In issue 6 of Cultivate, we discussed the windows of opportunity for Australian agribusiness investment. In light of that, we now discuss the deregulation of Australia's bulk wheat export industry and consider the opportunities it presents.
Code of Conduct
The Competition and Consumer (Industry Code-Port Terminal Access (Bulk Wheat)) Regulation 2014 (Code of Conduct) authorised, as from the opening day of the 2014 harvest season, the next phase in the systematic deregulation of the bulk wheat export market which began when the Australian Wheat Board's statutory monopoly was revoked.
Deregulation is supported by the Productivity Commission's report of 2010, which found that the bulk wheat export market had been performing well, despite concerns expressed by a number of growers.
The Code of Conduct's explanatory statement reveals Parliament's concerns regarding the costs incurred through compliance with regulatory protocols. The Wheat Export Marketing Act 2008 – now repealed – required, among other things, that port terminal service providers pass an access test. Parliament regards the wheat industry as having evolved to a point where the benefits of a stringent regulatory regime are outweighed by the associated costs.
This is not to minimise the recognised potential for monopolistic behaviour in the supply chain when substantial control is held by owners and operators of port terminal facilities over the bottleneck infrastructure required for the export of bulk wheat. Industry concern regarding this has been seen to justify continued regulatory oversight.
The obligation of good faith – a paper tiger?
Part 2 of the Code of Conduct (clause 2) imposes a general obligation on both the port terminal service providers and exporters to deal with each other in good faith. An obligation to act in good faith would restrain parties from acting maliciously, capriciously or for an improper purpose, but does not prevent a party from acting in its legitimate self-interest. In practice, the scope of 'good faith' has been interpreted inconsistently by the courts, and it is likely to be difficult to assess what conduct would amount to a breach of a party's legal obligation to act in good faith.
The Code of Conduct has sought to address the imbalance of bargaining power between port terminal service providers and exporters which arises from the highly concentrated nature of the port terminal services market. A similar approach has been taken by the Australian Parliament with regard to proposed amendments to the Franchising Code of Conduct, which include an express obligation to act in good faith.
However, unlike this Code of Conduct, the proposed amendments to the Franchising Code of Conduct provide a definition of 'good faith', which may assist in resolving ambiguity arising from the Court's application of the term. It is possible that a lack of similar detail will prove to be a weakness in the Code of Conduct.
Access regime – a minimalist approach
Under Part 3 of the Code of Conduct, port terminal service providers must enter into an access agreement, or enter into negotiations about the terms of an access agreement, with an exporter who makes a complete application, provided the port terminal service provider is satisfied on reasonable grounds about a number of matters generally relating to the financial substance of the exporter.
Notably, the Code of Conduct does not empower the Australian Competition and Consumer Commission (ACCC) to regulate, or otherwise control, the prices charged for port terminal services. This minimalistic approach can be contrasted to the legislative powers provided to the Essential Services Commission (ESC) in Victoria. Under the Essential Services Commission Act 2001, the ESC has the power to regulate the prices of goods and services in certain industries. Similar regimes exist in other jurisdictions. For example, the ESC of South Australia is provided with certain regulatory powers under the Water Industry Act 2012 relating to the prices charged by retailers in the water industry.
Determining the prices and access terms and conditions for infrastructure services is a key regulatory function of the ACCC, where general competition law established by the Competition and Consumer Act 2010 is inadequate to ensure the efficient and fair operation of relevant markets. Other monopolistic industries, where the ACCC is empowered to regulate price and access terms, are electricity, water and rail freight.
Regulation of access features in the October 2014 Harper Competition Review Draft Report, which considered the application of the National Access Regime, originally established by Part 3A of the Competition and Consumer Act 2010 to enable third-party access to bottleneck infrastructure for the purpose of improving economic efficiency in appropriate industries. The report highlighted the tension between ensuring that bottleneck industries were appropriately governed while trying to avoid negative economic consequences arising from inappropriate intervention.
This tension has, prior to the Code of Conduct, been managed in the bulk wheat port terminal services market by access undertakings (legally binding instruments approved by the ACCC) committing the port terminal operator to provide port terminal services to exporters of grain. Prior to the enactment of the Code of Conduct, the ACCC had accepted numerous access undertakings in the port terminal services industry, including undertakings from GrainCorp, Viterra and CBH.
The Code of Conduct removes any additional protection that access undertakings provided to users of port terminal services. Instead, the Code of Conduct only enforces standard terms and reference prices, which is an important, if basic, objective of competition policy.
The Code of Conduct also maintains a requirement on port terminal service providers to publish information on their website that is broader than the continuous disclosure requirements of the previous regime. This includes, among other things, performance indicators, such as the amount of grain loaded each shipping window for the previous calendar month (clause 29(b)), and stock information, such as the total amount of bulk wheat held at each port terminal at the end of the previous week (clause 30(a)). This is to assist the ACCC in enforcing the Code of Conduct, as well as general competition law, under the Competition and Consumer Act 2010.
Going beyond that, it is unclear to what extent the Code of Conduct's access regime will address perceived imbalances of bargaining power or promote the efficient operation of the port terminal services market or the wheat export market.
Clause 5(1) of the Code of Conduct provides the Minister for Agriculture with the power to exempt providers from the operation of Parts 3 to 6 of the Code of Conduct if the provider is a cooperative of grain producers who represent at least two-thirds of the grain producers within the relevant grain catchment area, and has sound governance arrangements that ensure efficiency and allow members to influence its management decisions. This represents a new departure in competition terms, since sound governance and member influence have no real bearing on competition in markets, particularly when the cooperative entity concerned dominates the market.
Additionally, clause 5(2) of the Code of Conduct provides that the ACCC may determine that any port terminal service provider is an exempt service provider of port terminal services at a specified port terminal facility. Clause 5(3) lists the factors which the ACCC must consider when exercising its power under clause 5(2), which includes the legitimate business interests of the port terminal service provider and the public interest.
However, under the Code of Conduct, no entity can be exempted from the obligations under Part 2, which include the requirement to have – and to publish – standard terms and reference prices.
An exempt entity would be at a distinct advantage, avoiding the regulatory burden and the cost of maintaining the full information disclosure requirements that apply to a nonexempt entity.
Exemption has already been granted to Graincorp's Carrington facility in the port of Newcastle. This is seen as exemplifying the philosophy behind the Code of Conduct as being a gradual move toward full deregulation in bulk wheat export port services.
Impact of the Code of Conduct on a highly concentrated market
While the Code of Conduct requires the publication of certain information (even by exempt entities) and enforces standard terms and standard reference prices, it does not purport to control or restrict the precise nature of those terms and prices, other than requiring a dispute resolution mechanism in clause 22.
The Code of Conduct appears to substantially address any possible concerns for exporters relating to their access to port terminal services. This is particularly important, as access to port terminal services is essential for fair and effective competition in the wheat export market. However, it is arguable that Parliament's decision not to address monopolistic pricing in the port terminal services industry fails to satisfy a key function of competition law.
Nevertheless, as the market for port terminal services for bulk wheat in Australia remains highly concentrated, a role remains for the ACCC to monitor conduct if it receives information on breaches of competition law. The Code of Conduct leaves a great deal up to participants in the export wheat industry in this respect.
Long-term agreements – back on the agenda
The primary concern for traders is ensuring access for their grain to be loaded at the required time. Most traders saw the best way of achieving this to be long-term 'take or pay' agreements with the port terminal service providers. Although time ran out for such agreements to be in place for the 2014 harvest season, there is nothing in the Code of Conduct specifically to prevent these agreements in future years. In reaching these agreements, larger exporters will have an advantage over any smaller, or newer exporters, who lack the established record of a volume of loading through their chosen ports.
Conclusion – the parts the Code of Conduct does not reach
Cooperative Bulk Handling Ltd has secured exemption from the Code of Conduct, even though it owns and operates substantially all port and related supply chain infrastructure in Western Australia. It remains to be seen whether the general competition law established by the Competition and Consumer Act 2010 is adequate to ensure an efficient and equitable bulk grain export market. Considering nearly all grain produced in Western Australia is grown for export, this is a large and possibly uneasy question for the Code of Conduct to have left unresolved.
In New South Wales the key export port of Newcastle now has more than one port terminal services provider, which has led to the established incumbent provider being exempted. Nevertheless, the eastern seaboard and South Australia remain, by comparison to Western Australia, relatively highly regulated. If proof of the concept of competition (as has occurred at Newcastle) spreads to other ports, the policy expectation underlying the Code of Conduct may become a reality. However, the fact that a review of the Code of Conduct is mandated for three years' time speaks of a less confident expectation.
A wave of impending port privatisations may play a part in shaking out new opportunities, but the barriers to entry for new players remain high and, whether in the east or the west of Australia, smaller exporters may simply find they are pushed back into the sphere of smaller containerised export grain businesses, leaving the bulk sector to the larger players. This would not deliver the full benefits which could result from a deregulated, but equitable, bulk grain export industry.