2002

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

HOUSE OF REPRESENTATIVES

EGG INDUSTRY SERVICE PROVISION (TRANSITIONAL AND CONSEQUENTIAL PROVISIONS) BILL 2002

EXPLANATORY MEMORANDUM

(Circulated by authority of the Minister for Agriculture, Fisheries and Forestry, 
the Hon Warren Truss MP)

EGG INDUSTRY SERVICE PROVISION (TRANSITIONAL AND CONSEQUENTIAL PROVISIONS) BILL 2002

GENERAL OUTLINE

This is the second of two bills designed to create an egg industry services company to provide generic promotion, R&D and industry services to the egg industry.  The new company will operate 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.  

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 its 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.

Financial Impact Statement

This second Bill, the Egg Industry Service Provision (Transitional and Consequential Provisions) Bill 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. 

It should be noted that no Commonwealth staff, and hence employee entitlements, will be directly affected by the legislation.  

REGULATION IMPACT STATEMENT

This Regulation Impact Statement relates to the Egg Industry Service Provision (Transitional and Consequential Provisions) Bill 2002, and the accompanying Egg Industry Service Provision Bill 2002.  However, it mostly considers the impacts of associated changes in Regulations (under relevant levies legislation) to be implemented concurrently for the new egg promotion levy that will be collected by the Commonwealth and paid to the new egg company.

Background
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.  

Nature and Extent of the Problem
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.  

Objectives of the Regulation 
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 service provision. 

Options
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.  

Assessment of Impacts
i)	Continue to operate without generic promotion
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. 

Competition Policy
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.

Consultation
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.

Conclusion and recommendations
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.

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.

NOTES ON CLAUSES

Part 1 - Preliminary

Clause 1: Short title

This clause provides for the Act to be called the Egg Industry Service Provision (Transitional and Consequential) Act 2002.

Clause 2: Commencement

This clause provides for the Act to commence on the day on which it receives Royal Assent, with Schedule 1 to commence immediately after the first declaration of an industry services body under subsection 8(1) of the Egg Industry Service Provision Act 2002. 

Clause 3: Simplified outline

This clause provides an overview of the Act.

Clause 4: Definitions

This clause defines the terms in the Act. 

Clause 5: Application of this Act

This clause provides for the Act to apply within and outside of Australia. 

Clause 6: Schedules

This clause provides for the Act to amend or repeal other Acts. 

Part 2 – Transitional provisions

Clause 7: Transitional functions of Rural Industries Research and Development Corporation

This clause sets out the functions of the Rural Industries Research and Development Corporation (RIRDC) in relation to the Act.  The functions are to plan, facilitate and participate in the implementation of the Act – namely functions associated with the transfer of assets and liabilities of the egg sub-programme to the new industry services body.  The clause also provides RIRDC with the function of meeting the costs of any other entity (including the Commonwealth) that assists RIRDC with their functions under the Act.  The Minister may give a written direction to RIRDC about the performance of its functions under the Act and RIRDC must comply with that direction.  The direction must be placed before each House of Parliament within 15 days of the direction being given.

Clause 8: Declaration of transfer time

This clause provides for the Minister to declare the transfer time in writing. 

Clause 9: Successor body

This clause designates that the first body to be declared as the industry services body under the Egg Industry Service Provision Act is the successor body.

Clause 10: Transfer of assets

This clause provides the mechanism for the transfer of assets associated with the egg sub-programme from RIRDC to the new industry services body.  It provides for the Minister to declare that the ownership of specific assets automatically vests in the industry services body.   In addition instruments relating to asset ownership apply to the industry services body after the transfer time. It also provides that the industry services body becomes RIRDC’s legal successor to the assets.

Clause 11: Transfer of liabilities

This clause provides the mechanism for the transfer of liabilities associated with the egg sub-programme from RIRDC to the new industry services body.  It provides for the Minister to declare that the ownership of specific liabilities automatically vests in the industry services body.   In addition instruments relating to liability ownership apply to the industry services body after the transfer time. It also provides that the industry services body becomes RIRDC’s legal successor to the liabilities.

Clause 12: Exemption from stamp duty etc.

This clause provides that the transfer of an asset under Section 10 or the transfer of a liability under Section 11 do not to give rise to stamp duty or other tax liability under any State or Territory law. This is intended to ensure that the steps taken in the egg industry restructure do not give rise to any stamp duty or other State/Territory tax liability that would not have occurred if the restructure had not taken place.

Clause 13: Operation of GST Law

The clause provides that, for the purposes of the GST Law, the transfer of assets from RIRDC to the new industry services body is deemed to be consideration given by the Commonwealth (which for this purpose will be regarded as acting through AFFA) to the body in connection with the obligations entered into by the body in the funding contract.  

By treating this transfer as consideration, all conditions for a creditable acquisition will be met.  Therefore, the Commonwealth will be able to claim an input tax credit corresponding to the full GST liability of the industry services body for the provision of obligations (taxable supplies) associated with the transfer of assets.

Clause 14: Certificates in relation to assets 

This clause allows for the registration of an asset that is transferred to the new industry services body. It provides for the lodgement of an appropriate certificate signed by the Minister and for an assets official to register that transfer in accordance with the certificate. The clause may apply, for example, to registered patents and trademarks.

Clause 15: Saving - levies 

This clause provides for levies and charges received by the Commonwealth prior to the transfer day, but not paid out to the egg sub-programme of RIRDC prior to the transfer day, to be paid to the industry services body from Consolidated Revenue Fund.  This clause only applies to the R&D levy, as collection of the promotional levy will commence after the transfer date.

Part 3 – Miscellaneous provisions

Clause 16: Operation of the Archives Act

This clause requires that Commonwealth records are transferred or otherwise dealt with as permitted under the Archives Act 1983 and as administered by National Archives of Australia.

Clause 17: Delegations

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 18: 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.

Clause 19: Regulations

This clause provides for the Governor-General to make regulations under the Act.