ACCC in dangerous game of monopoly
The deregulation of wheat marketing last year should have meant the end of inefficient and anti-competitive practices. Yet one single desk has been simply replaced by another.
Last year CBH, the monopoly bulk handler in Western Australia, successfully applied to the Australian Competition and Consumer Commission to gain control over all grain in WA between local silos and the ports.
The program, known as Grain Express, directs all grain in WA onto the ageing and largely uncompetitive rail network. At the time, in a submission to the ACCC against CBH's proposal, the Institute of Public Affairs argued CBH's proposal was anti-competitive and likely to result in the sub-optimal development of the grain industry in WA.
Unfortunately, the experience this season has exceeded even the most pessimistic expectations. Recent reports in The Australian Financial Review indicate major international wheat buyers, such as Indonesia, South Korea and Japan, cannot get wheat out of WA in a timely manner. Ships are lined up empty at WA ports waiting for grain to be moved from up-country silos.
This should be ringing alarm bells for the federal and WA governments. Make no mistake; these problems are a direct result of the monopoly the ACCC granted CBH, whose history is as a bulk handler supplying to a single buyer, AWB, under the old single desk. Consequently, the firm's primary consideration is utilising its fixed assets, not finding the least cost and most efficient pathways to port.
CBH claimed the adoption of the Grain Express system would lead to enhanced port efficiency and increased rail usage. However, as this season has proved, these two goals are mutually incompatible.
As in other states, the WA grain rail network is long overdue for rationalisation. Of the four port zones in WA, three lose money. As a recent state government report says, "Albany and Geraldton do not return positive results under any practical rationalisation scenario, primarily due to low grain-volume density and competitive road networks."
Yet CBH, with the support of the then WA Labor government, convinced the ACCC to force grain growers and buyers to use this outmoded rail network. Industry participants report that not enough trains were booked at the start of the season, so inherent inefficiencies in rail were compounded by the network running below capacity.
Had there been normal competition, instead of a single operator trying to second guess future volumes, more grain would have gone by road straight to port, and rail limitations would have been far less critical.
CBH has proved itself incapable of running the monopoly it convinced the ACCC to grant it.
If the consequences for Australian trade and farmers' returns were not so serious, CBH chief executive Imre Mencshelyi's blaming the state government for the rail network could be laughed off as yet another company chief trying to transfer blame. If anything, the previous WA government's biggest failing was to pander to its dominant bulk handler by keeping these unprofitable rail branch lines open to avoid stranded CBH assets up-country.
A direct result of the removal of competition in the WA supply chain was significant delays at ports, to the extent that the shipping stem was suspended for a month to clear the backlog. This led to the real risk of crippling demurrage charges that could severely test the financial viability of some exporters.
Reports also suggest the WA shipping stem has been altered to advantage some buyers. If this is proven, there is a risk of long-term damage to our export reputation, loss of custom to Canada and other exporters, and adverse renegotiation of current contracts.
Unfortunately, because CBH's monopoly was directly granted by the ACCC - supposedly pro-competition - there is nowhere for the industry to turn to fix this mess.
If the ACCC cannot recognise it made an error in allowing this new monopoly, it should at least impose conditions on CBH to improve transparency and accountability.
The federal and WA governments must ensure the deregulated wheat market can operate freely and efficiently. Farmers cannot afford to lose important export markets because the competition regulator granted an ill-advised monopoly to a company that has proved incapable of delivering..