Privatising and compromising

24 Nov 2006

A botched privatisation created the conditions for the AWB scandal, argues Stephen Bartos in this edited extract from his new book, Against the Grain: The AWB Scandal and Why It Happened

THE seeds of the AWB affair lie in its privatisation in the late 1990s, when inadequate safeguards were built into the way the organisation exercises its export wheat monopoly. Australia’s history of agricultural marketing monopolies (and indeed monopolies elsewhere in the economy) provides experience from which one universal observation can be drawn: without independent supervision and tough regulation, every monopoly goes bad.

The AWB privatisation was not a privatisation of the sort we are familiar with in the recent history of Australian government privatisations - companies such as Qantas, the Commonwealth Bank, various airports, part of Telstra, and dozens of other bodies. It was not a sale aimed at raising funds for the government; rather, it represented a transfer of responsibility from the government to wheatgrowers. An extensive publicity campaign sought to convince wheatgrowers of the desirability of the transfer, but as far as can be gleaned from evidence on the public record there was no due diligence process of the sort conducted for the privatisation of other government business enterprises. It is difficult to see who outside the Australian Wheat Board would have conducted such a due diligence, given the disparate and diffuse nature of the community to which responsibility was being transferred. The prospectus was prepared by the Wheat Board itself, the leading proponent of privatisation. In the event, no skeletons were uncovered or revealed - an oversight that is now coming back to haunt both AWB shareholders and the government.

The reality was that the privatisation was a political exercise. It proceeded in stages, with government support for a new “grower corporate model” announced in April 1997, assets transferred to AWB and AWB (International) - subsidiaries of the government statutory authority - in June 1998, and privatisation through issuing of Class A and B shares in July 1999.

The Wheat Board supported a marketing campaign for privatisation, providing airfares, logistical support, travel allowances and accommodation to advocates to help sell the case. The board held meetings with wheatgrowers around Australia, at which Trevor Flugge, the organisation’s chair at the time, spoke as an indefatigable advocate of privatisation. The meetings were held in numerous wheatgrowing areas and were well supported by AWB operatives on the ground. Following these meetings, the government set up the “grower control” arrangements and granted the organisation a wheat export monopoly. These two elements had been the key selling points at the grower meetings, and this is what the new regulatory and governance arrangements for AWB delivered.

The “single desk” arrangement has been an article of faith among a majority of Australian wheatgrowers since the inter-war period of 1918-39. Although it still has majority support among wheatgrowers, it is probably not as favourably regarded among the minority of growers who produce the majority of the wheat - the big producers and farming corporations based in Western Australia rather than the traditional “family farmers.” Nor is it favoured by many of the specialised wheatgrowers who produce distinctive products for market niches. The votes in AWB elections, however, are dominated by a large number of smaller growers who fear the entry of more sophisticated marketers.

Monopoly status has inherent problems. Almost by definition, a monopoly misbehaves unless it has independent oversight and regulation. In the case of AWB, the supervisory body is the Wheat Export Authority, WEA. Although the chair of the five-member authority, Tim Besley, is a well-respected figure from banking and industry, the structure of the authority is dubious. Two of the remaining members are appointed by the minister on the nomination of the Grains Council of Australia. These must be a “resident of either New South Wales, Victoria, Queensland or Tasmania” (at the time of writing, Barbara Clark, a grains producer from northern New South Wales) and a “resident of either South Australia or Western Australia” (Leith Cooper, a grain and livestock producer from South Australia). Given that they represent the interests of the grain growing community and are themselves grain producers, these two appointees have an automatic clash of interest. Another member is a departmental nominee (coincidentally, from a farming background), who is answerable to the agriculture minister. The independent Review of the Corporate Governance of Statutory Authorities and Statutory Office Holders (the Uhrig review) forcefully highlighted the conflicts of interest inherent when departmental officers serve on boards. According to Uhrig’s report, “care should be exercised when appointing public servants to boards. In circumstances where a departmental staff member is appointed on the basis of representing the government’s interests or having a ‘quasi’ supervision approach, conflicts of interest may arise and poor governance is likely.”

The role of the departmental representative on the WEA has not been the subject of public debate during the Cole inquiry because it is outside the terms of reference. It is also off limits for questioning in Senate committee hearings (see next chapter). When the matter does come under scrutiny we can expect that Uhrig’s concern about conflicts of interest will be strongly reinforced. Through the WEA the government had an opportunity to scrutinise AWB and quiz it when irregularities came to light; because there was a government appointee on the WEA the government is implicated in the authority’s failure to do so. And the government-appointed board member ought to have been well aware of how limited the WEA’s capacity to exercise scrutiny was, given the shortcomings of its enabling legislation.

The last spot on the WEA, an independent member, was left vacant for many months by the minister but is now filled by a Western Australian agricultural consultant.

This is hardly a strong, independent regulator. Its structure gives it neither bite nor bark. Its legislation places severe restrictions on what the WEA can do to monitor AWB. As a result, Tim Besley has had a difficult time in Senate committee hearings, where he has admitted that when news of the kickbacks emerged, all the WEA could do was ask AWB if they were true:

“There were denials all over the place AWB (International) said they had not been engaged in kickbacks and there was no evidence on their register of agency payments. I think I said last time they have a corporate governance charter under which, if you want to make an agency payment, you have to get approval to do so and you have to report it, having made the agency payment. We looked at the register. They showed us that. They showed our person who went down there. There was no reference to agency payments for Iraq on it. They denied it. There was no reason for him not to conclude that they were telling the truth.”

In the face of some incredulity from the committee, Besley pointed out that the flaw was in the legislation under which the WEA operates - it has literally no choice but to accept the information provided by AWB, and has no independent investigatory powers.

The need for a tougher regulator was widely recognised well before the Cole inquiry. On the government side the critics include the wheatgrowing NSW senator, Bill Heffernan, and his SA Liberal colleague, Jeannie Ferris, who has described the WEA as “a toothless tiger because it had its own hands tied within months of the legislation going through.”

It does appear that the government at the time of privatisation did not understand that a private monopoly would behave differently from a public monopoly. Rather than a strong, sceptical and dispassionate regulator, a much more intimate, “clubby” arrangement was put in place.

The role given to the WEA by its legislation, the Wheat Marketing Act 1989, is much more about protecting the AWB monopoly than preventing abuse of that monopoly; in exercising its powers the authority is constrained not by any personal preference of its members but by the legislative mandate it was given by government. Under section 5 of the Act, the WEA exists in order to “control the export of wheat from Australia” and to “monitor nominated company B’s performance in relation to the export of wheat and examine and report on the benefits to growers that result from that performance.”

In practice, “nominated company B” means AWB (International), or AWB(I), and it is abundantly clear from the Act and from the government’s statements at the time that the company is in charge. The WEA has a limited range of functions. It must report to the minister and growers on AWB(I)’s “performance in relation to export of wheat for the year” (note again that the focus is on selling the annual wheat crop) and on “the benefits to growers that resulted from that performance.” It does have the power to request information from AWB - although, as indicated earlier, once it has been given that information it has no capacity to question further. But beyond these limited powers, the WEA has little influence on the operations of AWB(I). Indeed, it is constrained to enforce the wheat monopoly under instruction from AWB(I). Section 57 of the Act provides that “a person shall not export wheat unless the Authority has given its written consent,” but before it consents the WEA must consult with AWB. To date AWB(I) has chosen - no surprises here - to block export of bulk wheat by any of its potential competitors. (The sole exception came when a group of traders attempted to re-enter the Iraq market in 2006 after the Iraqi administration made it clear it would not deal with AWB.) Anyone who exports wheat without WEA consent faces a fine of $60,000 (individuals) or $300,000 (corporations) under section 57 of the Act.

It was revealed in August 2006 that AWB(I) had negotiated an agreement in 2004 with its parent company, AWB, to the effect that if the export monopoly is removed by government, AWB(I) will be paid “exit costs” that are, in Tim Besley’s words, “undefined, uncapped and potentially significant.” The practical effect of this agreement is that if the single desk arrangement is removed, AWB(I) will obtain a large payment derived from wheatgrowers’ remaining equity in AWB. This not only represents a bad deal for growers, it also puts pressure on the government not to make any changes to the single desk. This situation could only have come about because of the complex interknitting of the export monopoly and AWB businesses, which allows AWB to contract on behalf of its shareholders (mostly wheatgrowers) with the export monopoly holder.

Imagine if Australian telecommunications giant Telstra were to put a clause in telephone contracts that meant domestic customers would be forced to pay up to an additional $500 million - say, $100 each - if the government increased competition by separating Telstra’s copper line network from its other activities (as has been suggested by some commentators). Further imagine that Telstra was able to have this clause inserted into all customers’ contracts without them knowing and without any outside party scrutinising the deal. The public would be justifiably aghast. The government would be outraged that its policy options had been second-guessed. It is not an exact analogy - it is hard to imagine another corporate structure exactly like AWB’s - yet that is something like what the AWB-AWB(I) deal has achieved.

Against the Grain: The AWB Scandal and Why It Happened, by Stephen Bartos ($16.95), is published by UNSW Press in association with Australian Policy Online

Publication Details
Published year only: