DISSENTING REPORT
By Senators Forshaw, O'Brien and McKiernan
The Basis for the Freeze.
1.1 The overwhelming majority of witnesses told the committee they
had recommended to the then Minister, Mr Anderson, that the freezing
of wool sales from the stockpile was not in the best interests of unit
holders in Wool International. According to media reports the submission
considered by cabinet reflected this view and recommended that sales
of wool continue and unit holders be given immediate access to their
equity in the stockpile.
1.2 The following is a brief summary of evidence to the Committee.
1.3 Mr Paul Sutton, Assistant Secretary, Wool and Dairy branch, Department
of Agriculture, Fisheries and Forestry advised the committee that a
number of options for the ongoing management of the stockpile had been
investigated in the lead up to the cabinet deliberations. He said a
number of other departments and agencies had been consulted in the preparation
of the cabinet submission. Departments consulted included the Department
of Prime Minister and Cabinet and the Department of Finance and Administration.
1.4 Dr Stephen Beare, Deputy Director, Australian Bureau of Agriculture
and Resource Economics [ABARE], told the Committee the Bureau provided
advice to the Government that there was no benefit in terms of returns
to growers from a freeze of sales from the stockpile. Dr Beare, said:
Our advice to the department essentially was that it probably would
not have had a great impact on prices or throughput, so there were
not be tremendously beneficial impacts in terms of the market prices
for fresh wool …. [1]
1.5 Dr Bob Richardson, the Chief Executive Officer of Wool International,
said the Board of Wool International believed that the “chill”
option – the sale of sufficient wool to meet Wool International's
costs – was the best option.
1.6 Dr Richardson said there were discussions with the former Minister
about alternative options to manage the stockpile and their implications
for unit holders in the context of the value maximisation objectives
of Wool International.
1.7 He said options included a freeze, a chill or maintenance of the
status quo and the analysis undertaken by Wool International found that
there were lower net returns to unit holders from a freeze than from
other alternatives.
1.8 Senator Forshaw referred Dr Richardson to the Minister's second
reading speech that stated the freeze had been imposed in response to
requests from industry.
1.9 Senator Forshaw said
In the minister's second reading speech he stated that the decision
to impose the freeze was a response to requests from the industry.
Do you agree with that statement?
1.10 Dr Richardson replied:
If there were requests from the wool growing industry they were not
requests that I was strongly aware of. [2]
1.11 The President of the Wool Council Australia, Mr Rod Thirkell-Johnston,
said the Council had been consulted on the question of the future management
of the stockpile by the then Minister, Mr Anderson.
1.12 Mr Thirkell - Johnston said there were a number of industry meetings
in the leading up to the cabinet meeting.
1.13 Senator O'Brien asked:
I understand it was your view and his [Mr Anderson] view at each
of the meetings you had that the sale of wool from the stockpile should
continue.
1.14 Mr Thirkell-Johnston:
Yes. The Minister was trying to keep faith with the international
community as a result of the Roundtable. [3]
1.15 Mr Thirkell-Johnston said at that Roundtable in 1996 the Government
told the international industry that there would be no further changes
to the sale of wool from the stockpile until it had been disposed of.
1.16 Senator O'Brien asked:
…..was it your view and the Minister's view, prior to the cabinet
making the decision that it did, that to freeze the sale of the stockpile
was a breach of faith with international customers?
1.17 Mr Thirkell-Johnston:
We were very concerned that it would be a breach of faith with international
customers and would require very careful handling, if it was enacted,
to regain their confidence.
1.18 Senator O'Brien:
1.19 Mr Thirkell-Johnston:
1.20 Ms Lynn Johnston, the Chairman of the Western Wool Growers, Pastoralists
and Grazier Association [PGA], Western Australia, said the Association
maintained its opposition to the concept of freezing the stockpile.
She said the PGA opposed it on the basis of economic principles.
1.21 Ms Johnston told the committee the PGA sought an independent analysis
from the economic division of Agriculture W.A. She said that analysis
backed up their objections.
1.22 Ms Johnston said:
However, the long-term result would be negative as the buyers making
their purchasing decisions would be making those decisions based on
the knowledge that the wool must come back onto the market. [5]
1.23 Ms Johnston said further that there was no comprehensive plan
in place that encompassed the whole industry from growers through to
processors as to how the stockpile would be unfrozen.
1.24 Mr Robert Tehan, a member of the Wool Committee, Victorian Farmers
Federation, said the Government's decision to freeze the stockpile would
cost growers at least $10 million a quarter.
1.25 Mr Tehan:
Yet the explanatory memorandum on the Wool International Amendment
Bill 1998 states that to improve the financial position of Wool growers
is one of the objectives of this Government action. [6]
1.26 Mr David Wolfenden, Chairman, Wool Industry Committee, NSW Farmers
Association told the committee:
1.27 Mr Wolfenden said the option to freeze sales of the stockpile
was debated at the Association's Annual General Meeting and was “comprehensively
defeated by 70 to 80 percent of the vote.” [8]
1.28 In the light of this evidence of overwhelming opposition it can
only be concluded that the freeze was imposed for political reasons
and not sound policy objectives.
Impact of the Freeze on private sector initiatives
1.29 The Government's decision to ignore the best available advice
and freeze wool sales may also have created legal difficulties in relation
to options available to unit holders to access the value of their holdings.
1.30 Mr Tehan [VFF] stated that the impact of the freeze on private
sector initiatives appeared to have been disregarded completely by the
Government. He said in September 1997, Wool International issued certificates
of equity to growers who paid wool tax on wool sold in the period 1
July 1993 to 30 June 1996.This allowed a number of private sector initiatives
that gave unit holders the ability to access equity locked up in future
distributions of Wool International. Producers accessed these services
on the basis that there was a clear, legislated disposal policy for
Wool International leading to a legislated final date for stockpile
disposal at the end of 2000.
1.31 Mr Tehan advised that in correspondence with a unit holder, who
used the Elders Wool stockpile Equity Advance, Elders stated:
Should the stockpile not be finally sold and settled by 31 December
2000, Elders reserves the right of clearance from you at the expiration
of a three-month notice period. [9]
1.32 Mr Tehan said there was an estimated $40 million so far lent by
financing facilities offered by Elders Rural Finance Loan Securitisation
Facility, Westfarmers Dalgety Loan Facility and Macquarie Bank Wool
International Equity Trading Facility.
1.33 Dr Richardson [WI] told the Committee that unit holder's units
entitle them to participate in a surplus once the debt has been removed
and the stockpile sold. He said if the Commonwealth were to withdraw
that right and replace it with something else without just compensation
then there would be legal problems.
1.34 Dr Richardson also said that if the Government was to withdraw
a unit which entitles unit holders to a share in a surplus and replace
it with a share which entitles them to participate in a dividend, there
is a question as to whether these two things are equivalent.
Impact of the Freeze on Wool Prices
1.35 Dr Beare told the committee that ABARE was reviewing its forecasts
for all commodities the results of which would be released on 15 December.
1.36 He said the September forecast for the Eastern Market Indicator
was 560 cents on a clean basis. He said that forecast would be reduced
somewhat in December.
1.37 Dr Terence Sheales, Chief Commodity Analyst, Australian Bureau
of Agriculture and Resource Economics, said economic conditions were
having a major effect on demand for all fibres and hence prices.
1.38 In response to a question about the recent recovery in wool prices
Dr Sheales said that while there was not yet any data available it appears
there had been a move to fill orders before the Christmas closedown.
He said the other thing to note is that prices have slipped a bit in
recent days.
1.39 Dr Sheales said:
I suppose the only other thing I would say is that we have gone through
a period in perhaps the last month of a feeling generally in the world
macro-economic environment that there has been some settling of the
Asian situation. That may have brought a little more confidence back
into the market but, again, that is quite anecdotal information in
terms of the effects it may have. [10]
1.40 There was no mention from the Government's key agricultural economic
advisory body of stockpile freeze as a contributor to better wool prices.
The de-mutualisation of Wool International
1.41 The Bill also contains amendments to the Wool International Act
1993 to allow Wool International to support the process of privatising
the wool stockpile and to meet costs associated with that process.
1.42 There was general support from industry bodies that appeared before
the committee that the de-mutualisation of Wool International was the
appropriate course for the Government to follow.
1.43 Mr Mike Hutchinson, Chief Executive, Office of Asset Sales and
Information Technology Outsourcing, told the Committee the sale process
for Wool International was somewhat different from a normal privatisation
process. He said the objective was to secure the divestment of Wool
International from the Commonwealth but not with the proceeds being
to the benefit of the Commonwealth. However, he said that the process
would be broadly the same as a normal privatisation.
1.44 Mr Hutchinson also said there would be a due diligence to ensure
all the relevant issues have been identified. The Commonwealth's current
and ongoing risks would also be identified and managed. He told the
Committee there would be an assessment of alternative processes and
structures to execute a transaction including the consideration of alternative
structures for the successor entity to Wool International. Consideration
would also be given to all the commercial, legal, constitutional and
taxation issues associated with the shift from the present statutory
form to a commercial form that would be in place after the de-mutualisation
process was complete.
1.45 Mr Hutchinson said consultants under the supervision of the Office
of Assets Sales would do most of the work. Those consultants will be
investment bankers and lawyers and possibly some specialist consultants.
He said the Office was in the process of selecting the consultants.
It had sought proposals from consultants for scoping studies as the
first phase of the transaction and was close to finalising the appointment
of consultants to do that work.
1.46 Mr Hutchinson said the options for the Wool International privatisation
have not yet been identified so there is no process in place. Nor could
he tell the committee what the steps to privatisation would be. He said
there had been no analysis of the taxation position with respect to
Wool International.
1.47 But he stated:
There are some fairly complex taxation issues associated with the
conversion of the present equity holdings into straight shares. [11]
1.48 Mr Hutchinson told the Committee the Office of Asset Sales could
meet the deadline of 30 June as long as the necessary legislation was
in place and there were no specific taxation legislation obstacles.
He said if the legislation was not in place by mid May “we would
be dealing with a very problematic situation but it may not be a terminal
situation” [12]
1.49 The Wool International Amendment Bill requires that the privatisation
process be completed by 1 July 1999 and the freeze on sales to end on
30 June 1999. Dr Richardson was asked in writing how Wool International
might manage a delay in the privatisation process beyond 1 July 1999.
Dr Richardson replied:
We are concerned about this and recommended to the Minister that
the freeze should continue until private body [sic] formally took
over, not June 30. [13]
1.50 We are particularly concerned that the Government has not made
any provision for a delay in the demutualisation of Wool International.
If the Government fails to meet the deadline set for the privatisation
process further legislative action will be required resulting in even
more instability and uncertainty in the Wool industry.
Consultation with industry
1.51 Evidence to the Committee suggested the Government, having ignored
advice from both its own advisers and a number of key industry bodies
that the freeze option was the least attractive, has no clear plan to
properly consult on the de-mutualisation process.
1.52 The industry will have to deal with a process built around an
interim advisory board, the board of Wool International, the Office
of Asset Sales, the consultants and the department of Agriculture, Fisheries
and Forestry. This process, if not properly arranged, has the potential
to disenfranchise many in the industry.
1.53 In fact, in response to a question was to whether would each unit
holder be required to formally endorse the new structure Mr Hutchinson
said that such a requirement did not appear to be necessary.
1.54 He said:
No. I believe that would be a matter for the parliament rather than
the policy holders because of the peculiar legal structure of Wool
International. [14]
1.55 The lack of any appropriate consultation process adds further
to the uncertainty in the industry following on from the Government's
rejection of the industry advice on the freeze.
Cost of Privatisation
1.56 The actual cost of the process is yet to be determined.
1.57 Mr Hutchinson told the Committee the present estimate of costs
associated with the exercise would be something in the order of $4 million.
However, he said that amount assumed there would be no stamp duty. Normally
stamp duty would be paid on the sale of a business and could be 0.3
percent of the net value of that business.
1.58 He told the Committee:
The advisers we are appointing are confident that, properly handled,
the deal should not attract stamp duty at the time of the de-mutualisation,
the time of transfer from government to private ownership. [15]
1.59 Mr Sutton, Assistant Secretary in Department of Agriculture, Fisheries
and Forestry, said the department's role was to support the Minister,
support the industry in terms of its interaction with the interim board,
and to support the interaction between the interim board and the advisers
to the Office of Assets Sales. He said the department's participation
in the privatisation would cost $500,000.
1.60 The industry argued that the Government should meet the costs
associated with the de-mutualisation process. Mr Thirkell-Johnston told
the Committee:
We believe that, as the Government made the decision to freeze the
stockpile and to proceed to privatisation, they should in good faith
accept the costs of this process. [16]
Conclusions
1.61 The Government's decision to freeze the sales of wool from the
Stockpile went against all advice and its impact on a recent, modest,
recovery in prices is questionable. According to ABARE that recovery
was likely to be related to pre Christmas buying coupled with a more
positive view of the state of the Asian economies.
1.62 The freeze is, however, imposing ongoing costs on the industry
until sales of the Stockpile resume after the demutualisation of Wool
International. The freeze has also created problems for unit holders
who have participated in private sector financing arrangements on the
assumption that the stockpile would continue to be sold down at the
legislated rate.
1.63 The demutualisation of Wool International appears to have general
support from the industry but there is considerable uncertainty about
the timing and the cost of the process. There are a number of complex
issues to be settled before the demutualisation can proceed. There is
not yet even a basic structure to progress the matter even though its
completion date is set at 30 June 1999.
1.64 There is no provision in the bill to allow for the stockpile sales
freeze to continue if the privatisation deadline is not meet despite
the potential problem being brought to the attention of the Government
by Wool International.
1.65 Nor has the Government determined a proper and comprehensive consultative
process with industry in relation to the privatisation process.
Recommendations
1.66 Senators Forshaw, McKiernan and O'Brien recommend
i) the bill be amended to allow for sales of wool from the stockpile
to be resumed to cover interest and operating costs incurred by Wool
International. Dr Richardson advised the Committee in a written answer
that Wool International could commence sales at this lower level in
the March quarter. He said the resumption would have no significant
effect on stability.
ii) the bill be amended to enable the minimum selling arrangements
to continue until the demutualisation process is complete.
iii) the Government immediately convene a meeting with the wool industry
to determine an effective consultative structure to progress the demutualisation
process.
iv) the Government seek advice, as a matter of priority, from the
Attorney General as to the impact of the freeze and the demutualisation
on those unit holders who have entered into private schemes such as
Elders Wool Stockpile equity Advance.
v) the industry meets the cost of the demutualisation of Wool International
on the basis that the process is both open and transparent.
…………………………….
…………………………. ……………………………...
Senator M Forshaw Senator K O'Brien Senator J McKiernan
Footnotes
[1] Evidence p.45
[2] Evidence, 27 November 1998 p.3.
[3] Evidence, p.14
[4] Evidence 27 November p. 14
[5] Evidence p.36,37.
[6] Evidence p.24
[7] Evidence p.31
[8] Evidence p.31
[9] Evidence p. 24
[10] Evidence p. 45
[11] Evidence p.48.
[12] Evidence p. 50.
[13] Evidence p. 36
[14] Evidence p. 49.
[15] Evidence p. 51
[16] Evidence p.8