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2002
THE PARLIAMENT OF THE
COMMONWEALTH OF AUSTRALIA
HOUSE OF
REPRESENTATIVES
EGG INDUSTRY SERVICE PROVISION BILL
2002
EXPLANATORY
MEMORANDUM
(Circulated by authority of the Minister for
Agriculture, Fisheries and Forestry,
the Hon Warren Truss MP)
EGG INDUSTRY SERVICE PROVISION BILL 2002
GENERAL OUTLINE
This Bill is one of two Bills designed
to create an egg industry company to provide generic promotion, R&D and
other industry services to the egg industry. The new company will be limited by
guarantee under the Corporations Act, and will assume the R&D functions that
are currently provided to the egg industry under a sub-programme of the Rural
Industries Research and Development Corporation (RIRDC).
The new
company will be not-for-profit and all levy payers who pay a new statutory
promotional levy will be eligible to register for membership and full voting
rights. To deliver its objects and strategic and operational plans, the board of
the industry services body will be required to supplement the skill mix of
member elected directors with specialist skilled directors, including an
independent director highly skilled in corporate governance.
The Bill
provides the Minister with the power to enter into a funding contract with an
eligible body to enable it to receive and administer levies collected by the
Commonwealth for industry promotion, research and development (R&D), and the
Commonwealth’s matching funding for eligible R&D expenditure. The
Minister may then declare the body with which the contract is made to be the
industry services body.
The contract between the body and the
Commonwealth will set certain obligations and accountability requirements for
the industry services body, including provisions relating to the use of levies,
matching R&D funding and transfer of assets and liabilities from RIRDC. The
detail of the new industry services body’s accountability arrangements to
its members and to the Commonwealth will be outlined in the contract and the
constitution of the industry services body.
The second Bill, the Egg Industry Service Provision (Transitional and
Consequential Provisions) Bill 2002 provides for the transfer of assets and
liabilities associated with the egg sub-programme of RIRDC to the new industry
services body. Assets, including cash balances, are held by RIRDC on behalf of
industry as the proceeds of a statutory levy and matching contribution for
R&D by the government. The transfer of assets is estimated to have a
positive impact on the Fiscal Balance of $2.9 million over four years, due to
estimated operating losses for the RIRDC egg sub-programme. The final outcome
will be determined following the financial transfer on 1 January 2003.
The egg industry is currently serviced at a national levy by the peak
industry body, the Australian Egg Industry Association (AEIA) and an egg
sub-program under the Rural Industries Research and Development Corporation
(RIRDC).
At present, a levy of 7.87 cents per laying chicken placement in
the industry is imposed under the Primary Industries Excise Levies Act
1999 where more than 1000 laying chickens are hatched in one year. The
overall industry levy is split to accommodate research and development, residues
testing and animal health issues, as follows:
- 7.2 cents per laying chicken
is directed to RIRDC for research and development,
- 0.4 cents per laying
chicken is directed to the NRS, and
- 0.27 cents per laying chicken is
directed to the AAHC.
The 7.87 cent levy is imposed on, and collected by,
the hatchery owner, with some or all of the costs passed on to the egg producer
when they purchase laying chicks.
The egg industry has experienced a difficult period since deregulation of
State marketing arrangements in the late 1980s. Further pressures in recent
years have resulted from the Newcastle Disease outbreaks and changes to layer
hen housing to meet animal welfare requirements. In particular, egg producers
have suffered from an inability to adopt a whole-of-industry approach on crucial
issues, to communicate the health benefits of egg consumption to consumers and
to benefit substantially from industry R&D, market promotion and other
service provision.
Over the last decade, eggs as a food source have
suffered from negative consumer perceptions regarding dietary issues and animal
welfare. Nutritional research is increasingly showing the benefits of eggs, but
there has been no avenue through which to promote this information effectively
to consumers. Whilst the industry has been fighting to retain the place of eggs
as a preferred food category in the face of dramatically changing consumption
and lifestyle preferences, declining consumption has forced some producers to
leave the industry, and those remaining to question their
viability.
Between 1989 and 1999, Australia’s average annual egg
consumption decreased from 146 to 137 eggs per person (source ABS), well below
the industry’s target of 200. The AEIA has argued strongly that this
decline is a result of a market failure in egg promotion. Whilst there are some
producers large enough to carry out marketing and create brand recognition, this
has not proved enough to redress the declining per capita egg consumption. In
addition, the structure of the industry and the nature of the product mean that
the marketing efforts of individual firms benefits other egg marketers, without
the latter’s contribution to the cost. This “free-riding”
problem results in a commercial disadvantage to the investing firm, and as a
result, generic promotion is hindered.
Over the past fifteen years the
Australian egg industry has made several attempts to address the need for
generic promotion through voluntary levies. However, the levies have ultimately
failed. The industry believes that demand for eggs can be generated through
promotional activities, but that being generic in nature, the cost should be
shared by all.
In early 2001, the Australian Egg Industry Association
(AEIA) presented the Commonwealth Government with a proposal for a new
Corporations Act company to undertake generic promotion, the research and
development services currently provided by RIRDC and some strategic industry
service provision. The proposal also involved a new statutory promotional levy
of 32.5 cents on each laying chick purchased from a hatchery.
To assist the egg industry to become more sustainable, competitive and
profitable through generic promotion and to develop a structure to effectively
and efficiently manage that promotion as well as industry R&D and other
service provision.
There are three possible courses of action for the egg industry.
i) Continue without generic promotion for eggs. This option would mean that
the industry would continue with some individual brand promotion by larger
producers, but no generic promotion in terms of public health, food safety,
nutrition and dietary benefits
ii) Develop a system for collecting
voluntary contributions towards generic promotion. The contributions would be
collected independently from Government, and the industry would be entirely
responsible for developing and administering a system for collecting monies.
iii) Establish a compulsory promotional levy through regulation. This is
the option that the egg industry have chosen to pursue and involves a
promotional levy of 32.5 cents, to be imposed on producers per laying chick
purchased from a hatchery. The AEIA selected the rate of 32.5 cents per laying
chick as a balance between affordability for producers and the estimated
operational budget for an effective promotional campaign. The levy would be
collected by the hatchery at the time of purchase, and remitted to Commonwealth
on a monthly basis. Under the proposal, AFFA would disburse the monies
generated to the new industry company, Australian Egg Corporation Limited.
The AEIA have proposed that the new 32.5 cent promotional levy would be
additional to the existing industry 7.87 cent levy. As all egg producers
purchase laying chicks from a hatchery, the AEIA believe that the proposed
imposition mechanism is an effective way to collect a promotional levy from all
producers.
Costs: The egg industry comprises a range of producers, from the
small rural and regional operations with little market power, to the larger
organisations, which have greater market power and the potential to promote a
distinctive brand. Whilst the larger producers have the opportunity to develop
recognition for their brand, the atomistic nature of the industry means that it
is not in their commercial interests to promote the egg generically. Between
1989 and 1999, Australia’s average annual egg consumption decreased from
146 to 137 eggs per person (source ABS), well below consumption in other Western
nations with similar diets and the industry’s target of 200. The AEIA has
argued strongly that this decline is a result of a market failure in egg
promotion. According to the AEIA, the industry faces a continuing decline in per
capita egg consumption if generic promotion is not undertaken. In addition, the
nature of the marketing system, which is dominated by the supermarkets, means
that generic promotion is the most appropriate method of communicating to
consumers.
Without generic promotion, the industry has almost no way to
communicate the result of research and development, particularly in relation to
the dietary and health benefits of egg consumption. The result is likely to be
a continued decline or stagnation in consumption, reducing profit margins for
the industry, declining number of producers and inadequate investment in new
infrastructure and technologies. In addition, product quality and food safety
may also suffer. As egg production tends to be concentrated in regional
clusters, this would have a flow on effect to the communities surrounding those
clusters, as well as to Government, who would be required deal with adjustment
issues, and to the general public, who wish to see welfare and disease issues
addressed through investment in infrastructure and technology.
Benefits: Without generic promotion, individual producers will
not be required to make individual contributions towards funding the program.
This would be particularly attractive for some marginal producers who are
already struggling to retain viability, and who may suffer negatively as a
result of voluntary or statutory contributions towards
promotion.
ii) Implement a voluntary promotional levy
Costs:
The industry has in the past attempted to fulfil the need for generic
promotion via a voluntary levy. For example, the now defunct Incredible Egg
Company, established by the AEIA in 1987 to promote egg consumption and the egg
industry nationally, initially enjoyed the support of the organisations that
supplied around 70% of the Australian market. However, that support fell away
and the company failed due, to a large extent, by resentment at the large number
of “free riders” benefiting at the expense of those producers who
paid their contributions. In addition, the administrative costs of managing the
collection of the voluntary levy and chasing defaulters proved to be a
disproportionate burden for the Incredible Egg Company. These problems are
likely to apply to any new voluntary levy that the industry was to implement.
In addition, the uncertainties associated with voluntary levies would
make it difficult to design a promotional strategy with long-term goals. This
is particularly the case given the industry’s history with voluntary
levies. For any promotional program to be effective, there must be enough
financial security to make the decisions that generate the greatest benefit for
the industry in the long-term.
Benefits: With a voluntary
scheme, producers would more easily be able to demonstrate their satisfaction or
dissatisfaction with the promotional program. In addition, they would have more
flexibility to make contributions in accordance with their financial state at
the time.
iii) Establish a statutory promotional levy
Costs:
The levy will be charged to egg producers at a rate of 32.5 cents per laying
chicken purchased from a hatchery for the purposes of future egg production. In
terms of impact, 32.5 cents is equivalent to 5% of the current average cost of a
pullet, or 1.7 cents per dozen eggs sold. The levy will increase egg production
costs as a proportion of GVP by about 1%. In the first year, the levy is
expected to generate approximately $3.1 million dollars, with the
industry’s current GVP at just over $300 million.
Although the levy
will be imposed on, and paid by, producers, the hatchery operators will be
responsible for collecting the levy and remitting it to the Commonwealth. This
is likely to involve a separate remittance from that used for the existing
industry levy, and therefore some additional cost to the hatchery operators.
However, the AEIA wrote to each of the sixteen hatcheries that pay the current
levy, outlining the detail of the proposal and their role in collecting the new
levy. A survey was included in the letter. The AEIA received 10 responses, 9
of which supported the proposal. Despite some extra cost in collecting the
levy, benefits generated through generic promotion will flow through to the
hatcheries in terms of additional chicks purchased.
The latest Australian
Bureau of Statistics (ABS) figures (for the year ending 30 June 2000) indicate
that there are just over 500 egg-producing establishments in Australian. The
AEIA argue that only 340 are commercial producers (those with a minimum of 1000
laying hens). Although the remaining producers may not be commercial, they will
be required to pay the new promotional levy when they purchase laying chicks
from the hatchery.
Benefits: Disbursement of the existing
R&D and new promotional levy to a single industry corporation will allow a
unified, efficient, informed and science-based approach to R&D and
promotion, benefiting industry and consumers.
The proposal put forward
by the AEIA spreads the costs of generic promotion across the industry according
to the size of each operation and in an equitable manner. As the promotional
levy is paid on the laying chick at the time of purchase, operators with a
larger number of laying chickens will pay a larger levy than the smaller
operators. In terms of those involved in niche products, they too have
supported the levy, as any increase in egg consumption will ultimately feed
through into their products as well. In addition, all payers of the promotional
levy will be eligible to register for membership of Australian Egg Corporation
Limited, and will be able to vote on issues such as the rate of the levy.
The difference between the existing levy and the new levy is that the
promotional levy will be imposed directly on the egg producer (at the point of
purchase of laying chicks) where the laying chicken levy is imposed on the
hatchery operator (on chicks hatched). However, in both cases the hatchery
operator is responsible for collection of the levy and remittance to AFFA.
Using this mechanism to collect what is essentially a producer levy limits the
number of collection points (at present 16) and hence the costs to the industry.
In addition, because all producers purchase laying chicks from the hatchery, use
of this mechanism is an effective way to impose the costs of the levy directly
on those who stand to receive the greatest benefit from generic promotion.
As a result of the policy of cost recovery, there should be no net cost
to the Government in terms of collecting and processing the levy. The
promotional levy will not be matched by Commonwealth funding, however the
R&D levy will continue to be matched up to 0.5% of GVP.
In New
Zealand, the egg industry has been turned around by generic promotion. They
funded their promotional campaign through a statutory levy set at a similar rate
to that proposed by the AEIA, and have used their limited funds for strategic
promotional activities. Since the commencement of the promotional program five
years ago, per capita consumption in New Zealand has increased by approximately
12 eggs per year, to an average of 208 eggs. Statutory levies have also been
used in Canada and the United States to fund promotional programs with positive
outcomes.
The levy will be applied equitably to all egg producers, with generic
promotion designed to benefit the entire industry rather than individual
producers. As a result, the proposed levy will have no impact on competition
within the industry. However, it is anticipated that the levy will allow the
industry to compete more effectively with other fresh food production
industries.
In order to satisfy the Commonwealth’s Levy Principles, the AEIA
embarked on an Australia-wide consultation during the period from April to June
2001. This was later extended to 30 September 2001 in order to ensure that all
stakeholders were aware of the proposal and had the opportunity to provide
comment. The consultation was primarily directed at producers, but also others
involved in the wider egg industry, including hatcheries and egg marketing
companies. The AEIA circulated a letter on the proposal to all known producers,
included articles in their industry newsletter, “The Eggsaminer”,
and conducted media interviews on the proposal and the levy. In addition,
regional meetings were held in each state for producers and other industry
stakeholders.
During the regional meetings, and through the period until
30 September 2001, producers were asked to vote on the proposal. Each egg
producing business was allocated one vote, and 238 votes were collected in
total. The AEIA claim that these producers represented over 96% of the
ownership of laying hens in Australia. From these producers, 93.7% supported
the establishment of a privatised company and 87% supported the levy
being set at 32.5 cent per laying chick purchased from the hatchery for egg
production. In terms of flock ownership, 92.7% supported the levy at 32.5
cents.
In terms of the proportion of industry included in the
vote, the latest data from the Australian Bureau of Statistics (for the year to
30 June 2000) indicate that there are 508 egg-producing establishments in
Australia. Of these, the AEIA argue that only 340 are commercial producers
(those with a minimum of 1000 laying hens), which would mean that 70% of
commercial producers have voted on the proposal. As mentioned above, the AEIA
estimate that they represent 96% of the Australian flock.
In addition,
the AEIA have consulted with hatchery owners on the proposal, and they are in
support. Whilst the hatchery owners will not pay the new levy, they will be
responsible for collecting levies from the producers and remitting the monies to
the Commonwealth.
Opposition to the proposed levy
Opposition to
the levy has been limited, and there has been no campaign of letters to the
Government or the AEIA opposing the levy. Of those who did vote against the
proposal or the levy, the AEIA have listed the following reasons.
• philosophical dislike of generic ideas stemming from a
post-regulation environment;
• some larger producers indicated that
they were already conducting local marketing and do not see the need to
contribute to generic promotion; and
• lack of understanding of the
proposal and industry issues.
Over the past year the AEIA has been working to ensure that the Commonwealth
Levy Principles are fulfilled and the proposal is viable. Through the
AEIA’s consultation process, both producers and hatchery operators have
demonstrated significant support for the new company and the proposed nature and
size of the promotional levy.
On the basis of consultation and
analysis, the proposal for a statutory levy for egg promotion conforms to the
Government’s levy guidelines and principles, does not restrict competition
and has clear potential to benefit the industry and consumers. It is therefore
recommended for implementation.
The levy is to be implemented as soon as possible, depending on passage of the legislation for the new industry company. The levy rate and performance of the promotion will be suggested for review in two years to determine whether the levy should remain in place, be adjusted or removed. In addition, all producers who pay the statutory levy will be levy payers will be able to vote on changes to the levy through their membership of the private corporation.
Part 1 - Preliminary
Clause 1: Short
title
This clause provides for the Act to be called the Egg
Industry Service Provision Act 2002.
Clause 2:
Commencement
This clause provides for the Act to commence on the day
on which it receives Royal Assent.
Clause 3: Simplified
outline
This clause provides a simplified outline of the
Act.
Clause 4: Definitions
This clause provides for terms
in the Act to be defined.
This clause provides for the Act to apply both within and outside
Australia.
Part 2 – Declaration of the industry services
body
Clause 6: Declaration of the industry services
body
In order for the Minister to be able to provide for the new egg
company to deliver generic promotion, research and development and other
industry services, there is a need to formally declare the company to have these
functions. This is achieved in this clause by providing for the Minister to
declare a body to be the industry services body if a funding contract has been
entered into and the Minister is satisfied that the company will comply with its
requirements under that contract.
This clause also provides for the
declaration to specify the day on which the declaration will apply, and for that
declaration to be tabled in Parliament and published in the Gazette
within 14 days after it is made.
Part 3 – Funding of the
industry services body
Clause 7: Funding contract
This
clause provides for the Minister, on behalf of the Commonwealth, to enter into a
contract with an eligible body which will allow the Commonwealth to make
promotion, research and development and matching R&D payments to the
body.
The clause ensures that before the funding contract is entered
into, the Minister is satisfied that the public accountability requirements of
the Commonwealth have been met. The public accountability requirements relate to
the use of promotion payments; R&D payments and Commonwealth matching
payments for the correct purposes.
The clause also provides that the
Commonwealth does not have to pay the full amounts that could be paid from the
money collected as promotion and R&D industry levies. This will allow the
Commonwealth to made deductions prior to payment to cover the costs of
collective the levy and to make adjustments to cover refunds and payments made
in error.
In addition, the clause provides that the contract may include
provisions relating to the industry assets and liabilities being transferred
from the RIRDC egg sub-programme to the industry services body under the Egg
Industry Service Provision (Transitional and Consequential Provisions) Act
2002.
Clause 8: Appropriation for payments under funding
contract
This clause appropriates the Consolidated Revenue Fund for
the purposes of making payments to the industry services body under the funding
contract.
This clause sets overall limits on the appropriation for the
Commonwealth to make promotion, R&D and matching payments to the industry
services body. In terms of the matching payments, the clause also sets annual
limits on what can be paid to the industry services body. The annual limit is
the lesser of either 0.5% of the gross value of egg production (GVP) for the
financial year or 50% of the amount spent by the eligible body on R&D
activities that qualify under the funding contract in that financial year. It
provides for regulations to be made to prescribe the manner in which the
Minister is to determine the egg GVP.
In the case where the industry is
prevented from receiving their full matching payment as a result of the GVP cap,
the clause also provides for the unmatched R&D excess to be rolled over into
the following financial year for matching. The purpose of this is to allow for
fluctuations in R&D spending to be accounted for over a number of years.
The clause provides a formula for determining what amount of R&D excess can
be carried forward into the following year.
Part 4 –
Miscellaneous provisions
Clause 9: Ministerial
directions
This clause provides for the Minister to give a written
direction to the industry services body. The direction must meet the criteria of
being in the national interest because of exceptional and urgent circumstances.
The industry services body has to comply with any such direction.
The
clause requires the Minister to be satisfied that the direction would not
require the industry services body to incur expenses greater than amounts
provided under the Act and that the Minister has given the industry services
body's directors an adequate opportunity to discuss the need for the proposed
direction. The direction must be laid before each House of Parliament within 5
sitting days, unless the Minister makes a written determination that doing so
would prejudice either the national interest or the industry services body's
commercial activities.
In addition, the clause requires the direction to
be gazetted and reflected in the annual report of the industry services body for
that period, and for the impact of that direction to be assessed.
The
clause also allows the Minister to determine in writing that a direction be
waivered if compliance would be contrary to public interest or the body
recommends that it would prejudice their commercial activities.
This clause provides for the Minister to delegate any or all of his or
her powers and functions under this bill to either the Secretary of the
Department or an SES employee or acting SES employee of the Department. The
delegate, in exercising these powers or functions, must comply with any
directions of the Minister.
Clause 11: Compensation for acquisition of
property
This clause provides for compensation to be paid by the
Commonwealth to a person from whom property is acquired on other than just terms
as a result of the operation of the Bill. If the Commonwealth and the person in
question cannot agree on the amount of any such compensation to be paid, the
Federal Court may, on application by the person from whom the property was
acquired, determine what is a reasonable amount of compensation for the
acquisition of the property.
This clause provides for the Governor-General to make regulations under
this Act.