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Egg Industry Service Provision Bill 2002

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2002

 

 

 

 

 

 

 

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

 

 

 

 

 

 

 

EGG INDUSTRY SERVICE PROVISION BILL 2002

 

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

 

 

 

 

 

(Circulated by authority of the Minister for Agriculture, Fisheries and Forestry,

the Hon Warren Truss MP)



 

EGG INDUSTRY SERVICE PROVISION BILL 2002

 

GENERAL OUTLINE

 

This Bill is one of two Bills designed to create an egg industry company to provide generic promotion, R&D and other industry services to the egg industry.  The new company will be limited by guarantee under the Corporations Act, and will assume the R&D functions that are currently provided to the egg industry under a sub-programme of the Rural Industries Research and Development Corporation (RIRDC). 

 

The new company will be not-for-profit and all levy payers who pay a new statutory promotional levy will be eligible to register for membership and full voting rights. To deliver its objects and strategic and operational plans, the board of the industry services body will be required to supplement the skill mix of member elected directors with specialist skilled directors, including an independent director highly skilled in corporate governance.

 

The Bill provides the Minister with the power to enter into a funding contract with an eligible body to enable it to receive and administer levies collected by the Commonwealth for industry promotion, research and development (R&D), and the Commonwealth’s matching funding for eligible R&D expenditure. The Minister may then declare the body with which the contract is made to be the industry services body.

 

The contract between the body and the Commonwealth will set certain obligations and accountability requirements for the industry services body, including provisions relating to the use of levies, matching R&D funding and transfer of assets and liabilities from RIRDC. The detail of the new industry services body’s accountability arrangements to its members and to the Commonwealth will be outlined in the contract and the constitution of the industry services body.

 

Financial Impact Statement

 

The second Bill, the Egg Industry Service Provision (Transitional and Consequential Provisions) Bill 2002 provides for the transfer of assets and liabilities associated with the egg sub-programme of RIRDC to the new industry services body.  Assets, including cash balances, are held by RIRDC on behalf of industry as the proceeds of a statutory levy and matching contribution for R&D by the government.  The transfer of assets is estimated to have a positive impact on the Fiscal Balance of $2.9 million over four years, due to estimated operating losses for the RIRDC egg sub-programme.  The final outcome will be determined following the financial transfer on 1 January 2003.

 

 

 



REGULATION IMPACT STATEMENT

 

This Regulation Impact Statement relates to the Egg Industry Service Provision Bill 2002 , and the accompanying Egg Industry Service Provision (Transitional and Consequential Provisions) Bill 2002 .  However, it mostly considers the impacts of associated changes in Regulations (under relevant levies legislation) to be implemented concurrently for the new egg promotion levy that will be collected by the Commonwealth and paid to the new egg company .

 

Background

The egg industry is currently serviced at a national levy by the peak industry body, the Australian Egg Industry Association (AEIA) and an egg sub-program under the Rural Industries Research and Development Corporation (RIRDC).

 

At present, a levy of 7.87 cents per laying chicken placement in the industry is imposed under the Primary Industries Excise Levies Act 1999 where more than 1000 laying chickens are hatched in one year.  The overall industry levy is split to accommodate research and development, residues testing and animal health issues, as follows:

-           7.2 cents per laying chicken is directed to RIRDC for research and development,

-           0.4 cents per laying chicken is directed to the NRS, and

-           0.27 cents per laying chicken is directed to the AAHC.

 

The 7.87 cent levy is imposed on, and collected by, the hatchery owner, with some or all of the costs passed on to the egg producer when they purchase laying chicks. 

 

Nature and Extent of the Problem

The egg industry has experienced a difficult period since deregulation of State marketing arrangements in the late 1980s.  Further pressures in recent years have resulted from the Newcastle Disease outbreaks and changes to layer hen housing to meet animal welfare requirements.  In particular, egg producers have suffered from an inability to adopt a whole-of-industry approach on crucial issues, to communicate the health benefits of egg consumption to consumers and to benefit substantially from industry R&D, market promotion and other service provision. 

 

Over the last decade, eggs as a food source have suffered from negative consumer perceptions regarding dietary issues and animal welfare.  Nutritional research is increasingly showing the benefits of eggs, but there has been no avenue through which to promote this information effectively to consumers.  Whilst the industry has been fighting to retain the place of eggs as a preferred food category in the face of dramatically changing consumption and lifestyle preferences, declining consumption has forced some producers to leave the industry, and those remaining to question their viability.

 

Between 1989 and 1999, Australia’s average annual egg consumption decreased from 146 to 137 eggs per person (source ABS), well below the industry’s target of 200.  The AEIA has argued strongly that this decline is a result of a market failure in egg promotion.  Whilst there are some producers large enough to carry out marketing and create brand recognition, this has not proved enough to redress the declining per capita egg consumption.  In addition, the structure of the industry and the nature of the product mean that the marketing efforts of individual firms benefits other egg marketers, without the latter’s contribution to the cost.  This “free-riding” problem results in a commercial disadvantage to the investing firm, and as a result, generic promotion is hindered. 

 

Over the past fifteen years the Australian egg industry has made several attempts to address the need for generic promotion through voluntary levies.  However, the levies have ultimately failed.  The industry believes that demand for eggs can be generated through promotional activities, but that being generic in nature, the cost should be shared by all. 

 

In early 2001, the Australian Egg Industry Association (AEIA) presented the Commonwealth Government with a proposal for a new Corporations Act company to undertake generic promotion, the research and development services currently provided by RIRDC and some strategic industry service provision.  The proposal also involved a new statutory promotional levy of 32.5 cents on each laying chick purchased from a hatchery. 

 

Objectives of the Regulation

To assist the egg industry to become more sustainable, competitive and profitable through generic promotion and to develop a structure to effectively and efficiently manage that promotion as well as industry R&D and other service provision.

 

Options

There are three possible courses of action for the egg industry. 

i)                Continue without generic promotion for eggs.  This option would mean that the industry would continue with some individual brand promotion by larger producers, but no generic promotion in terms of public health, food safety, nutrition and dietary benefits  

ii)              Develop a system for collecting voluntary contributions towards generic promotion.  The contributions would be collected independently from Government, and the industry would be entirely responsible for developing and administering a system for collecting monies. 

iii)            Establish a compulsory promotional levy through regulation.  This is the option that the egg industry have chosen to pursue and involves a promotional levy of 32.5 cents, to be imposed on producers per laying chick purchased from a hatchery.  The AEIA selected the rate of 32.5 cents per laying chick as a balance between affordability for producers and the estimated operational budget for an effective promotional campaign.  The levy would be collected by the hatchery at the time of purchase, and remitted to Commonwealth on a monthly basis.  Under the proposal, AFFA would disburse the monies generated to the new industry company, Australian Egg Corporation Limited.   

 

The AEIA have proposed that the new 32.5 cent promotional levy would be additional to the existing industry 7.87 cent levy.  As all egg producers purchase laying chicks from a hatchery, the AEIA believe that the proposed imposition mechanism is an effective way to collect a promotional levy from all producers. 

 

Assessment of Impacts

i)           Continue to operate without generic promotion

Costs:  The egg industry comprises a range of producers, from the small rural and regional operations with little market power, to the larger organisations, which have greater market power and the potential to promote a distinctive brand.  Whilst the larger producers have the opportunity to develop recognition for their brand, the atomistic nature of the industry means that it is not in their commercial interests to promote the egg generically.  Between 1989 and 1999, Australia’s average annual egg consumption decreased from 146 to 137 eggs per person (source ABS), well below consumption in other Western nations with similar diets and the industry’s target of 200.  The AEIA has argued strongly that this decline is a result of a market failure in egg promotion. According to the AEIA, the industry faces a continuing decline in per capita egg consumption if generic promotion is not undertaken.  In addition, the nature of the marketing system, which is dominated by the supermarkets, means that generic promotion is the most appropriate method of communicating to consumers.

 

Without generic promotion, the industry has almost no way to communicate the result of research and development, particularly in relation to the dietary and health benefits of egg consumption.  The result is likely to be a continued decline or stagnation in consumption, reducing profit margins for the industry, declining number of producers and inadequate investment in new infrastructure and technologies.  In addition, product quality and food safety may also suffer.  As egg production tends to be concentrated in regional clusters, this would have a flow on effect to the communities surrounding those clusters, as well as to Government, who would be required deal with adjustment issues, and to the general public, who wish to see welfare and disease issues addressed through investment in infrastructure and technology. 

 

Benefits:   Without generic promotion, individual producers will not be required to make individual contributions towards funding the program.  This would be particularly attractive for some marginal producers who are already struggling to retain viability, and who may suffer negatively as a result of voluntary or statutory contributions towards promotion.

 

ii)         Implement a voluntary promotional levy

Costs: The industry has in the past attempted to fulfil the need for generic promotion via a voluntary levy.  For example, the now defunct Incredible Egg Company, established by the AEIA in 1987 to promote egg consumption and the egg industry nationally, initially enjoyed the support of the organisations that supplied around 70% of the Australian market.  However, that support fell away and the company failed due, to a large extent, by resentment at the large number of “free riders” benefiting at the expense of those producers who paid their contributions.  In addition, the administrative costs of managing the collection of the voluntary levy and chasing defaulters proved to be a disproportionate burden for the Incredible Egg Company.  These problems are likely to apply to any new voluntary levy that the industry was to implement. 

 

In addition, the uncertainties associated with voluntary levies would make it difficult to design a promotional strategy with long-term goals.  This is particularly the case given the industry’s history with voluntary levies.  For any promotional program to be effective, there must be enough financial security to make the decisions that generate the greatest benefit for the industry in the long-term.    

 

Benefits:   With a voluntary scheme, producers would more easily be able to demonstrate their satisfaction or dissatisfaction with the promotional program.  In addition, they would have more flexibility to make contributions in accordance with their financial state at the time.

 

iii)       Establish a statutory promotional levy

Costs:  The levy will be charged to egg producers at a rate of 32.5 cents per laying chicken purchased from a hatchery for the purposes of future egg production.  In terms of impact, 32.5 cents is equivalent to 5% of the current average cost of a pullet, or 1.7 cents per dozen eggs sold.  The levy will increase egg production costs as a proportion of GVP by about 1%.  In the first year, the levy is expected to generate approximately $3.1 million dollars, with the industry’s current GVP at just over $300 million.

 

Although the levy will be imposed on, and paid by, producers, the hatchery operators will be responsible for collecting the levy and remitting it to the Commonwealth.  This is likely to involve a separate remittance from that used for the existing industry levy, and therefore some additional cost to the hatchery operators.  However, the AEIA wrote to each of the sixteen hatcheries that pay the current levy, outlining the detail of the proposal and their role in collecting the new levy.  A survey was included in the letter.  The AEIA received 10 responses, 9 of which supported the proposal.  Despite some extra cost in collecting the levy, benefits generated through generic promotion will flow through to the hatcheries in terms of additional chicks purchased.

 

The latest Australian Bureau of Statistics (ABS) figures (for the year ending 30 June 2000) indicate that there are just over 500 egg-producing establishments in Australian.  The AEIA argue that only 340 are commercial producers (those with a minimum of 1000 laying hens).  Although the remaining producers may not be commercial, they will be required to pay the new promotional levy when they purchase laying chicks from the hatchery. 

 

Benefits:  Disbursement of the existing R&D and new promotional levy to a single industry corporation will allow a unified, efficient, informed and science-based approach to R&D and promotion, benefiting industry and consumers. 

 

The proposal put forward by the AEIA spreads the costs of generic promotion across the industry according to the size of each operation and in an equitable manner.  As the promotional levy is paid on the laying chick at the time of purchase, operators with a larger number of laying chickens will pay a larger levy than the smaller operators.  In terms of those involved in niche products, they too have supported the levy, as any increase in egg consumption will ultimately feed through into their products as well.  In addition, all payers of the promotional levy will be eligible to register for membership of Australian Egg Corporation Limited, and will be able to vote on issues such as the rate of the levy. 

 

The difference between the existing levy and the new levy is that the promotional levy will be imposed directly on the egg producer (at the point of purchase of laying chicks) where the laying chicken levy is imposed on the hatchery operator (on chicks hatched).  However, in both cases the hatchery operator is responsible for collection of the levy and remittance to AFFA.  Using this mechanism to collect what is essentially a producer levy limits the number of collection points (at present 16) and hence the costs to the industry.  In addition, because all producers purchase laying chicks from the hatchery, use of this mechanism is an effective way to impose the costs of the levy directly on those who stand to receive the greatest benefit from generic promotion. 

 

As a result of the policy of cost recovery, there should be no net cost to the Government in terms of collecting and processing the levy.  The promotional levy will not be matched by Commonwealth funding, however the R&D levy will continue to be matched up to 0.5% of GVP.

 

In New Zealand, the egg industry has been turned around by generic promotion. They funded their promotional campaign through a statutory levy set at a similar rate to that proposed by the AEIA, and have used their limited funds for strategic promotional activities.  Since the commencement of the promotional program five years ago, per capita consumption in New Zealand has increased by approximately 12 eggs per year, to an average of 208 eggs.  Statutory levies have also been used in Canada and the United States to fund promotional programs with positive outcomes.

 

Competition Policy

The levy will be applied equitably to all egg producers, with generic promotion designed to benefit the entire industry rather than individual producers.  As a result, the proposed levy will have no impact on competition within the industry.  However, it is anticipated that the levy will allow the industry to compete more effectively with other fresh food production industries.

 

Consultation

In order to satisfy the Commonwealth’s Levy Principles, the AEIA embarked on an Australia-wide consultation during the period from April to June 2001.  This was later extended to 30 September 2001 in order to ensure that all stakeholders were aware of the proposal and had the opportunity to provide comment.  The consultation was primarily directed at producers, but also others involved in the wider egg industry, including hatcheries and egg marketing companies.  The AEIA circulated a letter on the proposal to all known producers, included articles in their industry newsletter, “The Eggsaminer”, and conducted media interviews on the proposal and the levy.  In addition, regional meetings were held in each state for producers and other industry stakeholders.

 

During the regional meetings, and through the period until 30 September 2001, producers were asked to vote on the proposal.  Each egg producing business was allocated one vote, and 238 votes were collected in total.  The AEIA claim that these producers represented over 96% of the ownership of laying hens in Australia.  From these producers, 93.7% supported the establishment of a privatised company and 87% supported the levy being set at 32.5 cent per laying chick purchased from the hatchery for egg production.  In terms of flock ownership, 92.7% supported the levy at 32.5 cents.

 

In terms of the proportion of industry included in the vote, the latest data from the Australian Bureau of Statistics (for the year to 30 June 2000) indicate that there are 508 egg-producing establishments in Australia.  Of these, the AEIA argue that only 340 are commercial producers (those with a minimum of 1000 laying hens), which would mean that 70% of commercial producers have voted on the proposal.  As mentioned above, the AEIA estimate that they represent 96% of the Australian flock.

 

In addition, the AEIA have consulted with hatchery owners on the proposal, and they are in support.  Whilst the hatchery owners will not pay the new levy, they will be responsible for collecting levies from the producers and remitting the monies to the Commonwealth.

 

Opposition to the proposed levy

Opposition to the levy has been limited, and there has been no campaign of letters to the Government or the AEIA opposing the levy.  Of those who did vote against the proposal or the levy, the AEIA have listed the following reasons.

·          philosophical dislike of generic ideas stemming from a post-regulation environment;

·          some larger producers indicated that they were already conducting local marketing and do not see the need to contribute to generic promotion; and

·          lack of understanding of the proposal and industry issues.

 

Conclusion and recommendations

Over the past year the AEIA has been working to ensure that the Commonwealth Levy Principles are fulfilled and the proposal is viable. Through the AEIA’s consultation process, both producers and hatchery operators have demonstrated significant support for the new company and the proposed nature and size of the promotional levy. 

 

On the basis of consultation and analysis, the proposal for a statutory levy for egg promotion conforms to the Government’s levy guidelines and principles, does not restrict competition and has clear potential to benefit the industry and consumers. It is therefore recommended for implementation.

 

Implementation

The levy is to be implemented as soon as possible, depending on passage of the legislation for the new industry company.  The levy rate and performance of the promotion will be suggested for review in two years to determine whether the levy should remain in place, be adjusted or removed.  In addition, all producers who pay the statutory levy will be levy payers will be able to vote on changes to the levy through their membership of the private corporation.

 

NOTES ON CLAUSES

 

Part 1 - Preliminary

 

Clause 1: Short title

 

This clause provides for the Act to be called the Egg Industry Service Provision Act 2002.

 

Clause 2: Commencement

 

This clause provides for the Act to commence on the day on which it receives Royal Assent.

 

Clause 3: Simplified outline

 

This clause provides a simplified outline of the Act.

 

Clause 4: Definitions

 

This clause provides for terms in the Act to be defined.

 

Clause 5: Application of this Act

 

This clause provides for the Act to apply both within and outside Australia.

 

Part 2 - Declaration of the industry services body

 

Clause 6: Declaration of the industry services body

 

In order for the Minister to be able to provide for the new egg company to deliver generic promotion, research and development and other industry services, there is a need to formally declare the company to have these functions.  This is achieved in this clause by providing for the Minister to declare a body to be the industry services body if a funding contract has been entered into and the Minister is satisfied that the company will comply with its requirements under that contract. 

 

This clause also provides for the declaration to specify the day on which the declaration will apply, and for that declaration to be tabled in Parliament and published in the Gazette within 14 days after it is made.

 

Part 3 - Funding of the industry services body

 

Clause 7: Funding contract

 

This clause provides for the Minister, on behalf of the Commonwealth, to enter into a contract with an eligible body which will allow the Commonwealth to make promotion, research and development and matching R&D payments to the body.

 

The clause ensures that before the funding contract is entered into, the Minister is satisfied that the public accountability requirements of the Commonwealth have been met. The public accountability requirements relate to the use of promotion payments; R&D payments and Commonwealth matching payments for the correct purposes.

 

The clause also provides that the Commonwealth does not have to pay the full amounts that could be paid from the money collected as promotion and R&D industry levies.  This will allow the Commonwealth to made deductions prior to payment to cover the costs of collective the levy and to make adjustments to cover refunds and payments made in error.

 

In addition, the clause provides that the contract may include provisions relating to the industry assets and liabilities being transferred from the RIRDC egg sub-programme to the industry services body under the Egg Industry Service Provision (Transitional and Consequential Provisions) Act 2002 .

 

Clause 8: Appropriation for payments under funding contract

 

This clause appropriates the Consolidated Revenue Fund for the purposes of making payments to the industry services body under the funding contract.

 

This clause sets overall limits on the appropriation for the Commonwealth to make promotion, R&D and matching payments to the industry services body.  In terms of the matching payments, the clause also sets annual limits on what can be paid to the industry services body.  The annual limit is the lesser of either 0.5% of the gross value of egg production (GVP) for the financial year or 50% of the amount spent by the eligible body on R&D activities that qualify under the funding contract in that financial year.  It provides for regulations to be made to prescribe the manner in which the Minister is to determine the egg GVP.

 

In the case where the industry is prevented from receiving their full matching payment as a result of the GVP cap, the clause also provides for the unmatched R&D excess to be rolled over into the following financial year for matching. The purpose of this is to allow for fluctuations in R&D spending to be accounted for over a number of years.  The clause provides a formula for determining what amount of R&D excess can be carried forward into the following year.

 

Part 4 - Miscellaneous provisions

 

Clause 9: Ministerial directions

 

This clause provides for the Minister to give a written direction to the industry services body. The direction must meet the criteria of being in the national interest because of exceptional and urgent circumstances.  The industry services body has to comply with any such direction.

 

The clause requires the Minister to be satisfied that the direction would not require the industry services body to incur expenses greater than amounts provided under the Act and that the Minister has given the industry services body's directors an adequate opportunity to discuss the need for the proposed direction.  The direction must be laid before each House of Parliament within 5 sitting days, unless the Minister makes a written determination that doing so would prejudice either the national interest or the industry services body's commercial activities.

 

In addition, the clause requires the direction to be gazetted and reflected in the annual report of the industry services body for that period, and for the impact of that direction to be assessed. 

 

The clause also allows the Minister to determine in writing that a direction be waivered if compliance would be contrary to public interest or the body recommends that it would prejudice their commercial activities.

 

Clause 10: Delegations

 

This clause provides for the Minister to delegate any or all of his or her powers and functions under this bill to either the Secretary of the Department or an SES employee or acting SES employee of the Department.  The delegate, in exercising these powers or functions, must comply with any directions of the Minister.

 

Clause 11: Compensation for acquisition of property

 

This clause provides for compensation to be paid by the Commonwealth to a person from whom property is acquired on other than just terms as a result of the operation of the Bill. If the Commonwealth and the person in question cannot agree on the amount of any such compensation to be paid, the Federal Court may, on application by the person from whom the property was acquired, determine what is a reasonable amount of compensation for the acquisition of the property.

 

Clause 12: Regulations

 

This clause provides for the Governor-General to make regulations under this Act.