June 19th 2004

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Articles from this issue:

COVER STORY: The legacy of Ronald Reagan

Remembering Reagan

CANBERRA OBSERVED : Coalition, Labor split widens over Iraq

TRADE: Behind Iraq's $700 million wheat debt

FEDERAL: Labor Left hopes to pigeon-hole Marriage Bill

RELIGION: Costello attacked over thanksgiving speech

QUEENSLAND: Labor makes push for ethanol-sugar vote

OPINION: Coalition defends its sugar package

POLITICAL IDEAS: Samuel Taylor Coleridge - Conservatism's radical prophet

QUARANTINE : Biosecurity inflames fire blight fears

CHILDREN AT RISK: Protecting children from Internet porn

DRUGS: Redfern riot linked to heroin trade

CANADA: Health care primary focus in Canadian election

INDIA: What went wrong with the BJP?

STRAWS IN THE WIND: Drums on the Congo / The next moonlight state?

DEMUTUALISATION: Credit unions an endangered species

Britain and Palestine (letter)

Worker co-ops (letter)


BOOKS: Taking Sex Differences Seriously, by Steven Rhoads

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Behind Iraq's $700 million wheat debt

by Colin Teese

News Weekly, June 19, 2004
The Financial Review (June 3) reported that "the Federal Government and the grains industry" had forgiven Iraq a $A700 million dollar debt covering wheat sales to Iraq in the period 1987 to 1990.

Apparently, the debt to Australia is part of what is said to be the sum total of Iraq's total debt to the rest of the world of about $US150 billion.

Ours may not seem much, but it means a lot to Australia and to our wheat industry. Of the $A700 million owed for Australian wheat, the industry itself will carry 20 per cent of the loss - i.e., around $A140 million. The Government - or more accurately the taxpayer - will bear the rest of the loss.

Now, before we consider the full implications of all this, it becomes necessary to understand how export finance - especially for large-scale commodity sales to high-risk markets - actually works.

Credit risk

Quite obviously, sales involving large sums of money to countries where the risk of non-payment is significant - and where credit is a necessary part of the transaction - carry an extra and heavy burden of non-commercial risk.

Without some kind of protection against the adverse consequences of this additional risk, individual exporters, or even the industry bodies (in the case of wheat, the Wheat Board) standing behind them, would be reluctant to export at all.

John McEwen, as Minister for Trade, first recognised this problem. The Minister, with the help of a Departmental team (of which this writer was part) developed a scheme intended to help exporters deal with this problem.

There was nothing special about what was developed. Every significant developed country, including the US, had such a scheme - in most cases more generous than ours. Nevertheless, as was usual practice, before any such proposal could be considered by Cabinet, it had first to run the gauntlet of an inter-departmental committee.

In this context the idea had to withstand intense opposition from the Treasury and some other like-minded departments.

Opponents of the idea insisted that what was in mind amounted to nothing more than an unwarranted intrusion, by government, into the private insurance business. If exporters wanted this kind of protection, and were willing to pay for it, they should approach the insurance industry.

Of course they completely ignored the fact that for credit sales to markets with unstable governments, such cover was simply not available. Indeed, it was for precisely that reason, that our exporting competitors had introduced similar, though, in many cases, more comprehensive schemes than that being proposed for Australian exporters.

Despite Treasury opposition, the proposal did finally get to Cabinet. And despite the fact that it was burdened with a divided inter-departmental report, the proposal finally gained the support of the government; but only with the considerable weight of Mr McEwen's argument firmly behind it.

Thus was born what we now know as the Export Finance Insurance Corporation (EFIC).

It works like this:

The corporation does not cover normal commercial risk - in fact, export sales on credit to less than perfectly stable governments lie well outside the scope of normal commercial risk. What EFIC covers is extra and unusual exposure involved in such sales.

This includes the possibility that a government may possibly not release the currency necessary to allow the purchaser (whether government or private) to meet its contractual obligations. Or, indeed, it may be the case that the government, though not unwilling, is simply unable to meet its obligations.

These are considered "country risks". So far as the risk is concerned on any particular proposal, EFIC may - and often does - decide to bear the exposure on its own account, and from its own resources.

Alternatively, it may decide that the level of risk is too great for it to bear. It then approaches the government for backing. If the government thinks the transaction is importantly in the national interest, then it agrees to become the "insurer of last resort".

This is precisely what happened with the Wheat Board's sales to Iraq back in the late 1980s and early 1990s.

All this is fine and makes perfect sense in terms of what the export finance arrangements were intended to be. But what we can't avoid concluding is that these wheat sales could not have taken place without the taxpayer agreeing to underwrite 80 per cent of any loss by the industry.

And further, the Wheat Board, and the growers on whose behalf it operates, have already been paid by EFIC for 80 per cent of the value of their sales while the corporation seeks to have Iraq complete the terms of the contract.

The first and most obvious point to be made about all this is that this sale of wheat to Iraq could not have been possible without what has now become a substantial subsidy.

The question to be asked is whether it was good business in the first place? The Wheat Board is not shy in boasting of its negotiating prowess, but can it have been difficult to negotiate the sale of large quantities of a foodstuff (wheat) to a country which desperately needed it, and yet was known to be in financial difficulties? Probably not. Nevertheless, the sale was important to Australia (and to the wheat industry) and the judgment of the government to underwrite the risk was well founded.

But what about the position of the wheat industry and of wheat-growers? Spokespersons for the industry are fond of pointing out the sturdy, self-supporting independence of growers and of the industry's capacity to stand on its own feet. And so it does - up to a point. It has also strongly supported the idea of less government interference in its activities. And, by implication, it has supported those who condemn the dairy and sugar industries who ask quite reasonably - given the international forces they are required to confront - for relief from some of the obligations of the effects of National Competition Policy at home.

Further, the wheat industry has consistently condemned the protection of manufacturing as an unnecessary cost burden that wheat-growers are required to bear. Let us hope they now are prepared to recognise that the costs and benefits of government assistance, in the form of taxpayer subsidies, cut both ways.

Subsidising wheat sales to Iraq helped the wheat industry help Australia. Fine. How about conceding that subsides to help dairy, sugar and manufacturing, can have the same effect?

One final point on the Iraq situation. Selling wheat to more or less bankrupt countries (and Trade Minister Mark Vaile admits Iraq is bankrupt, and surely will remain so) amounts, in the end, to nothing more than a gift of food from Australia to Iraq. Which is a worry.

Do we, in particular - and, for that matter, the rest of the food-exporting countries - want to see food aid to impoverished countries sustained financially by rich food-exporting countries alone? Why should not the cost burden of financing food aid be spread more equitably across the international community? Why, for example, should not the rich food-importing countries pay their share?

Suppose we could get support for a UN-collected and administered fund to cover the cost of supplying aid in the form of food to impoverished countries. Suppose such a fund could be financed by contributions from rich countries, food exporters and importers alike, on some equitable basis. It's just possible that a deal could be worked for such food to be acquired at something better than the world dumped export price. And wouldn't that be something!

How about it, Mr Vaile? Iraq might just be the place to start.

  • Colin Teese was Deputy Secretary of the Department of Trade

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