The Cole inquiry into Australia's involvement in the UN's oil-for-food scandal will hand down its findings next month. The revelations that, among other things, the AWB paid $US220 million in kickbacks to Saddam Hussein, have been appalling.
Recent news reports suggest the final report will be highly critical of many facets of AWB's behaviour and performance. This is hardly surprising, for AWB's behaviour stems from, and is driven by, a culture that reflects its monopoly status. Monopoly always breeds arrogance and inappropriate behaviour. One way to fix this problem is for Canberra to remove the exclusive privilege of the single desk from the wheat board.
The arrogance and inappropriate behaviour at the AWB was evident well before it was accused of funneling millions of dollars in kickbacks to the former Iraqi tyrant. Think of AWB's selective duchessing of growers and other supporters. Or its sneering at those who had the temerity to question its actions or omnipotence. There are countless other examples.
These shortcomings can, and hopefully will, be lessened by changes in corporate governance, personnel and the like. But any improvements are likely to be temporary unless fundamental changes are made to the commercial environment within which the company operates. We only have to recall the saga of the Australian Wool Corp's mishandling of the reserve price scheme, or the $165 million losses incurred by the NSW Grains Board, despite its legislated monopoly position over canola and barley, to be reminded that the culture of monopoly is systemic and universal, not personnel-specific.
So it is vital for the federal Government to recognise that mere tinkering will not be sufficient to put an end to the behaviour that has been revealed at the Cole inquiry.
As the Government addresses the report, the objective should be to make changes that enhance growers' net returns. Manifestly, the single-desk arrangements do not. Indeed, it is one of the great hoaxes perpetrated on wheat growers that the single desk is able to extract a significant market premium.
Australia does enjoy premium wheat prices, but these have almost everything to do with intrinsic quality attributes of our wheat and/ or with geography in terms of freight rate advantages, not the single desk per se. In fact, recent marketing visits by Graincorp representatives to wheat purchasers overseas (especially in Asia) have confirmed that they are reluctant to put all their eggs in one basket, so to speak.
Diversifying their supplier base, by definition, means purchasing wheat from another country when Australia operates a single desk. Australia unnecessarily loses market share as a result.
At the same time, the cost padding and cost shifting that is involved with existing single-desk arrangements is both clear and significant, albeit not appreciated by many wheat producers, because AWB has never been transparent.
Many studies have documented these costs. The net costs are estimated (conservatively, in my view) at between $6 and $11 a tonne in an average year, or $78 million to $143 million in total: a transfer from Australian wheat producers to AWB shareholders.
A particularly egregious example is the way that AWB Ltd books ship chartering profits to itself (hence shareholders), when they should flow through to producers via AWB International. Demurrage costs (net of dispatch surpluses), by contrast, are a charge on the national pool. This practice is outrageous and utterly indefensible. This year, because of the drought, the per-tonne impact of the $65 million national pool management fee -- a fee structure negotiated between AWB Ltd and AWB International (although the people involved were the same) -- will be horrendous, to the point where many producers with wheat to sell will be reluctant to deliver to the national pool. Potentially, on a two million tonne national pool, the management fee may come to $25-$30 a tonne.
No wonder the conventional wisdom among wheat producers across the country is changing rapidly. The single-desk structure and its management by AWB have been highly deleterious to wheat producers' economic returns.
Meanwhile, as testimony to the Cole inquiry has demonstrated, the effectiveness of the supervisory body, the Wheat Export Authority, has been lamentable.
Wheat producers facing increasingly competitive world markets, an exchange-rate squeeze resulting from Australia's mineral and resources exports success, not to mention the vagaries of Australia's climate, cannot afford to be captive to a high-cost monopoly marketing organisation whose principal obligations are owed to its shareholders, not wheat producers. If wheat producers enterprises are to remain viable, they must have the choice to shop around for marketing options and operators who will offer them the best net returns, as is taken for granted in every other part of the economy. While these separate organisations are also seeking to maximise their profits, they have to compete to attract wheat producers' business and so have to offer the best net prices (gross prices at the lowest cost), which is not the way a monopolistic AWB operates.
So how should Canberra respond to the Cole inquiry? A good start would be to remove the exclusive privilege of the single desk (its effective veto over bulk exports) from AWB, starting with the 2007 harvest at the latest. Other recommendations: transfer the management of a contestable single desk to a genuinely independent and effective WEA; allow other marketers to enter the export market (perhaps on a graduated basis); and encourage the establishment of a standards-setting and quality assurance agency that will certify the premium standards that Australia's wheat producers rightly expect.
In short, competition will herald an end to bad cultural practices at AWB and lead to higher returns for grain growers.
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