Academic journal article Journal of Australian Political Economy

Contestability in the Australian Wheat Export Industry

Academic journal article Journal of Australian Political Economy

Contestability in the Australian Wheat Export Industry

Article excerpt

In the past 30 years, policy makers have argued that privatisation and deregulation of State-administered businesses, services and infrastructure leads to enhanced choice, competition and greater efficiency. Less clear is the question of how contestability theory has been used as a policy lens to understand and predict competition and firm behaviour in deregulated markets. To address this issue, I analyse the application of contestability theory to the Australian wheat export market.

The Federal Government, under Prime Minister Kevin Rudd, deregulated the Australian wheat export market in 2008, ending 60 years of statutory marketing by the Australian Wheat Board. The Minister for Agriculture, Tony Burke, said that deregulation would enable growers to maximise their returns on production (Grattan 2008). Many wheat growers, on the other hand, were sceptical of such claims. Members of Parliament and Senators from both major political parties argued that deregulation would create a market place featuring numerous grain traders competing for farmers' wheat. Liberal Senator Chris Ellison stated that '[i]t is imperative that as many participants enter the market as possible' (Australian Government 2008; 2308). This, it was claimed, would give growers choice, while the competition would drive up wheat prices. However, this description of a competitive market differs from how competition has been conceived in policy documents. Contestability theory, emphasising potential, rather than actual competition, informed policy from 1988, when the Industries Assistance Commission (1988) argued for deregulation of wheat exports, to 2008, when the Rudd government's policy shift was implemented.

Policy documents analysed in this article include reviews and inquiries into competition policy and wheat industry policy (particularly wheat marketing), initiated by government and government authorities between 1988 and 2008.

The National Competition Policy Review, initiated by the Keating Government to investigate how a national policy could 'develop an open, integrated domestic market for goods and services by removing unnecessary barriers to trade and competition', provides a different interpretation of competition (Hilmer et al., 1993: 361). Hilmer et al. (1993: 3), dismiss the conception of market competition as necessarily involving large numbers of small firms, instead claiming that 'competition between a few large firms may provide more economic benefit ... due to economies of scale and scope'. Hilmer et al. (1993: 2), draw upon Dennis (1977) to define competition as the 'striving or potential striving of two or more persons or against one another for the same or related objects'. Referring to Baumol (1982), Hilmer et al. (1993: 2) explain that:

   Recent work suggests that the real likelihood of competition
   occurring (potential striving) can have a similar effect on the
   performance of a firm as actual striving. Thus, a market which is
   highly open to potential rivals--known as a highly 'contestable'
   market--may be of similar efficiency as a market with actual
   head-to-head competition.

Policy documents informing Australian wheat industry policy share this interpretation, viewing competition in terms of the contestability of the market, rather than the number of firms in that market. Yet, these policy documents do not refer in detail to the three conditions of a contestable market: that entry of new firmsis costless, the market is susceptible to hit-and-run entry and entry is reversible (Shepherd 1984: 1995). This raises the question of how contestability theory is used in policy, and whether contestability theory can be applied to the Australian wheat export market.

To analyse the use of contestability of the Australian wheat export market, we first need to understand the broad structure of the wheat supply chain, outlined in Figure 1. In Australia, infrastructure servicing the wheat industry, including off-farm storage and handling, and port facilities is controlled by three regionally-based bulk handling companies (BHCs)--CBH (Western Australia), Viterra (South Australia), and GrainCorp (eastern Australia, including Victoria, New South Wales and Queensland). …

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