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CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details
Export Finance and Insurance
Corporation Amendment Bill 1999
Date Introduced: 30 June 1999
House: House of Representatives
Portfolio: Trade
Commencement: The amendment relating to
tax-equivalent payments (Item 4 of Schedule 1) is taken to have
commenced on 1 July 1998. The amendments relating to the changes to
the Insurance Contracts Act 1984 (Items 2,3 and 4 of
Schedule 2) commence on a day to be fixed by Proclamation, or
failing that, on 1 July 2000. The remainder of the Act commences on
Royal Assent.
To apply aspects of the Commonwealth's
competitive neutrality policy to the Export Finance and insurance
Corporation (EFIC).
EFIC is a Commonwealth statutory authority. Its
mission is to assist Australian exporters by providing
internationally competitive insurance and finance services,
particularly in areas which the commercial sector are unable or
unwilling to cover due to risk or other factors.
It is a self funding organisation, with its
costs being covered by client charges. It incurred a loss of $9.5
million in 1997-98, the first loss recorded since 1991. This loss
was mainly associated with the East Asian crisis.
The Commonwealth Government guarantees all
monies payable by EFIC, but it has built up its own reserves and
has never called on this guarantee.
EFIC undertakes three categories of business
-
- Medium/long-term business. Exports of $400 million in 1997-98
were supported in this category. The largest sector supported was
the purchase by overseas buyers of large Australian built fast
catamaran ferries.
-
- National Interest Account services. In this area, the
Commonwealth carries the direct liability. An example is the
Government action to establish a $500 million National Interest
facility to support Australian exporters to South Korea during the
Asian crisis.
-
- Short-term business (other than National Interest). This is the
major part of EFIC's business. In 1997-98, $6.6 billion of exports
were provided short-term support by EFIC. About $10 billion of
Australian exports are credit insured, so EFIC provides about
two-thirds of this market.
Measures to achieve competitive
neutrality
Competitive neutrality requires that government
business do not have a net competitive advantage over their private
sector competitors simply as a result of their public ownership. It
aims to ensure that resources available for public expenditure are
used in the most efficient manner possible, and to improve
transparency and accountability in public sector business.
The issue of competitive neutrality only arises
with respect to EFIC's short-term business. According to the
regulatory impact statement (RIS) accompanying the explanatory
memorandum, an (unspecified) proportion of EFIC's short-term
business could be carried out by the private sector and hence there
is an issue of possible competition with the private sector in this
area. There is no domestic private competitor for EFIC's
medium/long term or National Interest business.
The RIS covers six non mutually-exclusive
options to implement competitive neutrality principles whilst
avoiding 'jeopardising EFIC's support for Australian
exporters'.(1)
Option 1, to incorporate EFIC under the
Corporations Law is rejected by the RIS as being 'incompatible with
EFIC's role to encourage and facilitate exports'.(2) This is
because it would limit EFIC's ability to accept higher than normal
commercial levels of risk in conducting its business. It is not
included in the Bill.
Options 2, 3 and 4, which the Bill seeks to
implement, provides for EFIC to pay the Commonwealth, with respect
to its short-term business:
-
- a guarantee fee, to apply to EFIC's use of the Commonwealth
guarantee
-
- a debt neutrality charge, to apply to borrowing by EFIC,
and
-
- tax equivalent payments (note that this implements a government
decision dating from December 1997 to remove the tax-exempt status
of EFIC's short-term business from 1 July 1998).
Option 5, also partially implemented through the
Bill, canvasses subjecting EFIC to business laws from which it is
now exempt.
Option 6 proposes that the Government fund EFIC
for community service obligations (CSOs) undertaken by EFIC. CSOs
are services provided under certain conditions that would otherwise
not be provided by organisations if they operated under purely
commercial criteria. The RIS proposes this option should be
implemented through administrative, rather than legislative,
action, and so is not covered in the Bill.
Impact of measures
The Bill provides for the Minister to make
determinations as to the amount of the payments EFIC must make to
the Commonwealth regarding a guarantee fee, debt neutrality charge
and tax-equivalents.
The guarantee fee is analogous to commercial
reinsurance, and its amount might potentially approach commercial
reinsurance rates. In regard to the debt neutrality charge, it
appears that EFIC has never borrowed to support its short-term
business(3) and so presumably this measure would not have a
tangible financial impact unless EFIC changed its practices in this
regard. The tax-equivalent payment would obviously have a very
direct impact on EFIC's bottom line and consequently its ability to
build up its reserves.
While overall it is not possible at this stage
to estimate the total amount of the payments to the Commonwealth
proposed by the Bill, it must be assumed that they will raise
EFIC's costs, and unless corresponding savings can be found, EFIC
may be forced to pass on these higher costs to exporters in the
form of higher charges. Two outcomes could follow.
Firstly, the higher EFIC charges could induce
the transfer of some of EFIC's short-term business to private
sector providers.
Alternatively private insurers may be unwilling
to accept all of this business and then the higher EFIC fees could
lead to a reduction in the share of Australian exports which are
subject to credit insurance. This could be an unfortunate outcome.
However, this impact could be potentially offset through the
operation of Option 6 dealing with CSOs. CSOs, including support
for small-medium enterprises, already represent a 'significant
proportion of EFIC's business...[and are funded] from internal
[EFIC] resources'.(4) The RIS proposes that the cost to EFIC of
providing CSOs at less than a commercial rate of return would be
partly or fully covered by the government providing what would
effectively be compensatory funding to EFIC.
The RIS notes that there has been no formal
consultation with exporters over the Bill even though it
acknowledges they would 'potentially be affected by any changes
proposed'.(5) It does state there has been consultation with EFIC,
relevant government departments and an (unnamed) 'major private
insurer', but there are no indications of EFIC's or the private
sectors view as to the possible impact of the Bill. In addition,
the option of funding CSOs to counteract any pressure on EFIC to
raise prices for those that rely on its services is not referred to
in the second reading speech. It is therefore uncertain what plans
the Government has for implementing the CSO option through
administrative action, including whether it has made any financial
provisions for extra funding to EFIC.
Debt neutrality charge
Item 2 of Schedule
1 inserts a new section 61A into the
Principal Act that allows the relevant (currently Trade) Minister
to direct EFIC to pay a debt neutrality charge to the Commonwealth
in relation to short-term insurance contracts. The amount and the
way it is calculated are at the discretion of the Minister.
Fee for use of Commonwealth
guarantee
Item 3 of Schedule
1 inserts a new section 62A into the
Principal Act that allows the relevant Minister to direct EFIC to
pay a fee for the use of Commonwealth guarantee to the Commonwealth
in relation to short-term insurance contracts. The amount and the
way it is calculated are at the discretion of the Minister.
Tax equivalent payments
Item 4 of Schedule
1 inserts a new section 63A into the
Principal Act that provides that EFIC must pay a tax-equivalent
payment to the Commonwealth every financial year.
Subsection 63A(2) says that the Minister should
have 'regard to the purpose of ensuring that EFIC does not have a
net competitive advantage over other insurers...in relation to its
short-term insurance contracts' when determining the amount to be
paid. The effect of the proposed subsection 63A(3)
is to ensure the amount determined under 63A(2)
does not exceed the level of Commonwealth and State taxes EFIC
would have to pay if it were a private sector company.
Subjecting EFIC to business laws from
which it is now exempt
Item 1 of Schedule
2 amends paragraph 7(c) of the
Insurance (Agents and Brokers) Act 1984
to remove EFIC's current exemption from this Act in relation to
short-term insurance contracts. The general effect is to increase
the level of consumer protection to EFIC clients involved in
short-term insurance business. The exemption remains for National
interest and medium/long-term business.
Items 2-4 of Schedule
2 amends paragraph 9(1)(c) of the
Insurance Contracts Act 1984 and adds a
new paragraph 9(1)(ca) to remove EFIC's current
exemption from this Act in relation to short-term insurance
contracts entered into on or after the commencement of
paragraph 9(1)(ca). Again, the general effect is
to increase the level of consumer protection to EFIC clients
involved in short-term insurance business. The exemption remains
for National interest and medium / long-term business.
-
- Export Finance and Insurance Corporation Amendment Bill 1999,
Regulatory Impact Statement, p 2.
- Export Finance and Insurance Corporation Amendment Bill 1999,
Regulatory Impact Statement, p 2.
- Export Finance and Insurance Corporation Amendment Bill 1999,
Regulatory Impact Statement, p 3.
- Export Finance and Insurance Corporation, 1998 Annual
Report, p 48.
- Export Finance and Insurance Corporation Amendment Bill 1999,
Regulatory Impact Statement, p 7.
Angus Martyn & Mike Emmery
2 September 1999
Bills Digest Service
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ISSN 1328-8091
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