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RURAL AND REGIONAL AFFAIRS AND TRANSPORT LEGISLATION COMMITTEE
(SENATE-Friday, 26 September 1997)
- Committee front matter
- Committee witnesses
- Committee witnesses
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ACTING CHAIR (Senator O'Brien)
- Committee witnesses
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Content WindowRURAL AND REGIONAL AFFAIRS AND TRANSPORT LEGISLATION COMMITTEE - 26/09/1997 - Wheat Marketing Amendment Bill 1997
ACTING CHAIR (Senator O'Brien) —The committee has your submission on the issues before it. Do you have any objection to its publication?
Mr Price —No.
ACTING CHAIR —There being no objection, the submission will be published. The committee prefers all evidence to be given in public, but should you at any stage wish to give your evidence, part of your evidence or answers to specific questions in private, you may apply to do so and the committee will consider your request, although there are circumstances in which that evidence can be made public by order of the Senate--for example, by its publication in a report of the committee or a dissenting report. Would you like to make any opening remarks?
Mr McKeown —Certainly. Good morning. Thank you very much for the opportunity this morning. There is just one housekeeping issue that I would like to raise first. We have faxed through a letter from our managing director, who unfortunately was unable to be here this morning. He had other commitments that he could not reschedule. I will actually table the letter expressing his apology.
Also, before we move on to the submission, there are a couple of references made in the Hansard record of evidence previously provided to the committee that we would like to comment on. There are only two points. They both relate to evidence provided by Mr Moffet in his capacity as the Grain Section President of the WA Farmers Federation. I refer in particular in the first instance to page 80 of the transcript of proceedings on Monday, 15 September 1997. In his opening remark in paragraph 3 he said:
We were told by the Chairman of the Australian Wheat Board at a meeting that after he is privatised he really does not care what the growers want.
This, obviously, has caused some concern both for our chairman and for our board members. We wish to table a letter both from our chairman and from the other board member that was present at that meeting. The comment was taken out of context. It was referring to some issues that arose in relation to the issue of introducing the state marketing of wheat and dissolving the international approach that is adopted under the wheat marketing arrangements.
The chairman was clearly indicating--and the letter will support this--that he was referring to grower comments in the context of the state marketing debate. He was concerned that the full information had not been before the growers and, until that was, it was inappropriate for there to be a comment on that. He concluded by saying that, if the full information was received, the growers would come to a different conclusion, because certainly that would move towards the elimination of a single desk.
ACTING CHAIR —Are you proposing to supply copies of that correspondence to the committee?
Mr McKeown —Certainly. I will table a letter from the chairman. The letter refers to both remarks, so I will refer to the second remark and then table that letter and also a letter from our other board member, Kerry Sanderson, who was present at that meeting.
The second statement made by Mr Moffet on page 83 of Hansard on the same date, 15 September, occurs in the middle of the page. I quote:
It is made very difficult for us, Senator, when you have the chairman of the Wheat Board himself--not talking about the loss of single desk maybe, it is when we lose single desk, a fait accompli about all this.
Again, this caused some concern both to our chairman and to the board because the board has been a strong supporter of the industry's position of single desk. On regular occasions the chairman refers to support for the single desk. Attached to his letter is an article in the Farm Weekly supporting a comment made by the chairman in relation to the support of the single desk. So I table the letter from the chairman in relation to both issues and also a letter from our board member, Kerry Sanderson, in relation to the first comment.
CHAIR —Thank you.
Mr McKeown —Moving on to our submission--
—Just a moment. Is the committee happy to receive this, and
also the first one which I was not here for?
Senator FORSHAW —I have not seen the letter yet from Kerry Sanderson, but is that the other director that is referred to in Mr Moffet's statement--there is Mr Moffet, Mr Thomson and Mr Sanderson?
Mr McKeown —Correct.
CHAIR —So what page is the first statement on?
Mr McKeown —The first statement is on page 80, in the first sentence in the third paragraph of Mr Moffet's comments.
CHAIR —Thank you.
Mr McKeown —Moving on to the submission, we will start with James providing the background.
Mr Price —We have got a very brief outline statement and my purpose is to provide, I guess, from a commercial and marketing perspective some of the background to the AWB's involvement in the process and also looking at the sort of structures that may suit where the wheat market is tending to trend. Peter will then provide some information, from our perspective again, on the grower corporate model and some of the key issues in terms of the commercial aspects which we see as being important in terms of operating in the marketplace.
CHAIR —Before you go any further, because I had to drop out for a minute--I am not sure whether you knew--I must inform you that I do have an interest in a family partnership. I am a wheat grower and I have an interest in the WIF fund.
Mr Price —Senator, I have no interests to declare.
Mr McKeown —I certainly have no direct pecuniary interest in wheat production.
Mr Price —Perhaps I can go through our perspective on perhaps the imperatives for change--both from a commercial market perspective and looking at some of the aspects that the government has put forward.
I guess the Wheat Board sees the international market becoming increasingly competitive. That is driven by technology. It is also driven by changes in the way some of our customers are doing their business. That is tending to put added pressure and competitiveness on the supply side of the industry. Australia, whilst an important exporter in the world trade, is still a small player in the big five, and that means that we need to have an efficient marketing system moving forward to challenge and to be able to extract maximum return for the Australian economy.
Really there has been some continual change of requirements in terms of markets. What we are seeing is the need for a structure to adapt and revolve and remain competitive in terms of servicing growers' needs in that market.
I guess there are some other imperatives for change. Certainly in April 1997 the minister reiterated that the government guarantee would cease in 1997 on the AWB's borrowings, which clearly impacts on our ability to make high level harvest payments to growers. Other parts of the legislation would disappear at that time and essentially you have the single desk legislation remaining.
The other aspect of the minister's announcement in April 1997 was, of course, the termination of the two per cent WIF levy at that time. On top of that, it is important to look at the market and think about the national competition policy review, which has been set down for 1999-2000, in regard to ensuring that the AWB is in a good position to be assessed at that time in terms of its effectiveness in operating according to the legislation's requirements.
Some of the pressures for change have really been borne out in one particular independent study that was done involving the Grains Council, the AWB and a number of other industry players, customers and growers and people in the industry chain in 1994 and 1995. That was a Booz Allen and Hamilton strategic planning report into the milling wheat industry which essentially found that, given all these changes and given the market and the competitive pressures of the international market, the industry was really unsustainable in its current form. Certainly, the AWB supported that view and some of the recommendations coming out of that report are now coming forward to you in the legislation you see before you.
CHAIR —When you say the industry was unsustainable, you mean the marketing arrangements in the industry were not sustainable, do you? Can you clarify that, because the industry is a lot of us? I hope I am sustainable.
Mr Price —The report was specifically relating to the marketing arrangements. It was talking about the dynamics within the industry and looking at the decline in terms of trade. It did make judgments about aspects of the industry which needed to be improved. Yes, you are right, Senator, it was referring to the marketing arrangements.
CHAIR —Thank you.
—So the process we are seeing now is a direct result of
that independent research as a starting point. We have gone through with
the Grains Council and the department a number of processes in seeking
growers' views. The growers have come forward with their five key grower
objectives, being retention of the single desk, grower ownership and/or
control, a commercial, flexible market driven structure, an adequate
capital base in the organisation in terms of providing adequate levels of
harvest payments, and industry efficiency--all objectives which the AWB
supports from a commercial market prospective. The process has really led
to the grower corporate model, and Peter might like to talk about some of
our views in terms of that model.
Mr McKeown —Just moving on to the grower corporate model, on page 4 of our submission we represent in diagrammatic form the eventual model, being post-July 1999. As you can see from the diagram, the single export desk will be enshrined in legislation and there will be a mechanism to provide that control.
Growers will have direct interest post-1999 in AWB Limited through the distribution of both A-class shares, as has been mentioned earlier in the proceedings, and also the conversion of WIF fund units into B-class shares. Underneath the holding company, AWB Limited, there will be two operating subsidiaries which will be wholly owned by the holding company, separately operating the pooling arrangements and the trading arrangements.
Moving to that structure in the near future, which is obviously the subject of the current amendment to the Wheat Marketing Act in parliament, is the structure until 1999. The shares in AWB Limited, or in the holding limited company, as referred to in the diagram, will be wholly owned by the Australian Wheat Board to the account of the Wheat Industry Fund. We will have a similar structure in place in terms of the pooling subsidiary and the cash trading subsidiary under that holding company. Obviously the legislation is providing for the creation of those entities and the transfer of assets and liabilities and contractual arrangements from AWB across to the holding company and it subsidiaries, and also retaining within the AWB its major role of controlling the single export desk. They are the only comments I wish to make on the submission.
CHAIR —Thank you for that. I will repeat my last question to the Grains Council. There has been some criticism by certain sectors of the position and the role of the Wheat Board in terms of the working party. To put it simply, you are the servants of the growers in being the marketer and so on. Why was it important, in the Wheat Board's view, that you participated in the working party, and what expertise did you bring to that working party to get a better result?
Mr McKeown —I suppose from the Australian Wheat Board's perspective, as has been mentioned by the Grains Council, we are the servant, we are the operators, but also, in designing the structure, one has to be aware of the impact of the operational aspects. One has to be aware of the capital market's reaction, for example, in terms of designing a structure, particularly the rating agencies' assessment of the model, because at the end of the day our objective is to maintain the access to the capital markets and to maintain any credit rating that will deliver the cost of funds at a similar level to what we achieve currently, and also to ensure that we have access sufficient to be able to provide harvest payments up to the level that we are currently providing.
What we brought to the table was the knowledge of the capital markets, the knowledge of the rating agencies, an understanding of how the operational arrangements will impact on our customers, both internationally and domestically, an understanding of the particular markets and what impact the model may have in those markets. We felt, from the Australian Wheat Board's perspective, that the operational impacts were very important in designing the most effective structure to achieve, as James has referred to, the objectives that have been enshrined at an earlier Grains Week meeting.
CHAIR —As well as the significant material that flows from the Wheat Board to offices like mine, can you give us a brief run-down of how often you actually go out into the country and have grower meetings on a state by state basis?
Mr Price —Certainly. The way in which that operates varies from state to state, depending on the region and requirements.
CHAIR —I just want an overview. I do not want you to say whether you were there on that day. Do you get to every state every year, or twice a year, or once every two years? You can take the question on notice.
Mr Price —I will answer briefly, and if you require more detail, I can provide it. Usually, we have pre-harvest meetings around most of the regions in all states. In some states, we also have a follow-up, post-harvest, pre-planting meeting arrangement--and that involves a number of meetings face to face with growers--apart from our existing regional office network that meets individually or with grower groups on a regular basis.
CHAIR —So in each state, you would hold at least one round of meetings every year?
Mr Price —Correct.
—Thank you. I want to go straight to the structure and the
arrangements. Evidence has been given to us by representatives from WA and
also from the New South Wales Farmers that they believe that the greatest
number of growers and, I think, their organisations would have preferred no
change. They would quite happily live with the status quo. If something
happened tomorrow and we said, `We're not proceeding any longer, the same
arrangements are going to stay in place, but it's going to be financed
through the WIF fund,' what impact would that have? You mentioned the Booz
Allen report, which said that it was unsustainable. What would be the
ramifications if all of a sudden we threw our hands in the air tomorrow and
said, `It's all too hard. What we have got now is good,' and there was no
Mr Price —The first thing that would happen is that, come 1999, the AWB would not be able to efficiently fund the requirement of harvest payments to growers. One of the key grower objectives has been that the growers want a high level of harvest payment, the existing 80 per cent harvest payment, for payment for pool wheat.
If the AWB, under these transitionary arrangements, were to stop and was not able to gain a market track record between now and the period that the government guarantees were removed, the situation becomes questionable--in terms of financial markets, managing that and efficiently funding that requirement. That, on its own, is a major issue moving forward for the growing sector. In terms of the AWB operating according to what growers expect the organisation to service to them in that area, we would have a problem in that area.
I think there is a more general point, which gets back to our role in the process, about talking about how the market is changing and how we need to be able to be more commercially flexible to respond to that market so we can, in fact, put more dollars in growers' pockets and continue to maximise their returns under the pooling system. If these transitionary arrangements were not to take place, then, again, the track record of our customers and being able to operate in a more commercially flexible environment in the marketplace is put at risk.
CHAIR —In terms of the timing of what is called enabling legislation, the first part of what is a prospectus of the future of the Australian Wheat Board, it has been put to us, certainly privately, on a number of occasions that there should be a full package put on the table at once so that people know exactly where they are going, what the final arrangements are, what their investment is going to be, how it is going to operate, et cetera. If you are out in the real world, the commercial world, it is against the law to put up half a prospectus; you have to put up one that is signed off with the Australian Stock Exchange. Why is it necessary, from the Wheat Board's perspective, to proceed at this time with this first part of the legislation and not wait until February to do it all in one hit so that we have a total and clear picture of what is before us?
Mr Price —I think it reflects the evolution of the grains industry, and particularly the Wheat Board, over a number of years. It acknowledges the evolutionary process, the transitionary arrangements, of this enabling legislation and the subsequent legislation that will be required. The fact is that in the future, in 1999, we have a government guarantee being taken away. I guess what the industry has said--and the Wheat Board has been involved in that--is that in support of that we need to prepare for that, but we also need to be prepared for the future beyond that.
It also gets back to the issue of the industry not wanting to change--a point you raised earlier, Senator. I guess that evolutionary process allows the industry to go through a change process. Despite all of that, as the Grains Council indicated earlier in their submission today, this transitionary arrangement is not being considered in isolation of the arrangements beyond 1999. In fact, as they suggested, further meetings this October will define the final elements yet to be resolved on that post-1999 arrangement. In a sense, there is a package, but it is recognising the evolution and the changing circumstances of the government guarantee being removed in 1999, the single desk review in 1999 and 2000, and the issues that may result from that and then moving forward again.
Mr McKeown —Just to add to Mr Price's comments: in the ideal world we agree with the proposition that we would prefer to have the total package dealt with in one piece of legislation. I think there is certainly acceptance of that proposition. However, we are keen to have as long as possible, pre-July 1999, to be able to educate the rating agencies, to obtain the appropriate rating for post-July 1999, to educate the capital markets and to educate our customers with the changeover.
What we have done previously with the five-year review of wheat marketing arrangements is that we have successfully been able to use that education through the transition as we have moved to a different arrangement. We have recognised that it is very important to bring the groups along with us so that they have an understanding of the new structure well before it is in place so that they have an appreciation, and, if necessary, so that we also have time to make any adjustments to the structure.
CHAIR —So, in effect, you are saying it is important that you have it in place for the operations of the 1997-98 harvest?
Mr Price —That is our view, certainly, in terms of ensuring that we get a commercial track record and get that education process going as we move through the whole raft of changes.
CHAIR —Because, in effect, you really only have this harvest and the next one and then you are out in the real world.
Senator FORSHAW —If the worst happened, from your point of view, and the legislation did not go through for whatever reasons, would you expect that the guarantee should be extended? What is the possibility of that? That is a matter for government, I suppose, but are you saying that there would have to be consideration of the government extending its time for guarantee?
Mr McKeown —What we are saying is that it is highly desirable for us to have as long as possible to prepare the markets. We are not saying it is critical.
Senator FORSHAW —I am just trying to understand whether the end of the guarantee in 1999 drives the legislation to that extent or whether that can remain in place, notwithstanding whether the legislation is delayed, held up or reconsidered.
Mr Price —I think there are a number of factors that are relevant there. Certainly the timing of that government guarantee removal is important. At the end of the day, you are going to have people with capital sitting behind this organisation that is bearing a risk. They will want to be comfortable that this organisation is able to operate efficiently, in a commercial sense. As we have seen with the privatisation of other government instrumentalities, there is a time frame needed to ensure that those efficiencies and commercial practices are developed.
As a wheat board, we believe we are providing an efficient service, but we are the first to acknowledge that that is one of the reasons why we think a commercial structure will be good for the industry in terms of the AWB. We are the first to acknowledge that we can do things better. But, in terms of putting the pressure of the market onto us, we want to ensure that we have sufficient time to get to a stage where essentially a grower's investment is protected, because that is what it will be in the first place.
The other factors driving that are obviously the single desk review and the national competition policy in 1999-2000; and the need for the organisation to be well-structured and the changes to be implemented and up and operating well before that situation so that the organisation can go into the review on a sound footing and then operate effectively in the international market, come what may in terms of the result of the review. It is a time issue.
CHAIR —The reality is, though, that the previous government made the decision to remove the guarantee. We did not oppose it. In government, we have said we will keep that policy initiative in place. There was not a huge outcry from the industry about the government guarantee; they had accepted the fact that it was going. So there would be no purpose, really, in changing the date, would there? It would just delay the commercialisation of the Wheat Board.
Mr Price —I think that would be an issue for the growing industry and the government to resolve, if we ever got to that issue. For the AWB, our view is that we are very keen to see the new structure implemented as soon as possible so that we can get on with delivering the commercial benefits that we believe are possible.
CHAIR —If the legislation is dealt with now and goes through, that gives you two seasons of operation prior to 1999, whereas if it does not go through and it is delayed it would only give you one.
Mr Price —Correct.
Senator FORSHAW —I just have a couple of follow-up questions. One of the things that concerns me here is that we have some major grower organisations and farmer organisations from Western Australia and now from New South Wales telling us that the feeling amongst their membership is rather apprehensive about this, and the membership would prefer things to stay as they were. I suppose I have not questioned them to this extent, but I have taken it that that may even include reinstituting or not abandoning the government guarantee.
I can see what Senator Crane is getting at; I do not think that is much of a likelihood. But it really does concern me that we should be trying to test out just how strong that opposition or that feeling is, and how much regard we should pay to it, when we have the Grains Council and the Wheat Board saying, `No, it is imperative to get this thing done.'
That is probably a statement more than a question, but I have one other question. Do you think it would be possible to complete the package and handle it all in one piece of legislation and still meet that time line--in other words, try and bring forward the second tranche of legislation?
CHAIR —You'd have to agree to let it in.
Senator FORSHAW —This is a committee of inquiry. It has been said. That position has been put, without any degree of detail as to how it might be able to be done. I am just asking you people, who have been intricately involved in the preparation of all of this, is that possible? I know it is not what you want or desire. Is it too hard to say?
Mr McKeown —As far as we are aware, the drafting of the second tranche of legislation has not even commenced. There is a major time frame involved in actually drafting that legislation.
—That is right.
Mr McKeown —It is probably a more appropriate question for the department, but I would have thought that within the time constraints of this year it might not be possible. It also depends on the commitments of Parliamentary Counsel and on other pieces of legislation. They would need instructions in the first instance which, obviously, would require cabinet approval and so on. As I say, that is probably more appropriately answered by the department.
Senator O'BRIEN —I listened to your answer about whether the change is absolutely essential given the opposition of growers, and I came to the conclusion from the answer that you gave that you thought it was desirable but that a question mark remained. It was an opinion that perhaps this was the best way to go, but I did not gather any great conviction in your answer that the system that we are going to is better than the current system.
Mr Price —Maybe I skipped over some of the detail of the background of the process--and I refer, Senator, to your comments about change as well; I think we have to expect that people do not like change. But the process that has involved this restructure has been going on since 1993-94 within the Grains Council--and they would be better able to outline the detail of that.
But there have been a number of investigations. With the current working party process, since late 1995 the working group and the independent consultants have looked at privatisations, corporatisations, cooperatives and trusts. They have looked at mechanisms whereby we could retain the existing statutory authority and still allow some flexibility in terms of the Wheat Industry Fund through revolvement. There was also the look at whether the status quo was acceptable in terms of where the market was going and also the signposts, in terms of the government guarantee being removed and the single desk review towards the end of the century.
So there has been extensive analysis of that, and all grower bodies--in terms of the GCA and their affiliates--have been involved in that. The Wheat Board has provided its advice in terms of commercial and market impact.
Senator O'BRIEN —What is the relevance of all this, if a 2001 policy is that there should not be a single desk? Where do we end up? This body is essentially the single desk corporation, isn't it?
Mr Price —Certainly the body would operate the single desk, but the single desk would be held by a statute. If the single desk was taken away, the relevance would be in terms of the grower objectives. They are telling the industry that they want a grower owned and controlled organisation.
Senator O'BRIEN —Ignoring that, with this legislation we are creating the framework for a corporation which--at least initially--will represent growers.
Mr Price —Yes.
Senator O'BRIEN —And it is essentially a legal embodiment of the single desk principle, isn't it? That is essentially what this corporation is going to be. It has got a monopoly on marketing for export. That is what we are creating, isn't it?
Mr Price —We are creating a structure where that single desk power is provided to a commercial entity to undertake that.
Senator O'BRIEN —Replacing the entity that is not a commercial private corporation at the moment?
Mr Price —Correct. Come the review, if the single desk were taken away--and we do not believe that will be the case, because we believe that we will still be able to demonstrate a net benefit there, but that is for the future--then I think growers have indicated that, without the single desk, they would want a company that acted in their interests in the marketplace and that was commercially viable. Once it is in the marketplace, they will decide. I guess they will vote with their feet in the sense of how efficient or otherwise the organisation is in terms of delivering benefits to them--both from an investment point of view and also in terms of marketing their wheat and other grains.
CHAIR —Can I follow up a question there?
Senator O'BRIEN —Can I just follow this through and then perhaps you can go back to that.
Senator O'BRIEN —We have the first tranche of legislation before us now, and some other legislation which is not even drafted yet will come before us later: is it not the case that, if we pass the first tranche of legislation, we will be irrevocably headed towards the structure that is proposed, without knowing what the second phase is in terms of the actual legislative instrument?
—You may not know what the legislative instrument is,
but the industry, the Grains Council, the department and the AWB, in
putting together the proposed amendments, have a clear view--and there are
some outstanding issues which are being determined, as I said, this coming
month--about the structure post-1999, notwithstanding that the legislation
may not be developed as yet. So it is just a question of implementation, I
guess, rather than the policy framework behind it, in terms of how the
commercial entity will operate post-1 July 1999.
Senator O'BRIEN —If there is an inquiry into the second piece of legislation, I can imagine that one view which will be put to us will be: `We are halfway there. You cannot hold us up now', even if we do not like the way that the legislation is expressed. I am making a statement really.
Mr Price —Yes.
Senator O'BRIEN —That is an issue for the legislators and how they want to deal with it, irrespective of the issue of your wish to officially embark upon the process. Is it not the case that, if the legislation is flagged and combined but the decision is taken, effectively there is time for the market to become accustomed to the concept?
Mr McKeown —That is certainly another approach that could be explored.
CHAIR —In terms of the development of the memorandum of understanding and what have you, we asked the Grains Council earlier on whether or not--and we will be going to the department as well on this--you would have any objection to that being given to the committee on a confidential basis to look at, in terms of determining our position?
Mr McKeown —Yes. I suppose we would regard that as a working group decision or issue. Bearing in mind that the advisers--Mallesons, the legal advisers, and BT, the financial advisers--were engaged by the working group as a group, we do not have the capacity to represent the working group's views on the issue. From the AWB's perspective, our likely view is that we would support the access, but we believe that is really a working group decision--not a decision for a single party in the working group.
CHAIR —We understand that. But we did put it as being if all parties in dealing with the department were in agreement. I take it from your answer that, if the other people agreed to that, you would not have any opposition?
Mr McKeown —No.
CHAIR —It is very important to us, in terms of progressing this and the argument that you put before us, that we at least have some working knowledge of where it is at and an understanding of it. I understand a lot of the issues were ironed out, in terms of the difficulties or the conflict which existed over some issues.
Post-1999, if the single desk did disappear--because the single desk, theoretically at least, could be granted to a number of grain traders or whatever to operate it through an agency basis--wouldn't the Wheat Board, as a grower controlled, grower owned marketer out there in the cold, hard, competitive world become equally or even more important to growers? I make no judgement about whether the Wheat Board would be better, worse or otherwise on this; I simply state that it could be done and ask whether it would not be important after 1999 for growers to be able to have their own investment, to be marketing their own grain crop if, for whatever reason--competition policy, for instance--it got knocked off?
Mr McKeown —That is certainly our view. The structure has been designed with the first objective of securing the retention of the single desk. But, being designed on commercial principles, it can also survive in the absence of that.
CHAIR —It is almost a two bob each way situation, isn't it?
Mr Price —Correct. I think the industry, by the very nature of their objectives, tends to support this. What they are saying is, `We want to take out some insurance here, in terms of the arrangements we are putting forward, so that we attempt at all costs to retain the single desk, but we ensure that, whatever the environment, we have a viable, commercial, sound organisation operating in our interests in the market place moving forward.' So I agree, Senator.
CHAIR —In terms of--I want to go to the structure--
Senator O'BRIEN —You did interrupt me to go on to those. I have got a number of other questions.
CHAIR —Sorry. You can go. It does not worry me. We have plenty of time.
Senator O'BRIEN —I have a few questions. They are not directly related to that. Is it true that the Wheat Board supplies wheat for about 70 per cent of the domestic grain market?
Mr Price —It varies. I can check the exact figure at the moment for you and get back to you, but it has varied since deregulation. The general figures would be between 60 and 80 per cent.
Senator O'BRIEN —So it would not be unreasonable to say that the AWB dominates the domestic market?
Mr Price —It is a major player in the domestic market.
Senator O'BRIEN —At the Perth hearing, Mr Tuckey suggested to the committee that the Australian Wheat Board makes more money out of its domestic trading arm than it does out of international trade. Can you give the committee an indication of the split between the two operating arms?
Mr Price —In terms of--?
—In terms of which area you make money from or
what the split of money is from those two arms?
Mr Price —It is difficult for me to draw a direct parallel between those two. On the international side we have a single desk pooling arrangement whereby, apart from any costs attributable to those pools, all money is returned direct to growers, so you do not actually have a profit and loss scenario--as it stands currently--whereby the trading division is clearly a profit and loss activity. However, by the very nature of the fact that 80 per cent of Australia's crop--or between 70 and 80 per cent, year to year--is exported through the single desk of the AWB, clearly business turnover is hugely greater in that area than in the domestic area.
Senator O'BRIEN —In general terms, can you tell me how the AWB operates in the domestic market and what the relationship is between your domestic business and your international business?
Mr Price —The AWB has a trading business in the domestic market. We trade in wheat--and other grains, where there are no state statutory regulations preventing us from being involved in that. The trading business also exports other grains, feed barley, for instance, where they are able to; and lupins. The business is also involved in grain seed commercial activities. For instance, we are involved in a program involving introducing new plant varieties to assist the industry. So it is really a commercial activity.
Senator O'BRIEN —And the relationship between the international and the domestic--is there a strict dividing line or is there a merging of the operation?
Mr Price —In terms of the organisational structure, there is separation between the activities in the current structure to ensure the integrity of the single desk pools. Currently there is a divisional structure in the organisation, and there are two divisions that look after the pooling arrangement: the international marketing division and what we call the merchandising division, which handles the pricing and product position management for the pool. Then you have what we call our Australian division, which is our trading activity.
Under the structure that is proposed in the legislation, the commercial trading area and the pool area will be separated into separate, wholly owned subsidiaries.
Senator O'BRIEN —Yes, I understand that. I am just looking at the comparison with the current operation of the board. Going to another matter, Mr Moffet of the Western Australian Farmers Federation told the committee that this year the wheat industry fund grew by 16.6 per cent. I assume that is for the financial year 1996-1997. Can you tell me how each part of your operation contributed to that growth? Can you separate out the pool activities, the trading activities, return on value-adding investments, and money market activities, or would you need to take that on notice?
Mr Price —I will take it on notice. The only general comment I would make is that essentially that return comes from two sources. One is the profit from our trading and commercial activities. Secondly, the remainder of the wheat industry fund is invested by a group of fund managers which we employ, and it is invested in market equities--various equities across a broad spectrum of the market. Those are the two areas from which returns to WIF are appropriated, but I can certainly come back to you on the detail.
Senator O'BRIEN —Am I to understand that the money that is invested is invested in the equities market?
Mr Price —Correct.
Senator O'BRIEN —Australian and international or just Australian equities?
Mr Price —I think some are international, but I will come back to you with a full explanation of that.
Senator O'BRIEN —Thank you. That fund was established in 1989 to provide the capital base for domestic trading activities and for downstream investments of the AWB. After 1992 and the decision to end the government guarantee, the role of WIF was broadened to build an adequate capital base. Is it possible to provide the committee with a list of the downstream investments made since 1989?
Mr Price —It certainly is, and with the earlier advice I will furnish that list for you.
Senator O'BRIEN —Okay. When you do that--or perhaps now, depending on what you can do--can you tell me what principles apply to downstream investment? What are the hurdle rates of return, for example?
Mr Price —There are a number of criteria which are assessed in terms of those investments. I will furnish those details with the other information. The Grains Council is also involved in terms of considering the wheat industry fund business plan, and they are involved in considering those investments as well.
Senator O'BRIEN —So they were set by the board with reference to, in conjunction with, or in consultation with the Grains Council. Was the government involved in that decision making process?
Mr Price —Let me take it on notice. I will get back to you with the detail.
Senator O'BRIEN —Once the guarantee ends, the future borrowing capacity of the board and therefore the advance payment scheme will depend on the size of the equity base, so a primary objective of the AWB is to maximise the value of WIF, to maximise the equity base once the government guarantee goes. Is there a conflict between that objective and the operations of the AWB in the interim?
—I am not sure. I need to clarify the question.
Senator O'BRIEN —The government guarantee ends in 1999, and your future borrowing capacity under the proposed model for the advance payment scheme will depend, I presume, on the size of the equity base--the size of the WIF fund or the category B shareholding, whatever it is. So is the primary objective of the board to maximise the value of the WIF, to maximise the equity base, once the government guarantee goes?
Mr McKeown —If we can go back, one of the objectives of the grower model was to provide sufficient access to capital and a similar price to what is currently obtained under the underwriting arrangements. In the advice that we received from Bankers Trust, they determined what capital requirement was needed to provide sufficient capital at a similar price, subject to obtaining the appropriate credit rating in an average crop year and at average prices. It was really designed from that point of view, to try and maintain as near as possible the current arrangements. That was driving that particular equity level.
Senator O'BRIEN —Mr Chairman, I have a significant number of questions to follow. I am mindful of the time. It might be better that I try and supply them on notice and have them answered on notice, given what is a very strict timetable today. Is that acceptable?
CHAIR —Yes, it certainly is acceptable, but because of the tight time frame and our reporting date it means you will have to be writing in the plane on the way home.
Senator O'BRIEN —I am prepared to do that, because there are some complexities that I would like some answers to in relation to the financing of the operation.
CHAIR —Will you table them?
Senator O'BRIEN —I will get them put in an appropriate form for this afternoon.
Mr McKeown —I would like to refer to an earlier answer I gave to Senator O'Brien's question on deferring the current package of legislation until the second package is in place. We responded by saying we could explore that option, or something like that.
The education of the market is certainly very important. The second component, which James referred to, is the track record. The track record is obtained through the actual operation of the model. The markets are concerned not only with understanding how the model will work, but seeing it operate in practice; so obviously we would not achieve the second component if we delayed the current package of legislation.
Senator O'BRIEN —Could I not put it back to you that the question of how quickly we get the second component is in the hands of the government?
Mr McKeown —Correct.
CHAIR —It is only in the hands of the government in the sense that some of the issues were only signed off by the grain industry working party yesterday. They are not finalised, so it is not entirely in the hands of the government. Those matters will have to come forward and there will be draftsmen et cetera. I think the fundamental principles have been signed off on.
Mr McKeown —Yes.
CHAIR —But I do not think it could happen that you would have to cancel everything else to allow drafting to start, when there are still further meetings to take place within the grain industry.
Mr McKeown —As Mr Fisher mentioned, we have further meetings in October, and a final meeting in late October. The expectation is that it will all be resolved by the end of October.
CHAIR —I accept, myself, that it is a reasonable proposition that if you can have two harvest practices, it is better than one harvest practice, but you have got to weigh that against the other considerations.
I just want to go to your corporate model here, which I think is very well set out. I understand pictures. I put to you that there has been no-one come before this committee and say, `We want the single desk to disappear'--I think I am correct in saying that--but there have been two or three different versions of it, or ways that it could be put in place. Certainly, the vast majority of growers--yourselves, the Grains Council et cetera--see the single desk as being paramount to the future of the Australian wheat industry and its ability to perform in world markets.
Having said that, the one thing overhanging it is competition policy, which is in our hands in a sense. A concern has been raised, which I share, that in this particular model you have got the holding company, the pools subsidiary and the trading subsidiary. The risk is in terms of servicing B-class shareholders and their right to maximise their returns vis-a-vis the growers in the pools to maximise their particular position, and you have got the trading arm out there in a very competitive marketplace.
But if ever any situation arose out of the pools arrangement, for
whatever reason, so that the trading arm was not performing up to
expectation and not meeting the objective of maximising returns to B-class
shareholders, an argument could be put that because the vast majority of
the return--or all of it, if you like, to take the extreme, which is not
likely to happen--came out of the pool operation and there was
cross-subsidisation, in effect, back to the domestic market operation, this
would immediately be in conflict with competition policy in that an unfair
advantage was being given to an arm like that. Can you explain to us what
mechanisms there are in this model which would prevent that from happening?
Mr Price —I think that is a very important question. There are a few aspects in the model moving forward which I think are going to guard against that happening. Firstly, in the model you have two separate subsidiaries with separate accounting mechanisms, so they are totally separate accounts, and the group accounts are held by the holding company. Behind that, we would envisage that, in line with normal corporate practice--or even beyond that--you will have an internal auditing and reporting arrangement that will be focused on each of those subsidiaries and the holding company.
The boards of those subsidiaries and the holding company will have access to the business flows behind the activities to ensure that the objects and the duties of the directors of the various entities are complied with in terms of the responsibilities for each of the businesses' activities.
In the case of the pools, the people involved in that side of the business will have clear responsibilities and accountabilities to maximise returns to the pools that they operate.
The third and probably more important point is an issue being considered by the working group at the moment, that is, how the return paid to B-class shareholders is arrived at. The clear principle is to have priority to pool deliverers in terms of meeting the single desk obligation, but at the same time having a fair return to B-class shareholders. What is `fair'? That return clearly has to be a return which recognises the risk borne by those B-class shareholders in terms of being capital providers to fund the harvest payments.
BT Corporate Finance and Mallesons and another actuarial firm have been involved in putting a process forward whereby components of that return will be struck according to a formal service agreement between the holding company and the pool subsidiary so that it is very clear where the returns are apportioned and so that there is no chance of cross-subsidisation between different activities of the business.
That structure and arrangement has not been agreed by the working group as yet, because it is a detailed one and it is clearly important in getting at the issues that you raised. It is something that will be considered over the next month.
Mr McKeown —The other important aspect of that consideration is that there will be a cap on the limits of what can be extracted from the pool subsidiary in terms of providing a component at the commercial rate of return, so that we do not have the situation where, in a poor performing year by the cash trading arm to deliver a certain rate of return, the pool subsidiary will need to cross-subsidise to achieve the appropriate return.
CHAIR —Could I put it to you--and I am talking now about post-1999--that up until then the Australian Wheat Board will still have to report annually to parliament. While the single desk remains it will also be important, for public scrutiny purposes, for the Wheat Board to continue to report to parliament on an annual basis.
Mr Price —I am not sure of the details that would be required there. I could take it on notice, but I am not sure what the department has in mind. It may be an issue you could test with them.
CHAIR —I certainly will. That will be part of the MOAs, I would imagine, beyond 1999. While it is fine to give individual growers annual reports, really the only process--outside of limited activity by the grower organisations--where you can have any effective proper scrutiny is in parliament. While you still have, if you like, that gift from government of the single desk, I would think it would be important, from the Wheat Board's point of view as much as anybody's, that that process continue.
Mr McKeown —Again, this is an aspect of the second tranche of legislation rather than the current package. It really centres on the arrangement in the legislation as to how the single desk control is put in place and the relationship between that mechanism and AWB Ltd. It is obviously a critical feature of that piece of legislation and that component of it.
CHAIR —This is one of the difficulties we face in terms of having such a situation. I do not know whether it is similar to being half pregnant because there is no such thing, but it is getting close to it. Thank you very much for being here. Senator O'Brien will put some questions on notice for you to answer. If there is any further information or anything you would like to add to any of the questions, we would certainly appreciate it. If we need to come back to it, we will. Again, thank you very much.
Mr Price —Thanks for the opportunity.
Sitting suspended from 12.52 p.m. to 1.22 p.m.