SENATE - aph.gov.au · At this stage I declare an interest in this particular issue because I am a grain grower from the south coast of Western Australia, operating through my family

COMMONWEALTH OF AUSTRALIA

PARLIAMENTARY DEBATES

SENATE

Official Committee HansardRURAL AND REGIONAL AFFAIRS AND

TRANSPORT LEGISLATION COMMITTEE

Reference: Wheat Marketing Amendment Bill 1997

FRIDAY, 26 SEPTEMBER 1997

BY AUTHORITY OF THE SENATECANBERRA 1997

Friday, 26 September 1997 SENATE—Legislation RRA&T 145

SENATE

Friday, 26 September 1997

RURAL AND REGIONAL AFFAIRS AND TRANSPORT LEGISLATIONCOMMITTEE

Portfolios: Primary Industries and Energy; Transport and Regional Development

Members: Senator Crane(Chair), Senators Calvert, Forshaw, McGauran, O’Brien andWoodley

Senators in attendance:Senators Abetz, Boswell, Brown, Brownhill, Chapman, Bob Collins,Colston, Conroy, Cook, Eggleston, Ferris, Gibbs, Harradine, Lundy, Ian Macdonald, SandyMacdonald, Mackay, Margetts, Murphy, Murray, Neal, O’Brien, Schacht, Sherry, Tierney andWest

The committee met at 9.01 a.m.Matter referred by the Senate:Wheat Marketing Amendment Bill 1997CHAIR —I declare open the hearing into the Wheat Marketing Amendment Bill 1997. On

28 August 1997 the Senate referred the Wheat Marketing Amendment Bill 1997 to the SenateRural and Regional Affairs and Transport Legislation Committee for consideration and reportby 2 October 1997. The bill was referred to the committee for examination of its provisionsrelating to the implementation of the first phase of restructuring of the Australian Wheat Boardfrom a statutory marketing authority to a grower owned corporation from July 1999.

Following its referral to the committee, advertisements calling for submissions to the inquirywere placed in the rural press in each state. In addition to this advertising, a large number ofletter were written to potentially interested individuals, companies and groups, drawing theirattention to the existence of the inquiry. The committee secretary had also prepared aninformation kit on the bill, of which a number have been distributed to interested persons andbodies. Ten submissions to the inquiry were received by the committee. Today the committeeis holding a second hearing, which it will use to gain a more detailed knowledge of theprovisions of the bill and its potential impact on those who will be affected by it. Today wewill hold discussions with representatives of the New South Wales Farmers Association, theAustralian Grains Industry Taskforce, the Grains Council of Australia, the Australian WheatBoard, Mr John Begg and officers from the Commonwealth Department of Primary Industriesand Energy.

It should be noted that the committee has authorised the recording, broadcasting andrebroadcasting of these proceedings in accordance with the rules contained in the order of theSenate of 23 August 1990, concerning the broadcasting of committee proceedings. Before wecommence taking evidence, let me place on record that all witnesses are protected byparliamentary privilege with respect to submissions made to the committee and evidence givenbefore it. Parliamentary privilege means special rights and immunities attached to parliamentor its members and others necessary for the discharge of the functions of the parliamentwithout obstruction and without fear of prosecution. Any act by any person which operates

RURAL AND REGIONAL AFFAIRS AND TRANSPORT

RRA&T 146 SENATE—Legislation Friday, 26 September 1997

to the disadvantage of a witness on account of evidence given by him or her before the Senateor any committee of the Senate is treated as a breach of privilege.

In terms of matters where we might go in camera—it is only what I call a 99.9 per centcommittee matter—if the committee believes it is in the national interest to make thatsubmission public, they may do so or, if any individual or group of individuals putting in aminority report chooses to use it in their submission, they may also do so.

At this stage I declare an interest in this particular issue because I am a grain grower fromthe south coast of Western Australia, operating through my family partnership of A.W.J.R.& P.A. Crane. Obviously I have an interest in the outcome of this and also an interest in WIF.MARTIN, Mr William Xavier, Chairman, Grains Committee, NSW Farmers’ Association,1 Bligh Street, Sydney, New South Wales 2000DALTON, Mr Glenn John Dudley, Director, Grains, NSW Farmers’ Association, 1 BlighStreet, Sydney, New South Wales 2000

CHAIR —Our first witnesses today are representatives of the New South Wales FarmersAssociation. The committee has received a submission from you on the issues before it. Doyou have any objection to its publication?

Mr Martin —No, we do not.CHAIR —There being no objection, the submission is published. We have 45 minutes

allotted to this first group of witnesses. We have a tight day, so we are going to have to runto schedule. We usually like witnesses to leave a little bit more than half their time forquestions. We also prefer you to stick reasonably close to the reference but, if you use yourtime differently, it just means that you are not dealing with the reference. That is yourjudgment.

In the case of the evidence we took in Western Australia, it covered the full spectrum ofthe whole arrangements for phase 1 and what will be phase 2, which is coming in nextMarch—and I think it is probably necessary to do that. That gives you an outline of wherewe are at and a rough outline of the rules in which we operate. I now invite you to make anopening statement.

Mr Martin —Thank you for the invitation to appear before the committee. I am Chairmanof the Grains Committee of the New South Wales Farmers Association. I am a fifth generationfamily farmer in this nation, and our core business is in the production of grain and cottonand, certainly, WIF equity is something I have an interest in too. My colleague Mr GlennDalton is the Grains Executive Officer of the New South Wales Farmers Association. We arehere representing the interests of our 15,000 members—and increasing. I do not think we areup to 16,000 yet, but we certainly have a large membership of agricultural producers,specifically wheat producers, in this nation.

New South Wales represents more than a third of the smaller wheat growers—that is, from100 to 1,000 tonnes—and, on ABARE data, we are the only state in this nation that has astatistically significant number of growers exceeding 7,000 tonnes. We represent by far themajority of small producers, right through. Admittedly, we do not have the bulge that one otherstate has at one particular point, but we have got the major range of not only the small at thebottom but also the large at the top.

The other major dynamic in New South Wales is that we are the only state, as we understandit, that grows all the leviable grains in this nation and, as such, wheat is the major benchmarkland use for commodity producers in the state—wheat being the only major commodity that



our producers have a real marketing system for. When I say that, I mean that the other majorcommodities, being wool and meat, have never had, in our view, a real marketing system.Having an effective marketing system has been of great benefit to the wheat industry and hasin no small part added to its success over the decades.

Policy development of New South Wales farmers has been ongoing for decades and hascertainly been refined annually by our annual conference, and we have considered for sometime our position as this change was flagged to us. Certainly, the grower intent for change wasnot there. It is a government intent on change, and it has been driven for at least a decade now.The majority of our members have a strong view that what has been successful for nearly 60years should mainly be left alone.

Senator WOODLEY—So it is not pro?Mr Martin —They are very happy with the system as it has operated. It has been successful

and it has brought prosperity. From time to time, profitability may have been affected byoutside factors, but that is reflected in our policy and in the support for the single desk andthe marketing arrangements, that I mentioned before, which have gone on for decades.

At the moment our members are most concerned with—and, certainly, we have been directedto pursue with vigour—a grower marketing structure, and I must separate that in intent fromthe idea of a middleman. Growers have a fear that what we are building is just anothermiddleman, and what they really want is a grower marketer. That is what we have had, andthey have instructed us to pursue that.

At times there has been a view that the processes dealt with the interests of New SouthWales farmers in a rather capricious or whimsical manner. In other words, the headlong rushto accommodate the interests of other parties has largely ignored what we see as the coreinterest, that is, the wheat growers. We have a strong view that in this process we are at riskof losing the distinction between a grower marketer and the legislated power. There seemsto have been an ongoing problem—perhaps understandably, given that in the past it was astatutory authority that conducted that marketing activity—with the distinction between whatwe are ideally developing as a corporatised grower marketer and that statutory power.

We are also concerned that to the degree we lose the distinction of that company from anyother company—in other words, the degree to which that marketer looks like any othermarketer—it is very unlikely that it will do what our objectives expect it to do. Over the lastmonths and years of this process there has been an ongoing comparison with companies suchas BHP, although that has dropped off a little lately. People have a strong view that they arebuilding some major corporate identity when really we see that as anathema to a strong growermarketer.

We believe that, in developing a corporate structure with share holdings, one of ourobjectives—that is, grower control—is greatly threatened. In the past we have had, we believe,grower control via the legislation and the political system. What we are moving towards indeveloping this grower market is a system of control via shareholding, and we believe thatthere is a great threat to grower control embodied in the proposal to develop this corporatestructure.

We have retained Minter Ellison to advise us on this matter. Their advice to us in relationto this matter was in accord with the classic study,The modern corporation and privateproperty, which was published in New York in 1939:. . . shareholdings in many large companies are so widely dispersed that no shareholder or group ofshareholders has any real control over the management and the board.Berle andMeansconcluded that



in these cases, control of the company lies with the directors. Their control is enhanced by their abilityto control the processes of shareholders’ meetings, relying on the apathy of shareholders—

being a widely dispersed group—and a system of proxy voting which tends to benefit them. Consequently, there is a separation ofownership from control of the company, whichBerleandMeansdescribed as a ‘new .. absolutism’ . . .

We have seen many examples of that since 1939. We have a classic example here in that weare likely to have between 40,000 and 50,000 shareholders. The exact number is a bit up inthe air, but they would be a disaggregated shareholding. So an extraordinary difficulty ariseswhich the process thus far has failed to address, we believe. It is at risk of not achieving thegrower control that we expect from our grower marketer. We do not believe that theshareholders are going to have the control we expect.

The other thing I should mention at this point is that courts are beginning to recognise—asI am sure that you are all aware—that the concept of effective control can reside with less than50 per cent shareholdings. Certainly the concept of the ability of the equity shareholders inthe proposed structure, even though they have a limited representation, to have effectivecontrol is well recognised. So a number of problems lie there.

We have to consider the continuum of this, as the Chairman mentioned in his openingcomments. The first tranche of legislation, the setting up of the holding company andsubsidiaries, dovetails in with the second tranche of legislation and with the post-1999development of that company structure. In relation to that first tranche and the need for themto reflect each other, we have been given a process that has a lot of ‘trust me’ in it. It seemsto us that we have been offered a destination which is not really as attractive as what we haveat the moment.

The road ahead—and certainly the one we are on now—has been quite difficult, and themajor thing that caps it all off is that parts of the vehicle that we seem to be travelling in don’tseem to be terribly roadworthy. Growers feel that the pathway is at least to some degreeunacceptable, yet they are compelled to tread that pathway. A significant number of ourmembers believe it is irresponsible of government to walk away from the industry in themanner in which it is intending to. Nevertheless, we have participated in good faith to try andacquiesce to both sides of government and their expectation in this matter.

Our real concerns lie in separation of the legislative monopoly from the privatised structure,and all the risks that that entails: with the expectations of listing, the opportunity for foreigninvestment, indeed the opportunity for foreign takeover or at least control of the equity, is real.It is vital that the separations are real and capable. The way in which I prefer to describe itis that we have an expectation of this parliament that they legislate the monopoly to a statutorybody with a legislative requirement that the bulk monopoly rights reside with the new growerowned company. That includes the right to use the Commonwealth power while it behavesin a certain manner.

The growers feel there is very little incentive for them to pursue the process; in fact, theysee a lot of penalties in changes to the tax status of the structure and particularly in thecapability of the new corporate model to sequester profits from its role in marketing the wheat.So there is very little incentive in there. Their expectation is that they will get tax treatmentthat provides the incentive for them to take the risks in this structure.

In summary, I would like to quote from the Booz Allen Hamilton study, which, as manyof you are aware, is a consultancy published two years ago in relation to this matter. The leadconsultant, Sam Hill, said at the time:



One important consideration is that ideal solutions may not exist.

I take that to mean that the commercial interests that want it to look like BHP may clearlynot be satisfied. Perhaps the legislative interests that want it to look more workable and similarto what it used to be—because it has been an extraordinarily successful system—will not besatisfied. I can tell you that already growers’ expectations have not been satisfied. So perhapsthat is what Sam was referring to. Another point that he made is:By virtually any standard, the Australian industry has been extraordinarily successful—becoming a majorworld wheat exporter and a significant contributor to the Australian economy.The question now is how to continue that success.

. . . . . . . . .The answer, we believe, is that the industry has achieved most of its marketing goals, and is very effectivein world markets. The challenge now is to improve the efficiency with which it reaches these markets.In the face of continued subsidies by major competing nations, the most effective short to medium termmarketing strategy will be the continued use of a differentiated marketing strategy and of a single deskto support this strategy.

We are here this morning because we want to maintain that effective use of that single desk.CHAIR —Thank you. Mr Dalton, do you want to say anything?Mr Dalton —No, Mr Chairman. I am happy to participate in the question and answer

session.CHAIR —I will ask the first question. You made reference to the fact that it was the

government or governments driving the change, and that you would prefer the existing arrange-ments to stay. I just want to get that clarified, because in Western Australia Chris Moffet madea very similar statement.

I would challenge one part of that statement, that governments in isolation are driving thechange, because there have been a number of notable wheat industry leaders and a numberof notable representatives out of the Australian Wheat Board who have clearly spelt outpublicly on a number of occasions, at least for seven or eight years—and I have attended someof these meetings myself so I have heard them say it—that the wheat industry must changeso that ‘we get control of our industry’. In other words, they were insinuating, which Ipersonally always questioned, that under the current arrangements the industry did not havecontrol of its arrangements.

Having said that, how strong do you think the feeling is at membership level about the viewyou expressed to us—that you would prefer the current arrangements to remain?

Mr Martin —I think the majority view is that it has been extraordinarily successful.Senator WOODLEY—The previous arrangements?Mr Martin —Yes. I believe that the majority don’t see a need for change. There is probably

a significant minority who recognise that there can be improvements in efficiency in theactivities that the marketer undertakes, not just basic trading but risk management and otherareas. So there is a recognition of that. However, I am here to reflect our policy and I wouldsuggest that perhaps some of those individuals in the past may not necessarily have beenreflecting the policy of organisations such as the New South Wales Farmers.

Mr Dalton —I think the feeling that government has imposed the change comes from thebipartisan decision to cancel the government guarantee on borrowings in 1999. For growersthat means that we have put the $550 million into the capital base and it is going to cost theindustry $2.75 or possibly more to make up for the loss of that government guarantee, because



whatever capital base we have we can’t get the same credit rating as we had with thegovernment guarantee.

The growers’ contention, as you would be aware, has been that we understand thatgovernment feels that the government guarantee is a contingent liability, but we alsounderstand that in solid dollars and cents that liability has not cost the community anything.That is one rationale.

On the other side of the argument has been the question of ownership of that capital baseand the belief that technically that ownership resides with the government, although it isgenerally and universally recognised as being growers’ money.

CHAIR —The slip you get every couple of months or so makes it quite clear where theownership resides.

Mr Dalton —Nonetheless, the advice we have always had is that the Wheat Industry Fundis a tax and technically belongs to the government. The changing in that situation is thepressure for change.

CHAIR —We could sit here all day and debate who drove setting aside the governmentguarantee the hardest, and I have heard some pretty prominent grain grower leaders from bothsides of the country saying, ‘We have to get control of the financial aspects of our industry,’but that is irrelevant to this. If there was some way in which that could be secured—and Ithink it is—do you think the preferred position in New South Wales would be the graingrowers funding it through the capital base that has been built up with the WIF and thenecessary requirements so that people do have some access to the money if they need it orthey are leaving the industry?

Mr Martin —Certainly in relation to the management of the capital base, as it is knownnow—the WIF fund—I believe there has been good acceptance of the mechanisms forcontribution and for redemption. Is that what you were asking? They are happy with thebuyback system. I would have to say that there has been concern from time to time as to howthe capital base has been managed and in fact some proposals that were floated for itsinvestment did cause considerable alarm within our membership.

However, by and large there has been enthusiasm for the development of the fund—certainlynot in the first instance, but once it has been developed people have been supportive of it.There has been incentive there in relation to the tax treatment and the return on funds.

CHAIR —Let us look at the proposed structure that we are going into and your commentsabout the single desk and that being absolutely paramount. When you look at the figures—andI have them here—91 per cent, in round figures, of domestic trading is done on the easternseaboard and only nine per cent in Western Australia and South Australia. You then have notquite but almost the reverse situation—and this is over the period of life of the Wheat IndustryFund: 70 per cent in round figures has been done out of Western Australia and South Australiaon the export market and 30 per cent on the eastern seaboard—Queensland, New South Walesand Victoria.

Why is the single desk so paramount when so much of your trading is related to thedomestic market? Within that, can you also address the question of what role the Wheat Boardhas in domestic trading that could not be done by other operators that exist over here anyhow?

Mr Dalton —Taking that on board, first of all, I have no quarrel with the figures you use.

CHAIR —They are actual ones.



Mr Dalton —There has been a series of droughts in New South Wales and in other partsof the eastern states. For example, in this last year, 1996-97, when we have had a huge cropof 8.3 million tonnes, we have just exported five million tonnes of that from New South Walesin less than the full shipping year and we will be exporting more—we will be coming closeto six million. In looking at what the long-term trends are, we certainly do not believe thatNew South Wales will be anything other, given normal seasonal conditions, than a significantexporter of wheat and other grains in the next five or 10 years.

The economic theory suggests that, even if we exported a barrowload of grain, it would bethat, as the next best option that growers have, that would determine the prices in themarketplace. In actual fact, we are exporting millions of tonnes of grain each year. So theexport price feeds back into the price levels on the domestic market, and that is thesignificance of the single desk to us and of the Wheat Board’s operations to us.

Mr Martin —If it is not the grower’s best option, it is his next best option, and it isfundamental that that export option is maximised because, for the domestic market to attractany tonnage, they have to pay a premium on what is either the real or perceived export value.

Just to back up Mr Dalton in relation to the exports: we will export close to 75 per cent ofour wheat production of last year. It is unfortunate that, during the whole dynamics of thisprocess—including the collection of the WIF levy—there has been this drought event whichhas caused some distortion, particularly in Queensland. I should not be complaining so muchfrom New South Wales’s point of view. I respect the figures that you have in front of you but,as we all know, statistics can tell you many things, and certainly in seven years out of the last100 New South Wales has produced more than Western Australia.

CHAIR —But the figures do not change very much when you go on a 10-year movingaverage. When you go back over the years, there have been droughts. What has happened isthat Western Australia has increased its production by expanding its wheat industry since thesixties.

Mr Dalton —There are two factors in that.CHAIR —I am not here to debate that. What I am trying to establish is this: having told

us that, what is the importance of the Wheat Board in the domestic market when it is totallyderegulated?

Mr Martin —Given that the domestic market is totally deregulated, the Wheat Board hastwo significant impacts on the dynamics of that market. We have just dealt to some degreewith the first one in relation to the next best option and export. The second matter relates tothe trading division of the Wheat Board as we know it and its activities. Certainly, as anorganisation with significant skill in aggregation and logistics, it has had a dynamic impacton cash trading since deregulation. I expect that to go on with wheat and I expect that tocontinue to have a significant play within other grains.

CHAIR —I want to come to the separations of power between domestic trading and thepooling arrangements for export. In particular, you mentioned the importance of the singledesk, which is a position I personally support very strongly, and I think most people knowthat. The domestic side is sitting there with its arrangements in a competitive marketingsituation and the pooling arrangements over there will extract what they can get out of theworld market—I think the Wheat Board has done a pretty good job of maximising returns overthe years in a very corrupt world market—and the competitive aspect on the domestic sideis to give a return to the shareholders. Under Corporations Law you have to maximise returnsto shareholders; you cannot walk around that in a corporate company, unless we are going



to have a special law for the shareholders and the Wheat Board, and that will not happen. Doyou have a concern that you might get some cross-subsidisation or cross-movement from thepooling arrangements to make sure there is a reasonable or fair return to the shareholders andthat you put the single desk at risk against the ACCC and the National Competition Council?

Mr Dalton —We do have a concern, and we have had a strong concern about this over manyyears. One acknowledged difficulty with the present system is that the trading division is nota separate company, and the lack of transparency between the trading division and the restof the board’s operations has concerned us, which is the basic reason why we have insistedthat in the new structure the trading division be a separate company, separately accounted for,and that there be a high level of transparency so we can trap or police whether or not thereis cross-subsidy and do something about it if there is. So certainly it has been a concern, andwe are looking forward to newer arrangements improving on the existing situation in thisregard, if not in many others. I am sorry, what was the other part of the question?

CHAIR —The cross-subsidisation which puts the single desk at risk. I do not think it is acase of taking action after the event, because after the event it has gone. What mechanismsdo you think there need to be? We are looking at a public prospectus here, in a sense. Youhave a half-baked cooperative and a half-baked corporation between the two models. You havegot A and B and one is run on cooperative principles and the other switches into a cooperativearrangement. Wesfarmers has an arrangement like that, so I am not being derogatory in thatsense, but I am not sure that the structure is quite right. What mechanisms would you seebeing necessary to have there so that could not occur to put the single desk at risk?

Mr Martin —Certainly we have the strong view that this needed to be distinguished, as Irefer to it, from a different structure, that it will be different and that it will need to be anunusual animal, if you like. To achieve the outcome you have referred to where it does notfall into those difficult areas that attract problems and competition—we believe that a numberof areas have been addressed such as the tender process—we believe a number of areas canbe improved in the future, and certainly Mr Dalton has referred to those under this process:for instance, the separation of the company structure. Nevertheless, we do have a requirementthat this structure, if it is to be, must have these distinguishing features that ensure it does notdo the sorts of things you are referring to. I am sorry, I have lost the point you made aboutthe directors.

CHAIR —The point was that the directors would utilise the pool to fund the payments toshareholders.

Mr Martin —You made the point in opening that the director’s priority would lie inmaximising returns to shareholders. It is envisaged in this corporate structure that thememorandum and the articles reflect objects, at least in the pooling subsidiary and certainlyit is our expectation in the holding company, that actually prioritise the returns to poolparticipants before they then access the total, the quantum, if you like, of the activities of theholding company to make a commercial return to the shareholders.

CHAIR —While the shareholders and wheat growers are one and the same thing, it is nota problem, but that will not always be the case.

Mr Martin —In that structure the distinction would be that the holding company is actuallythe shareholder of the subsidiary, so that is where the priority lies. The expectation ofmaximising the return to the shareholders is actually external to the holding company, for thoseshareholders. It is a point that distinguishes the need for this structure to be very differentfrom, for example, the BHPs of this world.



Senator WOODLEY—I share your concern about grower control. The experience that Ihave had with many—not all—wool growers and people in the sugar and beef industries isthat they believe that that is the basis of their problem. I was interested in your comment oninternational competition. You would be aware that there would be large transnationalcorporations, like Cargill, which would love to break up the single desk selling, and have triedto do that for many years. If you want to read a book that talks about their predatory activities,there is one called theInvisible Giant. That is why I have concerns. International competitionis really about the powerful getting access to all the markets they possibly can and people likegrowers losing control of their own industry.

Mr Martin —You are completely correct. It is not lost on us. Even though we believe ourindustry in quantum is a large industry, it is only a drop in the bucket compared to the majormiddlemen in this world, one of whom you have referred to. We have a major concern thatwe preserve the system of order and control and the structure that gives us that power. Wehave had a great experience over the last 57 years and we have a need for that ability to goforward. I need to make it explicit: if we get this wrong, if we upset the fabric, the dynamic,of the wheat industry in this nation, the demographic change we will see in other commoditieswould be immeasurable. There would be a knock-on effect, not just in wool and meat, butin a range of other industries. It is a benchmark land use—it is fundamental.

Senator WOODLEY—I share your concern.

Senator O’BRIEN—You talked about an advice you had from Minter Ellison. We havebeen supplied with a copy of advice that the Western Australian Farmers Federation had fromClayton Utz. Would you be prepared to supply the committee with the advice that you havereceived?

Mr Martin —We are quite prepared to provide the Minter Ellison advice. Mr Dalton willforward that to the committee.

Senator O’BRIEN—Thank you. In your submission you have expressed grave concernsabout the arrangements which will follow this legislation and the lack of clarity for the wholepicture. Are you asking us to recommend to the Senate that this bill not be passed?

Mr Martin —I am asking the Senate to look very carefully at the way in which the intentof this structure is enforced. We have the first tranche of legislation with a lot of expectation,and the second tranche. We have a first, if you like, pre-1999 set of memorandums and articlesout there that contemplate significant change in the second—

CHAIR —When do you anticipate the working party signing off on the memorandums ofunderstanding and articles?

Mr Martin —The pre-1999s were agreed by the Grains Council of Australia yesterday, butI am sure they will inform the Senate in their submission of the exact dynamics of that.

Mr Dalton —With amendments.

Mr Martin —Yes, with amendments. However, you are correct in identifying the timingof these matters. We are at least considering the pre-1999 M and As at the same time asconsidering the first tranche of amendments. As I referred to in the ‘trust me’ scenario thatI put, what I see as a looming problem is that we are moving to approve the second set of Mand As—the post-1990 M and As—without knowing what is in the second tranche oflegislation and whether it accommodates it. My answer would be that we would ask the Senateto consider very carefully the expectations of growers in these matters and whether theincentive is there for them to embark on this path.



Senator O’BRIEN—You are saying that the majority of growers that you represent do notwant to change?

Mr Martin —I am saying that the majority of growers whom I represent and who havedeveloped our policy have had a very satisfactory experience with the Australian Wheat Boardas it is known in a statutory authority form and see little reason for change. However, since1989, with the path that was set by the then government, they have been compelled to movedown a track. At the point at which we are on this pathway, it makes it extraordinarily difficultto envisage or contemplate, with bipartisan support for the cessation of underwriting, theexisting arrangements continuing. Nevertheless, many growers—and it would be unfair of menot to represent the many growers—believe it is irresponsible for the federal government towalk away from an industry which is this large.

Senator O’BRIEN—I gather you have concerns on the allocation of a monopoly power toa private corporation and how that corporation will be controlled in the future. How wouldyou suggest that we corral or limit that monopoly? How can we maintain the control of theuse of the monopoly power?

Mr Martin —I believe that it is necessary to maintain a statutory authority. We believe thatpower should rest in an, obviously, downsized statutory body, that those rights be conferredupon a commercial grower marketer that acts in a certain manner, and that certain manner isin the interests of the growers.

Senator O’BRIEN—Are you talking about some sort of licensed monopoly?

Mr Martin —There obviously needs to be a system of independent assessment. The statutoryauthority would need to be satisfied that the pooling structure was acting in a certain mannerthat complied with the expectations of growers.

Senator O’BRIEN—In terms of the proposal to use the company structure of the new bodyto provide access to WIF money, we have had a view put to us that there are some greatproblems posed by that in whether the Stock Exchange will allow the company to be registeredbecause of the control of the growers who are A-class shareholders over the directors andwhether the directors will be operating in the interests of the A-class shareholders or the B-class shareholders who are the equity holders. Have you any views about that?

Mr Martin —In New South Wales we have had considerable advice and experience inmatters similar to this in relation to the corporatisation of our bulk handler. It was a nearmonopoly structure that went from a statutory power through to a privatised company. Thatexperience has been a good one. It has traded on an exempt market, has acted in a commercialand profitable manner, has returned dividends and has systems of demonstrated control inthere.

I guess the point I made about the disaggregated shareholding and the disempowerment isthat certainly in New South Wales, where we have a foundation share arrangement to givecontrol to that grower bulk handling structure, it has been a good experience. The problemthat you assess with the ASX is one that I do not believe is insurmountable. I know that fromtime to time advice has been proffered that says it may discount the share value by this or that,but my point is that we would believe that that is a very small price to pay, given that we arenot about developing a marketing structure to maximise share value, but we are aboutdeveloping a structure that maximises the return to wheat growers at the farm gate. Whilstyour concern is one that has been dealt with, it is not one that holds any fears for us.



Senator O’BRIEN—Is the advice that you received in relation to the corporate structurefor the bulk handler able to be made available to the committee?

Mr Martin —I will have to ask Glenn about the advice from the early 1990s in relation tothat matter.

Mr Dalton —We are going back a few years, but if we can find anything relevant we willcertainly forward it.

Mr Martin —Our archives may contain some of that advice, but certainly the associationwas a major player in the consideration of what was in the growers’ best interest in relationto that privatisation.

Senator FORSHAW—I have a couple of questions. Would you prefer to see a positionwhereby this legislation was shelved and the whole package was brought back, including thesecond tranche post-1998?

Mr Martin —I would not prefer to see it shelved, but I would prefer to see a rigorouscontemplation of exactly where the second tranche was and how it dovetailed, how it reflectedthe development of the corporate structure.

Senator FORSHAW—When I said ‘shelved’, I meant basically put on hold. You see, itmay be difficult, if not impossible, for us or the Senate to really understand or consider wherethat is going.

Mr Dalton —You have the same problem that we have, that is, without knowing what isin the second tranche of legislation, we do not whether all bets are covered.

Senator FORSHAW—There are a lot of problems around this place at the moment!

Mr Martin —We do not know whether the first tranche is adequate.

CHAIR —Can I follow that up? This is a proposition I have pursued. I am told that it isabsolutely crucial, in terms of the future operations of the Wheat Board, that this go throughnow; in fact, it should have gone through some time ago in terms of development of theircredit lines et cetera. We will question the Wheat Board on that. Are you familiar with anyof that and the reasons why the Wheat Board—

Mr Martin —There is certainly a view that the intended structure should be up and runningyesterday to maximise the benefits that may flow from the credit rating that needs to attach,given the intent of the outcome of the process. However, what we are concerned about asgrowers is broader issues than that. The broadest issue I can refer to is the one of growercontrol and just how we enforce the sort of change that we need. At the moment we are feelingthat we are going to have great difficulty enforcing it. We have been asked to check off onM and As and we are not sure that the change is going to be reflected effectively in the secondtranche.

Mr Dalton —The imperative is that we have something in place so that when the governmentguarantee ceases in July 1999 we have a system there to cope with that. The belief of manyis that we need to get a company up and have a track record of 1½ or two years to make thattransition smooth. That is the imperative for urgency, if you like.

Senator FORSHAW—You just mentioned the concern about the extent of grower control.One of the things that is supposed to underpin all of this is that it will end up with greatergrower control than you have now. This is where I find it a bit confusing. We have heard themessage, both in Western Australia and here today, that growers are saying they are pretty



comfortable with what they have got at the moment. That may well just be a reflection of notwanting to change because of the fear of change.

Mr Martin —It will probably pass.

Senator FORSHAW—Yes. Do you think it will end up with a greater degree of growerinput and control if the second tranche deals appropriately with the concerns that you have,particularly, as I understand it, as the critical question is maintenance of the single desk?

Mr Martin —I cannot be sure, and I cannot be sure in two critical areas. One is in relationto the legislation and how that is committed to a statutory body, and that is largely in yourhands. That is one aspect. The other area where I cannot be sure as to the interests of growersbeing affected is this area of the disaggregation, the disempowerment of shareholders that Ireferred to from the Berle and Means study.

Senator FORSHAW—One final question. It has been put to us that people should be giventhe opportunity down the track to take out their equity in WIF. Concerns have also been putto us about a flight of capital if that was allowed. It has also been said to us by other witnessesin Western Australia—I can’t remember who—that that is not a major problem and it wouldnot occur. What is your view?

Mr Dalton —There is a problem if growers are allowed to take their equity out of WIFbefore it is converted into shares because that would reduce the capital base and the capitalbase, we are told by the consultants, at $550 million is very necessary if the structure is goingto borrow money to enable it to pay high levels of first payments to growers, which iscritically important to us. If the WIF units are created into shares and either you have anexempt market or they are listed on the stock exchange, at that point growers will be able tocash in their shares and the structure will still have the cash value of the capital base behindit.

Senator FORSHAW—If too many want to cash them in—

Mr Dalton —Certainly it will drive the price down, but it still means that the structure hasgot the cash value of the $550 million and can in fact borrow the finance that it needs. Butit would mean that growers’ individual equity would suffer; I grant that.

Mr Martin —In conjunction with that, we are also supportive of the idea of a mechanismthat would allow current pool deliveries in any year henceforth to have first call, if you like,on any issue of authorised capital, and that mechanism, we believe, should also contemplatethe opportunity for the directors to redeem capital from those leaving the industry. I know thatin Western Australia the idea of that sort of system carries some considerable favour. Webelieve that would be a very worthwhile inclusion as well which would partially address theissues that senators refer to.

CHAIR —One of the big concerns is more of a Western Australian problem than it is aneastern states problem because of the size of the farms and the amount of equity and thenumber of growers in Western Australia who have between 150,000 and 250,000. Unless thestructures are right and it is a truly proper operation, it is not really an attractive investmentto people outside, only to people in the industry, and you are not likely to get a rush ofgrowers wanting to buy shares; they will want to get their money out of the pool. Do you thinkthere should be some mechanism to ensure that growers at least get their money back?

Mr Martin —I think there is some considerable merit in considering a voluntary system ofunderwriting. If some equity holders or B-class shareholders, as they would become known,wish to avail themselves of an underwriting provision—if not for all equity holders—it should



be made available. I must say, though, that in building your question, we have the same thingwith a range of equity holders in New South Wales but it must be remembered that it is inproportion to their production. We are hearing from our smallest producers through to ourlargest producers—and they are very large in this state—that it is viewed as a strategicinvestment and, whilst I respect that you built the question on the quantum of some people’sinvestment, their interests are the same.

CHAIR —I accept that there are similarities. I guess the thing that I am trying to draw outhere is that when you start talking about that amount, a number of growers say, ‘With thatmoney we can get off the farm, retire and buy ourselves a house.’ Once again, when you lookat the figures in New South Wales, nine per cent of your growers produce over 1,000 tonnesand 77 per cent produce under 500 tonnes. You almost have the reverse in WA: 43 per centproduce over 1,000 tonnes. You have different quantums and different objectives. You havegrowers over as well. Is there a mechanism that buys some protection, because I do not believethere will be a flight of capital.

Mr Dalton —The intent of GCA is certainly that an underwriting system be used if it isfeasible at the time. I guess the one difficulty is the time gap between the conversion of WIFinto B-class units and the listing of those units. One school of thought, as you know, is thatthey should not be listed until after the single desk review appeal mechanism takes place. Ifit is several years out, there are some technical difficulties with underwriting or having anindividual option or whatever. If it happens very shortly after the conversion into B-class units,it should be both feasible and desirable to underwrite the flow.

CHAIR —We are going to have to wind this up unfortunately. There are some otherquestions we could ask. If there is any other information that you would like to pass to us,please do. I think you said you would get some information for Senator O’Brien, which wouldbe appreciated. If we need to call you back, we will. I thank the representatives from the NewSouth Wales Farmers’ Association. No doubt, we will be talking to you some more.[9.57 a.m.]JOHNS, Mr Mark William, Executive, Australian Grain Industry Task Force, RMB 4235,Horsham, Victoria 3402KELLY, Mr Vincent James, Executive, Australian Grain Industry Task Force, RMB4235, Horsham, Victoria 3402

CHAIR —I welcome representatives from the Australian Grain Industry Task Force. In whatcapacity do you appear before the committee today?

Mr Kelly —I appear as a member of the Australian Grain Industry Task Force and as awheat grower for 30 years.

Mr Johns—I appear as an executive member of the Australian Grain Industry Taks Forceand a wheat grower.

CHAIR —In case you were not here earlier, I declare that I have an interest in this as awheat grower in Western Australia as well. The committee has received a submission fromyou on the issues before it. Do you have any objections to its publication?

Mr Kelly —None whatsoever.CHAIR —The committee prefers all evidence to be given in public, but should you at any

stage wish to give your evidence, part of your evidence or answers to specific questions inprivate, you may apply to do so and the committee will consider your request. I must pointout here that the committee also has the right, although it seldom happens, to submit your



submission if they think it is in the national interest. Any member who puts in a minorityreport also has that right. It is a 99.9 per cent guarantee, if you like.

Gentlemen, would you like to make any opening remarks? We set aside 45 minutes orthereabouts for you, so if you can give us some time for some questions at the end. We dohave a tight day. At the conclusion of your remarks, I will invite members of the committeeto submit questions to you.

Mr Johns—On behalf of the task force, we welcome the opportunity to approach the Senatethrough your committee. The AGIT is an informal lobby group which started to fill a vacuumin the grain growing community left by the older, recognised and more rigidly structuredfarmer organisations. These organisations, the GCA and its affiliates have evolved over timein an environment dominated by statutory authorities and very limited communication in thebush.

The skills of soapbox oratory and widespread use of poorly defined jargon such as ‘thesingle desk’ and ‘the mushroom syndrome’ have very much been the method of operation.I should emphasise here that I am speaking as an eastern states grower.

The close connection between statutory authorities and traditional farmer organisations meansthat the pinnacle of an agri-political career is achieved when you land a position on the boardor you are able to tap into one of the many perks that the statutory authorities are able to handout. Clearly, when the future of many of these perks of office is at stake, the ability of thetraditional grain farmers organisations to fairly represent national, or even farmer, interestsis questionable. The uptake of IT, such as word processors, faxes, e-mail and the World WideWeb, is allowing supporters of the AGIT to overcome this mushroom syndrome.

The awareness of the PGA’s philosophy by eastern states growers has been made possiblelargely by their Web site. I note from reading theHansardrecord of the Perth hearing, whichwas received by e-mail two days ago, that the committee has placed considerable emphasison being able to define how many growers the witness groups can claim to represent. TheGCA claimed to represent the majority of growers, and I make up one of its number as anexecutive member of a local VFF branch. Most grassroots members at branch level see theirmembership as a community obligation because a farmer organisation at this level serves animportant community function. The collegiate structure above the branches enables the GCAto claim members’ support, but in reality the opportunity for grassroots members to changepolicy is extremely limited.

The AGIT has significant, growing support in the eastern states, where our database ofgrowers who have clearly expressed support for more marketing choices has about 500 names.The AWB estimate of the support for the PGA in Western Australia is about 43 per cent ofthe crop. If a formal organisation with similar philosophies existed in the east, I wouldconfidently suggest that an even greater percentage of the crop could be attributed to it.

If it is possible to assess grower awareness of the existence of this bill before you, I wouldsuggest that in Victoria less than five per cent of growers would know it existed. If you wereto ask growers if they wanted more marketing choices for their wheat crop, 95 per cent wouldsay yes. If you asked those same growers whether they would like to be able to decide thefuture of their personal WIF equity, 99 per cent would say yes. Clearly, the nub of the issuebefore us is giving grain growers freedoms that were removed from them in the NationalSecurity Act of 1939, known as the ‘war act’.

I would like to comment on the mention made earlier about the success of the marketingsystem that we have in Australia. The assessment of the Australian system as being successful



is very hard to understand. We have rapidly declining numbers of growers. We have very fewprocessors of milling wheat left in Australia when we once had a very large number, with theexception of the increasing number of stockfeed grain processors that has occurred only sincethe deregulation of the domestic market. One could highlight the GCA’s and the WheatBoard’s resistance to the change to a freer domestic market and their insistence that thedomestic market was insignificant. As soon as that market was deregulated, we saw a rapidincrease in options and a definite increase in return to growers.

Historical evidence clearly shows that the intended function of the AWB—that is, pricestabilisation—has not been effective. In fact, that marketing system has clearly been a net costto growers since its inception. Any changes in marketing practice that the board may boastof now have not been driven by the board—they have been forced on it by the market—thatis, the increasing segregation. Any reference to the history of wheat marketing in Australiawould highlight the resistance to move away from the FAQ system, which cost growers afortune. It was an advantage for the European, particularly English, millers—they preferredto be able to get a cheap base quality flour out of Australian wheat and to buy good qualitygrain out of America with which to blend it up—but it was a rather ridiculous system. Also,I think you can attribute the poor rate of development and adoption of new grain varieties tothe lack of communication between end users and growers.

I would also like to refer to the comment about grower control. The only time growers havegot control is when they can decide where their grain goes, when they decide to whom theycan sell it. If they have not got a choice, they have not control.

As we mentioned in our written submission, we are referring to the issues which willprobably be covered by the second bill that was referred to earlier. We will just briefly mentionsome specific issues on this first bill. Perhaps you could ask questions of us on the first billafter you have referred to our notes. We have a problem in that we are not directly involvedin the joint working party. Like the vast majority of grain farmers, it is very difficult tounderstand what is going on. So it is difficult for us to come before you here and tell you whatis wrong with this bill.

However, we can see that it is important that a transitional body be put in place becausewe need to get a commercial structure in place as soon as possible and we need to allowgrowers to have access to that money that was taxed from them in WIF. They need to be ableto decide sooner rather than later whether they leave it there or take it back. So let us get thistransition in place quickly.

On WIF cessation, let us stop the WIF as soon as we can, but on conversion to shares wemust make it possible for growers to make a choice to be able to get their money back, to beable to sell their shares, and it needs to be done in such a way that they do not have to risklosing their capital first by being forced to invest in a private company.

The bill refers to a model. We have concerns about the division between the trading, poolingand regulatory powers of the new or future organisation. There needs to be clear division.

Mr Kelly —I would like to support Mark’s remarks. We are very concerned, in thetransitional provisions, that the B-class shareholders control the company. We think it isinconceivable that a company be set up under ASC rules and expect to go to the market wherethe shareholders, being the WIF equity holders, do not even control the directors. We thinkthe market would not view that very well at all. If this bill is to go ahead, we think that B-class shareholders, being WIF equity holders, must be clearly able to decide who the directorsof the company are. That is how we see the corporate model.



The second thing is that I support Mark’s remarks that WIF equity holders should clearlyhave a choice as to whether they want to redeem their money before conversion. We thinkthat choice is important in this bill. Although I understand that that can also be addressed inthe second bill, we believe it should be addressed here.

CHAIR —Mr Kelly said in his comments that there should be a structure where thecorporation is controlled by the shareholders, being the WIF equity holders. What sort of astructure would you envisage or how would you change the proposed structure?

Mr Kelly —On the face of what I see here as the grower corporate model put up by the jointworking party body, Bankers Trust, Mallesons and Minter Ellison, I think the B-classshareholders or the owners of the equity in that company should be able to clearly decide whothe majority of the directors are, and then the ASC can go to the open market and clearly saythat the board does control this company. As I understand it, in the other case, A-classshareholders would be wheat growers. I understand A-class shareholders will have a say inthe majority of the directors. Is that correct?

CHAIR —Are you saying you would not have a dual-class model?Mr Kelly —I would have to say that I believe that to be the case, that B-class shareholders

or owners of the equity should clearly determine who the majority of the directors of thatcompany are.

CHAIR —Mr Johns said that the Australian Wheat Board had been of a net cost to growers.A number of studies have been done over the years with regard to the benefits or otherwiseof the Australian Wheat Board returns to growers in Australia. Can you point to the evidenceor research that supports that view?

Mr Johns—Yes, certainly.CHAIR —Can you provide it to the committee?Mr Johns—Yes, certainly. There is not a lot of published information on the grain industry

in Australia but I can certainly forward to the committee a reference to published informationon assessment of the performance of the marketing structure that exists in Australia.

CHAIR —Can you source that now?Mr Johns—Not right now.CHAIR —I know you haven’t got it, but can you tell us who has done the work or where

it is from, for theHansardrecord?Mr Johns—Alistair Watson’s work would be one source I would look to. The Wheat

Board’s publicationA shared harvestis another source, which is published as a 50-yearpublication for the Wheat Board. I knew it was being published at the time and asked theboard a number of times when it was going to be released. I am quite confident in saying thatthey contracted some people to do the work and produce the report, but the report did not saywhat they wanted and they made sure its release was delayed.

Senator O’BRIEN—I am a little confused. Do you support a single desk or not?Mr Johns—It depends on your definition of ‘a single desk’.Senator O’BRIEN—It seems to me that a single desk in this model is a mechanism for

channelling all of our export wheat market through one seller. That is the single desk model.

Mr Johns—Under the single desk as it exists at the moment, I would see for a large amountof grain our Wheat Board acts as an accumulator and passes it on to other sellers to sell it.



I could buy Australian wheat offshore and I would not have to go to the Wheat Board. I wouldgo to any number of multinationals that could sell—

Senator O’BRIEN—It all goes through the one desk for sale purposes. I just wanted tounderstand whether you are saying we should bypass this sort of funnel, this control on theexport market, that exists through the single desk and go straight to the middleman?

Mr Kelly —I think that an independent regulatory mechanism is important to administer thesingle desk. However—

Senator O’BRIEN—Let’s go back. I am asking: do you believe there should be a singledesk?

Mr Kelly —Yes, but not in the current form, Senator.Senator O’BRIEN—Your submission is that you support a single desk?Mr Kelly —Yes, where there is clear separation of regulatory and competition powers.Senator O’BRIEN—So your issue is the ability of the single desk to market back into the

Australian market?Mr Johns—No, the single desk would not have marketing powers; it would not be a

marketing body in itself. An example would be that if a single farmer or a cooperative offarmers developed a contact with a market outside Australia, they would be able to go to thatauthority and receive approval to trade outside Australia.

Senator O’BRIEN—So it would be a bureaucracy that regulated international trade?Mr Kelly —A type of Canadian Grain Commission or regulatory mechanism that purely

would have a set of guidelines to administer permits—Senator O’BRIEN—The purpose of this desk being?Mr Kelly —The purpose of the desk would be that there would be no conflict of interest

as there currently is where the board administers export permits to its competitors, whichcurrently is the case. So we believe in the separation of powers between regulatory andcompetition.

Senator O’BRIEN—I am just trying to understand what you would see it as doing. If themarketing is to be done by the growers direct with overseas markets, what purpose does theregulatory authority serve?

Mr Johns—We talked about the urgency for the transition. The existing Wheat Board wouldbecome a commercial organisation which would be able to trade wheat outside Australia. Theregulatory authority, where it could identify markets where there was a definite advantage inonly having one authority trading with them, could allow the Wheat Board—assuming thatwe can put a mechanism in place to audit the performance of the Wheat Board and that,clearly, is not in place at the moment—to be the only trader into those markets. But wherethere is no clear advantage in having only one person trading into that part of the world—

Senator O’BRIEN—This authority would make the decisions on where it was desirableto have a single marketing focus and where it was not.

Mr Johns—There would have to be a very good case put. To take Japan as an example,it may be argued that we would be better served if there was only one organisation tradinginto there—the Wheat Board—or we may find that another organisation would be able to dothat job better. You might find that what is happening is that the Wheat Board is doing it andthen passing it onto another trading organisation but, if that is happening, why have we gotthe Wheat Board there?



CHAIR —What would be different to the arrangement now where the Wheat Board contractsout to a number of grain traders around the world and within Australia who sell a percentageof wheat? As I understand it, apart from the very early years, that has always been the case.What is the difference between what you are proposing to Senator O’Brien and what in effectexists now?

Mr Johns—It would mean that international organisations or other organisations in Australiacould deal directly with farmers or groups of farmers. They could invest in handling ortransport facilities in Australia. There would be an incentive for other people to invest ininfrastructure in the grain industry. If you read my submission, I said that, with theintroduction of plant variety rights, there would be incentive for other organisations to comein and deal directly with growers.

Mr Kelly —I do not believe that there would be a large amount of difference except thatthere would be absolutely no chance of a conflict of interest. The Administrative ReviewCouncil, which is the advisory body to the Attorney-General, says in, I think, its 12th annualreport that it is inconceivable that a body be both regulator and competitor. A classic examplewas Austel when it was set up, although I am not sure that setting up an Austel type bodyis what would be needed in this case. This system could be run from within the DPI. Anyhow,that is the way we feel.

CHAIR —I am not arguing with you; I am just trying to get the classification. I have notread your submission yet, but I will before we finalise our report. A lot of reading goes onin this place.

Senator O’BRIEN—In terms of the support which you give to the model proposed in thelegislation, you say that that model should be altered so that the B-class shareholders wouldelect the directors or the majority of the directors.

Mr Kelly —That is correct.Senator O’BRIEN—Are you saying that the B-class shareholders would elect all of the

directors or the majority of the directors?Mr Kelly —The majority of the directors.CHAIR —How would the others be elected?Mr Kelly —Some of them would be elected by the board or the minister. I believe that that

is currently how the majority of directors are elected. Am I correct in saying that?CHAIR —As clarification: when this thing is over—and it has got a little way to run in the

process—the government will be right out of it.Mr Kelly —Yes, we understand that.Mr Johns—When it reaches the point where it becomes a commercial organisation, the

election of board members would be as in any other commercial organisation.Senator O’BRIEN—The model as I understand it—members of the committee can correct

me if I am wrong—is that A-class shareholders will be growers who will be allocated sharesfor being growers in relation to the quantity of grain they produce. That, in simple terms, ishow A-class shares will be allocated. B-class shares, as I understand it, will be allocated inrelation to the equity in the WIF.

Mr Kelly —Yes.Senator O’BRIEN—That B-class shareholding will be tradeable and you will not need to

be a grower to buy those shares.



Mr Kelly —That is correct.

Senator O’BRIEN—So you understand all of that?

Mr Kelly —Yes.

Senator O’BRIEN—Let us take the model a step further. If your approach is adopted andB-class shareholders elect the majority of directors and the shares become attractive and thecompany profitable, and the majority of shares are bought by fund managers or whoever andthe control of the company passes from grain growers to the financial sector, superannuationfunds and private investors, are you happy with the concept that this company would hold aprivate monopoly, albeit for the marketing of grain overseas?

Mr Johns—I think it would be great if we could encourage other people to put equity intothe grain industry. Certainly we would be very much against that organisation having amonopoly on the export of wheat.

Senator FORSHAW—I think they would be putting the equity in at the expense of thegrowers.

Mr Johns—Not necessarily.

Senator FORSHAW—Perhaps not necessarily, but it could happen if the company becameattractive and fund managers and institutions bought them out. Is it potentially possible thatthe proportion of share ownership could swing very heavily towards non-growers?

Mr Johns—Our objective is to see the Wheat Board converted into a viable tradingorganisation and that there be vibrant trade in wheat in Australia and that you could see onthe Sydney futures exchange, say, the wheat contract internationally becoming the mostpopular wheat contract in the world. In a country which is a very large net exporter, thedomestic trade would not have a big influence on that contract. You could attract an enormousamount of speculation from financial markets around the world on the Australian wheatcontract on the Sydney futures exchange, which would be an excellent thing. You would havea very effective price setting mechanism.

Senator O’BRIEN—What seems to flow from what you are saying—I do not want to taketoo much time but I think that this is important—is that the control of the company could passultimately to a grain trader, for example.

Mr Johns—It is a grain trading company.

Senator O’BRIEN—But to a grain trader within Australia or to a grain trader or a cartelof grain traders outside Australia? I suppose there are some mechanisms to control that, butit would be possible. In your submission you say:Australia’s physical isolation as an island is the only reason the monopoly on wheat export has been ableto be enforced unlike their Canadian counterparts, Australian Wheat farmers cannot readily export theirwheat.

Mr Johns—I included a copy of an article.

Senator O’BRIEN—Yes, I see that. I am trying to get from you how you feel about theconcept that a monopoly in the export market for grain might ultimately, in the model thatyou propose, pass to a grain marketer or cartel of marketers.

Mr Johns—The monopoly would not be there. We would insist—

Senator O’BRIEN—That is the point. This legislation is creating a model. You are sayingthat it should not exist, I think, if that were the outcome.



Mr Johns—If there was a monopoly there, no. Removal of the monopoly is paramount. Weneed to get growers in contact with end users both domestic and offshore.

Senator O’BRIEN—I can see where you are coming from in relation to that—connectionwith the markets might lead to more market driven production of grain varieties that wouldmaximise the potential return to the grower.

Mr Kelly —I would like it on the record that I would not like to see the company fall toone large trading firm. It is not desirable. I am sure that if there is a way to circumnavigatethat problem—

Mr Johns—The foreign investment people could control that, I imagine.Senator O’BRIEN—We want to create with this legislation a model that does not have

inherent problems. I am exploring your proposed model to test it for those inherent problems.Mr Johns—I am suggesting that by 2010 our own xenophobia might be much more reduced

and we will see ourselves as part of South-East Asia, and the fact that there might besignificant investment from outside Australia in the Wheat Board would not be the fear thatit is at the moment.

CHAIR —On the FIRB, as I understand it, if it was to Australia’s export advantage thatshareholding be in excess of the 50 per cent then it is acceptable. It certainly happened in livesheep trading. It caused quite a furore in Western Australia.

Senator FORSHAW—You said before that, if a grower manages to find a marketsomewhere, they should be able to go along and get approval to do that. Can you explain tome how that approval process would work? Do you see that the regulatory body would havea veto, or would it be virtually automatic that that would be approved? If you have got at thesame time, as you were saying, the AWB—

Mr Johns—If the regulatory authority could see that the organisation that requested thepermit was financially secure and was not going to put growers’ funds at risk, was going tocomply with the export health requirements, which are increasingly important, and was notgoing to impinge on what can be demonstrated as a market which would be better served witha single desk, they would issue the permit.

Senator FORSHAW—So the principle that would underpin it is that essentially the rightshould exist, subject only to a couple of tests, one being quarantine and health issues. Whatabout this second aspect, which takes you back again to the broader national interest, singledesk, monopoly approach? Could you give me an example of where you think that may notbe worth while, where a grower should be refused that opportunity?

Mr Johns—I would have great difficulty in finding a reason why a grower should be refuseda permit to deliver his own wheat into another market.

Senator FORSHAW—That is what I thought you would probably say. I just wanted to askyou to get you to say that.

Mr Johns—I think one thing that is overlooked is that the financial return to growers, theactual dollar return, is not the only reason they are in existence, is not the only reason whya farmer is a farmer. If you assess why a farmer is in the business of farming, maximising hisfinancial return is not at the top of the list. Having an affinity with the end user of the grain,in the case of wheat, has been impossible in Australia until we had deregulation of thedomestic market. I see that as being very important. A grower should be able to communicatewith and deliver directly to an offshore market. It is up to him to decide whether he will getthe best financial return for it.



Senator FORSHAW—What is the potential for that to be large scale?

Mr Johns—Where I come from we have been encouraged by the Wheat Board to growASW wheat. We can grow very good soft biscuit wheat. Until a number of years ago it was,I will not say illegal but you were not allowed to deliver it into the system and you receiveda penalty for it. The Wheat Board preferred to trade their soft wheat out of Western Australia.With the authority the Wheat Board has got now, it has that power. It can direct you to growthis particular type of grain because it suits its marketing system. The growers in the area Ilive in would be better growing a soft biscuit wheat or a noodle wheat. Last year we hadrosella wheat, which came in at a protein level which the Wheat Board said was not veryattractive and it could not be marketed.

A local cooperative, in contact with a market in Fiji, was able to able to find in the box tradea premium for that wheat. They requested a permit from the Wheat Board and the WheatBoard said, ‘No, you haven’t got anything special, we’ve got plenty of that wheat. If they wantwheat, we’ll supply it to them. No, you cannot have a permit.’ I would say that the relationshipbetween the buyer and the producer is as important as the price. That small market was I thinkas interested in having a close relationship with the grower as it was in achieving a specialquality of grain at a very attractive price.

CHAIR —Could I clarify a couple of points. You said in your opening remarks that Australiawas sending—I am not sure of your exact words—bulk average-quality FAQ wheat into theUnited Kingdom and they were topping that up with good quality US wheat to get their flourgrades up. I am rather intrigued by that remark.

Mr Johns—I would encourage you to look at the share harvest—

CHAIR —I am asking you the question. Australia is responsible for 85 per cent of theworld’s trade in white wheats. The US exports almost only red wheat. There is a little bitgrown on the western coast. Most of the rest comes out of Pakistan, as I understand it. Canyou tell us what wheat they were actually topping up the—

Mr Johns—I was referring to the fifties and sixties. There was considerable academicargument in the late fifties and sixties about whether we should continue with the FAQ system,and eventually they decided they would not.

CHAIR —That was part of the evolution, wasn’t it?

Mr Johns—Yes, and I would say that, because of that very regulated structure we have,it took far too long and it meant that for many years growers were not receiving as good areturn as they could have.

CHAIR —That is a matter of opinion. My understanding—and I have already told you thatI am a grain grower—is that ASW is just a name for a type of wheat amongst a whole rangeof types of wheat. For example, we grow hard 13 primarily where we are. We have thatchoice. You take a small yield drop for a higher price for protein. How do you link theAustralian standard white, which is basically your 10 per cent protein wheat, into yourargument? I did not get the gist of what you were saying. In other words, why did you notpick hard 13 or one of the other grades?

Mr Johns—Traditionally, the Australian method of marketing wheat was to make it intoas large a bulk as possible to try to minimise the number of segregations. It is interesting,referring to a history of flour milling in Victoria, that there were mills in around 1910 thathad something like 85 different possible segregations for the wheat—wheat they received indirect off farm. We very quickly, when the regulation came in, went to a FAQ system. The



FAQ system was really a method of assessment. They harvested the grain, it went into all thecountry silos, then they took a sample out of all the different country silos, went to adesignated place on a designated date and tipped all the wheat into a heap on the floor, stirredit up with a shovel and took a sample out of it, and that was the sample for the Australiancrop from that area.

CHAIR —I do not want to be difficult, but that is not relevant today, is it?

Mr Johns—It definitely is very relevant, because if you continue—

CHAIR —It is a long time since we have had FAQ.

Mr Johns—The system where you bulk all the grain together and do not allow maximumsegregation is an expense to growers and an expense to the industry.

CHAIR —My understanding as a Western Australian grower—I have not studied thesituation over here—is that we have a far greater range of types that we can put our grain intothan any of our major competitors.

Mr Johns—The Wheat Board has been forced to adopt much more segregation.

Mr Kelly —‘Differentiation’ they refer to it as, don’t they?

CHAIR —I just want to get the record straight. My understanding is that we have a muchgreater opportunity across the board as Australian wheat growers in terms of the types andthe various quality streams in which we can deliver wheat to than any of our internationalcompetitors.

Mr Johns—I am not in a position to question that, but I would doubt it very much. Partof the segregation can come down to area segregation.

CHAIR —You have made a number of assertions with regard to this, and that is fine. Butthey are assertions; they are not based on factual knowledge that you have yourself?

Mr Johns—I will forward to you information to explain—

CHAIR —If you can get the information, that is fine. My last question is related to the singledesk. It was interesting to note what occurred in Western Australia. It might have a lot to dowith the Pastoralists and Graziers Association and also the Farmers Federation. I have had along connection with them. At no stage in their submission did they seek the removal of thesingle desk or the type of variation that you have put on it. They certainly indicated in theirsubmission—one sometimes gets things mixed up with private discussions, without going backand reading theHansard—that they were not opposed to the Tuckey model which has beenfloated around the place. I understand that the PGA is a member of your organisation. Iunderstand that their position is not identical to yours.

Mr Johns—I would say it is very similar.

CHAIR —I am not saying it is similar; I said it was not identical. Their position wasdifferent to yours.

Mr Johns—Referring to theHansard, their observation on our differences was that in theeastern states we have much better access to the much bigger domestic market and, havingmore experience in selling grain direct to end users, we perhaps had more experience and abias which might have been more in favour of focusing that single desk as purely regulatory.Without reference to theHansard, I am also of the understanding that the PGA’s definitionof a suitable single desk was one where there was a clear segregation between the marketingorganisation and the regulatory powers.



CHAIR —I said that their inclination was to the Tuckey model, which is significantlydifferent to yours. The final question I have relates back once again to the single desk andhow it operates. The United States made it quite clear at the first opportunity—and supportedby the Canadians—that they are going to take as soon as possible the issue of Australia’ssingle desk to the World Trade Organisation because they believe that it gives Australian wheatgrowers a significant advantage on the international marketing scene and it is unfair trading.Do you have any comment to make on that?

Mr Johns—Certainly. They do not see it as an advantage to Australian wheat growers; theysee it as a disadvantage to individual wheat growers. Under the single desk as we have it now,the Wheat Board does not have to buy grain off farmers. It compulsorily acquires the exportgrain, so it does not have to be concerned about the purchase price when it sells.

CHAIR —But they indicated that the World Trade Organisation is not for the benefit ofAustralian growers; it is because they believe their growers are being disadvantaged.

Mr Kelly —Is it on the basis that the current underwriting arrangements are in place andthey regard that as a quasi subsidy?

CHAIR —No.Mr Johns—Their concern is with a marketing structure where the organisation which is

selling the grain does not have to be concerned. It can select a market and sell it at any price.It is after the sale that it determines what price it passes back to the growers.

CHAIR —I am just intrigued by what the Americans—the big movers and shakers in this—have said. This is my understanding of it. I have not spoken to them in a formal sense, butI have informally. The Americans say that it gives Australian growers a better return and anunfair advantage in the world trade market than what their own growers get because they havenot got it.

Mr Johns—It gives the Australian Wheat Board as the Australian seller better access to amarket. They are not saying it is giving the Australian grower a better price.

CHAIR —That is what they are saying.Mr Johns—No, it is not. I can confidently say—CHAIR —You can have your opinion. That is what the Americans have told us.Mr Johns—I can confidently say that the Australian Wheat Board can go in and sell at any

price. It does not have to be concerned because it is after the sale that it determines how muchit will pass back to the pool. It makes it very difficult for a market to work when you havea player in there that does not have to worry about what price it sells at. I would imagine theAmericans are concerned about having an effective market where normal market pressuresexist. If you have someone in there that does not have to worry about what price it sells at,it makes it a bit difficult.

CHAIR —Certainly the trade attaches here and their representatives have spelt out veryclearly that they believe it gives a better return to Australian growers. Their growers don’t getaccess because they haven’t got it, and they think that is unfair trading. Anyhow, we mustwind up now. I thank you very sincerely for your evidence here today and your submissions.Let me tell me that they will be read. If we need any further information—and you haveagreed to get some—we will look forward to it. Thank you very much.

Sitting suspended from 10.41 a.m. to 10.52 a.m.



[10.52 a.m.]FISHER, Mr Neil Bray, Executive Director, Grains Council of Australia, c/- NFF House,14-16 Brisbane Avenue, Barton, Australian Capital TerritoryKREITALS, Mr Jock, Deputy Director, Grains Council of Australia, c/- NFF House, 14-16 Brisbane Avenue, Barton, Australian Capital TerritorySTEWART, Mr Brendan James, President, Grains Council of Australia, NFF House, 14-16 Brisbane Avenue, Barton, Australian Capital Territory

CHAIR —I welcome representatives from the Grains Council of Australia. I think you shoulddeclare whether you have an interest in the matter before us—whether you are a wheat grower.

Mr Stewart —I do. I am a wheat, grain and cotton grower in a family partnership, withequity. I am President of the Grains Council of Australia and also Chairman of the joint GCA-AWB-Department of Primary Industries and Energy working group on the restructure.

CHAIR —I should also state as I have to other witnesses that as a grain grower I have aninterest in the matter as well, in a family partnership.

Mr Fisher —I am also involved in a family partnership in the wheat industry.Mr Kreitals —I have an interest, but I am not a wheat grower.CHAIR —The committee has received a submission from you on the issues before it. Do

you have any objection to its publication?Mr Kreitals —No, certainly not.CHAIR —There being no objection, the submission will be published. The committee prefers

all evidence to be given in public, but should you at any stage wish to give your evidence,part of your evidence or answers to specific questions in private, you may apply to do so andthe committee will consider your request. For your information, while it is a 99.9 per centguarantee, if the committee decide it is in the public interest to publish your submission, theymay do so. If any individual senator decides to put in a minority report, if they believe it isessential to their report they also may publish some of it or all of it. But you would be notifiedto that effect. I invite you to make an opening statement and then we will go into questiontime.

Mr Stewart —Thank you very much, Chairman. Senators, thank you for the opportunity topresent the submission to your committee this morning on the restructure of the AustralianWheat Board and, in particular, issues relating to this first tranche of legislation in relationto the structure pre 1 July 1999.

The Grains Council of Australia is a peak body of the Australian grains industry and werepresent nationwide about 60,000 growers of all different types of grains. The fundamentalobjective of the council is to maximise Australian grain growers’ returns by seeking to initiateor influence policy decisions on matters which affect their profitability and their internationalcompetitiveness. The GCA’s members and associate member bodies are the Western AustralianFarmers Federation, the South Australian Farmers Federation, the Victorian Farmers Federation,the New South Wales Farmers Association and the Queensland Grain Growers Association,and the Tasmanian Farmers and Graziers Association as an associate member of the council.The council is a member of the National Farmers Federation, which represents over 170,000farmers through 25 affiliated member groups.

The GCA welcomes this opportunity to speak to its formal submission to the Senate Ruraland Regional Affairs and Transport Legislation Committee with reference to the Wheat



Marketing Amendment Bill 1997. I have already declared my conflict of interest, so I will gostraight to the summary of the GCA submission.

The GCA believes that the grower corporate model strengthens our requirement for the fivekey grower objectives: the retention of the single desk; the grower ownership and control ofthe organisation; an adequate capital base to maintain at least the existing level of harvestpayments; increased commercial flexibility; and industry self-determination.

These objectives were identified at a round of grower meetings held in 1995 as the keyrequirements to be included in the restructured Australian Wheat Board. The growers vestedwith the GCA the authority to negotiate with government a structure that contained these keyobjectives whilst at the same time provided the capacity for the AWB to be a world classmarketing organisation well into the next century. The GCA has been advised by BankersTrust, Mallesons Stephen Jaques and Minter Ellison, the independent financial and legaladvisers throughout the process, that the grower corporate model is a robust, commercial modelwhich meets both the GCA’s and the AWB’s objectives.

Similarly, the Minister for Primary Industries and Energy, on behalf of the government, hasadvised the GCA:. . . not only has industry risen to the challenge, it has represented a model which the government broadlybelieves is a sound way to go. I believe the new structure will stand the wheat industry in good steadfor the future as an internationally competitive industry which continues to make a very significantcontribution to the Australian and rural economies.

The GCA-AWB-DPIE working group has decided that the pre-1999 structure should be putin place as soon as is practical and possible. The implication of a decision to set up AGL Ltdin 1997—of course, the name is undecided as yet but AGL has been the name that has beenused throughout the process for the sake of having a name—is that the structure will have justtwo years to get ready for full grower ownership and commercial operations.

The independent financial and legal advisers have strongly endorsed this strategy, as withinthat period a suitable credit rating must be sought and granted if existing AWB operations areto continue in the future. This can be achieved by approaching the rating agencies late in 1997and making a formal application for a rating during 1998. The credit rating for the operationsafter June 1999 must be gained before that time and cannot be left until 1999. The rating givenin 1998 is likely to be conditional on certain factors such as the WIF having reached aparticular size; nevertheless, it is important to get this rating before the 1999 harvest.

Similarly, the commercial operations of the new organisation should be operating in fullexpectation of the move to grower ownership in 1999. No longer having the Commonwealthgovernment in effective control in 1999 will bring change which must be identified andhandled.

The GCA, supported by the AWB and the independent advisers, is confident that we canprovide the Minister for Primary Industries and Energy with a comprehensive package ofreforms for the Australian wheat industry which enshrines our key objectives yet provides acommercial structure for the long-term future of the Australian wheat industry. The GCAcommends the 1997 Wheat Marketing Amendment Bill to the committee.

Senator O’BRIEN—The memorandum and articles for the company once said that theywill require the written agreement of the minister for any variation. Is that right?

Mr Stewart —In the lead-up to 1999—the pre-1999 M and As—it is envisaged that thatwould be the case, as the AWB will remain a statutory authority up to 1 July 1999. After that,of course, the organisation will operate under corporate law and any changes to the



memorandum and articles will be along those guidelines, which will need to have approvalof the shareholders.

Senator O’BRIEN—So those articles will define the activity of the AGL?Mr Stewart —Yes.Senator O’BRIEN—And the company will be obliged to operate within the terms of the

articles?Mr Stewart —Absolutely.Senator O’BRIEN—And if they don’t, the shareholders can take legal action to restrain

the board?Mr Stewart —That would be the case. Under the new structure, the grower control is a key

issue by virtue of the fact that the growers will be electing a majority of the board membersand the B-class shareholders will be electing a minority of the board members. As with anycorporation, the shareholders would have the right to move against a director or directors ifthey thought that they had been misrepresented or had acted outside the memorandum andarticles.

It is not envisaged that prior to 1999, the changeover date, there would be many changesto the M and As. It would only be if legislation were changed—either Corporations Law,company’s bills or something like that, which may necessitate a change.

CHAIR —Can I just clarify a point there? That would just be normal procedure as it existsnow under Corporations Law and under Australian stock exchange rules, wouldn’t it? Thereis no special arrangement there.

Mr Stewart —Post-1999?CHAIR —Yes; the ability of shareholders to take action if they thought they had been

unfairly treated.Mr Stewart —As you would be aware, we have not signed off on the M and As at this stage

for post-1999, but it is envisaged that that would be done just as any other normal corporation.Senator O’BRIEN—In the memorandum and articles as they exist, can you tell us what

the activities of the AGL will be?Mr Stewart —Pre-1999?Senator O’BRIEN—Yes.Mr Stewart —The activities and the main objectives will be to maximise returns to growers.

That will be done through the pooling subsidiary, which is being set up underneath the holdingcompany. There is a requirement that there will be pooling and that those pooling operationswill be done in such a manner as to maximise returns to growers. That is the key objective.

Senator O’BRIEN—Is there a formal document which sets out the objectives?Mr Stewart —That is included in the pre-1999 memorandum and articles.Senator O’BRIEN—I do not know whether the committee has those.Mr Stewart —They were only signed off on yesterday. The last details will be put into those

documents in the next day or so.

Senator O’BRIEN—Can the committee have a copy then?

Mr Stewart —I would imagine that that would have to be a decision of the minister, as theAWB will still remain a statutory authority in the lead-up to that changeover date.



Mr Fisher —I do not think there would be a problem because at the moment the councilenvisages that in the introduction of the legislation there be reference made to the M and Asin the regulations.

CHAIR —Subject to satisfaction of the department and the Australian Wheat Board, youwould have no objection to us at least having these on a confidential basis?

Mr Fisher —No.

Senator O’BRIEN—Is the memorandum for the two subsidiary companies drafted and arespecific activities going to be contained for those companies in the memorandum or are theysimply going to be subject to the direction of the board?

Mr Stewart —There are specific operations that will be required of each subsidiary and theholding company.

Mr Fisher —Consistent with the requirements of the board, because there is an impressionamong some people that the two subsidiaries will operate in a non-controlled environment.What you are actually talking about is making a holding company with two separatesubsidiaries that report to the holding company, and so overall there will be control throughthe AWB through the holding company and two separate subsidiaries.

Senator O’BRIEN—Will they be separate entities from an accounting point of view?

Mr Fisher —Yes.

Senator O’BRIEN—How will a grower be defined for the purpose of this new structure,and also the voting rights?

Mr Fisher —The definition of a grower is in our submission. Do you want us to read it toyou?

Senator O’BRIEN—Just refer me to the point. It is on page 27?

Mr Stewart —The definition of a grower is about half-way down the page at No. 5—‘rightfully to determine the definition of a grower for holding an A-class share’.

Senator O’BRIEN—Yes.

Mr Kreitals —If I may just make a small correction, in those definitions we talk aboutreceiving one share and additional shares. A grower will have one share. What he will in facthave is a number of votes depending on how much grain he delivers to the AWB. That is asmall correction.

Senator O’BRIEN—So each grower will have a share, but different shares will attractdifferent numbers of votes, or having a share will entitle you to a vote or a number of votesand that will be calculated separately from shareholding?

Mr Kreitals —Each grower who qualifies—that is, by producing on average 33 tonnes ayear over a three-year average—will have a share. The number of votes attached to that willvary depending on how much grain is delivered to the AWB or its agencies.

Senator O’BRIEN—So each year each shareholder will get some sort of certificate as tothe number of votes they can exercise?

Mr Kreitals —Each shareholder who delivers to the AWB will automatically get a numberof votes issued to him. Those who produce more than 33 tonnes a year but do not use theAWB will have to provide some evidence of their production and a share will be issued tothem with one vote.



CHAIR —Non-deliverers to the Wheat Board get one vote for their 33 tonnes. After thatthey do not qualify for any more votes. Is that correct?

Mr Stewart —No. To qualify for further votes, you have to deliver your grain to the AWBor its agents.

CHAIR —Thank you, that has clarified it.

Senator O’BRIEN—Will there be an automatic process for advising this year that a groweris entitled to so many votes?

Mr Stewart —For those growers who deliver to the AWB, that will be automatic. Thosewho do not will be required to furnish evidence that they have produced and delivered thatmuch to somebody, which will entitle them to that vote.

Senator O’BRIEN—The number of votes will therefore vary each year for individualgrowers?

Mr Stewart —You are correct. The number of votes varies but the number of shares thatthe grower holds does not vary, and that is purely done for reasons of simplicity.

Mr Fisher —The council does not envisage annual elections. While the votes may varybetween years, there are only certain issues that the shareholders will be required to vote on—for example, the election of directors or amendments to the M and As.

Senator O’BRIEN—Amendments to the M and As could occur at any time?

Mr Fisher —Yes.

Senator O’BRIEN—With amendments to the M and As, will B-class shareholders beentitled to vote?

Mr Fisher —Yes.

Senator O’BRIEN—What standing will their vote have in relation to the A-classshareholders?

Mr Stewart —In relation to the A-class rights there are three sections of memorandum andarticles. There are part 1s, part 2s and ordinaries. The part 1s are the entrenched A classprovisions, the part 2s are other provisions that are termed ‘special’ resolutions above thoseones that are the ‘ordinary’ resolutions underneath.

Senator O’BRIEN—Excuse my ignorance, but you have a group of A-class shareholderswho hold one share each. Those shares attract a number of votes depending on, firstly,satisfying the floor level of 33 tonnes of production, not necessarily delivered to the WheatBoard—is that right?

Mr Stewart —It is a combination of both.

Senator O’BRIEN—If someone holds a share and they satisfy you that they produce 33tonnes, they are entitled to one vote whether they give it to the Wheat Board or not.

Mr Stewart —Yes.

Senator O’BRIEN—Beyond that, the number of votes is calculated based on delivery tothe Wheat Board. So you have these shareholders who will have one or a number of votesthat they can exercise, depending on those criteria.

Mr Stewart —Yes.



Senator O’BRIEN—Then you have the B-class shareholders who initially will be theshareholders who convert their WIF contribution, however it is going to be done—perhapson a share per dollar of equity basis or whatever.

Mr Stewart —Yes.Senator O’BRIEN—Will the B-class shareholders be able to vote on a move to alter the

memorandum and articles of association?Mr Stewart —It is my understanding that they can do that on all the M and As apart from

the part 1 entrenched A-class provisions. But under the set requirements both classes of sharesmust pass a change in an M and A.

Senator O’BRIEN—What things will they not be able to vote on?Mr Stewart —The part 1 entrenched provisions. Offhand I could not name them all, but they

are issues like the majority of A-class directors on the board.Senator O’BRIEN—Okay, let us exclude that. I understand that there is a specific provision

to ensure that A-class shareholders elect seven of the 11 directors.Mr Stewart —Yes.Senator O’BRIEN—When we get to the question of the memorandum and articles of

association, I am keen to know what B-class shareholders cannot vote on.Mr Stewart —I would have to look through the M and As. That is clearly defined in the

M and As, which you will get.Mr Fisher —You can be sure though, Senator, that the B-class shareholders will have the

capacity to vote on changes to the M and As, provided those M and As are not related to thegrower ownership and control issues of the A-class shareholders. It is as commercial as theindustry can make it without jeopardising grower ownership and control. That was theprerequisite for the dual class model.

CHAIR —Mr Fisher, could you drop us a line about that specific question?Mr Fisher —Yes. There are examples around the world, Senator, of the dual class model,

for example, the Saskatchewan wheat pool where the B-class shareholders do not get a vote.The A-class shareholders in that instance were prepared to take a discount on the value of theirequity—the B-class as well—to not have a vote, but the council did not believe that that wasappropriate.

CHAIR —I need something clarified here from a grower’s point of view. I produce 1,000tonnes of wheat and deliver it to the Australian Wheat Board. I get one vote for my 33tonnes and another vote for the first 500 tonnes, which gives me two votes. I get a third votefor the 500 to 1,000 tonnes. I also privately sell 100 tonnes of wheat. Do I get another votefor the first 33 tonnes of that? How is that handled?

Mr Stewart —No. The first 33 tonnes is irrespective of whether you deliver to the AWBor privately. If you grow 1002 tonnes it is 500 tonnes or part thereof delivered to the AWB.

CHAIR —I just wanted to clarify that differentiation. I thought that would be the answer.Senator O’BRIEN—In relation to the mixed shareholding control and the guarantees that

are given to A-class shareholders in the structure, we have had certain evidence which tellsus that there is a view that there may be problems with listing the company with the StockExchange, even with the control model and the fact that B-class shareholders will have fetteredcontrols on the company. Have you taken advice or approached the Stock Exchange on thequestion of listing?



Mr Stewart —We have taken advice from the independent financial and legal advisers thatthe structure that we have come up with, known as the grower corporate model, will meet therequirements of the Stock Exchange for listing. If some provision were to be incorporated inthat, legislation obviously would override the Stock Exchange requirements and guidelines.But we are not aware of anything in there at the moment that would need legislation tooverride the ASX listing guidelines.

Senator O’BRIEN—Are you saying that legislation would or could force listing?

Mr Stewart —No, it would not force listing. If there were a provision in a model that didnot suit the ASX listing guidelines and it was included in legislation, then the ASX wouldaccept it outside their guidelines.

Senator O’BRIEN—Is that the basis of your advice from the Stock Exchange?

Mr Stewart —That is the basis of the advice.

Mr Fisher —There is a little bit more advice than that, too, Senator. Technically, the adviceyou have received is that the Grains Council has not approached the Australian StockExchange to get approval for the grower corporate model. Technically, the information thatyou have received is correct.

However, Bankers Trust have approached the Stock Exchange on two occasions with thegrower corporate model. On both occasions, the Australian Stock Exchange said that they arenot in a position to give us approval for our grower corporate model because this will notoccur until after 1999. They are aware of dual-class model structures around the world. Theyhave asked Bankers Trust to provide additional detail to the Australian Stock Exchange ondual-class models.

They want to set up a situation in Australia where the Australian Stock Exchange has thecapacity to list similar structures that operate around the world. They have looked at it. Theybelieve that the grower corporate model will be able to list on the Australian Stock Exchange,but they are not prepared to give us a decision at this time. So, technically, the informationreceived is correct, but we are very confident and the independent financial and legal advisersare very confident that it will list; otherwise there is not much point the industry pursuing thismodel.

Senator O’BRIEN—I accept that. The other issue that has been raised in relation to theA- and B-class shareholders is the dichotomy between the interests of the A-class shareholdersand the interests of the B-class shareholders, who are the equity owners. Have you takenadvice on legal action by B-class shareholders against decisions of the board which are morein the interests of A-class shareholders for the industry than the B-class shareholders for returnby the company, for example, and how that might interfere with the operations of the board?

Mr Stewart —I think the issue you are referring to is how the organisation will overcomethe conflict of maximising returns to shareholders as opposed to maximising returns to growers.That is the precise reason why the grower corporate model has separate subsidiary companiesof the holding company and why the subsidiary board, under the grower corporate model, hassome independent directors.

It is without doubt that there has to be some commercial arrangement and some commercialpayment from the pools subsidiary to the holding company for the use of that capital. Howthat will be done will be through a service agreement, which has not been drawn up yet, andthere will have to be some payment for the use of that capital. The industry and the councilacknowledge that.



It is our job to ensure that that is a commercial arrangement and that money is not takenfrom the pools wantonly, I suppose, in an overcommercial type way. We just want to makesure that the pools are paying a fair and reasonable rate of payment for the use of that capitalprovided by the holding company. The three independent directors that we have set up on thepooling company board—

CHAIR —Does ‘reasonable’ mean commercial?Mr Stewart —Yes, ‘reasonable’ does mean commercial. We have been terming it as a

commercial rate of return for the use of the capital.Mr Fisher —The independent legal advisors have also advised us that there are corporate

structures in Australia where those sorts of possible tensions can be addressed within thecorporate structure. For example, the insurance industry can be structured in such a way toensure that there is not conflict between the two objectives.

Senator O’BRIEN—Is there not a necessary tension? Tell me if I am wrong but, on theone hand, the growers are interested in the return to them and, on the other hand, if the ownersof the B-class shares are not the growers—they are interested in the return to them—there isnecessary tension there, is there not?

Mr Fisher —It depends on how many B-class shareholders are not growers.Senator O’BRIEN—Exactly.Mr Fisher —Up until 1999 they will obviously always be growers. After 1999, if the

company is listed, and that is a decision to be made, the council envisages that some growersmay wish to sell their equity and that be replaced by external investors, but we are confidentthat the majority of B-class shareholders, those who have control and ownership of their owncompanies, will still be growers as well.

Senator O’BRIEN—But that is the point, isn’t it? It does not matter that the majority ofgrowers are B-class shareholders. Once you get outside of the grain growers in that field—thatis, B-class shares are held by people who are investors, not growers—they should have astanding for the purpose of taking legal action.

Mr Fisher —B-class shareholders are interested in a commercial return on their investment.We are confident that we can structure the grower corporate model in such a way that the B-class shareholders will get a return on their investment without jeopardising the overall aimof the company, which is to maximise returns to growers.

Senator O’BRIEN—I accept your confidence. What I am putting to you is that there is anecessary potential tension there. I am interested in the advice you have taken about that,because it has arisen with other models where, for example, companies have been establishedto sell part of the Commonwealth shareholding in an activity and then the minorityshareholders have been able to take action against the board of directors where the board wastaking action in the interests of the majority but, in the view of the minority, not in theirs.

Mr Fisher —There is no point in the Grains Council repeating its answer. I think the bestway to deal with this—and I am not sure if the inquiry is aware of the comprehensive papersprovided to the working group by the independent financial and legal advisors; I have seenreference to them in some of theHansards—is for the council to recommend that youapproach the Minister for Primary Industries and Energy to gain access to that independentlegal and financial advice on a confidential basis. Obviously, the advice is based on verydetailed and comprehensive advice on the AWB’s operations in terms of their finance, etcetera.



CHAIR —We might ask the department this afternoon.

Mr Fisher —Your concerns in that area and a number of other concerns that have beenrelayed to your committee will be addressed when you see the independent legal and financialadvice.

Senator O’BRIEN—I am glad that you have given us that answer, and we will take yoursuggestion on board. I see the department’s already heard the question.

CHAIR —Do I get to ask it?

Senator O’BRIEN—If we show that we have asked it, we will not need to put it inHansard. In relation to that, I think it is important to note that if the information is notavailable to us we have to draw our own conclusions.

CHAIR —For new purchases coming in, the rules and what exists and the conditions underwhich they are buying their shares will be quite clear, and they will make a commercialjudgment, even with that potential conflict or tension, whatever you want to call it, that exists.I believe they will see it as a sound investment.

Bearing in mind that between us all we have had somewhere between $550 million and $650million compulsorily acquired out of our hip pockets over a number of years, there is a fairmechanism for people to get access to their capital in due course. It is clear to me anyhow,from the current provisions in place with cashback and what have you, that it is satisfyinggrower demand now. But the question remains: they want to know that after 1999 they aregoing to have access to their capital.

As I see it, there are really only two ways in which this can be done. One is that there bean automatic listing of the company at some stage, so it has to be done over a two-year period.I suspect that, in terms of fairness to those people that put their money in there compulsorilyacquired, as I have already said, to turn that into a vote with a 75 per cent majority is not veryfair.

The other way would be to have written into the articles that there be a guarantee for thosepeople who had funds compulsorily acquired that they at least get their money back with areasonable return on their investment over that period of time. We have got the growth factorthrough the lengthy statement we get from time to time. That means that producers at that timewhen people want their money if it is not listed will actually pay back the money to thosepeople who have got it in the first place. Is that a reasonable option if it is not listed? Couldthat be written into the memorandum of articles to guarantee that at least people knew theywere going to get their money back?

Mr Stewart —Senator, I need to lead you through the process as to what has happenedleading up to this week’s working group meeting. Prior to this week’s working group meeting,the council had made a decision, which was agreed to by the working group, that growerequity in the terms of their B-class shares would be freely tradeable and transferable after 1July 1999. There has never been envisaged a case where they would not be able to access theirWIF equity; it was always going to be available to them after that date of conversion.

The second question then became when and on what basis it would be made. Of course,listing has always been one of those options, exempt markets and many other options, thathave been canvassed. The council made a decision as late as yesterday that we wouldrecommend to the working group that B-class shares be listed as soon as commerciallypossible—and I choose the words carefully—after conversion on 1 July 1999 and that amechanism be put in place to guarantee the value at issue value for WIF equity holders. We



have also used those words very carefully, meaning a mechanism, because there are a numberof options available under that, whether it be underwriting or put options or buybacks or whathave you.

CHAIR —That is a very important answer. I will be sending that in my newsletter to allgrowers because it is probably the most asked question, apart from the single desk.

Mr Stewart —We have an obligation, representing the growers in these negotiations, toensure the value of their WIF equity and we believe we have achieved that through thisdecision.

Senator O’BRIEN—Going back to the three entities, can you tell the committee what thefinancial relationship between the three entities will be? For example, will conditions be inplace for the on-lending of funds by, say, company A to company B?

Mr Stewart —Yes. The organisation is set up with the holding company nominated companyA, the pooling subsidiary nominated company B and the commercial subsidiary nominatedcompany C. The main focus of our deliberations has been on the pooling subsidiary and therewill be a provision for on-lending between nominated company A and nominated companyB under that arrangement. The council has a very clear view that nominated company C, thecommercial subsidiary, should as far as possible be isolated from the activities of the poolingsubsidiary—and I choose those words carefully, too—because under the Corporations Law,and realising that they will both be 100 per cent wholly owned subsidiaries, I don’t think itis, on our advice, 100 per cent possible to do that, but we have endeavoured to do that by alimit on capital allocation to the commercial subsidiary.

Senator O’BRIEN—Is that a matter within the articles or a matter of policy that you thinkwould be carried through?

Mr Stewart —It is a matter within the articles.Senator O’BRIEN—On another matter, can you explain to me the relevance of new season

and old season wheat in the context of the pools?Mr Stewart —The terms old season and new season wheat relates to the changeover

basically in the legislation under which the regulations and new organisation will operate.Purely and simply, ‘old season’ is under the old legislation and ‘new season’ is under the newlegislation by way of definition. It does not mean this year and next year. It means that underthe old arrangements the residual pools or whatever will be paid out under the term ‘old seasonwheat’. Under the new arrangements, all wheat will be classed as new season wheat. It is amatter of definition basically.

Senator O’BRIEN—So it is not season by season?Mr Stewart —No, it is one to the other. There will obviously be a seasonal gap when the

organisation changes, but it does not refer to one year from the other. It refers to wheat thathas been marketed under the old system and wheat that will be marketed under the newsystem.

Senator O’BRIEN—So the only relevance is the initial impact of the legislation?Mr Stewart —Yes, its changeover.Senator O’BRIEN—It has nothing to do with articles or anything of that sort?Mr Stewart —No.CHAIR —I have a general question. In terms of the concerns that have emanated from

Western Australia—I hear from your previous answer that there is one result—how many



outstanding issues are there that you are aware of that are still of concern? I suspect that thetax on capital gains is one, but that is probably a general one. Could you give us a quickoutline, point by point, of outstanding issues which are still of concern?

Mr Stewart —As far as the West Australian Farmers Federation endorsement of the growercorporate model is concerned, I spoke to their representative after our meeting yesterday andhe informed me that he was, to use his words, almost in a position to endorse the growercorporate model. I think it is now a matter of whether that endorsement comes prior to therelease of the taxation expectations or after. I certainly feel that the council would be in amuch stronger position to negotiate with government if that endorsement came beforehand.

As far as the issues that were raised by the West Australian Farmers Federation areconcerned, we believe that having the decisions that have been made up to this stage—ofcourse, we still have post-1999 M and As and a few other things—all the relevant things inthe process of the West Australian Farmers Federation have been covered.

CHAIR —Have you any indication as to when you are going to get an answer on theoutstanding issue of capital gains tax?

Mr Stewart —No, we have not at this stage. One of the disappointments of the process upto now is that we have been waiting for some months for a draft ruling from the governmenton the taxation arrangements. It has certainly been one of the disappointments at this stage.We have continually progressed the issue with the Minister for Primary Industries and Energy.Away from his office, I am not sure of the workings or the internal mechanisms of thegovernment in that term. But he assures us that he is continuing to ask for that on a regularbasis. We certainly want to see it as soon as possible. It is absolutely crucial to the growersand the growers’ support for the grower corporate model and the restructured organisation.

CHAIR —Could you tell the committee how you would like to see the capital gains issuehandled? Have you actually approached the Treasurer directly on the matter or only theMinister for Primary Industries and Energy?

Mr Stewart —I will let Jock answer the first part. The answer to the second part—have weapproached the Treasurer direct?—is no.

Mr Kreitals —The position of the GCA and the grower corporate model is that, at the timeof conversion in June-July 1999, growers’ contributions plus their earnings plus any goodwillassociated with the AWB name—that is, in other words, the valuation of WIF at that time—should be exempt from any tax, be it income tax or capital gains tax, and you start any gainsor losses from that date.

CHAIR —From that date, normal tax arrangements apply.

Mr Credulous—Yes. But the important thing is that it also goes to capital gains taxprovisions rather than income tax provisions.

CHAIR —What about in terms of income tax? You have had a reply as to your position onthat?

Mr Stewart —The only reply we have had at this stage on taxation is that the event ofconversion of WOOF equity into shares will be a non-taxable event.

CHAIR —That is a verbal advice; it is not written advice?

Mr Stewart —It is a verbal advice from the minister at Grains Week and on a number ofother occasions.



CHAIR —That was my understanding too. Thanks for that. Evidence was given to us byWAFT that the Pastoralists and Graziers Association was invited to attend. When the PGAappeared before us they said, sure, an invitation was issued, but there was a big high fenceput around with a whole host of conditions which were totally unacceptable to them. Why itwas necessary to put as high a fence as you did around the conditions under which they couldbe involved in the working party, or in the Grains Council?

Mr Stewart —I will let the executive director answer that, because there are someconstitutional arrangements within GOA which would come into play in that.

Mr Fisher —The invitation that was extended to the Pastoralists and Graziers Associationwas made in good faith, but it was based on the support of the Pastoralists and Graziers forthe grower objectives determined at the 23 grower meetings held in 1995. All the othermembers of the working party, from the Grains Council’s perspective, were supporters of thegrower objectives. The invitation said that, if the PGA was supportive of the grower objectivesestablished at those meetings, they were more than welcome to participate in the workinggroup. They declined to participate because they did not support the objectives.

CHAIR —Thank you. I come to the question of the separation of power. Senator O’Brientouched on this a little bit but I would like to get more on the public record. The twosubsidiaries, the trading company and the pooling company, to use my terminology, are relatedto the holding company. What mechanisms are there in place between the operations of thosecompanies—or how can it be handled might be a better way of putting it—and the holdingcompany so that you do not create a situation where, in terms of servicing B-class shareholdersand maximising their returns, the conflict we talked about in the arrangements, there wouldnot be subsidisation from the pooling arm to the domestic arm, which would in fact put thesingle desk at risk through the National Competition Council and the ACCC?

Mr Stewart —That is the precise reason why the Grains Council has a very strong positionon the structure as in where the entities sit and the setting up of the holding company and thetwo subsidiary companies. We always held the very firm view that, if this organisation is towork efficiently and effectively without pressure on the single desk arrangements, then thetrading activities or other commercial activities have to be clearly separated from the poolingactivities. That is why we chose the two subsidiary companies; that is why we want to ensurethat the independent directors are on the pool subsidiary. That is why, leading up to thedecision, there was a tender arrangement put in place for pooling wheat to go back into thedomestic market. The commercial activities of the Wheat Board, the trading activities of theWheat Board, have got to approach the pool subsidiary on the same footing as any other traderthat operates within Australia.

CHAIR —And you are satisfied that the arrangements you have got in place would deliverthat outcome?

Mr Stewart —Absolutely.

CHAIR —I think we have got most of the legal advice floating around, but, if we find thatwe have not, you have mentioned some here today that we might come back to you onseparately just to see whether or not we could get hold of it.

Mr Stewart —The Mallesons advice and the BT advice are all contained within the issuespapers that have been presented to the working group that you request the minister for.

CHAIR —We certainly have got a fair stack of it, anyhow.

Mr Stewart —It will be a bigger stack when you get these ones, I assure you.



CHAIR —I would like to ask a question about the structure. Setting aside the argument aboutwhether you represent growers or you do not represent growers, the Grains Council and itsvarious affiliates and structures is a representative organisation?

Mr Stewart —Yes.CHAIR —The Wheat Board is the agent that sells wheat on behalf of Australian wheat

growers?Mr Stewart —Yes.CHAIR —In terms of the debate on the structure and where you want to get with it, why

has the Wheat Board been given equal status to grain grower representatives when, in fact,the Wheat Board is the agent of grain growers?

Mr Stewart —In the negotiations, in the working group?CHAIR —Yes.Mr Stewart —The working group was set up by the minister prior to Grains Week 1996

and, as such, the Wheat Board holds, my summation would be, a lot of expertise, particularlywith its board of directors and some of its senior management, on how marketing is doneoverseas and how the operations of the Wheat Board are carried out on a day-to-day basis.I believe that the input of the Wheat Board has been invaluable in the process, because withoutthe information that they have been able to give us on their operations and how they go abouttheir dealings with both domestic and international customers it would have been much moredifficult for the council to come to decisions on where we wanted to be in the future.

CHAIR —I think you understand why I am asking that question.Mr Stewart —I totally understand why you are asking, Senator.CHAIR —In view of the fact that this legislation is before us now and the proposal is for

the second tranche of the prospectus, if you like, to come in when we get back in February,what outstanding issues are there to be resolved and what work is there to be done betweenwhere we are now and next February?

Mr Stewart —In relation to pre-1999, all the work has been done—not all the work, butall the work in relation to the legislation. What needs to be done in terms of putting thelegislation into place and, hopefully, having it passed through the House has been done. Thereis still some administrative work to do in terms of writing up the service agreements and theagreements between the pool subsidiary and the holding company which will be progressedover the next couple of months. But in terms of what needs to be done now prior to thelegislation being, hopefully, passed through the House, it is basically under control.

Mr Fisher —We have a schedule, Senator. We hope to meet in the middle of October, andhave a final meeting at the end of October and complete the majority of the detail.

CHAIR —Any questions, Senator Forshaw?Senator FORSHAW—No, Mr Chairman.CHAIR —I think that just about covers it, so I thank you for your attendance here today.

There are some matters that you are going to attend to for us. There is just one thing I wouldlike to do. Mr Fisher, I have got a paper here which I prepared myself and which you haveseen. I have faxed it through to you. It puts down what has occurred in percentage terms inproduction and what have you since the WIF came in. I would just like to table that for thepublic record if you are satisfied that it accurately reflects what the situation is, because I thinkit would be useful for the committee to have it on the public record.



Mr Fisher —Senator, refresh me as to—CHAIR —I will show it to you.Mr Fisher —You sent it to me on a confidential basis, if I recall.CHAIR —Yes.Mr Fisher —Senator, it has got Australian wheat production by state, and that has been

verified with the AWB?CHAIR —Yes, AWB and ABS.Mr Fisher —Given that it was given to me on a confidential basis, can I comment on it and

come back to you?CHAIR —Certainly.Mr Fisher —Is that the most appropriate way of doing it?CHAIR —Fine.Mr Fisher —Okay.CHAIR —Can I get that back for the rest of the day? I might need it this afternoon.Senator O’BRIEN—Can the members of the committee have a copy?CHAIR —Certainly.Mr Stewart —Thank you.

[11.45 a.m.]McKEOWN, Mr Peter Julian Joseph, Board Secretary/General Legal Counsel, AustralianWheat Board, 528 Lonsdale Street, Melbourne, VictoriaPRICE, Mr James Creel, Manager, Grower Relations, Australian Wheat Board, 528Lonsdale Street, Melbourne, Victoria

ACTING CHAIR (Senator O’Brien) —The committee has your submission on the issuesbefore it. Do you have any objection to its publication?

Mr Price —No.ACTING CHAIR —There being no objection, the submission will be published. The

committee prefers all evidence to be given in public, but should you at any stage wish to giveyour evidence, part of your evidence or answers to specific questions in private, you may applyto do so and the committee will consider your request, although there are circumstances inwhich that evidence can be made public by order of the Senate—for example, by itspublication in a report of the committee or a dissenting report. Would you like to make anyopening remarks?

Mr McKeown —Certainly. Good morning. Thank you very much for the opportunity thismorning. There is just one housekeeping issue that I would like to raise first. We have faxedthrough a letter from our managing director, who unfortunately was unable to be here thismorning. He had other commitments that he could not reschedule. I will actually table theletter expressing his apology.

Also, before we move on to the submission, there are a couple of references made in theHansard record of evidence previously provided to the committee that we would like tocomment on. There are only two points. They both relate to evidence provided by Mr Moffetin his capacity as the Grain Section President of the WA Farmers Federation. I refer in



particular in the first instance to page 80 of the transcript of proceedings on Monday, 15September 1997. In his opening remark in paragraph 3 he said:We were told by the Chairman of the Australian Wheat Board at a meeting that after he is privatised hereally does not care what the growers want.

This, obviously, has caused some concern both for our chairman and for our board members.We wish to table a letter both from our chairman and from the other board member that waspresent at that meeting. The comment was taken out of context. It was referring to some issuesthat arose in relation to the issue of introducing the state marketing of wheat and dissolvingthe international approach that is adopted under the wheat marketing arrangements.

The chairman was clearly indicating—and the letter will support this—that he was referringto grower comments in the context of the state marketing debate. He was concerned that thefull information had not been before the growers and, until that was, it was inappropriate forthere to be a comment on that. He concluded by saying that, if the full information wasreceived, the growers would come to a different conclusion, because certainly that would movetowards the elimination of a single desk.

ACTING CHAIR —Are you proposing to supply copies of that correspondence to thecommittee?

Mr McKeown —Certainly. I will table a letter from the chairman. The letter refers to bothremarks, so I will refer to the second remark and then table that letter and also a letter fromour other board member, Kerry Sanderson, who was present at that meeting.

The second statement made by Mr Moffet on page 83 ofHansardon the same date, 15September, occurs in the middle of the page. I quote:It is made very difficult for us, Senator, when you have the chairman of the Wheat Board himself—nottalking about the loss of single desk maybe, it is when we lose single desk, a fait accompli about all this.

Again, this caused some concern both to our chairman and to the board because the board hasbeen a strong supporter of the industry’s position of single desk. On regular occasions thechairman refers to support for the single desk. Attached to his letter is an article in theFarmWeeklysupporting a comment made by the chairman in relation to the support of the singledesk. So I table the letter from the chairman in relation to both issues and also a letter fromour board member, Kerry Sanderson, in relation to the first comment.

CHAIR —Thank you.Mr McKeown —Moving on to our submission—CHAIR —Just a moment. Is the committee happy to receive this, and also the first one which

I was not here for?Senator FORSHAW—I have not seen the letter yet from Kerry Sanderson, but is that the

other director that is referred to in Mr Moffet’s statement—there is Mr Moffet, Mr Thomsonand Mr Sanderson?

Mr McKeown —Correct.CHAIR —So what page is the first statement on?Mr McKeown —The first statement is on page 80, in the first sentence in the third paragraph

of Mr Moffet’s comments.CHAIR —Thank you.Mr McKeown —Moving on to the submission, we will start with James providing the

background.



Mr Price —We have got a very brief outline statement and my purpose is to provide, Iguess, from a commercial and marketing perspective some of the background to the AWB’sinvolvement in the process and also looking at the sort of structures that may suit where thewheat market is tending to trend. Peter will then provide some information, from ourperspective again, on the grower corporate model and some of the key issues in terms of thecommercial aspects which we see as being important in terms of operating in the marketplace.

CHAIR —Before you go any further, because I had to drop out for a minute—I am not surewhether you knew—I must inform you that I do have an interest in a family partnership. I ama wheat grower and I have an interest in the WIF fund.

Mr Price —Senator, I have no interests to declare.

Mr McKeown —I certainly have no direct pecuniary interest in wheat production.

Mr Price —Perhaps I can go through our perspective on perhaps the imperatives forchange—both from a commercial market perspective and looking at some of the aspects thatthe government has put forward.

I guess the Wheat Board sees the international market becoming increasingly competitive.That is driven by technology. It is also driven by changes in the way some of our customersare doing their business. That is tending to put added pressure and competitiveness on thesupply side of the industry. Australia, whilst an important exporter in the world trade, is stilla small player in the big five, and that means that we need to have an efficient marketingsystem moving forward to challenge and to be able to extract maximum return for theAustralian economy.

Really there has been some continual change of requirements in terms of markets. What weare seeing is the need for a structure to adapt and revolve and remain competitive in termsof servicing growers’ needs in that market.

I guess there are some other imperatives for change. Certainly in April 1997 the ministerreiterated that the government guarantee would cease in 1997 on the AWB’s borrowings,which clearly impacts on our ability to make high level harvest payments to growers. Otherparts of the legislation would disappear at that time and essentially you have the single desklegislation remaining.

The other aspect of the minister’s announcement in April 1997 was, of course, thetermination of the two per cent WIF levy at that time. On top of that, it is important to lookat the market and think about the national competition policy review, which has been set downfor 1999-2000, in regard to ensuring that the AWB is in a good position to be assessed at thattime in terms of its effectiveness in operating according to the legislation’s requirements.

Some of the pressures for change have really been borne out in one particular independentstudy that was done involving the Grains Council, the AWB and a number of other industryplayers, customers and growers and people in the industry chain in 1994 and 1995. That wasa Booz Allen and Hamilton strategic planning report into the milling wheat industry whichessentially found that, given all these changes and given the market and the competitivepressures of the international market, the industry was really unsustainable in its current form.Certainly, the AWB supported that view and some of the recommendations coming out of thatreport are now coming forward to you in the legislation you see before you.

CHAIR —When you say the industry was unsustainable, you mean the marketingarrangements in the industry were not sustainable, do you? Can you clarify that, because theindustry is a lot of us? I hope I am sustainable.



Mr Price —The report was specifically relating to the marketing arrangements. It was talkingabout the dynamics within the industry and looking at the decline in terms of trade. It didmake judgments about aspects of the industry which needed to be improved. Yes, you areright, Senator, it was referring to the marketing arrangements.

CHAIR —Thank you.

Mr Price —So the process we are seeing now is a direct result of that independent researchas a starting point. We have gone through with the Grains Council and the department anumber of processes in seeking growers’ views. The growers have come forward with theirfive key grower objectives, being retention of the single desk, grower ownership and/or control,a commercial, flexible market driven structure, an adequate capital base in the organisationin terms of providing adequate levels of harvest payments, and industry efficiency—allobjectives which the AWB supports from a commercial market prospective. The process hasreally led to the grower corporate model, and Peter might like to talk about some of our viewsin terms of that model.

Mr McKeown —Just moving on to the grower corporate model, on page 4 of our submissionwe represent in diagrammatic form the eventual model, being post-July 1999. As you can seefrom the diagram, the single export desk will be enshrined in legislation and there will be amechanism to provide that control.

Growers will have direct interest post-1999 in AWB Limited through the distribution of bothA-class shares, as has been mentioned earlier in the proceedings, and also the conversion ofWIF fund units into B-class shares. Underneath the holding company, AWB Limited, therewill be two operating subsidiaries which will be wholly owned by the holding company,separately operating the pooling arrangements and the trading arrangements.

Moving to that structure in the near future, which is obviously the subject of the currentamendment to the Wheat Marketing Act in parliament, is the structure until 1999. The sharesin AWB Limited, or in the holding limited company, as referred to in the diagram, will bewholly owned by the Australian Wheat Board to the account of the Wheat Industry Fund. Wewill have a similar structure in place in terms of the pooling subsidiary and the cash tradingsubsidiary under that holding company. Obviously the legislation is providing for the creationof those entities and the transfer of assets and liabilities and contractual arrangements fromAWB across to the holding company and it subsidiaries, and also retaining within the AWBits major role of controlling the single export desk. They are the only comments I wish tomake on the submission.

CHAIR —Thank you for that. I will repeat my last question to the Grains Council. Therehas been some criticism by certain sectors of the position and the role of the Wheat Boardin terms of the working party. To put it simply, you are the servants of the growers in beingthe marketer and so on. Why was it important, in the Wheat Board’s view, that youparticipated in the working party, and what expertise did you bring to that working party toget a better result?

Mr McKeown —I suppose from the Australian Wheat Board’s perspective, as has beenmentioned by the Grains Council, we are the servant, we are the operators, but also, indesigning the structure, one has to be aware of the impact of the operational aspects. One hasto be aware of the capital market’s reaction, for example, in terms of designing a structure,particularly the rating agencies’ assessment of the model, because at the end of the day ourobjective is to maintain the access to the capital markets and to maintain any credit rating thatwill deliver the cost of funds at a similar level to what we achieve currently, and also to ensure



that we have access sufficient to be able to provide harvest payments up to the level that weare currently providing.

What we brought to the table was the knowledge of the capital markets, the knowledge ofthe rating agencies, an understanding of how the operational arrangements will impact on ourcustomers, both internationally and domestically, an understanding of the particular marketsand what impact the model may have in those markets. We felt, from the Australian WheatBoard’s perspective, that the operational impacts were very important in designing the mosteffective structure to achieve, as James has referred to, the objectives that have been enshrinedat an earlier Grains Week meeting.

CHAIR —As well as the significant material that flows from the Wheat Board to officeslike mine, can you give us a brief run-down of how often you actually go out into the countryand have grower meetings on a state by state basis?

Mr Price —Certainly. The way in which that operates varies from state to state, dependingon the region and requirements.

CHAIR —I just want an overview. I do not want you to say whether you were there on thatday. Do you get to every state every year, or twice a year, or once every two years? You cantake the question on notice.

Mr Price —I will answer briefly, and if you require more detail, I can provide it. Usually,we have pre-harvest meetings around most of the regions in all states. In some states, we alsohave a follow-up, post-harvest, pre-planting meeting arrangement—and that involves a numberof meetings face to face with growers—apart from our existing regional office network thatmeets individually or with grower groups on a regular basis.

CHAIR —So in each state, you would hold at least one round of meetings every year?Mr Price —Correct.CHAIR —Thank you. I want to go straight to the structure and the arrangements. Evidence

has been given to us by representatives from WA and also from the New South Wales Farmersthat they believe that the greatest number of growers and, I think, their organisations wouldhave preferred no change. They would quite happily live with the status quo. If somethinghappened tomorrow and we said, ‘We’re not proceeding any longer, the same arrangementsare going to stay in place, but it’s going to be financed through the WIF fund,’ what impactwould that have? You mentioned the Booz Allen report, which said that it was unsustainable.What would be the ramifications if all of a sudden we threw our hands in the air tomorrowand said, ‘It’s all too hard. What we have got now is good,’ and there was no change?

Mr Price —The first thing that would happen is that, come 1999, the AWB would not beable to efficiently fund the requirement of harvest payments to growers. One of the key growerobjectives has been that the growers want a high level of harvest payment, the existing 80 percent harvest payment, for payment for pool wheat.

If the AWB, under these transitionary arrangements, were to stop and was not able to gaina market track record between now and the period that the government guarantees wereremoved, the situation becomes questionable—in terms of financial markets, managing thatand efficiently funding that requirement. That, on its own, is a major issue moving forwardfor the growing sector. In terms of the AWB operating according to what growers expect theorganisation to service to them in that area, we would have a problem in that area.

I think there is a more general point, which gets back to our role in the process, abouttalking about how the market is changing and how we need to be able to be more



commercially flexible to respond to that market so we can, in fact, put more dollars ingrowers’ pockets and continue to maximise their returns under the pooling system. If thesetransitionary arrangements were not to take place, then, again, the track record of ourcustomers and being able to operate in a more commercially flexible environment in themarketplace is put at risk.

CHAIR —In terms of the timing of what is called enabling legislation, the first part of whatis a prospectus of the future of the Australian Wheat Board, it has been put to us, certainlyprivately, on a number of occasions that there should be a full package put on the table at onceso that people know exactly where they are going, what the final arrangements are, what theirinvestment is going to be, how it is going to operate, et cetera. If you are out in the real world,the commercial world, it is against the law to put up half a prospectus; you have to put upone that is signed off with the Australian Stock Exchange. Why is it necessary, from the WheatBoard’s perspective, to proceed at this time with this first part of the legislation and not waituntil February to do it all in one hit so that we have a total and clear picture of what is beforeus?

Mr Price —I think it reflects the evolution of the grains industry, and particularly the WheatBoard, over a number of years. It acknowledges the evolutionary process, the transitionaryarrangements, of this enabling legislation and the subsequent legislation that will be required.The fact is that in the future, in 1999, we have a government guarantee being taken away. Iguess what the industry has said—and the Wheat Board has been involved in that—is that insupport of that we need to prepare for that, but we also need to be prepared for the futurebeyond that.

It also gets back to the issue of the industry not wanting to change—a point you raisedearlier, Senator. I guess that evolutionary process allows the industry to go through a changeprocess. Despite all of that, as the Grains Council indicated earlier in their submission today,this transitionary arrangement is not being considered in isolation of the arrangements beyond1999. In fact, as they suggested, further meetings this October will define the final elementsyet to be resolved on that post-1999 arrangement. In a sense, there is a package, but it isrecognising the evolution and the changing circumstances of the government guarantee beingremoved in 1999, the single desk review in 1999 and 2000, and the issues that may result fromthat and then moving forward again.

Mr McKeown —Just to add to Mr Price’s comments: in the ideal world we agree with theproposition that we would prefer to have the total package dealt with in one piece oflegislation. I think there is certainly acceptance of that proposition. However, we are keen tohave as long as possible, pre-July 1999, to be able to educate the rating agencies, to obtainthe appropriate rating for post-July 1999, to educate the capital markets and to educate ourcustomers with the changeover.

What we have done previously with the five-year review of wheat marketing arrangementsis that we have successfully been able to use that education through the transition as we havemoved to a different arrangement. We have recognised that it is very important to bring thegroups along with us so that they have an understanding of the new structure well before itis in place so that they have an appreciation, and, if necessary, so that we also have time tomake any adjustments to the structure.

CHAIR —So, in effect, you are saying it is important that you have it in place for theoperations of the 1997-98 harvest?



Mr Price —That is our view, certainly, in terms of ensuring that we get a commercial trackrecord and get that education process going as we move through the whole raft of changes.

CHAIR —Because, in effect, you really only have this harvest and the next one and thenyou are out in the real world.

Mr Price —Correct.Senator FORSHAW—If the worst happened, from your point of view, and the legislation

did not go through for whatever reasons, would you expect that the guarantee should beextended? What is the possibility of that? That is a matter for government, I suppose, but areyou saying that there would have to be consideration of the government extending its timefor guarantee?

Mr McKeown —What we are saying is that it is highly desirable for us to have as long aspossible to prepare the markets. We are not saying it is critical.

Senator FORSHAW—I am just trying to understand whether the end of the guarantee in1999 drives the legislation to that extent or whether that can remain in place, notwithstandingwhether the legislation is delayed, held up or reconsidered.

Mr Price —I think there are a number of factors that are relevant there. Certainly the timingof that government guarantee removal is important. At the end of the day, you are going tohave people with capital sitting behind this organisation that is bearing a risk. They will wantto be comfortable that this organisation is able to operate efficiently, in a commercial sense.As we have seen with the privatisation of other government instrumentalities, there is a timeframe needed to ensure that those efficiencies and commercial practices are developed.

As a wheat board, we believe we are providing an efficient service, but we are the first toacknowledge that that is one of the reasons why we think a commercial structure will be goodfor the industry in terms of the AWB. We are the first to acknowledge that we can do thingsbetter. But, in terms of putting the pressure of the market onto us, we want to ensure that wehave sufficient time to get to a stage where essentially a grower’s investment is protected,because that is what it will be in the first place.

The other factors driving that are obviously the single desk review and the nationalcompetition policy in 1999-2000; and the need for the organisation to be well-structured andthe changes to be implemented and up and operating well before that situation so that theorganisation can go into the review on a sound footing and then operate effectively in theinternational market, come what may in terms of the result of the review. It is a time issue.

CHAIR —The reality is, though, that the previous government made the decision to removethe guarantee. We did not oppose it. In government, we have said we will keep that policyinitiative in place. There was not a huge outcry from the industry about the governmentguarantee; they had accepted the fact that it was going. So there would be no purpose, really,in changing the date, would there? It would just delay the commercialisation of the WheatBoard.

Mr Price —I think that would be an issue for the growing industry and the government toresolve, if we ever got to that issue. For the AWB, our view is that we are very keen to seethe new structure implemented as soon as possible so that we can get on with delivering thecommercial benefits that we believe are possible.

CHAIR —If the legislation is dealt with now and goes through, that gives you two seasonsof operation prior to 1999, whereas if it does not go through and it is delayed it would onlygive you one.



Mr Price —Correct.

Senator FORSHAW—I just have a couple of follow-up questions. One of the things thatconcerns me here is that we have some major grower organisations and farmer organisationsfrom Western Australia and now from New South Wales telling us that the feeling amongsttheir membership is rather apprehensive about this, and the membership would prefer thingsto stay as they were. I suppose I have not questioned them to this extent, but I have taken itthat that may even include reinstituting or not abandoning the government guarantee.

I can see what Senator Crane is getting at; I do not think that is much of a likelihood. Butit really does concern me that we should be trying to test out just how strong that oppositionor that feeling is, and how much regard we should pay to it, when we have the Grains Counciland the Wheat Board saying, ‘No, it is imperative to get this thing done.’

That is probably a statement more than a question, but I have one other question. Do youthink it would be possible to complete the package and handle it all in one piece of legislationand still meet that time line—in other words, try and bring forward the second tranche oflegislation?

CHAIR —You’d have to agree to let it in.

Senator FORSHAW—This is a committee of inquiry. It has been said. That position hasbeen put, without any degree of detail as to how it might be able to be done. I am just askingyou people, who have been intricately involved in the preparation of all of this, is thatpossible? I know it is not what you want or desire. Is it too hard to say?

Mr McKeown —As far as we are aware, the drafting of the second tranche of legislationhas not even commenced. There is a major time frame involved in actually drafting thatlegislation.

Senator FORSHAW—That is right.

Mr McKeown —It is probably a more appropriate question for the department, but I wouldhave thought that within the time constraints of this year it might not be possible. It alsodepends on the commitments of Parliamentary Counsel and on other pieces of legislation. Theywould need instructions in the first instance which, obviously, would require cabinet approvaland so on. As I say, that is probably more appropriately answered by the department.

Senator O’BRIEN—I listened to your answer about whether the change is absolutelyessential given the opposition of growers, and I came to the conclusion from the answer thatyou gave that you thought it was desirable but that a question mark remained. It was anopinion that perhaps this was the best way to go, but I did not gather any great conviction inyour answer that the system that we are going to is better than the current system.

Mr Price —Maybe I skipped over some of the detail of the background of the process—andI refer, Senator, to your comments about change as well; I think we have to expect that peopledo not like change. But the process that has involved this restructure has been going on since1993-94 within the Grains Council—and they would be better able to outline the detail of that.

But there have been a number of investigations. With the current working party process,since late 1995 the working group and the independent consultants have looked atprivatisations, corporatisations, cooperatives and trusts. They have looked at mechanismswhereby we could retain the existing statutory authority and still allow some flexibility interms of the Wheat Industry Fund through revolvement. There was also the look at whetherthe status quo was acceptable in terms of where the market was going and also the signposts,



in terms of the government guarantee being removed and the single desk review towards theend of the century.

So there has been extensive analysis of that, and all grower bodies—in terms of the GCAand their affiliates—have been involved in that. The Wheat Board has provided its advice interms of commercial and market impact.

Senator O’BRIEN—What is the relevance of all this, if a 2001 policy is that there shouldnot be a single desk? Where do we end up? This body is essentially the single deskcorporation, isn’t it?

Mr Price —Certainly the body would operate the single desk, but the single desk would beheld by a statute. If the single desk was taken away, the relevance would be in terms of thegrower objectives. They are telling the industry that they want a grower owned and controlledorganisation.

Senator O’BRIEN—Ignoring that, with this legislation we are creating the framework fora corporation which—at least initially—will represent growers.

Mr Price —Yes.Senator O’BRIEN—And it is essentially a legal embodiment of the single desk principle,

isn’t it? That is essentially what this corporation is going to be. It has got a monopoly onmarketing for export. That is what we are creating, isn’t it?

Mr Price —We are creating a structure where that single desk power is provided to acommercial entity to undertake that.

Senator O’BRIEN—Replacing the entity that is not a commercial private corporation atthe moment?

Mr Price —Correct. Come the review, if the single desk were taken away—and we do notbelieve that will be the case, because we believe that we will still be able to demonstrate anet benefit there, but that is for the future—then I think growers have indicated that, withoutthe single desk, they would want a company that acted in their interests in the marketplaceand that was commercially viable. Once it is in the marketplace, they will decide. I guess theywill vote with their feet in the sense of how efficient or otherwise the organisation is in termsof delivering benefits to them—both from an investment point of view and also in terms ofmarketing their wheat and other grains.

CHAIR —Can I follow up a question there?Senator O’BRIEN—Can I just follow this through and then perhaps you can go back to

that.CHAIR —Yes.Senator O’BRIEN—We have the first tranche of legislation before us now, and some other

legislation which is not even drafted yet will come before us later: is it not the case that, ifwe pass the first tranche of legislation, we will be irrevocably headed towards the structurethat is proposed, without knowing what the second phase is in terms of the actual legislativeinstrument?

Mr Price —You may not know what the legislative instrument is, but the industry, the GrainsCouncil, the department and the AWB, in putting together the proposed amendments, havea clear view—and there are some outstanding issues which are being determined, as I said,this coming month—about the structure post-1999, notwithstanding that the legislation maynot be developed as yet. So it is just a question of implementation, I guess, rather than the



policy framework behind it, in terms of how the commercial entity will operate post-1 July1999.

Senator O’BRIEN—If there is an inquiry into the second piece of legislation, I can imaginethat one view which will be put to us will be: ‘We are halfway there. You cannot hold us upnow’, even if we do not like the way that the legislation is expressed. I am making a statementreally.

Mr Price —Yes.

Senator O’BRIEN—That is an issue for the legislators and how they want to deal with it,irrespective of the issue of your wish to officially embark upon the process. Is it not the casethat, if the legislation is flagged and combined but the decision is taken, effectively there istime for the market to become accustomed to the concept?

Mr McKeown —That is certainly another approach that could be explored.

CHAIR —In terms of the development of the memorandum of understanding and what haveyou, we asked the Grains Council earlier on whether or not—and we will be going to thedepartment as well on this—you would have any objection to that being given to thecommittee on a confidential basis to look at, in terms of determining our position?

Mr McKeown —Yes. I suppose we would regard that as a working group decision or issue.Bearing in mind that the advisers—Mallesons, the legal advisers, and BT, the financialadvisers—were engaged by the working group as a group, we do not have the capacity torepresent the working group’s views on the issue. From the AWB’s perspective, our likelyview is that we would support the access, but we believe that is really a working groupdecision—not a decision for a single party in the working group.

CHAIR —We understand that. But we did put it as being if all parties in dealing with thedepartment were in agreement. I take it from your answer that, if the other people agreed tothat, you would not have any opposition?

Mr McKeown —No.

CHAIR —It is very important to us, in terms of progressing this and the argument that youput before us, that we at least have some working knowledge of where it is at and anunderstanding of it. I understand a lot of the issues were ironed out, in terms of the difficultiesor the conflict which existed over some issues.

Post-1999, if the single desk did disappear—because the single desk, theoretically at least,could be granted to a number of grain traders or whatever to operate it through an agencybasis—wouldn’t the Wheat Board, as a grower controlled, grower owned marketer out therein the cold, hard, competitive world become equally or even more important to growers? Imake no judgement about whether the Wheat Board would be better, worse or otherwise onthis; I simply state that it could be done and ask whether it would not be important after 1999for growers to be able to have their own investment, to be marketing their own grain crop if,for whatever reason—competition policy, for instance—it got knocked off?

Mr McKeown —That is certainly our view. The structure has been designed with the firstobjective of securing the retention of the single desk. But, being designed on commercialprinciples, it can also survive in the absence of that.

CHAIR —It is almost a two bob each way situation, isn’t it?

Mr Price —Correct. I think the industry, by the very nature of their objectives, tends tosupport this. What they are saying is, ‘We want to take out some insurance here, in terms of



the arrangements we are putting forward, so that we attempt at all costs to retain the singledesk, but we ensure that, whatever the environment, we have a viable, commercial, soundorganisation operating in our interests in the market place moving forward.’ So I agree,Senator.

CHAIR —In terms of—I want to go to the structure—Senator O’BRIEN—You did interrupt me to go on to those. I have got a number of other

questions.CHAIR —Sorry. You can go. It does not worry me. We have plenty of time.Senator O’BRIEN—I have a few questions. They are not directly related to that. Is it true

that the Wheat Board supplies wheat for about 70 per cent of the domestic grain market?Mr Price —It varies. I can check the exact figure at the moment for you and get back to

you, but it has varied since deregulation. The general figures would be between 60 and 80per cent.

Senator O’BRIEN—So it would not be unreasonable to say that the AWB dominates thedomestic market?

Mr Price —It is a major player in the domestic market.Senator O’BRIEN—At the Perth hearing, Mr Tuckey suggested to the committee that the

Australian Wheat Board makes more money out of its domestic trading arm than it does outof international trade. Can you give the committee an indication of the split between the twooperating arms?

Mr Price —In terms of—?Senator O’BRIEN—In terms of which area you make money from or what the split of

money is from those two arms?Mr Price —It is difficult for me to draw a direct parallel between those two. On the

international side we have a single desk pooling arrangement whereby, apart from any costsattributable to those pools, all money is returned direct to growers, so you do not actually havea profit and loss scenario—as it stands currently—whereby the trading division is clearly aprofit and loss activity. However, by the very nature of the fact that 80 per cent of Australia’scrop—or between 70 and 80 per cent, year to year—is exported through the single desk ofthe AWB, clearly business turnover is hugely greater in that area than in the domestic area.

Senator O’BRIEN—In general terms, can you tell me how the AWB operates in thedomestic market and what the relationship is between your domestic business and yourinternational business?

Mr Price —The AWB has a trading business in the domestic market. We trade in wheat—and other grains, where there are no state statutory regulations preventing us from beinginvolved in that. The trading business also exports other grains, feed barley, for instance, wherethey are able to; and lupins. The business is also involved in grain seed commercial activities.For instance, we are involved in a program involving introducing new plant varieties to assistthe industry. So it is really a commercial activity.

Senator O’BRIEN—And the relationship between the international and the domestic—isthere a strict dividing line or is there a merging of the operation?

Mr Price —In terms of the organisational structure, there is separation between the activitiesin the current structure to ensure the integrity of the single desk pools. Currently there is adivisional structure in the organisation, and there are two divisions that look after the pooling



arrangement: the international marketing division and what we call the merchandising division,which handles the pricing and product position management for the pool. Then you have whatwe call our Australian division, which is our trading activity.

Under the structure that is proposed in the legislation, the commercial trading area and thepool area will be separated into separate, wholly owned subsidiaries.

Senator O’BRIEN—Yes, I understand that. I am just looking at the comparison with thecurrent operation of the board. Going to another matter, Mr Moffet of the Western AustralianFarmers Federation told the committee that this year the wheat industry fund grew by 16.6per cent. I assume that is for the financial year 1996-1997. Can you tell me how each part ofyour operation contributed to that growth? Can you separate out the pool activities, the tradingactivities, return on value-adding investments, and money market activities, or would you needto take that on notice?

Mr Price —I will take it on notice. The only general comment I would make is thatessentially that return comes from two sources. One is the profit from our trading andcommercial activities. Secondly, the remainder of the wheat industry fund is invested by agroup of fund managers which we employ, and it is invested in market equities—variousequities across a broad spectrum of the market. Those are the two areas from which returnsto WIF are appropriated, but I can certainly come back to you on the detail.

Senator O’BRIEN—Am I to understand that the money that is invested is invested in theequities market?

Mr Price —Correct.Senator O’BRIEN—Australian and international or just Australian equities?Mr Price —I think some are international, but I will come back to you with a full

explanation of that.Senator O’BRIEN—Thank you. That fund was established in 1989 to provide the capital

base for domestic trading activities and for downstream investments of the AWB. After 1992and the decision to end the government guarantee, the role of WIF was broadened to buildan adequate capital base. Is it possible to provide the committee with a list of the downstreaminvestments made since 1989?

Mr Price —It certainly is, and with the earlier advice I will furnish that list for you.Senator O’BRIEN—Okay. When you do that—or perhaps now, depending on what you

can do—can you tell me what principles apply to downstream investment? What are the hurdlerates of return, for example?

Mr Price —There are a number of criteria which are assessed in terms of those investments.I will furnish those details with the other information. The Grains Council is also involvedin terms of considering the wheat industry fund business plan, and they are involved inconsidering those investments as well.

Senator O’BRIEN—So they were set by the board with reference to, in conjunction with,or in consultation with the Grains Council. Was the government involved in that decisionmaking process?

Mr Price —Let me take it on notice. I will get back to you with the detail.Senator O’BRIEN—Once the guarantee ends, the future borrowing capacity of the board

and therefore the advance payment scheme will depend on the size of the equity base, so aprimary objective of the AWB is to maximise the value of WIF, to maximise the equity base



once the government guarantee goes. Is there a conflict between that objective and theoperations of the AWB in the interim?

Mr Price —I am not sure. I need to clarify the question.

Senator O’BRIEN—The government guarantee ends in 1999, and your future borrowingcapacity under the proposed model for the advance payment scheme will depend, I presume,on the size of the equity base—the size of the WIF fund or the category B shareholding,whatever it is. So is the primary objective of the board to maximise the value of the WIF, tomaximise the equity base, once the government guarantee goes?

Mr McKeown —If we can go back, one of the objectives of the grower model was toprovide sufficient access to capital and a similar price to what is currently obtained under theunderwriting arrangements. In the advice that we received from Bankers Trust, they determinedwhat capital requirement was needed to provide sufficient capital at a similar price, subjectto obtaining the appropriate credit rating in an average crop year and at average prices. It wasreally designed from that point of view, to try and maintain as near as possible the currentarrangements. That was driving that particular equity level.

Senator O’BRIEN—Mr Chairman, I have a significant number of questions to follow. Iam mindful of the time. It might be better that I try and supply them on notice and have themanswered on notice, given what is a very strict timetable today. Is that acceptable?

CHAIR —Yes, it certainly is acceptable, but because of the tight time frame and ourreporting date it means you will have to be writing in the plane on the way home.

Senator O’BRIEN—I am prepared to do that, because there are some complexities that Iwould like some answers to in relation to the financing of the operation.

CHAIR —Will you table them?

Senator O’BRIEN—I will get them put in an appropriate form for this afternoon.

Mr McKeown —I would like to refer to an earlier answer I gave to Senator O’Brien’squestion on deferring the current package of legislation until the second package is in place.We responded by saying we could explore that option, or something like that.

The education of the market is certainly very important. The second component, whichJames referred to, is the track record. The track record is obtained through the actual operationof the model. The markets are concerned not only with understanding how the model willwork, but seeing it operate in practice; so obviously we would not achieve the secondcomponent if we delayed the current package of legislation.

Senator O’BRIEN—Could I not put it back to you that the question of how quickly weget the second component is in the hands of the government?

Mr McKeown —Correct.

CHAIR —It is only in the hands of the government in the sense that some of the issues wereonly signed off by the grain industry working party yesterday. They are not finalised, so itis not entirely in the hands of the government. Those matters will have to come forward andthere will be draftsmen et cetera. I think the fundamental principles have been signed off on.

Mr McKeown —Yes.

CHAIR —But I do not think it could happen that you would have to cancel everything elseto allow drafting to start, when there are still further meetings to take place within the grainindustry.



Mr McKeown —As Mr Fisher mentioned, we have further meetings in October, and a finalmeeting in late October. The expectation is that it will all be resolved by the end of October.

CHAIR —I accept, myself, that it is a reasonable proposition that if you can have twoharvest practices, it is better than one harvest practice, but you have got to weigh that againstthe other considerations.

I just want to go to your corporate model here, which I think is very well set out. Iunderstand pictures. I put to you that there has been no-one come before this committee andsay, ‘We want the single desk to disappear’—I think I am correct in saying that—but therehave been two or three different versions of it, or ways that it could be put in place. Certainly,the vast majority of growers—yourselves, the Grains Council et cetera—see the single deskas being paramount to the future of the Australian wheat industry and its ability to performin world markets.

Having said that, the one thing overhanging it is competition policy, which is in our handsin a sense. A concern has been raised, which I share, that in this particular model you havegot the holding company, the pools subsidiary and the trading subsidiary. The risk is in termsof servicing B-class shareholders and their right to maximise their returns vis-a-vis the growersin the pools to maximise their particular position, and you have got the trading arm out therein a very competitive marketplace.

But if ever any situation arose out of the pools arrangement, for whatever reason, so thatthe trading arm was not performing up to expectation and not meeting the objective ofmaximising returns to B-class shareholders, an argument could be put that because the vastmajority of the return—or all of it, if you like, to take the extreme, which is not likely tohappen—came out of the pool operation and there was cross-subsidisation, in effect, back tothe domestic market operation, this would immediately be in conflict with competition policyin that an unfair advantage was being given to an arm like that. Can you explain to us whatmechanisms there are in this model which would prevent that from happening?

Mr Price —I think that is a very important question. There are a few aspects in the modelmoving forward which I think are going to guard against that happening. Firstly, in the modelyou have two separate subsidiaries with separate accounting mechanisms, so they are totallyseparate accounts, and the group accounts are held by the holding company. Behind that, wewould envisage that, in line with normal corporate practice—or even beyond that—you willhave an internal auditing and reporting arrangement that will be focused on each of thosesubsidiaries and the holding company.

The boards of those subsidiaries and the holding company will have access to the businessflows behind the activities to ensure that the objects and the duties of the directors of thevarious entities are complied with in terms of the responsibilities for each of the businesses’activities.

In the case of the pools, the people involved in that side of the business will have clearresponsibilities and accountabilities to maximise returns to the pools that they operate.

The third and probably more important point is an issue being considered by the workinggroup at the moment, that is, how the return paid to B-class shareholders is arrived at. Theclear principle is to have priority to pool deliverers in terms of meeting the single deskobligation, but at the same time having a fair return to B-class shareholders. What is ‘fair’?That return clearly has to be a return which recognises the risk borne by those B-classshareholders in terms of being capital providers to fund the harvest payments.



BT Corporate Finance and Mallesons and another actuarial firm have been involved inputting a process forward whereby components of that return will be struck according to aformal service agreement between the holding company and the pool subsidiary so that it isvery clear where the returns are apportioned and so that there is no chance of cross-subsidisation between different activities of the business.

That structure and arrangement has not been agreed by the working group as yet, becauseit is a detailed one and it is clearly important in getting at the issues that you raised. It issomething that will be considered over the next month.

Mr McKeown —The other important aspect of that consideration is that there will be a capon the limits of what can be extracted from the pool subsidiary in terms of providing acomponent at the commercial rate of return, so that we do not have the situation where, ina poor performing year by the cash trading arm to deliver a certain rate of return, the poolsubsidiary will need to cross-subsidise to achieve the appropriate return.

CHAIR —Could I put it to you—and I am talking now about post-1999—that up until thenthe Australian Wheat Board will still have to report annually to parliament. While the singledesk remains it will also be important, for public scrutiny purposes, for the Wheat Board tocontinue to report to parliament on an annual basis.

Mr Price —I am not sure of the details that would be required there. I could take it onnotice, but I am not sure what the department has in mind. It may be an issue you could testwith them.

CHAIR —I certainly will. That will be part of the MOAs, I would imagine, beyond 1999.While it is fine to give individual growers annual reports, really the only process—outside oflimited activity by the grower organisations—where you can have any effective proper scrutinyis in parliament. While you still have, if you like, that gift from government of the single desk,I would think it would be important, from the Wheat Board’s point of view as much asanybody’s, that that process continue.

Mr McKeown —Again, this is an aspect of the second tranche of legislation rather than thecurrent package. It really centres on the arrangement in the legislation as to how the singledesk control is put in place and the relationship between that mechanism and AWB Ltd. Itis obviously a critical feature of that piece of legislation and that component of it.

CHAIR —This is one of the difficulties we face in terms of having such a situation. I donot know whether it is similar to being half pregnant because there is no such thing, but itis getting close to it. Thank you very much for being here. Senator O’Brien will put somequestions on notice for you to answer. If there is any further information or anything youwould like to add to any of the questions, we would certainly appreciate it. If we need to comeback to it, we will. Again, thank you very much.

Mr Price —Thanks for the opportunity.

Sitting suspended from 12.52 p.m. to 1.22 p.m.

BEGG, Mr John Sinclair, 178 Point Leo Road, Red Hill, Victoria 3937

CHAIR —This is the continuation of these hearings after lunch. I welcome Mr John Begg.Would you please state whether or not you have any interest at all whatsoever in the grainindustry on either side of the equation. For your information once again I will put on thepublic record that I am a member of a family partnership. I do have an interest in the outcomeof this and also I have WIF shareholdings.



Mr Begg—My name is John Sinclair Begg. I am appearing in this inquiry in a privatecapacity. I should perhaps read the fax I sent to you yesterday.

CHAIR —Before you do that, you are appearing in a private capacity?Mr Begg—Yes.CHAIR —I understand from what you told me privately that you do have an interest in the

grain industry?Mr Begg—Yes, that is correct.CHAIR —Can you inform the committee of those interests please?Mr Begg—Yes. I am presently retired. I am secretary of the Australian Grain Exporters

Association, a group of private merchant companies. I am a director of the Pea GrowersCooperative, a grower organisation specialising in the marketing of legumes. I worked for 31years for the Cargill group of companies with whom I held management and commoditymarketing positions at various times in Europe, Africa, the Far East and Australia. I no longerhave anything to do with Cargill.

CHAIR —Thank you. The committee has before it your submission on the issues. Do youhave any objections to its publication?

Mr Begg—It does include my private political views towards the end of it. I do not haveany objection to them actually being included, but they do not sway my opinion on thisparticular issue that we are talking about today.

CHAIR —The committee prefers all evidence to be given in public, but should you at anystage wish to give your evidence, part of your evidence or answers to specific questions inprivate, you may apply to do so and the committee will consider your request. In saying that,I would also point out that, if the committee believes it is in the public interest that it shouldbe published, then it has that power. Equally, if any individual puts in a dissenting report, theymay use some of your evidence. It is what I call 99.9 per cent privacy. Would you like tomake an opening statement?

Mr Begg—Yes, I would.CHAIR —As you are aware from our conversation on the phone, we had to adjust our

program to fit you in. It is important that you fit in what you want to say and we get ourquestions in in about 25 minutes.

Mr Begg—I would like to start by thanking Senator Crane and his colleagues for makingtime available at very short notice for me to appear before this inquiry. I have already readto you the background of my involvement with the grain industry so I will move on.

In addition, to this I believe that I may be the only person to date to have appeared beforethis inquiry who has actually worked at the coalface of international commodity marketing,having traded many millions of tons of grain, oil seeds, fertiliser and freight and conductedthe finance and foreign exchange work necessary to execute this business on behalf of thecompany that I worked for during the course of my career.

This said though, I was not and never will be an expert. There are no experts in thisbusiness, just those fortunate enough to have had more experience than others in a constantlearning process. I am appearing before you today as a private individual now retired, but whostill holds some very firm views as to how the Australian grain trade should be structured tothe benefit of all participants—growers, stock feed millers, flour millers, lot feeders, merchants,brokers and last, but by no means least, the retail consumer.



These as well as growers are all stakeholders in this industry that creates investment, wealthand employment. Each of these stakeholders has to be equally consulted in this process if theAustralian grains industry is going to deliver the full benefit to the Australian economy thatit has the potential to do.

I believe in policies of free choice and open competition, which I would strongly advocatefor the Australian grain industry, as opposed to the heavily regulated system that is now inoperation. In my view, Australia needs a strong merchant structure that encouragesentrepreneurial enterprise to bring business to Australia rather than a centralised marketingsystem lumbered by cost and stifled by regulation that basically discourages private initiative.

The fact that many of the participants that go to make up the industry, and whom I believesupport this view, are not present here today may be due to a fear of commercial retribution.Although I cannot speak for them, there is strong evidence that a substantial portion of thedomestic consumer market is looking for change in varying degrees and a liberalising of themarket place.

I would like to respectfully suggest that during the course of your deliberations you activelyseek out the opinions, knowledge and experience of those engaged in the substantialagribusiness. You may find a very different attitude to that portrayed by many of those whoare normally to the forefront of lobbying.

Last August I wrote to the Honourable Peter Reith, my local member of parliament,expressing some views about how I understood the bill to amend the Wheat Marketing Actis being proposed. Mr Reith forwarded that letter to the inquiry secretariat and this accountsfor my presence here today. With your permission, I would like to take you through that letterand comment on some of the points that I made.

CHAIR —Could I suggest that you just highlight the issues. There is no need to read it, wehave it on the public record. It is incorporated and that will give us some time to ask somequestions.

Mr Begg—The first point is that in the preamble to the explanatory memorandum theminister said that he had consulted all facets of the wheat industry and that the private tradershad provided input directly to the government. I have good reason to believe that that is notthe case and I asked Mr Reith to make sure that the minister was—and I cannot use the word‘instructed’—requested to consult such bodies as NACMA, GIAV, Rural Marketing and SupplyAssociation, Queensland Produce, Seed and Grain Merchants Association and AGEA, the grainexporters. These are the main merchant groups in the grain trade who have highly skilledAustralians in their management and on their staff and who make a substantial contributionto the national grain trade. That was the first point.

The second point was that, as far as I can make out, the bill did not include any provisionfor the national competition policy reform act. My understanding is that it is a requirementof all acts and regulations of all parliaments of the Commonwealth that it be included.

The third point was that the proposal that the private company be given single desk powersreally means that a private company will have the power to regulate its competitors. That issomething that I find blatantly and grossly anti-competitive.

The fourth point was that the bill seems to fly in the face of the policy enunciated in thePrime Minister’s supermarket to Asia council initiative. There were two points there aboutfostering development of an aggressive export culture amongst the Australian agrifood industry.How can this be achieved if you are proposing to confine wheat exports to one company? The



second thing that that council undertook to do was address the impediments to export. I regarda single desk as a major impediment to export.

I said to Mr Reith, on a personal basis, that as a Liberal voter I expected to see the partypromote liberal practices of free choice and open competition, and not what I called agrariansocialism, which seemed to be practised mainly by our coalition partners.

Senator FORSHAW—Mr Begg, do you grow any wheat or other grains?Mr Begg—No.Senator FORSHAW—Have you ever been involved in the farming side of it?Mr Begg—Never.Senator FORSHAW—Never. All right.Mr Begg—Well when I say ‘never’ that is not strictly true. Cargill did buy a 65,000-acre

property in the Riverina, we developed it, with 5,000 acres of irrigation, and we subsequentlysold it.

Senator FORSHAW—It has been put to this committee by some witnesses, particularlythe farmers’ associations in Western Australia and New South Wales, and also stated by MrTuckey, the member with a large constituency, that there are a lot of growers who are probablycontent with the current system and would not necessarily mind if it stayed that way. Ofcourse, the current system does not give a monopoly to a private company, but it is amonopoly anyway through the Wheat Board. Presumably what you are saying is that thecurrent system is no good and we should go to a totally free trade arrangement. Is that right?

Mr Begg—I personally think so, yes. That is my view.Senator FORSHAW—But how do you react to what we are told is the view of many

growers?Mr Begg—In my opinion, those growers are brainwashed. Those growers and their fathers,

and probably their grandfathers, have grown up with a centralised marketing system. You haveseen instances where, given the opportunity to exercise some commercial discretion—forexample, in the barley business when the New South Wales Barley Board tried to buyVictorian barley through various merchants—they got a lot of very positive reaction. I acceptwhat you say, but for many of these growers it is something they have grown up with andthey probably fear change.

Senator FORSHAW—They may fear that in a totally competitive, free trade situation theymight not get the return that they have been used to, either in good times or in bad, becausenot every single wheat grower out there is going to have the capacity to be a marketer, aninnovator, an exporter, and so on.

Mr Begg—There are two answers to that question. One is that the cotton and canolabusinesses in this country are proving to be highly successful. They are, in the broad brushsense, totally free. I doubt very much that a cotton farmer would want to see a centralisedsystem.

The other thing is that in the two countries which have recently deregulated—the Argentineand South Africa—you have seen the cooperatives become extremely active in grainorigination and trading.

Senator FORSHAW—That was going to be my next question. If they were cooperatives,that is still a different structure to individual growers themselves having to do it.

Mr Begg—Yes.



Senator FORSHAW—Do you favour the cooperative model, such as we have here in arange of other rural products?

Mr Begg—I have no objection. I have talked with my colleagues in the Australian GrainExporters Association and they see no problem with the continuation of any marketing board.I guess we can say that they want a level playing field. They feel that they can bring initiativeand new ideas to the business that will be of benefit to the growers.

Senator FORSHAW—I worry sometimes about this constant use of the words ‘level playingfield’. We are going to have more football level playing fields in the world than we could evercope with if we keep going that way. But that is just my bit of agrarian socialism!

CHAIR —Can I raise a couple of issues with you. I respect the views that you have put.However, in terms of grain marketing and the still rampant corruption occurring out of Europeand the US vis-a-vis the other products you said, where I will not say it does not exist butit almost does not exist, how can you refer to this so-called mystical level playing field in thecontext of what exists in the world markets today?

Mr Begg—I am not up to date on the latest moves in United States and Europe, but I dounderstand that subsidies have been very substantially reduced in the United States, if notcompletely done away with.

CHAIR —They still seem to have a pretty massive chequebook when they want it.Mr Begg—Yes, I guess so. They have got a big chequebook—we know that.CHAIR —And they have used it regularly. We will leave that for the moment. If I can just

come back to the situation which exists in the so-called free market, considering that the freemarket failed the wheat industry in particular so badly in the 1930s what is different now sothat it would not fail it today?

Mr Begg—I personally respect your view, but I am not sure that it did fail it. That is whatthe storybook tells us. I do not think there are many people around today who know that tobe a fact. But the one big—

CHAIR —You have only got to look at the pricing structure of what occurred.Mr Begg—I was not aware of that. The biggest change today is probably communication

and the fact that the farmer can get, at the turn of a switch, any price of any grain anywherearound the world. That was something that was completely and utterly hidden from him untilthis enormous change in technology that we have seen, even within the last five years.

CHAIR —Just for the record, I was not around in the 1930s. I was born in 1941. But myfather was a wheat grower and he reminded me many times of when the price of wheat went,in the space of 10 days, from 15 pence a bushel to nine pence, to sixpence, to threepence. Healso reminded me that their answer was to go and slash the wheat bags. That is the genesisof the Australian Wheat Board—the marketplace failed dismally.

Mr Begg—I simply cannot speak for that. The company that I work for, for example, hasbeen in operation for 150 years and I regard it as absolutely first class. They always pay theirbills. There is one market and that is the world market and I do not think that it can becorrupted. Personally, that is my view.

CHAIR —That is fine. Can I just go to the issue of the single desk that you mentioned. Wasthat wholly and solely directed at the export marketing, or are you including the domesticmarket in your comments?

Mr Begg—Both markets.



CHAIR —We have a deregulated domestic wheat market in this country and most othergrains fit into that category in most, but not all, states. How do you link the single-desk voteto the domestic market for wheat?

Mr Begg—I think that the important thing is that the farmer is getting the world price forwheat. Personally, I do not believe that the Wheat Board can achieve any better price. Thereis only one price, and that is the market price. If people can say they can make a premium,or do this or that, I do not believe that. Why should a buyer pay more to buy from Australiathan he can buy from Argentina, South Africa, America or Canada? There is no justifiableeconomic reason to do it.

CHAIR —My question related to the domestic market. It has been deregulated for a numberof years and, as I said, I am a wheat grower and I can sell my wheat to whomever I choose,or I can deliver it through the system to the Australian Wheat Board. I am a little bit confused,if you like, as to how you generalise your remarks right across domestic and export trading.In terms of this legislation before us, we have the holding company, the domestic tradingsubsidiary and the pooling arrangements for the export market, and I am a bit confused thatyou can generalise right across the board. Isn’t there a significant difference in terms of thearrangements?

Mr Begg—I would not have thought so. I would have thought that in a totally deregulatedsituation, the Australian farmer would be receiving the world market price and the consumerwould be paying the world market price for wheat. I do not believe that it is possible to getany better price, or there should be no justifiable reason for selling it at any lower price thanthe world market price.

CHAIR —The arrangements in Australia now are allowable under the World TradeOrganisation, but that is not going to be there forever and we have got the review in 1999.If what you are saying is correct, why has the United States said that at the first opportunitythey are going to take Australia to the World Court and challenge the single desk operatingon the export market out of here on the grounds that it gives a better return to Australiangrowers than can be achieved in the US or elsewhere?

Mr Begg—I guess you have to ask the United States that.

CHAIR —If, after the review in 1999, the single desk does disappear, do you think that themodel that has been proposed is an ideal grower controlled, grower owned—

Mr Begg—It seems fine from what I understand. As I said before, I see no objection, orany reason that the marketing boards should not exist for those growers who want to use them.What I would like to see is private trade being on a level with the marketing boards. Ifgrowers, for example, want a marketing board to run a private pool, then that marketing boardis there to run the private pool for the grower.

CHAIR —In your opening address you made mention of the fact that the committee shouldactively seek a number of organisations that, for whatever reason, have not sought to appearbefore us. Are you aware of the fact that we extensively advertised these hearings? We sentout about 50 letters to different organisations.

Mr Begg—I was not aware of that.

CHAIR —It is well known that these hearings are on. Would you have any idea why theyhave chosen not to appear before us?



Mr Begg—No, I do not, except to say that I am quite convinced that a number of companiesthat I know of are not here today simply because they are probably doing business with theWheat Board and it obviously would harm their business.

CHAIR —I do not know how that would happen. It always intrigues me when people say,‘You should seek this one out.’ We put in a major effort, significant taxpayers’ dollars, to getpeople here—you found out about it—but they do not appear. It always intrigues me.

Could I thank you very sincerely for appearing before us. If there is any other informationor anything you want to deliver to us, we would be delighted to have it.

Mr Begg—Thank you very much, Senator.CHAIR —Thank you.

[1.47 p.m.]MORTIMER, Mr David Kenneth, Assistant Secretary, Grains Branch, Crops Division,Department of Primary Industries and Energy, Edmund Barton Building, Barton,Australian Capital Territory 2600

CHAIR —Welcome, Mr Mortimer. You know all the reels so there is no need for me torepeat them. You know all our interests too, so I will not repeat them either.

Mr Mortimer —I have nothing more to add in terms of interests. I am not a wheat growereither.

CHAIR —Could I give you the opportunity to make an opening statement and then we willopen up the hearing to questions from the senators.

Mr Mortimer —In view of the statements that have been made previously by the GrainsCouncil of Australia and the Australian Wheat Board, there is probably not much more forme to say. As you know, there has been a working party process that has operated since GrainsWeek 96. The three members of that party have been the GCA, the Wheat Board and thedepartment, and I have been the departmental representative there. What has been said by theWheat Board and the GCA sets out the state of affairs within the working party, how itoperates, and the agreement that has been reached there, fairly succinctly.

Beyond that, I would comment that we in the department are guided by the government’spolicy, and the minister set that out most recently in his speech to Grains Week in Melbournein April of this year. The government there endorsed the dual share class company structurefor the Wheat Board after 1999, and that was accepted by industry. The question now is tosettle a number of details relating to that. The working party is continuing on that work and,as the other members said earlier, is close to resolving those issues.

The other point to comment on is that the minister set out the government’s approach—andthis has been reaffirmed in the second reading speech to parliament in the last sittings—tomove forward with two tranches of legislation to implement these arrangements. It might beworth commenting on that.

The advice from the financial consultants was that it would be important for the WheatBoard, to be able to continue as an effective and privatised marketer after 1999 when theunderwriting ceases, to have the new structure in place as well as the operational arrangementsthat would implement those new structures well in advance of the middle of 1999.

The advice also was that the organisation—which I probably should call it at this time—should be able to approach financial markets in the early to middle part of 1998 so that itcould explain to the financial markets and the rating agencies who would be lending the



organisation significant amounts of money after 1999 without a government underwritingprovision, exactly the structure of the organisation, how it would operate, and to get theconfidence of potential lenders so that the Wheat Board could continue in its private capacityto do exactly the sorts of things it is doing here and now.

That was the reason it was decided to have a first tranche of legislation this calender year,which would basically foreshadow the future structure of the organisation as agreed by industryand the government, and to allow the Wheat Board to reorganise itself very thoroughly so thatit could move most efficiently into that new set of arrangements.

As the minister said also in his second reading speech, there are other matters which werestill not settled which the government would have to address in terms of completing the newstructure and finalising the handover of the Wheat Board from a government businessenterprise to a grower owned company in 1999. Work is continuing on those aspects and thegovernment’s expectation is that there would be another tranche of legislation early next yearto settle all those aspects.

Senator O’BRIEN—In terms of the statement you make about the legislation, what wouldhappen if the parliament passed the first tranche of legislation and gave effect to what wasproposed, but was unhappy about the second tranche?

Mr Mortimer —The first tranche of legislation provides for the Wheat Board to bereorganised into a different operating pattern, if I can use that expression. It does not changeany of the activities that the Wheat Board does in terms of operating as a monopoly exporteror as providing payments for growers.

What the first tranche of legislation does is provide for those activities to be done withina different structural arrangement, with some different reporting lines, to foreshadow theorganisation which is expected to come after 1999. In that sense, nothing would change ina material way. The export monopoly would still continue and the growers would still get theiradvance payments. The other aspects of the legislation which are material in their impact arethat they provide for the cessation of the WIF levy in 1999, which is consistent with theunderwriting guarantee expiring then, and the organisation being passed to a grower ownedorganisation.

In a purely housekeeping sense there is provision for change to the way the board of thestatutory AWB would be appointed in late-1998, recognising that there is only a short periodof time between then and the middle of 1999 when a new privately owned corporate structurewould take place and the directors would be elected directly by the grower shareholders.

Senator O’BRIEN—In late 1998?

Mr Mortimer —In the middle of 1999. It is a preparatory move. In a broad sense, thepractical effect would be no change until the middle of 1999 because the decision thegovernment took in 1992 to write into the legislation that the underwriting would cease in mid-1999 has already cast the die, so to speak, in terms of what shall happen then. The governmentneeds to make provision for that because if the government did not act now, it could be ina situation in the middle of 1999 that there be no provision for the Wheat Board to borrowon the basis of underwritten finances from the Commonwealth and it would have to makealternative arrangements, and it would not be prepared to make those.

Senator O’BRIEN—Sorry, who would not be prepared to make those?

Mr Mortimer —The point I was making was that under the current arrangements, if we didnothing between now and the middle of 1999, the legislation would say in June 1999 that the



Wheat Board would not have a government underwriting for its borrowings, so it would haveto try to fend for itself in terms of how it finances activities or make alternative arrangements.That is currently not provided for in the legislation.

Senator O’BRIEN—Are you saying they could not do that or they would not?Mr Mortimer —It would be messy. I would have to say if I was a director of the board I

would be in a very difficult situation as to knowing exactly what to do because it is notenvisaged within the scope of the current legislation. Finally, of course, it would ultimatelybe the responsibility of the government at the time.

Senator O’BRIEN—Can you tell us when the second tranche of legislation will be beforethe Parliament?

Mr Mortimer —It is impossible to say exactly. Let me set out the timetable consistent withwhat the minister said in his speech to Grains Week. The minister set up a timetable there forpulling together the remaining aspects of the new structure by September-October of this year.I understand the minister intends taking a package to cabinet before the end of the calendaryear. When cabinet has made a decision, we are then in a situation to initiate drafting withthe Office of Parliamentary Counsel. They will not start those sorts of functions until it is aclear cabinet decision. It is then that that draft legislation can be worked through and finalisedand introduced into the House early next year.

Senator O’BRIEN—If the second tranche of legislation did not pass, would weautomatically revert to the situation as it is now, or would we have a hybrid?

Mr Mortimer —We would have a hybrid. We would have a Wheat Board that would stillbe an exporter with a monopoly and it would still be operating with a government guaranteeuntil 1999. But, instead of operating as a statutory board with trading divisions, it wouldoperate as a statutory board with a holding company to subsidiaries underneath it that wouldbe able to do the job just as well as the Wheat Board does now and possibly, in some regards,better. You will just simply reallocate some of the responsibilities within that broad structure.

Senator O’BRIEN—Would there be change?Mr Mortimer —Yes, there would be change in the way the Wheat Board does its business

as an organisation, but it would not affect what the growers got or what the financial marketsprovided or anything like that, or indeed how our wheat is marketed overseas.

CHAIR —Can I just absolutely clarify this to the nth degree and put it to you that if thefirst tranche passed and the second tranche did not, that it would be impossible for the firsttranche to work as an effective marketer because it is enabling legislation that puts in placea structure in which the nuts and bolts and the rules and the details are in the second tranche.

Mr Mortimer —No—CHAIR —The Wheat Board will effectively continue as it is even after the enabling

legislation is put in place. That allows you to get the framework to allow the Wheat Boardto start placing itself around in the marketplace and doing one or two things. However, it doesnot give them the tools. There would be no memorandum, no articles. There would be justnothing around it.

Mr Mortimer —The Wheat Board would be perfectly well-equipped to do what it is doingnow after the first tranche of legislation. Instead of having a board which simply doeseverything and organises that through a series of divisions, as mentioned earlier—the tradingdivision, the merchandising division, and the Australian division—that set of arrangementswe reorganise. The board would still oversight the whole organisation. It would have a



responsibility for the export monopoly for the WIF and account for everything that goes onunderneath it, but it would delegate certain commercial activities to the companies set out inthe draft bill, namely companies A, B and C, which provide for, generally speaking, a holdingcompany, which would look after the financing under delegation from the statutoryorganisation; the pooling subsidiary, which would do all the export marketing and poolingfunction; and the trading subsidiary, which would do exactly what the trading division doesnow. In a sense, it is just moving or restructuring the organisation from a rather traditionalgovernment business enterprise to a structure more like what you see in the commercial andprivately owned sector.

CHAIR —If that is the case, why do we need the second tranche?Mr Mortimer —The second tranche will be necessary to do two key things. It will need

to provide formally for the transfer of ownership of WIF units to shares in the hands ofgrowers. That is probably the key thing which is not done in the current legislation. Secondly,it will need to settle the provision of the export monopoly to the new company.

Senator O’BRIEN—What limitations are there on the board now in terms of the way itstructures its operation? I am not familiar with that. Is there a formal limitation in thelegislation?

Mr Mortimer —No. There is not a formal limitation. The Wheat Board at the moment could,arguably, restructure itself with the minister’s agreement in the way that is proposed. However,there will be benefit in making clear that the government agrees to this proposal and, indeed,making clear to the people who will be dealing with the Wheat Board after 1999—mostimportantly, the growers who will be delivering to it, the financial institutions who will befinancing it and the overseas customers who will be buying from it—exactly what the natureof the organisation is, making them comfortable with it and accepting its new functionalarrangement of activities.

Senator O’BRIEN—I am going to go to something else now unless you want to pursuethat further.

CHAIR —No, I am suitably confused.Mr Mortimer —I am happy to explain further.CHAIR —No, I am just reading about the 1998-99 wheat market. In fact, I might come back

to you.Mr Mortimer —I do not have my copy with me, but I hope I am reasonably familiar with

it.Senator O’BRIEN—I think it is probably the appropriate time to ask about the material

that has been supplied to the Grains Council of Australia. That is the working papers whichcontain the legal advice et cetera. Can this committee have a copy of those working papersas was almost offered by the Grains Council?

Mr Mortimer —Yes, we can do that. There are two classes of information in there, SenatorO’Brien. One class of information is a set of financial projections about how the companywould operate after 1999, based on a wheat industry fund of various valuations and makingcertain assumptions about crop sizes, market prices, lending rates, and all the rest. That wasworked over to establish the financial viability of the organisation and the adequacy of theWIF et cetera. I would have to say that we would have some reservations about making thatpublicly available, but if the minister is agreeable, there might be some way of giving abriefing on that. I would have to say that there is material in there that would be of commercial



value, and indeed, could impact on the new company in its operations after 1999. It projectsahead for a period of 10 years or so in terms of establishing the viability of the prospectiveorganisation.

There is another class of information which deals with issues of corporate governance,structure, issues of divisional structures as opposed to subsidiaries and so on, which wouldnot be of such a sensitive nature and which would probably have less risk in terms of theimpact on the organisation of the new company.

My response would be that, at the end day it is the minister’s decision to agree to it.Secondly, I would be grateful if you could be a bit more specific on the issues you would liketo know about. We could then cull out information which would be helpful or provide it ina useful way.

Senator O’BRIEN—Our difficulty is that we have a very short reporting time and goingthrough those procedures is going to take time we do not have. I think the minister has tomake a decision whether he is going to assist this committee or not. He can rely upon thegovernment majority to get a majority report or he can try to assist the committee. That is howI would respond to you.

Mr Mortimer —Okay, that is fine. Would the committee like to specify more clearly exactlywhat it is interested in? Otherwise, we would have to ask to pass over a whole truckload ofmaterial holus-bolus. As I said earlier, there are reservations about access to some of it.

CHAIR —If something could be given to the committee in committee, which gives it adegree of protection—you are familiar with that—if matters in there would put at risk thecommercial operations of the Wheat Board, I do not think any of us would want to jeopardisethat. I do not believe any of us on this committee would do it. Nonetheless, there are certainthings. To ask us specifically what we want in terms of this is very difficult when you do notknow what you have. I would like to think that we are not going to put ourselves in a merry-go-round of an egg and chicken situation, which is precisely what you are doing to us.

I would request that you request the minister to provide material that does not jeopardisethe Wheat Board. We already have a fair amount of material. If it comes to the situation wherewe are given a blank no, then we will examine our opinions.

One of the options the committee always has and the Senate always has—we might havea majority on the committee, but we do not have a majority in the Senate—is to put the dateback. We do not want to get into a situation of conflict or animosity. It is to get the best resultwe can for the wheat industry. If you can deal with it in that spirit, I would certainly appreciateit as the government’s chair of this committee.

Mr Mortimer —We are happy to do that. It might be sensible if I take that up with you inyour office after these hearings.

CHAIR —Yes.

Mr Mortimer —I am sure we can provide a significant amount of material that should behelpful.

CHAIR —Thank you. I have every faith in my colleagues from both sides of the chamberin regards to the integrity of this committee.

Mr Mortimer —Okay, that is fine.

CHAIR —Thank you.



Senator O’BRIEN—I wanted to put to you some matters raised in Perth. Some have beenin part dealt with by the document presented to the committee by the chair on wheatproduction. Is it true that 60 per cent of the export wheat crop is grown in the electorate ofO’Connor?

Mr Mortimer —I will not venture any comment on that, Senator. I think the ABAREmaterials around are fairly freely available.

CHAIR —It is a small exaggeration. Only 50 per cent. Can we answer that precisely? Sincewe have been in action, it is approximately 40 per cent, and there ain’t much grown outsideof O’Connor.

Senator O’BRIEN—It is interesting to test some evidence sometimes. I think part of thiswill be answered if we get certain material from you. He also said all structures are contraryto the basic rules of the Australian Stock Exchange—that is, the structures of the proposedcorporation that will replace the Wheat Board. The advice that you have is the advice that hasbeen supplied to the Grains Council.

Mr Mortimer —That is right.Senator O’BRIEN—Hopefully that will be supplied.Mr Mortimer —Yes. I think the GCA has already answered that.Senator O’BRIEN—Yes, they did refer to it. In the evidence taken by the committee from

Mr Moffet, representing the WA Farmers Federation, he told the committee that MinisterAnderson at grains week and other forums made it very clear there would be no taxation onthe wheat industry fund at conversion. Can you tell the committee what will be taxed, howit will be taxed and when it will be taxed once this new corporate structure is put in place?

Mr Mortimer —I have to say that I am not in a situation to make any further comment ontaxation beyond what the minister said in his Grains Week speech. I have that here and I amnot sure how much benefit there is in repeating it. But this is something that is currently thesubject of discussion between the minister and the Treasurer and the issue is not yet settledby the Treasurer.

Senator O’BRIEN—When will the issue be settled?Mr Mortimer —We hope as soon as possible, quite frankly.Senator O’BRIEN—Perhaps you can take the question on notice and respond more

fulsomely, if that is possible.Mr Mortimer —There is not much more I can say. When something is an outstanding matter

of business between ministers with portfolio responsibilities, there is not much I can saybecause it is impossible to know what might transpire.

CHAIR —Can I add that it certainly is a matter of grave concern to this committee. I thinkI can speak for the whole committee and I certainly can for the government members of thecommittee. We feel that, as far as our reporting on this legislation is concerned, we shouldhave and need an answer prior to us reporting. I think that would be the view of the oppositionand, I am sure, of Senator Woodley.

Mr Mortimer —Okay. I am not sure—CHAIR —I will be passing that information on anyhow, but I wanted that on the public

record. We view it as very important in terms of the structure and how it is going to operate.Mr Mortimer —The only comment I can make, Senator, is that it is acknowledged that that

will be one of the issues to be dealt with in the second tranche of legislation. The treatment



of WIF does not vary under this draft bill that is currently before the house. The WIF will behandled in exactly the same way as it is now and, indeed, it is appropriate that the questionof taxation be picked up in the second tranche of legislation because it is something to be dealtwith at the time that ownership of the WIF units is passed to growers.

So, yes, it is clearly on the agenda as an issue to be settled and we would like to settle asquickly as possible. But it is not something that is fundamental to the current draft bill. It issomething to be addressed in the second tranche of legislation.

CHAIR —I recognise that fully, that it will not be addressed in this bill. But could I suggestthat if the answer was not known before this legislation, or if the answer was that it was goingto be taxed and the position that the minister put in all honesty at that time was reversed, thennot only would Western Australia have a different position on it but I think you would findthe whole grain industry would. I have the president sitting behind us and he is not allowedto speak now but I can see him nodding. The industry might take a totally different view onthe current legislation. It is crucial to the whole thing.

Mr Mortimer —I understand that. I am sure the minister was fairly confident of his positionwhen he made the statement in the Grains Week speech that taxation would be paid onrealisation rather than on conversion in 1999.

CHAIR —Thank you.

Senator O’BRIEN—How does the new structure sit with various state tax regimes?

Mr Mortimer —The draft bill does not change the arrangements regarding tax except withone instance and that is the application of income tax to the profits of the trading division.That is one change the government introduced in the light of its policy on competitiveneutrality. Apart from that, the Wheat Board is subject, under the draft bill, to the same taxarrangements as it is at the moment. I will not list them all exactly, but the Wheat Board, asI understand it, pays state payroll tax but is exempt from certain other state taxes which relateto stamp duties and things like that on transactions.

Senator O’BRIEN—I think it is fair to say that there has been a significant level ofconsultation with the industry about the details on the second phase of this proposedrestructuring. Can you outline in general terms exactly how the department has gone aboutthat consultation process?

Mr Mortimer —The department has been a member of the working party over the lastperiod of time. In terms of our operation, we are guided by the government’s policy on thismatter and the minister has set that out in a series of speeches to Grains Week in 1996 andin 1997. That, in effect, gives us our direction on where the government wants to go.Therefore, in the working party we are able to provide advice on that and also to advise onhow the legislation operates now, on how the Wheat Board operates now and on any othergovernment policies that are pertinent.

Senator O’BRIEN—In relation to the question of how the monopoly power for export willbe managed, are there any precedents for the Commonwealth granting a monopoly to a whollyprivately owned company?

Mr Mortimer —I am not aware of any.

Senator O’BRIEN—Given recent trends to lessen monopoly powers in various areas, canyou advise the committee how, under this new structure, the public interest will be representedand protected with regard to the exercise of this monopoly power?



Mr Mortimer —The government would need to provide for an export monopoly power tothe Wheat Board through legislation. Without legislation, that is not possible. So the questionthen is exactly what mechanism would be provided to do that. There is a series of alternativesavailable, but each of those would require some form of accountability to the minister andparliament, and therefore to the whole community, on the use of the export monopoly powerand what benefits derive from it.

Those accountabilities can be provided for in a series of ways. They can fundamentally beprovided by reports by the organisation that holds the export monopoly power or by externalscrutiny, either through independent audit or regular review or some such. There are plentyof examples of those sorts of mechanisms around for different government authorities, andoptions are available. The question has not been examined and settled yet in terms of thearrangements post 1999.

Senator O’BRIEN—When will they be?

Mr Mortimer —I think it is the next item on the working party agenda, Senator.

Senator O’BRIEN—Would you expect them to be settled after the next meeting, or couldthat take some time?

Mr Mortimer —I think it is an issue which the minister would want to take to cabinet laterthis year when he brings a full package to the government for consideration.

Senator O’BRIEN—There will not be any public representation on the new company. Thatis effectively excluded by the model in this legislation, isn’t it?

Mr Mortimer —That is right.

Senator O’BRIEN—So whatever options there are have to fit with the model that is in thisparticular tranche of legislation?

Mr Mortimer —That is right, yes.

Senator O’BRIEN—Isn’t that a restrictive boundary on the consideration of therepresentation of the public interest?

Mr Mortimer —In what sense?

Senator O’BRIEN—Because if you pass one tranche of legislation, I am presuming youare not going to want to repeal it straight away, so you have set the boundaries for representingthe public interest within the company.

Mr Mortimer —I would not put it quite that way, Senator. As I explained earlier, nothingfundamentally changes in terms of the Wheat Board’s operations as a result of the first trancheof legislation in terms of how it relates to the external world outside the four walls of theWheat Board, if you like to call it that. The export monopoly will continue to be providedand, indeed, operate in exactly the same way. The question of how it is provided after 1999is something the government has to address and provide for before then. But there is nothingintrinsic in this draft bill that would influence how you would do that, one way or another.

Senator O’BRIEN—But you are establishing a corporate structure—


Senator O’BRIEN—to exercise the monopoly. So whatever you are going to dosubsequently to manage the public interest has to fit within whatever structure you establishnow.



Mr Mortimer —The draft bill leaves the export monopoly exactly the same as it is now.So you simply issue it to the clearing subsidiary in exactly the same way as it does now. Thatdoes not prejudice any outcome one way or another in terms of the post-1999 arrangements.

Senator O’BRIEN—I hear what you say but it seems to me that there must, by necessity,be some boundary on what you can do once you have established a framework for thecompany—other than saying that you are not going to give them the export monopoly, thatyou are going to leave it with the Wheat Board.

Mr Mortimer —No, I do not see that. Indeed, one option post-1999 would be to leave thescaled down organisation, which would exist simply to give the export monopoly. But, as Isaid, that is just one of a number of options that are on the table.

Senator O’BRIEN—So an option remains to leave the statutory authority, the AustralianWheat Board, single desk authority or something like that?

Mr Mortimer —That is an option.Senator O’BRIEN—Standing outside the company?Mr Mortimer —Yes.Senator O’BRIEN—So the company would not, in itself, hold the export monopoly?Mr Mortimer —The monopoly would have to be passed to the company in a way that was

secure so that it could use it to its advantage. That has to be provided for in the legislationin some shape or form but the exact mechanism as to how that is done is yet to be settled.

CHAIR —I have a question on the management of the single desk. As I understand theproposal in the legislation, the single desk will be considered and granted as a gift to thegovernment direct to the Australian Wheat Board?

Mr Mortimer —That is right, yes.CHAIR —I also understand that the Grains Council, in its submission, has expressed a view

that the single desk needs establishing under some form of authority, whether it be a statutoryauthority or some other name, and that it would be managed by a board of directors or by asystem of grower, government or whatever management. However, the proposal under thelegislation is that there will be some sort of obtuse or quiet committee within the departmentwhich will have the job of evaluating and, I guess, being the watchdog of the operation ofthe single desk or the handling of it by the Wheat Board. Is that a correct assessment?

Mr Mortimer —Let me make two comments. First, the draft bill and the material relatingto it do not say anything about how the export monopoly may be given after 1999. That isnot addressed or suggested in any shape or form. Second, in terms of the way that the exportmonopoly is given after 1999, if we look at the options along a spectrum there are twoextremes. One is to have it all managed in-house by government in a very direct simple way,say through the department, and the other would be to manage it through some moresubstantial statutory established authority, something akin to the current Wheat Board. Theyare the poles of the spectrum and there are a whole series of options available within that.

CHAIR —So a final decision has not been made on that?Mr Mortimer —No, it has not even been considered yet.Senator O’BRIEN—I presume that there are some principles of public policy on which the

mechanism—whatever it might be—would be based?Mr Mortimer —Absolutely, yes.



Senator O’BRIEN—Can you assist us with those principles.Mr Mortimer —I think the key principle would be accountability to parliament for the use

of the monopoly, to provide satisfaction that it is generating the benefits parliament intendsin providing it. That would be an important issue. That is the key principle. The other relatedprinciple is the government’s general desire to separate regulatory from commercial functionsin its business activities as far as possible. That is part of the government’s competition policy.

Senator O’BRIEN—How does this fit with independent grower control and ownership?Mr Mortimer —What will be happening is that after 1999 the growers will own and control

a marketing company. The whole range of activities which is currently provided for by thestatutory Wheat Board at the moment, with government backing—the financing of the wheatmarketing activities, the operation of pools, the provision of harvest payments and so on—willall be done by the privately owned company. The only activity the government will beinvolved in is the provision of the export monopoly in relation to export sales by the company.

Senator O’BRIEN—Some of the questions that I want to pursue now revolve around howthe Commonwealth would interact through this monopoly power with the new corporate body,and that will depend upon the solution. For example, presumably the government would haveto have some means of imposing sanctions on the company if it thought it was not actingproperly in the use of the monopoly.

Mr Mortimer —Yes, I expect that will be the case.Senator O’BRIEN—On the other hand, if the minister has the final say, what does that

mean for the grower elected board? How could the new board operate independently if it wassubject to some control by a panel of review?

Mr Mortimer —I understand the issue. It is important to distinguish between the differentfunctions within the wheat marketing arrangements. At the moment the Wheat Board, as astatutory organisation, has a whole bundle of activities wrapped up together. As I mentionedin my answer a minute ago, they involve operating pools, borrowing money, providing harvestpayments, selling in the domestic market, and selling in the export market through the exportmonopoly.

What will happen between now and 1999, in a series of steps, is that that will in effect beunbundled. Most of those activities will go to the privately owned company, and thegovernment will simply retain the export monopoly—because, of course, there is no way ofproviding an export monopoly except through legislation.

The government’s intention is that it would have no direct or implicit responsibility foractivities such as the financing of the wheat marketing, the provision of harvest payments,domestic selling, et cetera. They will simply be the responsibility of the board of the company,so it could have clear responsibilities there with no trammelling from government, and couldoperate on the basis of its capitalisation through the wheat industry fund and so on.

The government would simply have a linkage in terms of providing the monopoly, andgetting accountability from the company on a regular basis on how it uses that monopoly andwhat the net gains from that monopoly are.

Senator O’BRIEN—In relation to the domestic market, given that it is a deregulated marketnow, has that deregulation been a success? How has that manifested itself?

Mr Mortimer —I am not sure that I am in a situation to comment on whether it has beena success or not, myself. I have done no particular review of it. All I can say is that it seemsto have general support, and we do not hear any calls for it to be re-regulated.



Senator O’BRIEN—What would be the measures of success?

Mr Mortimer —The measures of success would be issues such as the marketing optionsavailable to growers, growth of production in different crops—wheat, as opposed to othercrops—prices and options available to domestic users, and so on.

Senator O’BRIEN—I accept that it is not a matter that you have looked at in any depth.In terms of the process being followed to develop the articles of association, I understand thatthe Grains Council has signed off with the minister—

Mr Mortimer —No, not with the minister. If I can refer to Mr Stewart’s earlier comments—correct me if I am wrong, Brendan—I think the pre-1999 memorandum and articles ofassociation were signed off with a couple of minor changes, and they are close to doing sowith the post-1999 memorandum and articles of association.

Mr Stewart —The pre-1999 ones are signed off, but the post-1999 ones have not been, asyet. We are still developing them.

Senator O’BRIEN—That is the Grains Council, is it?

Mr Mortimer —The Grains Council has signed off on the pre-1999 memorandum andarticles of association, and they are still settling the post-1999 memorandum and articles ofassociation.

Senator O’BRIEN—And are you able to advise how these structures will work in termsof the use of the wheat industry fund capital base?

Mr Mortimer —Fundamentally, the whole company will be financed by the equity baseprovided by the wheat industry fund, issued as shares to growers in 1999. If you are lookingat corporate structure, there are a number of aspects to it—boards and so on—butfundamentally it is the capital base that drives it, and in this case it would be the wheatindustry fund issued as shares.

Senator O’BRIEN—I assume you are familiar with the document itself. It is simply goingto be reflected in the equity structure of the new company.

Mr Mortimer —Yes.

Senator O’BRIEN—And that aspect of it is going to be developed in the second trancheof legislation.

Mr Mortimer —No. There are two issues here. The memorandum and articles of associationwill provide for shares to be issued, and they will specify those shares. One set of those shareswere the B-class shares described earlier. That will be handled purely under the memorandumand articles of association.

The second tranche of legislation will simply provide for the transfer of WIF, from beingestablished as a fund ultimately under the control of government, as it is at the moment, topractical ownership being exercised by the growers who have contributed that money. It willbe a one-off event. Once the WIF is passed over to growers as shares, the government willhave no further involvement in the matter.

Senator O’BRIEN—It is the way that that fund will be reflected, in the equity, as shares?

Mr Mortimer —Yes. Come 1999, the wheat industry fund will be changed from being ineffect an account with the Wheat Board, albeit with entitlements specified, to property thatwill be dispersed amongst growers on the basis of their WIF entitlements.



Senator O’BRIEN—Mr Moffet of the Western Australian Farmers Federation suggestedthat the trading subsidiary have access to a guarantee limited to $100 million and be subjectto a number of conditions. Can you advise whether such an arrangement is being considered?

Mr Mortimer —Yes, such an arrangement is being considered.Senator O’BRIEN—Okay. So the WIF is providing a capital base for the future, and also

working capital for the interim?Mr Mortimer —That is right, yes.Senator O’BRIEN—Are there any conflicting objectives in trying to meet the short-term

management objectives via the WIF and long-term management goals by the same fund?Mr Mortimer —Do you mean before 1999 or after?Senator O’BRIEN—I suppose it is after, is it not?Mr Mortimer —I guess so. After 1999 the board of the holding company will have

responsibility for managing all of its activities, consistent with its memorandums and articlesof association, and they have to provide for two things. They are going to provide for a priorityfor the pool return, and they will also provide for the provision of a commercial rate of returnto the B-class shareholders. That is a responsibility for the holding company board, and thatis consistent with corporate structures operating right throughout the economy. Basically boardshave to strike a balance between the price it is necessary to pay to ensure their capital baseis adequate and operating properly, as opposed to the returns to investors—or, in this case,the returns to the people who deal with the pools.

Senator O’BRIEN—Another matter raised by Mr Moffet was the question of theappointment of proxies. Whilst that will be dealt with in the articles, do you have any commentnow on that matter?

Mr Mortimer —The provisions for proxies will be provided for in the memorandum andarticles. That is the normal practice.

Senator O’BRIEN—He had some concerns about it; I am presuming you are aware of thoseconcerns.

Mr Mortimer —Yes, there was disputation, it is fair to say—Mr Stewart can make anorderly interjection, if he likes—within GCA as to the nature of those.

CHAIR —There is no need. The issue has been resolved.Mr Mortimer —Thank you, Senator Crane.Senator O’BRIEN—The issue has been resolved?Mr Mortimer —Yes, it has been resolved. There was a difference of view about the nature

of proxies, but that has now been settled by GCA.Senator O’BRIEN—So Mr Moffet does not have concerns any more.Mr Mortimer —No, I think Mr Moffet is quite happy with the outcome.CHAIR —The issue is reserved proxies; it is not something that is going to happen.Mr Mortimer —That is right.CHAIR —It has been agreed that they will not be there.Mr Mortimer —Exactly.CHAIR —Mr Moffet has informed me that he is relaxed about the situation now. With the

memorandum of articles, which I understand were resolved yesterday within the working party,



the other two parties have agreed that they do not have any objection to the committee havingthose in terms of pre-1999, so you are the last we have to ask.

Mr Mortimer —I am sure we are happy for you to see the memorandum and articles ofassociation pre-1999. There is no problem with that.

CHAIR —That would help us a lot in our deliberations. One of the other issues that wasof concern to the Western Australians and Mr Moffet was the issue of voting. I understandthat has been resolved.


CHAIR —Separation of powers was one outstanding issue. Are there any other issues, asfar as Western Australia was concerned, that have not been resolved?

Mr Mortimer —I think Western Australia is satisfied now. Mr Stewart made that commentearlier in terms of GCA’s advice.

CHAIR —I am asking you as you understand it.

Mr Mortimer —As someone who sat around the table at the working party, myunderstanding is that Mr Moffet is happy.

CHAIR —Thank you. I have another question that I would like to ask. I think SenatorO’Brien has partially covered it. I might be mixing it up with some of the earlier questions.There is that much repetition going on today you start wondering what you have asked andnot asked. It really relates to the timing in going forward on this legislation. We have heardfrom the Grains Council; we have heard from the Wheat Board. How crucial would you sayit is, in terms of the Wheat Board under the new structure establishing their bona fides outin the marketplace, that this enabling legislation proceeds now and does not wait for the fullpackage?

Mr Mortimer —Senator, it is crucial that it happens this year and that it happens as soonas possible because we need to acknowledge two things. Firstly, we need to acknowledge thatthe Wheat Board has operated as a fully government business enterprise, completely providedfor by the Commonwealth, for a period of some 50-plus years. The Wheat Board has a verylarge transition to make in operating as a privately owned company after 30 June 1999. Thatis a date that is less than two years away now. There is a big job to be done there movingwhat has been a statutory authority for a long time into private ownership.

Secondly, establishing the structure in a formal sense is only a relatively minor part of thatchange for the organisation. It is very major for all the parties to it, but that organisation itselfneeds to completely reassess its operations, how it does business, how it structures itself andso on in a practical way. It has a huge amount of work to do in putting all that in place interms of organisational change within a period of less than two years. I would suggest that,for an organisation of the size and breadth of activities of the Wheat Board, that job shouldnot be underestimated.

CHAIR —For the public record, in terms of the process which we are now going throughin 1997, this was put in train in the Wheat Marketing Act in 1989. If you look at section 13(1),it spells out pretty clearly what the direction was when Mr Kerin was the minister. So it hasbeen around a fair while.

Mr Mortimer —Exactly.

CHAIR —I would just like to go to the situation of the structure of the board and thereporting processes after 1999. You would have heard the questions I asked previously with



regard to annual reporting to parliament as a body of scrutiny—and I think an effective bodyof scrutiny from my experiences here, in terms of the annual reports. While the single deskremains as an integral part of the operation, is it the department’s position that the WheatBoard should still continue to report to parliament?

Mr Mortimer —There are certain activities that the Wheat Board would need to accountfor. As I said earlier, the Wheat Board as a company after 1999 will have to account for itsuse of the export monopoly, which is what government will be giving it. Arguably, governmenthas no right to demand to know any more than that. But, in terms of that, the Wheat Boardwill want to provide material on its export performance, how it is using the export monopolyand what net benefits it gets from that. That is provided for in the structure that is beingestablished through the operation of a separate pooling subsidiary.

The intention is that the pooling arrangements will operate largely as they do now and theywill operate through a separate subsidiary which will be self-contained. Given that it is asubsidiary with its own board, et cetera, it will have to provide its own set of accounts withinthe company structure. That provides a ready basis for the organisation to provide togovernment accounting for the export monopoly and its activities.

CHAIR —Just to follow that up, I guess I get to have my bit of fun here too. If Mr Tuckeyclaims to represent 60 per cent of the wheat growers in WA, I know I can claim to representthe growers of every grain that is grown.

Mr Mortimer —Fair enough.

CHAIR —Because as a senator, of course, the state is my electorate.

Mr Mortimer —Yes, exactly. I understand the distinction.

CHAIR —In terms of being able to scrutinise the necessary disciplines that will be requiredin the operations of the board between domestic trading and the pooling arrangements—bearingin mind there is a holding company and the various bits that we talked about—for parliamentto be able to make a proper assessment that the single desk or the pooling arrangements werenot being used to subsidise or assist the operations of the domestic market, would it benecessary for us to have a full report? You could not make the necessary assessment if therewere only a report that dealt with the operations of the single desk and the poolingarrangements.

Mr Mortimer —Not necessarily. If the organisation is operating properly with separatesubsidiaries which operate independently within the company structure—reporting to theirseparate, responsible and accountable boards—and those two subsidiaries deal at arm’s lengthwith each other as they should and as they are required to under corporations law, and thereis the necessary internal auditing capability and provision within the organisation, there wouldbe no need for the government to be seeing into the activities of, for example, the tradingdivision. It would not be something that would be germane to government because it couldbe buying from the pool subsidiary at arm’s length or selling to it at arm’s length, but that,in effect, is nothing separate from what the pooling subsidiary is doing in terms of its exportand marketing.

CHAIR —In your explanation, the operative word is ‘properly’.

Mr Mortimer —Yes.

CHAIR —If it becomes ‘improperly’, then I think, at the very least, it would be necessaryfor us to have access to the auditor’s report, bearing in mind that we are talking about what



is commonly known as a gift of government. I think it would be in the Wheat Board’s owninterest to have that scrutiny.

Mr Mortimer —There are two issues. One is the provision of information and—CHAIR —I am not asking for commercial-in-confidence information. I am raising the issue

of a standard, annual reporting process.Mr Mortimer —The provision of information might be possible. I am not sure that it is

necessary, I have to say, but it is something that will be looked at further. The important thingis to make a distinction in what the government or the minister might become responsible forde facto. That is an important distinction to make. If the company is to operate as aCorporations Law company, it is important that the government not become de facto involvedin something which it should not properly be involved with—or, to put it another way, doesnot leave itself open to becoming responsible for something which it really has no right tothink it is responsible for—namely, the domestic operations of the new company.

CHAIR —I am not talking about something de facto; I am talking about a real marriage ifgovernment is granting the single desk. Anyway, I have made my point. I think that issomething that needs careful consideration.

Mr Mortimer —I accept that.Senator O’BRIEN—I want to be clear on this two-tranche approach. If I understand you

correctly, what you are saying is that if the first tranche passes and the second tranche doesnot it is a workable model?

Mr Mortimer —Absolutely.Senator O’BRIEN—There is no reason anyone would be able to say to the parliament in

relation to the model that it would be effectively sabotaged if there was not agreement, say,between the Senate and House of Representatives on the second tranche legislation?

Mr Mortimer —Quite so.Senator O’BRIEN—And there is no doubt about that at all?Mr Mortimer —None whatsoever. The Wheat Board, as organised in the draft bill, could

operate perfectly capably and ably, possibly better in some ways, with clearer responsibilities.Senator O’BRIEN—And the consequence would be that the WIF would remain?Mr Mortimer —The WIF remains clearly under the control of the statutory AWB. There

is no change in that.Senator O’BRIEN—The single desk would remain under the—Mr Mortimer —Yes. The export monopoly function remains exactly the same as it currently

is. It is held by the statutory AWB.Senator O’BRIEN—And the reporting model would remain the same?Mr Mortimer —Exactly as it is at the moment.Senator O’BRIEN—Would it necessarily follow that the first tranche of legislation would

be of very limited relevance?Mr Mortimer —No. I think the first tranche of legislation will still be relevant regardless

of the outcome of the second tranche. The most dangerous situation we could be in next yearwould be if there had been no significant advance in reorganising the Wheat Board in acorporate sense to prepare for it being privatised in 1999, if that remains the wish ofparliament. At the moment, we have a clear requirement to provide for the Wheat Board to



operate independent of the government guarantee in 1999. So it is imperative that we takesteps to ready it to do that. The first tranche of legislation would assist in that regard regardlessof what came of the issues to be dealt with in the second tranche.

Senator O’BRIEN—You may have already answered this, but what aspects of the bill arebeyond the capacity of the Wheat Board now without the legislation? What things do the billput in train that the board could not do without the legislation other than the symbolism ofthe legislation?

Mr Mortimer —There are probably two key things that are done within the draft bill. Oneis that the government guarantee is delegated to the holding company so that it can startdeveloping an interface with the market and can start developing an identity and be knownto the credit rating agencies and the market as a potential borrower of large amounts of moneyin 1999. That is one key thing which the draft bill does which is not provided for otherwise.

The other thing the draft bill does in the fundamental sense is provide for separate subsidiaryactivities for pooling as opposed to your domestic trading activities. Presently, they are donethrough divisions and there is an important distinction in terms of corporate operations betweenhaving divisions and subsidiaries with there being separate accountability in boards and aclearer establishment of arms-length relationships in terms of the transactions between them.

Senator O’BRIEN—Couldn’t the Wheat Board, for example, structure itself and establisha relationship between an entity which had a delegated authority from the board now?

Mr Mortimer —It could but it would not have the same authority as having it spelt out inthe legislation. There would be no compulsion or necessity for it; it would simply be a wish.

Senator O’BRIEN—I have got a few other questions but rather than take everyone’s timewith them—there are a couple of scenario questions—I would appreciate it if I could redraftthem and put them on notice.

Mr Mortimer —That is fine.Senator O’BRIEN—I do not have any more questions.CHAIR —I think I have covered the fundamental questions that I wanted to ask. But before

we close this session—and we do sometimes have final statements from earlier witnesses whenwe are out in the bush—we have still got the Grains Council representatives here and thosefrom the Wheat Board. Mr Begg, if any of you are interested, I would be prepared to give youa couple of minutes if there is any particular issue you want to raise and put on the table nowbefore we leave this. Maybe I could just ask the Wheat Board delegates, ‘Have you got anyother issue you would particularly like to raise before we close?’

Mr Price —A small point.CHAIR —If you do, come to the table. Mr Begg, have you got any anything else you would

like to add? There will be no questions but a couple of minutes for each of you for anythingelse you want to say.

Mr Price —Thank you, Senator. Perhaps I could follow up on an issue that was touchedon with Mr Mortimer concerning the issue of the first tranche of the legislation and what couldhappen if the first tranche did not occur. Certainly, we fundamentally agree with MrMortimer’s comments. However, I guess there is a further issue and that is to do with thewheat industry fund and the fact that, come 1999, the fund will be terminated. Now, underthe first tranche, that fund is held in account for growers and, clearly, if the second tranchedid not proceed, the statutory authority would hold the fund and presumably use it to borrowto fund harvest payments.



Fundamentally, there is not a problem with that in terms of carrying out our operations—andthe Grains Council might like to comment—but I think growers’ expectations are that, in fact,whilst that fund has been a statutory tax, there is a point in 1999 where it will be convertedand growers will be given ownership and control of the organisation and an ability to assesstheir investment and the value of their investment and make decisions on that investment.Clearly the second tranche is important in achieving those objectives.

Senator O’BRIEN—Mr Chairman, could I just make a little comment that I was notnecessarily saying we were opposed to a second tranche. I was talking about a scenario as aproblem and just following that through. Of course, there is an interlinking because if youcreate B-class shares, they are supposed to reflect the WIF fund.

Mr Price —Certainly, I did not read it that way. I guess that is an area that the AWBbelieves is important. The only final comment I would make gets back to the issue of havingsufficient time to get the AWB in the best shape to meet growers’ expectations in terms oftheir investment.

We believe that it is very important that the first tranche of the legislation gives us thatperiod and window to reshape the organisation to perform in the best manner in thecommercial market. That is the only comment I would want to make.

Mr McKeown —Just to add to James’s comments, in an operational sense—and MrMortimer referred to this—the Australian Wheat Board could continue to operate effectivelywithout the second package of legislation. There are no sunsetting provisions under the firsttranche of legislation, so the access to the financial markets and the support provided by theWheat Industry Fund would continue. So we could operate. As James has said, the importantprovisions deal with the export arrangements and also the conversion of the Wheat IndustryFund into B class shares. But, in an operational sense, the second package of legislation isnot critical.

CHAIR —Thank you.

Mr Stewart —I would just draw your attention to page 23 of the submission from the GrainsCouncil of Australia in relation to the growers’ position in terms of the statutory authority,post-1999 in particular, and the strong belief from the grower community that there shouldbe some sort of statutory authority in place to oversee the operations of the single desk post-1999.

In relation to a question asked earlier by, I think, Senator O’Brien on the rights of B classshareholders, I would draw your attention to the information commencing on page 28 of thesubmission which is further explained in the memorandum and articles pre-1999.

The only other thing I would say in relation to the legislation and the conferring of the singledesk, particularly post-1999, is that whilst a statutory authority is in place and the legislationis linked to that statutory authority, it is our intention and our request that the single desk belinked by legislation to the AWB as well. That gives that certainty in our marketingarrangements. As you would understand, there has been a substantial period of time since 1989when there has been considerable uncertainty for growers in the marketing arrangements. Wewould certainly like some certainty for as long as possible after all this is settled.

CHAIR —Thank you, gentlemen, and all the witnesses who have appeared before us. Frommy point of view as chair of this committee I think it is worth putting on the public recordthat, when you consider the emphasise on domestic marketing on this side of the country andon export marketing on my side of the country, the western side of the country, I believe there



had to be some conflict in the process and there were issues that had to be sorted out. I thinkall parties are just about there. While it has been a long effort, I think we will end up witha better wheat marketing bill at the end of the day. And I say that about my colleagues inWestern Australia, too! I think they have represented us well. Thank you very much. I alsothankHansardand all the people with us in the secretariat.

Committee adjourned at 2.58 p.m.


SENATE - aph.gov.au · At this stage I declare an interest in this particular issue because I am a grain grower from the south coast of Western Australia, operating through my family

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