Further reform recommended

by Michael King
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Australia’s Productivity Commission, the government’s independent research and advisory body, published its examination of the success and failures of the Wheat Export Marketing Act 2008 in late October. Its findings lean heavily towards those that favor further deregulation of the Australian wheat industry, which accounts for some 3% of global production but around 12% of world exports. Its recommendations have not been universally welcomed.

FROM THERE TO HERE
First to recap: On July 1, 2008 the Wheat Export Marketing Act entered into force and ushered into being a new era of competition between Australian exporters. It removed AWB International Ltd.’s monopoly over bulk wheat exports and created a transitional regulatory system to monitor competition in the sector.

The move was widely applauded: the single desk system had gradually been stripped of its defenders over the previous decade. Mortal wounds were inflicted by a National Competition Policy Review which found in 2000 that the system offered no clear benefits for the marketing of wheat abroad. The successful deregulation of export systems for other grains had also undermined arguments in favor of monopoly. An inquiry in 2006 into AWB’s role in the United Nations’ Oil-For-Food Programme and kickbacks alleged to have been paid to Saddam Hussein’s Iraqi regime was the final nail in the coffin for the monopoly export system.

But as previously reported in World Grain, in the two years since the start of the new regime many have questioned whether the system is any less riddled with flaws than its predecessor. These arguments were set out clearly in lengthy submissions to the Productivity Commission as it embarked on its report earlier this year.

However, the publication of the Commission’s findings — some three months later than expected — revealed that most of those complaints have been carefully deconstructed and dismissed. Indeed, the Productivity Commission’s detailed 464-page report comes down firmly on the side of less regulation, albeit with some major, if temporary, exceptions.

RELATIVELY SMOOTH TRANSITION
The Commission found that the transition to a more competitive system of exporting bulk wheat — exports in containers and bags were freed from regulation in 2007 — had progressed “relatively smoothly” given that in the two-year period since that point, international trading conditions had been harsh due to the global financial crisis, exchange rate appreciation, drought and a volatile commodity price cycle.

“The regulatory arrangements for marketing bulk wheat exports have been beneficial during the transitional phase since deregulation,” concluded the report.

Despite praising the transitional system, however, the Commission called for the gradual dismantling of its key components.

If the Commission’s recommendations are passed into law, the trader accreditation scheme, Wheat Exports Australia (WEA) — the guardian of the regulatory framework set up by the Act — and the Wheat Export Charge levied at A22¢ per tonne on exports will all be scrapped on Sept. 30, 2011.

The cost of running WEA alone cost some $4.2 million in 2008-09, said the report.

Some 28 accredited traders exported some 12 million tonnes in the first year after deregulation. However, the report found that the “benefits of accreditation of traders will rapidly diminish in the posttransitional phase, leaving only the costs.”

The Commission found “no evidence” of a special need for the Australian government to intervene to accredit bulk exporters of wheat beyond the transitional period.

“The Australian government does not accredit exporters of other grains or most other agricultural commodities, and the export of those commodities operates smoothly,” concluded the Commission. “Ultimately, it is the responsibility of wheat growers to exercise due diligence in their business dealings with traders, just as they do for other grains or in other commercial relationships.”

Some players, most notably the WA Grains Group, had called on WEA to take on “industry good” functions such as supplying information on harvests, exports, distribution, sales, committals and stocks. The Commission recommended that the industry as a whole should be left to fund such services.

The Commission said deregulation of the sector had increased on-farm storage and modal competition across supply chain networks but concluded that some regulation in these areas would be required in the future, although this would be best managed under existing competition law. Indeed, the Commission supported the decision by the Australian Competition and Consumer Commission (ACCC) to review the exclusive dealing notification system in relation to CBH Group’s Grain Express system in Western Australia.

PORT ACCESS STILL DIVISIVE
The most controversial issue that has arisen since deregulation has been the prominent role assumed by bulk handling companies (BHC), three of which — Viterra, GrainCorp and CBH — run all of Australia’s export terminals except for one facility in Melbourne which is part owned by AWB, currently subject of a takeover bid by Agrium. All have strong positions in hinterland logistics and among growers, and a number of complaints were submitted to the Commission claiming the BHCs had established de facto regional monopolies as a result of deregulation because they were able to favor their own ex- ports, a point refuted by the BHCs.

The Commission’s position on the “most significant issue in this inquiry” was less forthright than in other areas. The report found that the existing port access tests in place for accredited exporters that also operate ports — in effect the three BHCs — should remain in place, for now at least.

“The port terminal access test has provided greater certainty for traders and made access easier, more timely, and less costly than it could have been by relying on potential declaration under Part IIIA of the Trade Practices Act (a part of competition law which covers infrastructure access),” said the Commission.

“However,” the report then added, “there are still some transitional issues associated with port access and contestability in the logistics supply chain,” and it is “critical to the success of the deregulated arrangements” that exporters can fairly access ports.

The Commission recommended that the current access tests should remain a condition for port operators to export bulk wheat until Sept. 30, 2014. The Commission cited the limited time in operation of the current system, the long development of bulk handling systems in each region, the concerns of traders and rival logistics companies about port access, and “the possible distortionary impacts of the current access arrangements on wheat trading and relative prices across regions.”

The Commission added: “The benefits of the access test will diminish and could become costly in the long term without the checks and balances of Part IIIA of the Trade Practices Act.

“From Oct. 1, 2014, regulated access should rely on Part IIIA, with continuation of mandatory disclosure, supplemented by a voluntary code of conduct by all port terminal service operators.”

INDUSTRY RESPONSE
Much of the response to the report has focused on port access and the role of the BHCs, although surprisingly many of the exporter and grower organizations who most strongly opposed the shape deregulation has taken were muted about the Commission’s report when contacted by World Grain.

GrainCorp CEO Alison Watkins agreed with the majority of the Commission’s findings, but said there was no need for continuing regulation of port elevators, or any need for regulation to continue after Sept. 30, 2014. But, she added, if such regulation was to continue, then the Commonwealth government, WEA and the ACCC should take immediate steps to ensure that Melbourne Port Terminal, and any other grain elevator capacity established in Australia while the current regulation is in place, be subject to an access undertaking overseen by the ACCC comparable to those currently in place for GrainCorp, CBH and Viterra.

“If the regulation of access to port elevators is to continue, for the sake of certainty, transparency and fairness, all grain export infrastructure should be regulated in the same manner,” she said. “It seems anomalous to have some infrastructure regulated, and other infrastructure that does exactly the same thing, not regulated.”

CBH’s CEO, Dr. Andrew Crane, told World Grain he “strongly agrees” with the Commission’s findings that the transition to competition in bulk wheat exports had progressed smoothly, and he also supported the Commission’s assertion that “the benefits of accreditation will diminish quickly, leaving only costs that are ultimately borne by the grain grower.”

He added: “While CBH acknowledges and supports the Commission’s recommendation to abolish accreditation in September 2011, it is our view that the access test should be abolished at the completion of the current access undertaking arrangements in September 2011, saving significant costs that are ultimately borne by growers with questionable benefit.”

Rosemary Richards, executive officer of the Australian Grain Exporters Association (AGEA), which represents a broad umbrella of Australian grain export organizations, welcomed the report which she said would “move the industry further through its transition to a fully deregulated market.”

AGEA had expressed concern in its submissions to the Commission that the transition period, in regard to port access, needed to be sufficient in length and have appropriate measures in place to encourage the industry to move to a commercial framework and supply chains. Richards said she was pleased these concerns had been recognized by the Commission and that the “recommendations provide an appropriate time frame for this to occur.”

She added: “AGEA will work through the implications of the Commission’s report and continue to promote a framework that will ensure that there is fair access to port terminal services to enable Australian wheat to be shipped to customers around the globe.”

MOVING FORWARD
While the Commission’s findings are clear, what happens next is less so. As World Grain went to press, no one was entirely certain what action the minority Labor government would take now that the Commission’s report was in the public arena.

“It is up to the government if and when they firstly respond to the report, and then if and when they decide to change the legislation,” said one regulatory source.

A spokesman for GrainCorp said there was no constitutionally mandated timeframe for action. “It is even possible that the government simply accepts the report and nothing comes of it,” he said. “This happened to the three previous reports done by the Productivity Commission into wheat marketing, all of which were anti the single desk, none of which led to the end of the monopoly. “The Minister will make a formal response at some time. It is highly likely that the Minister will seek to sit down and consult with a number of players about ‘the next step.’” GrainCorp would like that next step to be the convening of a roundtable of accredited bulk wheat exporters to advise the government on implementation of the reforms proposed by the Commission. “The process of reform needs to continue if the Australian grains industry is to capture efficiencies and become more competitive,” said Watkins. “This (roundtable) process should report back to the Minister by the end of March 2011. GrainCorp believes this will be the most effective way of delivering a tangible outcome from the good work done by the Commission during this very thorough and insightful inquiry.”

Michael King, a freelance journalist and editor, has been writing about shipping, transport and commodities for more than a decade. Currently based in Indonesia, he can be reached at Michael@borderline.eu.com.
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