(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.