Victorian Auditor-General's report
14 November 2012
Port of Melbourne Channel Deepening Project: Achievement of Objectives
Audit summary
Introduction 
The Port of Melbourne is Australia’s busiest container port, and a pivotal hub in the nation’s logistics network. It is therefore a key contributor to the economic wellbeing of Victoria and Australia.
The Port of Melbourne Corporation (the corporation) is responsible for managing the Port of Melbourne. It is required to provide safe and efficient movement of shipping through the channels and the port, and facilitate trade growth through the integrated management and development of land and maritime functions. 
The corporation identified the deepening of the shipping channels as a necessary and strategically important project based on the expected strong future growth in container trade and vessel size.
The 2007 business case for the Channel Deepening Project (CDP) proposed that, in the long term, it would deliver tangible benefits in the form of efficiencies and improved competitiveness of the port, and significant cost savings to shipping companies through the use of larger, more operationally efficient vessels with greater loads. The business case also indicated this outcome would be dependent on the implementation of significant landside investment.
CDP was the Port of Melbourne’s largest ever marine infrastructure development comprising dredging works, landside improvements, protection of underwater utilities, enhanced navigational aids for ships, and environmental monitoring and management. The project faced significant technical, procurement and environmental risks which created strong public interest in safeguarding the bay environment.
The project was subject to extensive and rigorous assessment under the Environment Effects Act 1978 between early 2002 and late 2007 to assure the state and Commonwealth governments and the community that the corporation could effectively manage the project’s environmental impact on Port Phillip Bay. 
CDP’s delivery phase commenced in February 2008 under close scrutiny by the regulators, interest groups and the public. The project’s delivery occurred within a strict set of environmental rules and conditions, complemented by a range of monitoring programs designed to monitor its compliance with approval conditions, and the health of Port Phillip Bay. 
The construction phase was publicly announced as completed on 25 November 2009, about a month ahead of schedule. The baywide monitoring programs continued for another two years as required and were completed by June 2012.
Our 2009 audit of CDP examined the corporation’s development and implementation of the project up to that time. It found the corporation was effectively delivering CDP in compliance with the approval conditions.
Three years after completion of the project, this audit examined how effective the corporation has been in achieving CDP’s objectives of:
·	improving the Port of Melbourne’s efficiency and competitiveness 
·	increasing trade through the Port of Melbourne compared to the situation without the project 
·	delivering the project on time, on budget, and to the required quality standards
·	complying with the environmental approval conditions.
Conclusions
The corporation has successfully delivered the construction phase of CDP ahead of time, under budget and, except for three minor nonconformances, in compliance with the environmental approval conditions. This is a significant achievement given the importance, scale and environmental risks associated with the project.
However, CDP has since been affected by the events of the 2008 global financial crisis (GFC). The significant downturn in global manufacturing and exports post-GFC has resulted in much lower demand for global trade and an oversupply of shipping capacity that has affected the financial viability of the global shipping industry. 
As it is only three years into the 25-year life of CDP, its full benefits cannot yet be determined. However, early CDP performance data highlight the recent effects of the GFC on global trade and shipping companies. Specifically, it indicates:
·	slower than originally projected growth in visits by larger vessels—around 1 560 such visits occurred over 2010 and 2011 compared to the forecast of 1 668 
·	that the current oversupply in shipping capacity is resulting in less than expected use of the extra draught capacity of these vessels
·	that adverse market conditions for ship owners and operators are currently precluding any practical realisation of cost savings as a result of CDP and the use of larger ships
·	lower growth in trade volume post CDP than was originally forecast.
These developments are beyond the corporation’s direct control and could not have reasonably been envisaged at the time it developed the CDP business case. While it should be noted that these early results do not preclude achievement of the CDP’s objectives in the long run, their significance however warrants a review of the assumptions underpinning current projections of long-term economic benefits from CDP. 
Such a review is justified given the project’s significant costs, value and importance to Victoria’s economy. It could also offer valuable and up-to-date insights into whether the existing assumptions need to be recalibrated in light of changes to the global economy, and whether new/additional strategies are now required to optimise achievement of future benefits and guide associated decision-making.
Assessing the impact of the changed global economic conditions on CDP is a highly challenging and complex task. However, it would improve accountability and transparency for CDP’s performance, and would substantially enhance the corporation’s ability to manage and optimise the realisation of future benefits.
Findings
Improving the Port of Melbourne’s efficiency and competitiveness
Improving competitiveness by enabling visits by bigger ships
A greater number of larger vessels are now visiting the Port of Melbourne but at a slower rate than was projected in the 2007 CDP business case. This is consistent with the decline in new vessel builds, including global demand for containerised shipping, evident following the GFC. 
Both pre-and post-CDP, Melbourne has remained the dominant port in terms of visits by larger vessels compared to Sydney and Brisbane. However, these larger ships are sailing well below their full load capacity and, consequently, in most cases are not yet utilising the expanded draught capacity of the port. The business case anticipated that full utilisation of larger vessels would not immediately occur post-CDP as it would take time for trade volumes to catch up with the expected step increase in ship capacity.
However, the current global oversupply of ship capacity caused by the GFC has exacerbated this situation. The corporation acknowledges it will take a number of years for the increased capacity to be utilised, consistent with the growth in trade volumes forecast in the business case. 
The 2007 CDP business case indicated that the imposition of the CDP cost recovery fee would decrease Melbourne’s price competitiveness but that it would still remain competitive with other Australian ports—this has occurred. 
Reducing vessel delays
A desired outcome of CDP was to reduce delays for vessels with an operating draught of more than 11.6 metres that previously had restricted port access. However, the corporation does not know whether CDP has achieved this as it advised that it does not collect such data.
Facilitating private sector investment
The CDP business case identified the level of investment commitments in port facilities by private operators as a key measure of the project’s success as it reflects the environment created by CDP.
While it is evident that some private sector investment in port facilities has occurred, the corporation is unable to demonstrate how this was influenced by CDP. The corporation has not measured the actual value of investment achieved to date compared to its 2007 business case forecast. The corporation advised that it discontinued this corporate performance measure from 2008–09 due to the difficulty in obtaining accurate and timely private sector investment data. 
Realisation of cost savings to shipping companies
During this audit, the corporation updated its estimates of the cost savings realised by shipping companies to date as a result of CDP. The revised estimates were derived using the 2007 business case economic model, and by:
·	substituting the original business case forecast of the size of vessels expected to visit Melbourne following CDP, with the actual profile of vessels that visited the port in 2010 and 2011
·	computing the average weighted unit cost of providing shipping services for the updated profile of vessels, and the difference between this cost and the equivalent cost expected in the absence of CDP
·	multiplying this difference by the actual quantity of shipping capacity provided in each of 2010 and 2011 to estimate total cost savings in US dollars, which were then converted to Australian dollars using the updated exchange rate.
These estimates suggest that daily ship operating costs for vessels visiting Melbourne have now reduced post-CDP, and that this has resulted in much greater cost savings to shipping companies than originally forecast.
However, the original business case assumptions do not reflect the significant impacts on worldwide shipping costs currently borne by ship owners and operators as a result of the GFC.
Specifically, the unprecedented global oversupply of shipping capacity following the GFC has led to a significant and sharp decline in freight and charter rates throughout the industry. While this has benefited cargo owners, it is threatening the financial viability of many ship operators and owners respectively. Collectively, these factors have dramatically increased the net costs borne by ship owners and operators worldwide, and are currently precluding the practical realisation of cost savings as a result of CDP.
The corporation’s estimated cost savings to date rely on pre-GFC assumptions about the weighted average unit cost of shipping services associated with the profile/capacity of vessels visiting the port. These assumptions are unlikely to be accurate in the current global shipping market. It is not evident that the corporation accounted for these potential impacts in determining its current estimates of ship operating cost savings.
Monitoring and managing the realisation of benefits
Despite the project’s significant cost, expected long-term economic benefits and importance to the state’s economy, the corporation has not developed a benefits management plan (BMP) for CDP.
The Department of Treasury and Finance (DTF) has promoted this practice within its investment management standard since 2004, recognising that new information may be uncovered during a project’s life that wasn’t available to the original 
decision-makers. 
Benefits monitoring enables the original investment assumptions and related strategies to be periodically validated and/or adjusted during a project’s life to assure the investment delivers maximum benefit. 
The corporation has instead focused on monitoring the project’s performance against the business case critical success factors. While a BMP is not a mandatory requirement, the emergence of the GFC since the original CDP business case was developed, coupled with the project’s 25-year horizon for benefits realisation suggests that such a review is warranted. Until this occurs, the soundness of the corporation’s savings estimates from the project to date cannot be reliably assessed.
The corporation advised that a benefits review of CDP is planned for late 2014 following discussions with DTF in April 2012. This is a positive initiative, which reinforces the need to expeditiously develop a benefits management plan to enable the planned review to effectively occur. 
Facilitating trade through the Port of Melbourne
The 2007 business case concluded that with or without CDP, the Victorian container trade volume was forecast to almost double by 2025. This forecast excluded the Tasmanian trade as these ships would not utilise the deeper draught provided by the CDP and would not be subject to the CDP fee.
From 2005 to 2008 trade volume through Melbourne, excluding the Tasmanian trade, steadily increased in line with the level forecast in the 2007 CDP business case. The GFC caused trade volumes to fall in 2009 and although they recovered in 2010 and 2011, volumes were slightly below the level forecast.
Melbourne’s share of trade volume, excluding the Tasmanian trade, declined from 2006–07 to 2009–10 while Sydney’s increased and was virtually equal with Melbourne in 2009–10. This trend was reversed in 2010–11 and 2011–12, following the completion of CDP. While not necessarily attributable to CDP, continuation of this positive two year trend would be consistent with the CDP objective of improving the port’s competitiveness.
Delivery on time and budget 
CDP’s dredging and construction components were all completed on 25 November 2009, one month ahead of schedule. At June 2012, the project’s expenditure was $717.3 million, about $250 million under the approved business case budget. It will remain significantly under budget after considering forecast expenditures in the future years for remaining surveys and monitoring programs. About half of the total savings—$137 million—was due to the unused contingency provision, reflecting the effectiveness of the corporation’s risk mitigation and project management processes.
As the corporation received a $100 million contribution from the government, the net cost of $617.3 million is being recovered through a CDP infrastructure levy.
Compliance with the environmental approval conditions
The audit assessed the corporation’s compliance with the environmental approval conditions by examining the comprehensiveness and reliability of the Office of Environmental Monitor’s (OEM) compliance reports and related assessment activities. We found OEM’s independent scrutiny of the project’s environmental compliance was active, comprehensive, and reliable, and that its conclusions were evidence based and could be relied on.
The corporation has delivered the project in compliance with the applicable environmental approval conditions with three minor exceptions relating to the clean-up, disposal and location of dredging works. 
The corporation closely monitored its environmental performance during the course of the project. It also actively engaged with the public through media releases and press conferences about the project’s activities and its environmental incidents. The corporation appropriately managed all minor nonconformances and environmental incidents which occurred. Importantly, the environmental effects of these incidents were inconsequential.
The project has not adversely impacted on the bay and the bay remains in good health.

Recommendations
Number	Recommendation	Page	

	The Port of Melbourne Corporation, in consultation with the Department of Transport, should: 		
1.	review the impact of the global financial crisis on the expected timing and quantum of future economic benefits from the Channel Deepening Project 	26	
2.	review existing Channel Deepening Project critical success factors/metrics and expedite development of a benefits management plan and related strategies for optimising the achievement of Channel Deepening Project objectives and future benefits	26	
3.	commencing from 2014, implement regular and timely benefits reviews/reporting to the corporation’s board, executive management and the Department of Transport, against the benefits management plan.	26	

Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report, or relevant extracts from the report, was provided to the Port of Melbourne Corporation, the Department of Transport and the Department of Sustainability and Environment with a request for submissions or comments.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments are included in Appendix A.