Part 2 of 2





MAY 2007

Chapter 9 (continued)

The Port Corporation’s “outstanding” economic case has been touted as the driver for the channel deepening project. It is therefore unacceptable and inappropriate that its funding is outside the scope of the SEES ‘except issues that could affect the distribution or the magnitude of project benefits and costs22 (eg. increased fees/costs per container)’
How the project is funded and how associated industries which might benefit, and whether they would pass on savings from the project is essential to understanding the justifications for the project.

Shipping Industry

The shipping industry does not have to comply with the Australian Competition Policy.
The ACCC does however monitor prices, costs and profits of container terminal companies at the Ports of Adelaide, Burnie, Fremantle, Melbourne and Sydney.
The current available evidence does not support the premise that any cost savings obtained by the shipping industry would be automatically passed on to other parties.

Stevedoring Industry

In 2004, PoMC consultant Meyrick suggested that stevedores had retained very little of the direct and indirect savings from waterfront reform. However, the following are extracts from the ACCC report dated November 2006:
Volume growth eased with throughput measured in terms of 20-foot equivalent units (TEUs)
Unit total revenue and unit stevedoring revenue earned on 20 ft and 40 ft containers increased again in 2005-06 following a rise in 2004-05 indicating further increases in charges for stevedoring services.
Average assets in the industry increased by 18% in 2005-06.
In short, the stevedoring companies are doing all right.

So who is going to pay for this project and who are the beneficiaries?

Port of Melbourne Corporation?

In its response to the Essential Services Port Regulation Review Issues Paper dated 28 January 2004, the PoMC stated that:

the deepening of the channels alone is expected to generate benefits in the order of $1.2 billion for the shipping industry’ and that ‘in the light of such significant private benefits and given the large proportion of these benefits that flow to non-Victorians, it is not appropriate for the PoMC’s investment program to be funded by Victorian taxpayers’.
This statement is an acknowledgement by the PoMC that Victorian taxpayers and consumers are not the major beneficiaries of the CDP. It is inappropriate that the PoMC is advocating economic benefits based on cost reductions when in fact the PoMC has stated that cost to importers and exporters will be increased by way of an indexed levy or charge as follows:
When Mr Bradford, CEO, PoMC was asked at the House of Representatives Standing Committee on Transport and Regional Services Enquiry, on 27 July 2005 (page 26):
“On the issue of dredging how are you going to go about charging customers? Are you going to charge right across the portfolio or are you going to charge just those customers that are using the Panamax-type vessels, where that draught is required?”
Mr Bradford replied:
“The Port has put in the public domain a funding model for channel deepening. It consists of four basic elements. The first is that the port receives its revenue from commercial rents of the port, which we propose will remain at a commercial level based on market rates. The second is that the port receives revenue from ships by tonnage dues – we see those tonnage dues increasing by the consumer price index plus possibly up to 1 per cent, but not significantly more than that. Third, we have recently – on 1 July – introduced into the port an $8 charge to the shipowner on empty containers coming through the port, as their share of the infrastructure that they are using. We see that increasing by CPI plus maybe one per cent. Fourth, the bulk of the channel deepening would be funded by a levy on international containers. At $33 or $34 per container Melbourne is currently by far the cheapest container port in the country. We would see a levy being in place of around $20 on the 30-year life of the project, subject to its final cost plus CPI. So that is the funding model.”
Current Port charges:
Wharfage charges as at 1 July 2006






Overseas import






Overseas export














Empty returns3&4


3 Except those on dedicated Bass Strait services
4 Cargo carrying unit that only contains reusable package or dunnage
Source: Relevant Port websites April 2007

Would the PoMC please provide an explanation as to why they are advocating economic benefits based on cost reductions in the S-EES when in fact the PoMC has stated that charges will actually be increased to pay for channel deepening and to provide a commercial return on assets.
We understand that goods come into Australia common rated, i.e. the same cost to alternative ports, whether Brisbane, Sydney, Melbourne, etc. If so, by the stroke of a pen Melbourne could be made uncompetitive with other Australian ports which are more strategically placed giving shorter voyages, even if channel deepening were to proceed. An assessment of changes in market share and competition from other Ports should have been included in the S-EES.

Who are the beneficiaries?

This is difficult to establish. It seems even the PoMC’s own consultants are unclear.
‘Once the project is completed, the reduction in freight costs (assuming competition results in a full pass through of savings by shippers) will have the effect of boosting the incomes of Victorian importers and exporters.’23
‘In the first instance, the benefits will flow to shipowners, however, because competition in the market for shipping services is reasonably competitive (or at the least the vast majority of them) will be passed on to those who pay for the shipping services. These in turn will ultimately be distributed between the sellers of the cargo (exporters) and the buyers of the cargo (importers). The shares of each in the total benefit will depend on the relative responsiveness of each to changes in price: in technical terms on the elasticities of supply and demand’24

Although there may be a slight change in emphasis, the key assumptions are unchanged, and it clear that the Victorian public will not benefit from channel deepening.
  • The international shipping companies are the major beneficiaries
  • Based on the real commercial world there will be little benefit, if any, for anyone else.
These views are well summed up by the following:
... the consumer is the last person to benefit from a reduction in either production or logistic costs. Suppliers will charge what the market will bear ... ignore the economic theory that deals with the behaviour of monopolies, duopolies and oligopolies. They will take windfall gains if allowed to ...25
We note the most vocal champions for the project are reluctant to pay for the project:

PoMC CEO says industry should pay through levy on containers
P&O Managing Director Tim Blood says major importers and exporters should pay
Patrick Corporation spokeswoman, Felicity Moffatt, says the shipping companies, which are the major beneficiaries of the Project, should pay any levy
Minister Batchelor said those who benefit directly from the project should pay26
Shipping Australia Ltd
SAL considers it vital that the Victorian Government assures the trading community that there would not be any undue delay in the undertaking of this major infrastructure project ... SAL has also been advocating that there must be an equitable solution for recovering infrastructure costs in port development. Part of the cost must be borne by the State and Federal Governments27.
Australian Peak Shippers Association

Frank Beaufort, President, of the Association which represents most exporting companies that use the Port of Melbourne, has broken ranks with the business community which, until now has been united in support for the channel deepening project told The Age the dredging ‘... give no benefits to exporters. It would only boost the profits of some major international shipping companies. We are going to be copping the entire cost of deepening the channels without any guaranteed benefits28

Australian Industry Group
Tim Piper says government should put its hand in its pocket29

VECCI says government should pay at least some….perhaps $200-300 million30

In spite of government’s in principle support in 2001 being contingent upon a sound financing strategy it seems we still await a sound financing strategy. No potential beneficiary wants to pay!
PoMC’s promotion of this channel deepening project is undoubtedly an attempt to maintain its traditional position as Australia’s premier container port. This outcome is not considered achievable whether or not the project goes ahead because of factors which have been enumerated in this submission and which are evidenced by the percentage decrease in container trade over recent years through the Port of Melbourne.

Summary of PoMC’s Economic Case
Costs                                 Not fully known or understood.
Benefits                            Based purely on assumptions over 27 years.
Cost-Benefit Analysis      Not valid

Twenty First Century Economic Analysis

Failure to value natural assets has been a broad oversight of government, underpinning much of the past environmental degradation and future challenges that we face.

The channel deepening project epitomises this failure. Port Philip Bay is a vast but largely unprotected natural area. At 1,930 km2 it is one of the largest single parcels of Crown territory in Victoria. The Bay is vulnerable to ad hoc claims for its use and modification because of our failure to value and promote the economic benefits of the asset. Common ownership has at least until recently suggested less intrinsic value in “the commons”. Decisions about the use of commonly owned property have tended to be made in on the grounds of expediency within a time-frame as short as one or two terms of a particular Government – unlike decisions around privately owned assets which stretch through the generations.

Developments in the public domain are often promoted as stimuli for local business or wider economic growth; eg: Grand Prix at Albert Park. The result are often degradation of public assets, unproven economic or social benefits, and abandoned failed works, undertaken by a Corporation but with no provision for restoration having been made.

It is time to change the way we think about natural assets such as Port Philip Bay otherwise they are under threat of being damaged or lost forever. Unless we change our thinking, narrow vested interests such as the PoMC’s will continue to direct how vast assets such as the Bay might be used for the Corporation’s benefit – and the community will be left with no commonly owned assets.

Are past trends suitable future predictors?

The proposal is predicated on trends which cannot be sustained if we are serious about our commitments to future generations of Australians. It is underpinned by promised economic and social benefits that are relative, unequal, and likely to prove illusory and unsatisfying - unlike the perpetual benefits we get from a publicly-enjoyed coastal and marine environment kept at its best.

The PoMC stresses the view of a pressing need for economic expansion, but understandably, as the proponent has no interest in presenting a view on the value of preserving the Bay in its current condition without further disturbance. It should be the duty of government to fulfil that role, but it has not risen to that challenge, instead being the major champion of the project.

Instead it falls to the Inquiry and the wider community to adopt the responsibility of putting a value on the Bay.

Government did commission an ‘independent’ economic analysis of the ‘project’ – undertaken by PriceWaterhouse Coopers (PwC). This analysis suffers from several limitations, the most obvious being:
  • It was an economic analysis of the Port of Melbourne not the Bay, or even the Port and the Bay
  • It was undertaken PwC who had worked as consultants for the PoMC on their first EES in 2004
  • It accepted most projections provided by PoMC, apparently without further analysis
Is the data rigorous enough for 2007-2035?

We submit that PoMC’s and PwC’s data is not rigorous enough in numerous areas to stand the test of time.

Shipping forecasts

Before any real determination of the economic benefits and costs of this project can be reasonably determined, the key question that needs to be answered and understood is the extent to which the existing channel draught is and will be a significant encumbrance to shipping.

The threshold question for the debate is exactly how many more containers could be put through PoM if channels are deepened as proposed? The public could reasonably expected PWC to have applied significant rigor in attempting to answer it. Instead PWC has relied upon the shipping forecasts provided by the PoMC, acknowledging that it has not created new data regarding the likely trade volumes with and without the CDP. This is curious given that elsewhere PWC notes an almost 30% difference between (2004-2005) trade figures reported by PoMC of $75 billion, compared with ABS data of $53 billion31.

PWC could reasonably argue perhaps that to thoroughly review or re-create shipping forecasts was beyond the scope of their engagement, but challenging some of the assumptions that underpin the PoMC shipping figures would have been helpful. For example, PWC could reasonably question whether the PoMC is still confident in its forecasts, completed last year, given the rapidly evolving world trade dynamics and environmental imperatives; the sustained drought; the anticipated changes to the
nature of our exports (reduced grain exports as production pattern evolve etc?

The PoMC forecasts grain exports to 2035. Given the history of the Australian grains industry in the last 12 months alone - not to mention the rapidly changing weather patterns – we contend that assuming to know anything about what the grain industry will look like in 30 years time is ambitious at best. Not only does PoMC base its shipping figures on its assumed knowledge of the size of the nations grain harvests in 30 years time, it predicts that Victoria will have its existing share of exports from the pool at around 12%.

The forecasts (assumptions) have been developed by extrapolating past trends in grains production. This methodology is very questionable in such a dynamic environment. This seems to be the antithesis of forecasting, more "rear-casting". PWC should have shed more light on the entire debate by giving some consideration to future trends in grain production instead.

Is it reasonable to base such a massive investment decision of forecasted shipping figures that, for example, assume that we will be exporting twice as much crude oil into this country in 2035 as we were in 2005?

Accepting the PoMC shipping data unchallenged and relying upon it as the foundation assumption upon which the remaining economic analysis is built, is wounding for the credibility of the report, both in terms of the reliability of the data and the independence of the process.

It also represents a missed opportunity to really advance the debate about the economic future of Victoria.

Trade forecasts

Trade flow assumptions are dubious32. These are long range assumptions based on short term trends. Figures quoted are based on World Bank data. But the World Bank is only, and appropriately, willing to predict economic growth trends for 5 years, to 2010. Meyrick does acknowledge that beyond 2010 there are no authoritative studies or indicators to predict growth beyond 2010, but chooses to fill this knowledge gap by sticking a wet finger in the air and saying "we assume growth between 2010 and 2035 will be slightly slower" ... than between 2005 and 2010. Why? On what basis? This is a serious flaw in the modeling, especially given the future uncertainties in Australian and world trade, as already described.

Valuing environmental services

There is considerable and growing academic opinion that services provided by the environment must be valued and represented in cost benefit analyses of public projects in order for them to have any face validity, let alone rigour, credibility and thence public acceptance.

That the task of costing environmental services is enormous is testament to the fact that the services are complex, intricate and irreplaceable. To dismiss these assets as “too difficult” to cost or “something not done in a traditional cost benefit analysis” risks rendering the analysis that is done of little value in the real world – a waste of time and taxpayers funds. Perhaps the continued subscription to traditional Cost-Benefit analysis of infrastructure projects contributes to why budgets for these large projects invariably seem to ‘blow out’, as the un-costed environmental consequences kick in – as they tend to.

Costanza et al33. goes some way to costing these services. Values are $US 1996, so 10 years hence with an oil and water crisis looming, clearly natural values would now be considerably higher. Costanza rates the most valuable ecosystems on earth as wetlands, seagrass beds, mangroves etc., rather than open oceans and forests. The Bay has extensive areas of wetlands, seagrass beds and mangroves, and although the PoMC does admit there would be some increase in tide height and sea level rise as a result of the project there is no serious attempt to calculate what area of low lying land might be inundated or altered by such changes.

Informal calculations in 2004 estimated that the Bay is worth at least $30,000 per hectare per year34. The Bay has an area of 1950 square kilometres.

A hard copy of Costanza’ article is also at Attachment 9.2

The very least that government should be prepared to do is to commission economic and social well being studies to take at least some account of what impact the project would have on:

  • Bay related Tourism
  • recreational and commercial fishing
  • Recreational diving
  • property values
  • Public health
  • open space and sense of wellbeing
  • essential services the Bay provides such as;
    • dealing with 50% of Melbourne’s sewerage waste every day
    • turning various noxious Nitrogen based compounds into the Nitrogen -the air we breathe
    • habitat for the 5,000 species other than ourselves which occupy the Bay.
These are all irreplaceable assets. And yet the proponent’s most optimistic industry predictions available for the channel deepening project’s contribution to the economy is $2.2 billion to 2035, based on present cost estimates which do not include various enabling infrastructure and potential adverse impact costs.

What should be valued?

Environment and economics intertwined

The Channel deepening project will adversely affect a number of industries and businesses. These include the Newport Power Station, marine and land based aquaculture, the commercial and recreational fishing industries, recreational diving and boating and beach and bay tourism and recreation35 A number of these industries are potential growth industries, so that any loss of opportunity for growth ought to be evaluated. Marine based aquaculture was noted as having significant potential for growth36

Although the Panel Report 2005 recorded that the economic costs of the environmental damage had not been properly evaluated due to systemic flaws in the risk analysis37, the SEES still does not record any economic costs of environmental damage.

The Phillip Island penguin colony risks significant adverse effects resulting from the Channel deepening project38 The penguin colony relies on Port Phillip Bay as a key winter feeding ground, where the penguins feed and gain condition, so that they can survive their breeding and moulting seasons39. The Phillip Island penguin colony makes a significant contribution to the Victorian economy. This contribution has been estimated to be worth $96.5 million per annum and 1000 related jobs40

There are also significant infrastructure implications to the Channel Deepening Project. The Yarra Sewer is at increased risk of damage, as is the West Gate Bridge. The economic implications are still to be properly evaluated and may well be substantial41. There is still a paucity of information in the SEES regarding sewer protection and integrity of the Westgate whilst dredging occurs nearby. It is not in our opinion adequate to check the integrity of Pier 12 prior to and then after the dredging operation. Attempts to obtain details of sewer protection plans have proved fruitless up until the closing date for submissions.

Weighting of economic and social impacts

The EES Panel emphasized the importance of the weighting of environmental risks involved in the project. It is important therefore to weight the economic and social risks and benefits the project involves. The figure of $1.9 billion in transport savings may seem large at first glance. When this figure is spread over 27 years it equates to a benefit of only approx. $70 million per annum. This figure, when compared to the trade through the Port of Melbourne being around $53 billion per annum42, is relatively very small. In fact it is less than 0.15 per cent of the value of the PoMC’s trade.

If this calculation is re-done using the PoMC’s inflated estimate of trade, rather than the ABS data, the purported annual savings would reflect even less proportion of their trade as savings of 0.097 per cent of PoMC’s annual trade figure.

In contrast, the economic damage caused by channel deepening to businesses that rely on the amenity of Port Phillip Bay is likely to represent a much larger proportion of the income of the affected businesses. Marine based tourism working from the Mornington Peninsula is likely to be directly affected by the channel deepening. This industry is estimated to be worth $376 million per annum43 The Independent Panel Report took the view that the project has the potential to “damage or extinguish” affected businesses44 and yet the PoMC is steadfast in claiming that its EMP will reduce all project impacts such that there will be no long term impacts on businesses other than the dive industry – and even it is left without the PoMC admitting it is liable to compensate it.

A possible increase in trade through the Port of Melbourne of < 0.1% is not worth the risk of extinguishing a growing and sustainable industry that is already worth $376 million per annum.

Regional economic and social impacts

The Mornington Peninsula is particularly vulnerable to the negative impacts of channel deepening. The $376 million marine based tourism industry will be directly affected by channel deepening. This figure includes Bay related tourism operators. It does not include the tourism industry as a whole, which is the largest employer in that region and is likely to sustain significant indirect impacts as a result of the channel deepening project. Nor does it include the marine based tourism industries operating in other parts of the Bay.

St Kilda’s economy and culture is also shaped by its proximity to and the amenity of the Port Phillip Bay. Potential negative social and economic impacts on bayside suburbs and St Kilda in particular should also be properly assessed.


Using a more rational, less proponent driven assessment, it is apparent that Channel deepening in Port Phillip Bay is not necessary for Victoria’s economic survival. Trade through the Port of Melbourne is predicted to quadruple irrespective of whether the channel is deepened or not. There is no evidence of a real crisis in trade due to depth limitations.

The Independent Panel assessing the EES was unable to “recommend that the project is acceptable in economic terms”45. There has been no appreciable change in economic modeling to demonstrate that a different decision could be reached in 2007 by another Inquiry.

The costs of the project are insecure and the cost benefit analysis does not come out in the project’s favor. The economic costs related to the environmental damage, inherent in the project have not been included in the present cost benefit analysis, need proper evaluation and are likely to far exceed any benefits the project may provide.
The weighting of economic and social costs highlight that a benefit to the Port of Melbourne of less than 0.1% of trade is not worth risking an industry that is the largest employer on the Mornington Peninsula. A full user pays system, where the Port of Melbourne is responsible for all costs associated with the project may force the proponent to reconsider its options.
There is an urgent need to shelve this project, in favour of more sustainable long term solutions, before any more public money is wasted and any actual environmental damage is caused. There is also an urgent need for the POMC to be replaced by a new Port Phillip Bay authority with a broader, bay wide perspective as well as an expert understanding of and care for the entire Port Phillip Bay ecosystem.


  [22] SEES Assessment Guidelines Page 26
  [23] Meyrick Economic Impact Study EES
  [24] Meyrick Economic SEES Impact Assessment 2006
  [25] Martin Feil Business consultant and ex Productivity Commissioner The Age 9th April 2007
  [26] All quotes above footnote ESC Review 2004; Fin Review 4 Oct 2004 ‘Vic in deep water over channel’
  [27] Source: SAL website 8.1.07
  [28] The Age 21st February 2005
  [29] ABC Radio 21st March 2007
  [30] Neil Coulson VECCI CH7 21st March 2007
  [31] PwC Economic Analysis of the PoM Page 3
  [32] Meyrick Technical Appendix 4
  [33] ‘The Value of the World’s ecosystem services and Natural capital’ in Nature Vol 387, pp 253-260 15 May 1997
  [34] Professor Graham Harris Blue Wedges Public Meeting March 2004
  [35] Panel Report Pages 278-321
  [36] Panel Report Page 302
  [37] Panel Report Page 285
  [38] Panel Report Page 236
  [39] Norman, F.1. 1992, Counts of Little Penguins Eudyptul minor in Port Phillip Bay and off Southern Phillip Island, Victoria, 1986-1988, EMU Vol. 91, 287-301
  [40] KPMG Management Consulting, Economic significance of the Phillip Island Penguin Parade to the State of Victoria.
  [41] Panel Report Page 331
  [42] PwC Economic Analysis of the PoM 2007 Page 3
  [43] Muir J, The channel deepening project and tourism impacts  – Submission to the Channel Deepening Independent Panel Hearing 2004
  [44] Channel deepening EES panel report p 311
  [45] Channel deepening EES panel report, p282

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