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AWB's Wheat Monopoly Under Cloud
CANBERRA (Dow Jones)--As an appalling week in the corporate life of Australia's AWB Ltd. (AWB.AU) draws to a close, the inescapable conclusion is that this marks the beginning of the end to its monopoly over bulk wheat exports - arguably its most important asset.
AWB enjoys the monopoly by government fiat, so it was particularly telling Friday when Prime Minister John Howard failed to offer support for its operation of the monopoly, and indeed backed away from it.
Howard was asked at a news conference, which he called over the resignation of the defense minister, whether he was confident that AWB would continue as the monopoly wheat exporter.
"Well, that is something that should be looked at," he replied, adding that this question, however, was separate from the current inquiry into allegations that AWB breached Australian law by paying kickbacks to the deposed Iraqi regime of Saddam Hussein.
"Up until now, the government has had a policy of having a single desk (as the monopoly is locally known) for exports. That's a policy that can always be reviewed and there are a range of views within the Australian community," Howard said.
The existence of the export monopoly was scheduled to be reconsidered under a scheduled national competition policy review in 2010.
The events of this week suggest this may be brought forward, or the government may offer wheat growers the same sort of choices that it promotes elsewhere by liberalizing the economy.
"If we were to change the policy, then we would need to take account of matters of policy and (their) impact on the industry, separate from the matters that are being dealt with before the Royal Commission" of inquiry, Howard said Friday.
Seasoned readers of political spin in Canberra say Howard is stepping away from the company.
AWB On Firing Line As Hearings Begin
This week, a government-appointed Royal Commission headed by Terry Cole, a former Judge of Appeal at the New South Wales Supreme Court, started hearings on whether AWB breached Australian law by paying kickbacks to Saddam's regime.
In a report issued Oct. 27 on the United Nation's oil-for-food program, Paul A. Volcker, former chairman of the U.S. Federal Reserve Board, had said AWB paid US$221.7 million to Jordan-based Alia Transportation to transport wheat through Iraq, but the funds were channeled to Saddam Hussein's regime.
AWB supplied Iraq with almost 12 million metric tons of wheat under the program, with 7.8 million tons involving an inland transport component. Interest is focussed on the wheat supplied in the period 2000-2003.
AWB was the biggest of about 2,200 companies and individuals from 66 countries that paid a total of US$1.8 billion in illegal kickbacks to Iraq, the Volcker report said.
The U.N. oil-for-food program was dismantled when Australia joined Britain and the United States in their invasion of Iraq in 2003 to get rid of Saddam's regime.
The U.N. report didn't claim outright that AWB knew it was paying kickbacks to the regime, but it maintained AWB should have known what was happening.
Both the Australian government and AWB say the U.N. had full administrative control of the oil-for-food program and approved AWB dealings.
Before the hearings began, AWB denied knowingly being involved in paying money to the regime through Alia, and said it could have been an unwitting participant in an elaborate scheme of deception devised by the Iraqi regime.
But at this week's hearings John Agius, the counsel assisting the inquiry, produced evidence suggesting that AWB officials may have known they were paying kickbacks to Saddam's regime and helped devise elaborate schemes to disguise such payments, which breached U.N. sanctions against Iraq.
Moreover, the Commission heard that AWB discussed such payments with the Department of Foreign Affairs as well as the Trade Department, and that current AWB Managing Director Andrew Lindberg met Foreign Minister Alexander Downer many times to discuss AWB business in Iraq, though individual contracts apparently weren't discussed.
It's possible that more damaging allegations could emerge when the inquiry starts taking evidence from those with an ax to grind against AWB, and its monopoly.
Probe Details Send Share Price Sharply Down
There is little doubt Howard now wants to distance himself and the government from AWB.
Last Oct. 30, just days after the Volcker Report was issued, Howard said: "I make no judgments beyond the findings of the Volcker inquiry about the conduct of AWB Ltd." He added that AWB staff to his knowledge were people of "complete integrity".
But this week's hearings and the market reaction to that have suggested AWB's reputation is taking a beating with its position as an agrarian, socialist, quasi-government operation leaving it open to charges of lack of transparency and poor corporate governance.
Although the company operates in a fiercely competitive and undoubtedly murky international wheat market, its collective export sales arrangements back home - arrangements which pool costs and returns - have raised concerns that AWB may have compromised on good governance.
AWB's monopoly involves exporting wheat to the value of more than A$4.6 billion (US$3.5 billion) a year. In addition the company exports and trades in other grains, offers a comprehensive range of financial products to farmers, and is one of Australia's biggest suppliers of rural merchandise and services.
While revenue derived from the export monopoly is contributing less and less to AWB's overall performance, it remains the maypole around which the company swings.
Investors voted strongly against the company this week, driving AWB shares sharply lower as details from the inquiry drifted through the markets.
AWB closed the week at A$5.21, up from an intraday low of A$5.12, but down 5.6% from Thursday and down 18% from its high of A$6.33 on Monday, on heavy turnover of 4.7 million shares.
MGR Archive 22.1.2006
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