ports.

Rod Sims, chair of the Australian Competition and Consumer Commission, said the agreement between DP World and the port was an “extremely pleasing outcome.”

Outcome ‘better than regulation’

“Negotiated outcomes are always better than regulation but sometimes you need the threat of regulation to get a good outcome and sometimes also a bit of helpful public opinion,” he said.

The ACCC plans to keep an eye on future rental agreements to ensure privatised entities don’t raise rents. “It’s bad for the economy and it puts people off privatisation,” Mr Sims said. “We should be privatising because the private sector is more efficient, not to try and do artificial things to raise a lot of money.”

Sims declined to comment on whether the new agreement would reduce in a lower price for the port when it is sold off but said that privatisations should not be about price.

“Wouldn’t you rather have an efficient port giving us the best, cheapest possible service we can get?,” he said. “Isn’t that more important for the future of the Victorian economy than a once-off payment?”

The Port of Melbourne has total annual revenues of $368.4 million, mostly contributed by wharfage charges for loading and unloading goods.

Asciano, the owner of stevedore Patrick Ports, also expected to be affected by the proposed rent hike when its rent is reviewed early next year. It now expects a similar outcome to DP World’s new agreement given it operates at the same terminal.

The logistics industry remains concerned about the lack of regulatory oversight over the port, and a coalition of stevedores and shippers has urged the Victorian government to amend its draft legislation for the privatisation to protect it against future price increases.

“Even if short-term rental increase issues are resolved with the Port of Melbourne Corporation, the draft legislation falls short of effective regulation, creating uncertainty and putting at risk future investment and trade volumes through the port,” said coalition spokesperson, Rod Nairn, Shipping Australia CEO.

The coalition also called for a parliamentary inquiry to “allow further time for the consideration, discussion and debate of issues with the draft legislation.”

“We are also concerned that the current draft appears to try to remove ACCC scrutiny for any transaction,” Mr Nairn said.

The coalition said it was prepared to encourage federal government intervention, if needed, to ensure an effective regulatory regime was put in place.

“The Victorian government can resolve these issues by including a mandatory requirement for the privatised owner to submit a voluntary access undertaking to the ACCC prior to the sale being completed.”

 



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