Bills Digest No. 49 1999-2000 Export Finance and Insurance Corporation Amendment Bill 1999


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details

Passage History

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.

Purpose

To apply aspects of the Commonwealth's competitive neutrality policy to the Export Finance and insurance Corporation (EFIC).

Background

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.

Main Provisions

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.

Endnotes

  1. Export Finance and Insurance Corporation Amendment Bill 1999, Regulatory Impact Statement, p 2.

  2. Export Finance and Insurance Corporation Amendment Bill 1999, Regulatory Impact Statement, p 2.

  3. Export Finance and Insurance Corporation Amendment Bill 1999, Regulatory Impact Statement, p 3.

  4. Export Finance and Insurance Corporation, 1998 Annual Report, p 48.

  5. Export Finance and Insurance Corporation Amendment Bill 1999, Regulatory Impact Statement, p 7.

Contact Officer and Copyright Details

Angus Martyn & Mike Emmery
2 September 1999
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1999

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1999.

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