A disaster waiting to happen – the AWB

We think it’s the best system in the world quite frankly

(Then) AWB CEO Andrew Lindberg in 2001 on the set up the AWB had as a private company with a government endorsed monopoly.

A column on the AWB was inevitable n’est pas?

As I worked on this column it occured to me that at the very time that the Federal Government were opposing extensions to native title because of the uncertainty it would create, they were perpetrating an arrangement with the AWB which is now being exposed as subject to the same kinds of criticism.

I suggest that the control the Government gave growers through Class A shares in the AWB is akin to ‘native title’ in its governance while it was owned by Class B shareholders. An exquisitely confused and compromised situation.

A special thanks to Alistair Watson who helped me nail down some of the detail about the AWB.

By the way, today I was rung by a jouno in Honkers from the Wall St journal who commented that this was the biggest scandal of its kind EVER. The journo was amazed that it wasn’t being taken more seriously in Oz – but I digress.

The Australian Wheat Board: Welcome to my schemozzle.

Imagine you owned a local bread shop, all locals had to buy bread from you and anyone making bread had to sell to you. You’d be on a pretty good wicket don’t you think?

That’s roughly the wicket that the Australian Wheat Board was on until 1989. And though that’s changed now, the AWB is still the dominant bulk handler of Australian wheat both here and overseas.

But it’s all been coming horribly unstuck.

You see the AWB has a culture problem. Deep in the mire of the oil-for-food/ wheat-to-Iraq/cash-for-Saddam scandal the (very part-time) AWB board members were, until just last week, hoping to increase their remuneration by one third to $120,000 each. The reason? They had to ensure the AWB’s internal control and reporting procedures were “adequate, effective and ethical”. Hmmm.

You’d think our premier wheat marketers would have better things on their mind than yet more pay rises, like helping Australia’s wheat growers.

Once upon a time they actually did. Statutory marketing monopolies like the AWB grew out of voluntary growers’ cooperatives in the mid twentieth century. The cooperatives met legitimate grower needs for better grain handling and pooling of price risks.

They also helped growers collude to increase prices. Once governments made them statutory monopolies, they lost much of their enthusiasm for productivity.

If you can stop competitors, why not take it easy?

Without competition with the AWB, growers couldn’t ‘benchmark’ the AWB’s performance to judge whether it was doing them more good (with monopoly pricing) than it was doing them harm (by being inefficient). Anyway, if you could keep most of the growers happy, why worry about the more demanding ones?

The monopolies turned increasingly to the internal politics of divvying up the spoils of monopoly.

This cosy arrangement took a big hit in 1989, when reformers stripped the AWB of its domestic market monopoly.

Its export market monopoly remains intact. But, with the possible exception of a few markets for which specific arrangements could be made, it has no monopoly power, because our wheat exports are up to their eyes in competition. Our biggest competitors are heavily subsidised. And Australia exports just a sixth of all wheat traded and three per cent of world production.

Almost all the benefits the AWB claims to deliver could be better delivered by competition. Economies of scale clearly exist for instance in grain handling. But the most efficient can win the business by competing as indeed the AWB has done since it lost its domestic monopoly using its vast infrastructure to dominate domestic bulk wheat handling.

And although we obtain price premiums on export markets, (even when we’re not bribing homicidal dictators) that’s mostly because our product is superior. So competitive exporters could capture those price premiums.

Indeed, as the Productivity Commission argued in 2000, the AWB’s export monopoly pooling arrangements actually penalise higher-value products and discourage the natural growth of direct and innovative relationships all along the production chain from growers to consumers.

In 1999 we privatised the AWB. We could have allowed the growers awarded the ownership to trade it freely. But that would have broken the control growers had over the AWB and so ultimately undermined political support for the AWB’s special position.

So the Government improvised like Dr Frankenstein in his lab.

Class A shares in the AWB were issued to wheat growers independently of how much wheat they delivered. Class A shareholders appoint most of the AWB’s directors.

You could think of Class A shares as growers’ ‘native title’ in AWB’s governance. Like aboriginal native title in land, Class A shares can’t be traded. And, not earning dividends, they have negligible commercial value. Meanwhile the financial equity is held and traded on the stock-exchange by owners of Class B shares.

Got that? Class B shareholders own the AWB, and Class A shareholders control it!

The resulting AWB is a sprawling conglomerate with billions of dollars invested in businesses that run rural finance, cattle and sheep trading, fertiliser distribution, port services and companies in China, Japan and Egypt.

While the AWB thinks its export monopoly is a great thing (who wouldn’t in their position?), the Productivity Commission argues that it’s unlikely to benefit Australia or even wheat producers themselves.

Big export growers in Western Australia and, representing them, Wilson Tuckey agree with the Commission. WA firm Cooperative Bulk Handling has close relationships with Asian flourmills and bettered the AWB’s offer to local growers to buy and export their grain. They report filling their 100,000 ton tender within nine hours. But the AWB vetoed the export deal.

I think of the board members’ vetoing this deal while they were arranging their next raise and wonder whose side they’re on.

Meanwhile Sandy Easterbrook, Chief Executive of Corporate Governance International, described the corporate governance of AWB as a “disaster waiting to happen”.

Well, it’s not waiting any more.

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Yobbo
Yobbo
15 years ago

The stupidest thing is that Western Australian wheat growers (my parents included) still think Wilson Tuckey is doing the wrong thing, even though breaking up the AWB monopoly would benefit WA wheat growers most of all.

Farmers are stuck firmly in the “better the devil you know” mindset about this.

Evil Pundit
15 years ago

I was rung by a jouno in Honkers from the Wall St journal who commented that this was the biggest scandal of its kind EVER.

Obviously this journo is not very well informed (sadly, a typical state for journos).

The AWB scandal is just one tiny part of the UN oil-for-food scandal, which is orders of magnitude greater, and is in fact the biggest scandal of its kind EVER.

Steve Edney
Steve Edney
15 years ago

Yes EP, but AWB was the biggest briber of this scandal.
$300 mil out of an estimated $1.8 billion. ie. 1/6 of the total amount. Pretty big chunk considering there was 2000 companies involved all up.

Steve Edney
Steve Edney
15 years ago

Actually that’s $300 million AUD, and $1.8 Billion USD, so its more like 1/8th. However the point still stands that AWB was the largest contributor to the scandal.

derrida derider
derrida derider
15 years ago

I used to believe that people were pretty good judges of their own financial interests, but I’m less sure these days. No one can tell me that the bulk of farmers, in particular, aren’t simply ignorant.

They voted for Black Jack McEwen’s tariff policies, and I’ll wager most of them still back a Hansonite view of industry policy. Whatever the pros and cons of such a policy for Australia as a whole, who the hell do they think would pay for the tariffs?

Yobbo
Yobbo
15 years ago

“I used to believe that people were pretty good judges of their own financial interests, but I’m less sure these days. No one can tell me that the bulk of farmers, in particular, aren’t simply ignorant.”

Well, no. For the bulk of farmers, that is the ones in the eastern states, the AWB monopoly is great for them because it allows them to sell their lower-quality produce at the same price as the higher-quality stuff produced in WA. It’s a disaster for WA wheat farmers though.

But what’s new. The rest of Australia has always been a net drain on WA. We’d be much better off without them.

Homer Paxton
Homer Paxton
15 years ago

Gus Hooke was one of my lecturers at Macquarie University.

I can just imagine him saying all that.

derrida derider
derrida derider
15 years ago

Gus Hooke was one of my lecturers in the early 80s. I dunno what he was like as an economist (I was a lowly undergraduate), but he was a bloody good lecturer.

On the car export subsidies, though, surely they’re vulnerable to exactly the same critique as import taxes – they’ll “lift the exchange rate and prompt trade retaliation”. Not to mention indirectly forcing farmers to buy overpriced rubbish for the cars on which they depend.

Homer Paxton
Homer Paxton
15 years ago

DD, you must have been at Macquarie at the same time as I!

gus was part of a large family from the Central West of NSW.

I think Mitch is his bro

Evil Pundit
15 years ago

Do you have a reference link for those figures, Steve? I was under the impression that the UN corruption figures were more in the $20-billion range.

Even if your numbers are correct, the AWB scandal is still only a fraction of the UN scandal, so the latter retains its position as “the biggest scandal of its kind EVER”, and the Honkers journo remains a typically ignorant member of that species.

Steve Edney
Steve Edney
15 years ago

EP,

The total oil for food program was about $64 Billion. The bribes all up totalled $1.8Billion. This is the figure from the Volcker report. There was about another $11 billion in oil smuggling also in breach of sanctions but this had nothing to oil for food.

The $20 Billion is the UN senate estimate of everything including the oil smuggling. (they put oil for food bribes at $4 billion).

Have a look atthe info here and around this website
“The IIC found that Saddam Hussein’s regime derived far more revenues from smuggling oil outside the OFFP than from its demands for surcharges and kickbacks from companies that contracted within the Program. The value of oil smuggled outside of the OFFP is estimated to be $10.99 billion, as opposed to an estimated $1.8 billion of revenues that came from Hussein’s specific manipulation of the OFFP”

Geoff Honnor
Geoff Honnor
15 years ago

Nicholas, EP’s assessment of journo’s is certainly a forthright one but given that polls invariably rank journos with used car salespersons and pollies in the least respected calling stakes, it’s scarcely the stuff of outraged horror.

And what is he supposed to make of a comment like, “By the way, today I was rung by a jouno in Honkers from the Wall St journal who commented that this was the biggest scandal of its kind EVER,” other than the journo who phoned you thought it was the biggest scandal of its kind, ever?

Is EP supposed to to discern some hidden nuance? Detect some backstory subtaxt bertween you and the journo before he ventures an opinion?

I too doubt very much that your journo is right with his assessment and pretty clearly, if you didn’t want it to be critiqued you shouldn’t have posted it.

Stephen Bounds
15 years ago

Nicholas,

I’d take Geoff’s comments a step further: Could you explain what you think the journo meant when he said “the biggest scandal of its kind EVER”?

After all, we can’t evaluate whether Evil Pundit’s comment is fair or just jumping to conclusions without some further information from you.

Evil Pundit
15 years ago

I say “typically ignorant”, because in my experience, maistream generalist journos usually are ignorant.

They place excessive reliance on trusted sources and usually don’t bother doing serious background research on the topics on which they report. Many of them don’t even bother to do trivial things such as typing the names of the people they interview into Google and seeing what comes up. I’ve seen many stories which consist of no more than retyped press releases (and some of those press releases were written by me).

The standards of mainstream journalism are, frankly, awful. So when I see a journo quoted as saying that something is “the biggest scandal of its kind EVER”, when I know for a fact that it’s only a small part of a much greater scandal, I don’t treat it with any more respect than it deserves.

I suppose that if you define “of its kind” as “relating to the Australian Wheat Board’s dealings with Iraq”, you could argue that it was correct. But, as Geoff points out, there are good reasons why the public ranks journos right up there with used car salesmen in the trustworthiness stakes.

Ken Parish
Admin
Ken Parish(@ken-parish)
15 years ago

EP’s epithet, perhaps unconsciously, exposes the conundrum in this whole AWB saga. Moreover, I suspect that EP’s reaction is rather closer to that of the average Australian voter than Nicholas’s (or mine, for that matter). Is it a big deal that a company greases palms in an Arab country where notoriously that’s the only way you can do business at all? A lot of people seem to agree with Bill Heffernan and Barnaby Joyce that the answer is no. What does make the AWB situation a big deal, however, (apart from the sheer size of the bribes themselves) is that: (a) it was a quasi-official government representative trading body; and (b) the government it quasi-represented was foreseeably (at least from late 2001) likely to be going to war against the bribe recipient in the near future, with the result that the bribes would be coming back at Australian soldiers in the form of exploding ordnance.

This is where Nicholas’s post gets to the heart of the conundrum. Why have a monopoly international wheat trader anyway? Is there any net advantage? I had reached the same conclusion as Nicholas on that, and was even musing about writing a post to that effect, although it wouldn’t have been anywhere near as elegant or economically literate as his column. If AWB was merely a private company without a government-conferred monopoly, this wouldn’t be a massive political scandal at all. It would still be a scandal of sorts, however, because it would evidence the fact that Australian governments are no more diligent than any other governments in ensuring that their citizens observe UN economic sanctions. However, as with the payment of bribes in countries where that’s the only way you can do business at all, the appropriate response is a resigned yawn. It would be nice if everyone put international morality ahead of short-term self-interest but in the real world it’s never going to happen, which is why economic sanctions have generally been a fairly ineffective weapon in international relations.

Gummo Trotsky
15 years ago

One small technical question – doesn’t that export monopoly also confer an effective monopsony (sole buyer in a market) on the AWB? Don’t see that as being in grower’s interests.

Yobbo
Yobbo
15 years ago

“Why have a monopoly international wheat trader anyway? Is there any net advantage?”

It would be an advantage if our production was high enough to act as a serious monopoly seller on the world market. If this was ever true, it certainly isn’t now. The AWB’s only function now is to reduce price risk and variance.

At least the *idea* behind the *export monopoly* makes sense: To advantage Australians at the expense of the rest of the world. However, there is absolutely no justification for the existence of the old domestic monopoly board, or the current monopoly single desk domestic agencies like the Potato Board and Egg/Dairy marketing boards in WA and elsewhere.

The main effect of the sellers monopoly is to disadvantage consumers in favour of producers. This kind of makes sense in a twisted nationalistic fashion if the producers are Australians and the consumers are not. It makes no sense at all when the consumers are also Australians (as is the case with the potato board).

Geoff Honnor
Geoff Honnor
15 years ago

“Is it a big deal that a company greases palms in an Arab country where notoriously that’s the only way you can do business at all?”

Add virtually all of Africa, much of East and South Asia, parts of Latin America and quite a few of the emergent, post-Soviet republics in eastern Europe and central Asia. The big news with the Iraqi Oil for Foor scandal was not that bribery was going on, per se, but that it was being conducted under the auspices of the UN, thus adding to the impression of an organisation so compromised by morally dubious practice that it’s difficult to see how it can be reformed without root and branch restructure. That Kofi Annan continues to preside as Secretary-General is eloquent testimony to the UN’s inability to confront and deal with it’s own demons.

The AWB has clearly adopted a “whatever it takes” approach in an over-heated competitive environment where I doubt that any players – including the US and Canadian whistleblowers – can legitimately claim the moral high ground. I’m sure that Cole will reveal AWB to be everything we perceive them to be but
the commentariat isn’t really interested in AWB itself.

There’s a bigger canvas here than the one on which the Australian media and opposition have focussed.
The decision to concentrate all energies on the singular pursuit of the government, in the hope of proving their direct authorising and sponsoring linkage into the scandal, looks shallow, politically expedient and business as usual. Worse, having failed to produce the requisite photos of Howard in bed with a container load of wheat, Saddam Hussein and 300 million in Treasury drafts, a la Trevor Pflugge, Rudd and Beazley are reduced to claiming the government was “negligent.” So what? Oppositions claim that governments are negligent every day. That’s what oppositions do and the hysterical insistence that Downer and Vaile were as good as mailing cheques off to the next-of-kin of self-detonating Palestinians just sounded desperate.

I suspect that most voters, flicking over briefly from the sports pages, would conclude that the opposition couldn’t give a big rat’s bum about the bigger questions at issue here. It’s about short-term political oneupmanship and it’s the droning backgound noise of our political discourse. People reflexively switch off. The smoking gun may yet emerge but I’m willing to bet that a wide-ranging investigation into the offshore commercial dealings and cultural practices of Australian companies will not.

Evil Pundit
15 years ago

There’s a certain amount of “boy who cried wolf” effect happening here, too.

The Howard haters and left-wing media have been howling so long and loudly over non-issues and portraying them as government scandals that even if there was a real scandal, the public would just dismiss it as more of the same.

derrida derider
derrida derider
15 years ago

OT, but surely the net benefit of the car export-subsidy scheme depends on what we think the counterfactual is. I can see how it’s allocatively more efficient than import barriers alone, and no more (or less) inclined to raise the exchange rate or prompt trade retaliation (on which latter grounds, of course, it got into trouble after the GATT noticed it).

But surely that misses the point Gus Hooke was making. It’s more harmful on all these grounds than having no quotas or subsidies at all. And it’s the cost/benefit calculus of assistance compared to no assistance that we’re talking about.

Mind you, I’ll happily concede that the policy was about the best politically feasible one at the time – but “best politically feasible” is not the same as “economically good”.

trackback

[…] A good piece by economist Nicholas Gruen at Club Troppo. It includes the following statement (which I am somewhat sceptical about, but is worth noting none the less): today I was rung by a jouno in Honkers from the Wall St journal who commented that this was the biggest scandal of its kind EVER. The journo was amazed that it wasn’t being taken more seriously in Oz […]

Andrew Bartlett
15 years ago

EP

By far the loudest media “howler” on the AWB scandal is The Australian – hardly ‘left wing media’ by anyone’s definition.

It does seem a bit out of character for them – someone suggested Rupert might be more interested in sucking up to the US at the moment, but that would surprise me.

Geoff Honnor
Geoff Honnor
15 years ago

“It does seem a bit out of character for them -”

Not at all. The Oz ran hard on children overboard, the Republic, Tampa, Rau and Alvarez. And call me naive, but does Rupert really call through on a daily basis to pass on the leader content?

Marilyn
Marilyn
15 years ago

Actually it is the biggest scandal of it ‘s kind because it is the only one of it’s kind, something people are forgetting.

When the program was set up it was already an obscenity making starving people pay for their own humanitarian aid. The people caught in the tsunami didn’t have to pay for their aid cash, the people of Afghanistan, Sudan, East Timor and other countries don’t have to use their own resources so that an outside body and other governments can give them permission to starve or eat – at the rate of $180 per year.

It’s like the world was running a Stalin type regime against innocent people because they didn’t like the Stalin type leader. We ill never know how many people in Iraq starved to death – but try in your imaginations to think how far $100 million per year would have gone towards feeding Iraqi kids.

Don’t forget they were not allowed to even accept donations of medicine with donors being fined or even sent to jail.
Never in the world has anything so grotesque and immoral been done to an entire population of people for no gain at all.

Then throw in the AWB – carpet baggers being paid upwards of $1 million a year in Lindberg’s case to steal from people existing on $180 per year. It’s interesting that Downer is still saying he didn’t know anything at all when even Lindberg wrote to him in June 2004 and told him explicitly that they were being accused of a complicit relationship with Saddam.

The letters are exhibits 83-87 on the exhibits page of the Oil for Food inquiry site and read like a bunch of boys got themselves into a sort of mad Secret 7 or B grade James Bond film and thoroughly enjoyed it.

Look at the nitwits today taking armed police and guards into a board meeting then ducking out the back like the criminal thugs they are.

Tonight I listened while an Iraqi doctor described to me the horror of the sanctions and oil for food program – he told me of the children he was forced to watch starve to death. He was sobbing like a baby.

Robert
Robert
15 years ago

The Australian can howl all it likes on this, because the chances are there’s nothing substantial to stick politically.

Vaile might have trouble but his problems are seen in the wider context of the Nationals Liberals unsettling. Clearly the advice is to hold out and Howard will back him.

At the end of the day, voters will know it’s a scandal but their hearts will be with the farmers. After the drought, and with farmers hurting more and more as this issue unfolds, there’s plenty of electoral room for Howard to invoke the farmers’ best interest play. Watch Howard start hurting for the farmers, pained face, and do it brilliantly while he is culpable not only for the scandal, but the damage to farmers from the inquiry as well. It’s a media walk he’s well used to.

And it’s not as though voters are immune from expecting kickbacks were the norm for dealing with that regime. Again, the ‘farmers’ best interests’ come into play.

Howard has built a public reputation of pragmatism, agree with it or not. The pragmatism of this issue lays in what is a fair bet of voter immunity from a proper expectation of dealing with Saddam’s regime, regardless of the fact or act of that dealing, and we want our farmers to get a break. It’s a money based mindset out there in voter land, and that make-money pragmatic need aligns nicely for Howard, once he pains it for the farmers.

And why is Howard so keen to await the results of the inquiry?

Hopefully more truth will become evident, but as it stands at the moment, and with the wheat farmers hurting more by the day, there’s a fair bit of teflon around for those doing denial.

The next election is too far out, and too many issues yet to arrive, for Howard to do anything but hold out on this one – because the only thing that will stick through until then is a political scalp: a big call in this day and age. Maybe with undeniable evidence, and with the farmers adding a screaming voice on account of it, something will give. That happening is more of a long shot than is the political damage as it now stands.

But, gee, there’s a real sense of the pressure cooker about some of our institutions now, and somewhere it might pop with the sound of a blowing whistle.

Homer Paxton
Homer Paxton
15 years ago

this case was always about incompetence.

There are now plenty of examples, as there were in 1993-6, that this Government has now reached the time where they need to be chucked out because of their incompetence.

This always just increases until the brilliant politicians don’t notice until they are kicked out.

I remember ‘brilliant ALP strategists’ telling me the punters didn’t care about Hindmarsh Island.
I suspect this will be similar. Nothing too much alone but becoming too much over time for most people to stomach.

Like Keating after 93 Howard after 04 thinks he is untouchable.

Robert
Robert
15 years ago

Too much of one thing or another, Homer, has come and gone in the last ten years. Each would have been enough to oust a previous government. Through Howard capitalising on the changing of the times, him changing them, and lack of a saleable alternative, he remains.

As time goes on, not only is he more vulnerable to what you say, but he too is more removed from voter concern, through all those changes. Which one will out?

We could hope there’d be a return to some sense of ministerial responsibility, and what you say prevails.

But look what’s in store. With Beazley there, it could be said the electorate is fairly connected in sentiment to Labor failure, which is a shame as far as alternatives are valuable, as Beazley once had access to voter heart. It’s too much to overcome his own baggage let alone eject the incumbent. Labor will need to change before the government changes. Go Julia.

Will IR bite in the meantime? We’ll see the damage of it often enough, but will there be enough of it where it counts?

And let’s see what Howard is cooking locally, in terms of racial tension. Many of us thought Australia could take no more division, no more low blows of opportunism, should we once again say those depths have been done?

A renewed terrorism threat, especially internally, and it’s a big ask to put Labor in as they now are.

Global environmental issues (reason enough to banish the incumbents and have them redesign their constitution from the ground up, and no philosophical joy from ALP either) have only just touched the outer minds of the electorate, no real movement there.

As you say, there is plenty unstomachable about. Debt alone might do it.

But none of it will change without a saleable alternative. Change the alternative, and a swathe of changes could be unleashed, slamming those untouchables severely.

Back on track, should we expect AWB to cop the blame, their heads roll, to find a lushy little post elsewhere? And so it goes…

Evil Pundit
15 years ago

Andrew, the fact that it’s the Australian doing the howling in this instance is irrelevant to the substance of my argument.

After ten years of anti-Howard howling by the media, opposition and commentariat, the public has become deaf to that note.

Kim
Kim
15 years ago

So how does that tally with Howard and the Coalition dropping in the polls as the AWB scandal came to prominence, EP?

MickM
MickM
15 years ago

I guess the AWB scandal is the kind of values we Australians have to live up to, or is it the migrants that have to live up to these values.

Angharad
Angharad
15 years ago

Nicholas

The model of A and B shares isn’t as uncommon as we might think. I know of at least 2 State government set-ups that have done exactly that. The “ownership” shares in these cases are held by the government to protect a capital investment but in neither of the cases did the State government (Qld and NSW) actually want to operate the business. They made sure their class of share gave them a nominated seat on the board and some veto powers but have largely been silent partners as far as I can tell. Both were property related but neither are listed companies so I guess that’s a difference.

Evil Pundit
15 years ago

It probably means as much as Howard dropping in the polls when Latham became leader of the Labor Party, Kim.

trackback

[…] described the corporate governance of A.W.B. as a “disaster waiting to happen.” (N. Gruen, ‘A disaster waiting to happen – the AWB, clubtroppo.com.au, 22 February […]