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Economics References Committee
29/10/2015
Cooperative, mutual and member owned firms

KNOCK, Mr Peter, Chief Executive Officer, The Co-op

[12:53]

ACTING CHAIR: Welcome. Would you like to make a brief opening statement?

Mr Knock : It is probably more along the lines of points, suggestions and opportunities that I have covered in my submission. I might come back and give a little more colour around the education agenda that has come up a little already this morning—just some information on that. Essentially, our submission is really around the diversification and how our economy can stay resilient, allowing the cooperatives and mutuals to flourish and develop. It is really around some of the policy suggestions government can adopt in that regard. We are also making a suggestion that there should be a minister for CMEs, cooperative and mutual enterprises, to provide a little more focus.

But, overall, if we had more relevant and regular business statistics measuring the diversity of business ownership, and that is collected at the state level and combined at the federal level, it would be extremely helpful overall. You start with the proposition that if you have someone who is focused on our business models it helps to raise our profile and then all the things that go to support the information in that regard.

Some of these stats you know: co-ops and mutuals in Australia are around seven per cent of GDP, which is the same size as the retail industry in Australia, so we are significant in that regard. A specific point around The Co-op, particularly around competitive issues, is government legislation supporting non-competitive issues. We have one issue: the Harper competition inquiry and recommendations to remove the remaining parallel importation regulations that relate to books in Australia. That affects not only our cooperative but the entire bookselling industry in Australia. I note that the Harper commission and the government have accepted that they will roll back those regulations. However, they are talking about a time frame of some three years before that will be enacted.

Senator XENOPHON: Government is not accepting the effects test, though, apparently.

ACTING CHAIR: But it is accepting this one.

Mr Knock: We would like all the recommendations of the Harper committee to be accepted. The effects test and all of those things will need to be looked at. We support all of the recommendations the Harper committee has put forward—all 49. But we do have some fear that specific interests and issues are being put to the backburner—they are not being brought forward by government, for whatever reasons we do not understand. That could be something I would ask the senators to put their minds to in the future.

As relates to the education and where that is up to, I am the chairman of the Cooperative Research and Education Committee, which we formed under the auspices of the BCCM nearly 12 months ago now. We formed that, with a number of academics and a number of industry representatives on board, to talk about how we can make recommendations to bring the education of cooperatives and mutuals business models into universities. We have had a little success in that regard, from 18 months ago having no universities talking about it, to Sydney University—as Greg Patmore just said—now just finishing the first masters. We also have courses being undertaken at UWA and Charles Sturt University. Also, Newcastle University is doing a full masters program covering cooperatives and mutuals.

So we have had some headway in that regard. However, as some of the suggestions have been made, the policy bodies, the industry bodies, and there are lots of other influences can be brought to bear, let alone going all the way back to reviewing the curriculums we were taught in schools. If there were some understanding of the opportunities around all these business models, again it is just profile raising and it gives people options for the various business models to support such a huge part of our GDP. If you have specific questions, I am happy to leave it there. Otherwise I am happy to go more into our specific co-op issues.

Senator XENOPHON: Can I just ask a parochial question. Are you familiar with Adelaide Unibooks?

Mr Knock: Yes.

Senator XENOPHON: What happened to them? Was that a cooperative?

Mr Knock: No. It was actually Adelaide University, Flinders and University of South Australia. They had bookshops on all of those. There were eight bookshops covering all of those campuses of the three universities. It was a little unusual in Australia, for such a scale. It was actually the Adelaide University student union that owned the bookshops and the business. They actually decided they could make more money out of beer and pizza than out of textbooks, so they went down that route.

Senator XENOPHON: So there is no university bookshop? There is still a university bookshop, but it is not run by the student union?

Mr Knock : It is run by the student union, currently, until next March. Senator, you will be pleased to know that we are opening four stores across the—

Senator XENOPHON: What has happened in South Australia? So with that model, there will have to be someone taking over that function of providing textbooks and the like?

Mr Knock : Correct. The problem was their business model just sold textbooks. That was how they operated for some years. While they were still profitable, just, they got to the point where they could not fund it any more. The student union said, 'We can invest our $2 million there or invest it in fast food.'

Senator XENOPHON: So it was a case of beer not books?

Mr Knock : Correct. That is not unusual, as far as uni students go. However, we already service a large number—

Senator XENOPHON: I am sure that there are many, many students and who are very diligent and would rather be buried in books. You cannot generalise.

Mr Knock : You are correct.

Senator XENOPHON: Do you mind if I goes through some of the issues that you raised? You raised the issue of parallel importing which is, I suppose, not directly on point to the terms of reference of this inquiry. But because you have raised it, what is your specific concern about parallel importing in terms of your co-op?

Mr Knock : Our simple raison d'être is to bring down the cost of education and to help students' lives, and to make them a little more stress free. Book selling in Australia is controlled by publishing. The legislation does not allow us as a retailer or any other retailer to go and buy their books from anywhere else in the world and sell them. In Australia, you have to buy off the local arm of the multinational publishers. There are only five big publishers in the world. That means that the publishers in Australia control the wholesale price and the selling price, because they all sell direct as well. Australians, especially in textbooks, pay some of the highest prices in the world. The local divisions of these multinational publishers are some of the most profitable in the world because they control both ends.

Senator XENOPHON: Where are they printed, though? Are you saying that the books are printed overseas?

Mr Knock : Most books are. There is very little printed in Australia.

Senator XENOPHON: So there is no rationale or argument about local jobs and local printing jobs?

Mr Knock : No. The books printed in Australia are generally for all-local curriculums—they are made for a specific institution or university. Universities do not range books right across the board. For accounting 101, for instance, it is taught at 39 of the 40 universities in Australia. There could be five different publishers and 20 different authors of those. So there is no homogeneity in that regard.

Senator XENOPHON: We heard evidence earlier today from Yenda Producers Co-operative. Were you here when they gave evidence?

Mr Knock : Yes.

Senator XENOPHON: They made reference to the change in the international accounting standards that came into force on 1 July 2005 and caused real issues for them in terms of raising capital. Fortunately, they had an understanding bank. To what extent have those changes in accounting standards made a different to the co-op in terms of your capital raising ability to do what you do?

Mr Knock : Certainly, it had a detrimental effect when that was taken on board back in 2005-2006. Effectively, it meant that the more successful you are and the more members you get, the bigger the hole you dig for yourself.

Senator XENOPHON: With your capital, in terms of shifting liabilities, how many members do you have in your co-op?

Mr Knock : We have 1.9 million.

Senator XENOPHON: Okay. It is a lot of members. Of those 1.9 million members, is it a fixed amount that they put in on an annual basis?

Mr Knock : It is a one-off fee, and it has varied over the 58 years that we have been operating.

Senator XENOPHON: What is it now?

Mr Knock : It is currently $25.

Senator XENOPHON: Hear me out on this. I can understand the rationale to protect consumers. If you have invested $150,000 or $200,000—your life savings—in a co-op, or a significant portion of your retirement income, you would want to make sure that if something goes wrong, as it did with the Berkeley co-op in the United States, you are not going to blow all that. But if we are talking about 1.9 million members, where the current fee to be a member of your co-op is a once-off $25 fee, and if something goes wrong—I am not suggesting anything will go wrong—at a co-op of that size into which people are putting $25 or even $50 in to be members, I would have thought you are not going to get too many people marching in the street if they have lost $25 on a worst-case scenario. But, in fact, it has the effect of actually crimping you in being able to raise finance.

Mr Knock : Correct. There are a couple of issues there. If it is in your constitution that you do not have to refund your memberships—it is either a board decision or you just do not have to do it—you do not have to comply with that accounting standard. Twelve months ago we made a legal submission and we had our auditors overturn that particular ruling.

Senator XENOPHON: How can you overturn it without changing the articles of association or the constitution?

Mr Knock : The constitution did not need changing, because it never allowed for refunding of memberships, which is the principle of the accounting standard.

Senator XENOPHON: So presumably the Yenda Producers Co-op would maybe have had a clause in there saying, 'You need to refund members.'

Mr Knock : Maybe, maybe not.

Senator XENOPHON: Chair, we might put that on notice to ask the Yenda Producers Co-op.

Mr Knock : The issue was that the accounting standard was introduced and it said: 'If you are a co-op or a mutual, essentially, you have to comply with this standard, so just go ahead and do it.' It was only last year that we started looking into it, because essentially the more successful we were and the more members that were joining, we were going south. However, we did have a very understanding bank. We bank with the NAB, and they have a very large government and institutional banking division that understood that accounting standard.

Senator XENOPHON: But you see my point that, if what is at stake in a worst-case scenario is that you lose your $25, that is not of the same magnitude as somebody who has $250,000 invested in a co-op, where it would cause them great harm if something were to go wrong. Do you have a view that that standard should not apply where the membership fee or the investment of an individual member is below a certain amount of money? I am talking about a very low threshold—say, $100 or less. Would that make a difference?

Mr Knock : It is just part of the symptoms for cooperatives and mutuals. We do not have a national law. States can go and make whatever conditions they like. Accounting standards can be just introduced, even on an ad hoc basis, essentially, as that one was, without any understanding of the diversity of the various business models.

Senator XENOPHON: I am sorry to harp on this, but I was worried by what Yenda told us. You are saying that you got advice from your accountant, so you do not have to comply with that standard?

Mr Knock : Correct.

Senator XENOPHON: For how many years did you comply with that standard?

Mr Knock : From 2005 through to 2014.

Senator XENOPHON: For nine years you went through the mill with that. Chair, I am in your hands as to whether Mr Knock does this confidentially or not. Presumably these are public documents from your co-op in terms of the accounting advice. Could you send us any of that material?

Mr Knock : We are happy to provide senators with that information and we are happy to provide advice, as we do through the Business Council of Co-operatives and Mutuals, in general terms as well.

ACTING CHAIR: Thank you. It would be great if you could provide that to the committee.

Senator XENOPHON: We have talked about the accounting standards. What other the measures do you think would make a real difference in the way that you operate? What is your competition at the moment—commercial book stores?

Mr Knock : Every retailer in the world is a competitor. If I use the Adelaide example, for instance, we transformed ourselves as a business. We were a textbook distributor, and we are on just over half the university campuses now. If we stayed selling textbooks, under current government regulations we would not have been able to stay in business. So we had to diversify our business model and start selling lots of other categories of merchandise that was relevant to our customers. That is what has helped us grow and succeed and essentially allow us to continue selling textbooks.

ACTING CHAIR: How do you avoid the Berkeley issue, where you grow and expand, grow and expand, and forget what your customers joined for in the first place?

Mr Knock : That is exactly it. Your raison d'etre is always there—your purpose and your ambition. It is simply to service the needs of your members and to bring down the cost of education. That is our simple purpose and that guides everything that we do.

ACTING CHAIR: I imagine that the governance works like this: I pay my 25 bucks as a first-year and I will get books discounted at 25 per cent for my four years of study. Is that essentially the model?

Mr Knock : Pretty much.

ACTING CHAIR: Do I vote in board elections?

Mr Knock : Absolutely. We have nine board members. One is a staff board member; one is an ex-vice-chancellor of a university.

Senator XENOPHON: You have 1.9 million members. How many participate in the vote?

ACTING CHAIR: Yes, I want to know how many vote.

Senator XENOPHON: How many vote?

Mr Knock : Not many take an interest in the annual general meeting each year.

Senator XENOPHON: How many?

ACTING CHAIR: How many?

Mr Knock : A handful, really. They would hardly fill this room.

Senator XENOPHON: Really?

ACTING CHAIR: What is the turnover of your business?

Mr Knock : One hundred and fifty million dollars this year.

ACTING CHAIR: Is it quite easy to stack out your board?

Mr Knock : In the past, there were all sorts of issues. What happened with the whole South Australian example cannot happen with our board. It nearly happened back in the nineties, and a number of professional and independent directors came on the board instead of student directors. Student directors have very particular interests. Fifteen years ago we changed to a very professional operating model.

Senator XENOPHON: You have to have certain qualifications to be on the board. Is that right?

Mr Knock : Certain levels of experience, independence and all of those qualifications.

ACTING CHAIR: Which essentially precludes most of your members.

Mr Knock : No, not necessarily.

ACTING CHAIR: If they are first- to fourth-years.

Mr Knock : Anybody can apply to be a director—anybody can put their hand up—and you have to be a member to be a director as well.

Senator XENOPHON: Going through your submission, you are going to send us some more information on the accounting rules. For the Yenda Producers Co-Op, who were not in the room before, you are saying that—

ACTING CHAIR: As they are still in the audience, I will ask them. It is in your constitution isn't it? Are you a distributive?

Senator XENOPHON: You cannot get that on the Hansard. You might want to call them up.

ACTING CHAIR: That is okay.

Senator XENOPHON: Sorry, there is a slight technical issue we want to clarify. For nine years, you were complying with this quite restrictive capital requirement, but then you got advice saying you do not have to do it, which freed up your capital because you do not have to refund the members?

Mr Knock : Correct.

Senator XENOPHON: Has that made life easier for you now?

Mr Knock : Absolutely.

Senator XENOPHON: What else would make life better for your co-op to be able to flourish?

Mr Knock : For our co-op, the main government restrictions that we have now are on parallel importing, which means we can only buy our products as 60 per cent of our turnover from five specific suppliers.

ACTING CHAIR: But that is an issue for all booksellers, isn't it, not just you?

Mr Knock : Yes. I am answering the question directly. That is the main restriction that we have. As far as the broader issues go, to help cooperatives flourish and grow in the future, it is about having the recognition of what you are bringing to our industry and shining a light on our industry. That is one of the reasons that we formed the Business Council of Co-operatives and Mutuals. Eighty per cent of Australians belong to one; they just do not know it, in the main.

ACTING CHAIR: One of the other policy barriers you raised which is of particular interest to Senator Xenophon and me is procurement policies. Are cooperatives restricted from tendering and procurement provision for governments?

Mr Knock : Not in my experience. There may be sectors that I am unaware of

ACTING CHAIR: You said:

Government tender processes for the delivery of services largely ignore the sector as a potential provider … and omit the clear policy need to incorporate broader values ...

Mr Knock : An example of that would be when Medibank Private was put up for sale. It was not included to our sector. It went straight to the stock market to be listed. It was not considered to be converted into a mutual or a cooperative.

ACTING CHAIR: Shame.

Mr Knock : That is part of the issue: we do not have a significant profile. Our models are not taught in business schools. All of these things relate.

Senator XENOPHON: That is very useful. Thank you. Perhaps you can send us that correspondence about how, after nine years, you got advice that you did not have to comply with what seems a pretty arcane or unnecessary restriction.

Mr Knock : Sure.

ACTING CHAIR: On that, we getting a lot of submitters wanting changes to the accounting standards, but in reality that is not needed if the constitution is as your constitution is. Is that widely understood within the cooperative movement itself, that they do not have to comply with that accounting standard if their constitution is as yours is?

Mr Knock : I would not think so, because there is no national law. We need this overarching focus that ASIC can bring. Having it controlled by the states, who can do anything they like and do not actively work together to have single issues dealt with, means it is very difficult.

Senator XENOPHON: So you want a federal system?

Mr Knock : Absolutely.

ACTING CHAIR: And you are talking to senators, who are innately parochial.

Senator XENOPHON: Speak for yourself!

Mr Knock : Just on that—

ACTING CHAIR: Proud!

Mr Knock : you mentioned Lismore as well, and I did mention to Senator Xenophon that we are opening physical stores in the University of South Australia. We are taking over all of those operations so that they do not fall over and we are servicing the students.

Senator XENOPHON: So you sell fiction books as well as non-fiction?

Mr Knock : Yes.

Senator XENOPHON: What is your bestselling fiction book at the moment? Do you know?

Mr Knock : The current one would be Matthew Reilly's last book. But the biggest selling book right now is by the last award winner—

Senator XENOPHON: Is that the name of the book?

ACTING CHAIR: The Man Booker Prize.

Mr Knock : The last Man Booker Prize winner.

Senator XENOPHON: Which is 'the road north'?

Mr Knock : No, that was Flanagan—he was the previous award winner.

ACTING CHAIR: We can google it.

Mr Knock : I should know these names. One more point: cooperatives, by their nature, breed entrepreneurialism, and our 60-odd stores are all localised to their own communities and they essentially service their own communities. Our communities just happen to be university campuses. Some are very large; some are very small. On our Lismore campus, and it is a very community-oriented campus—

ACTING CHAIR: Yes. I was up there the other week. It is fantastic!

Mr Knock : Our store was there and we had so many people coming from town—and you know how far the university if out of town, on the edge—that they wanted us to open another store in town, which our local manager has done. That takes entrepreneurialism to another degree and lots of new members are now joining our cooperative in the Lismore area.

ACTING CHAIR: Excellent! A hotbed of cooperatives is Lismore. Thank you so much, Mr Knock, for your evidence.

Mr Knock : Thank you for the opportunity.

Senator XENOPHON: I wonder if we could quickly call back Yenda, if they are willing to be called back. I do not know whether that is a bit unorthodox.

ACTING CHAIR: I think we have got the numbers. Can we call back Yenda.