Bills Digest No. 87, 2016–17
PDF version [648KB]
Paul Davidson
Economics Section
6 April 2017
Contents
The Bills Digest at a glance
Purpose of the Bill
Structure of the Bill
Background
EFIC’s insurance and financial
services and products
Concept of the ‘market gap’
EFIC’s lending constraint
Committee consideration
Selection of Bills Committee
Senate Standing Committee for the
Scrutiny of Bills
Foreign Affairs, Defence and Trade
Legislation Committee
Submissions
Committee’s Report
Majority government report
Labor Senators dissenting report
Australian Greens Senators dissenting
report
Nick Xenophon Team dissenting report
Financial implications
Statement of Compatibility with Human
Rights
Parliamentary Joint Committee on
Human Rights
Key issues and provisions
Ability of EFIC to provide services
to government bodies
Rationale for the amendment
Key issues and consequences of the
amendment
Current arrangements for accessing
specialist financial capabilities
The specialist financial capabilities
that EFIC possesses
Are EFIC’s specialist financial
capabilities fit for other Commonwealth bodies’ purposes?
Alternative providers with specialist
financial capabilities
The opportunity cost of EFIC providing
its specialist financial capabilities to Commonwealth bodies
Amendments to the current definition
of ‘eligible export transactions’
Rationale for the amendment
Key issues and consequences of the
amendment
Broader access to EFIC’s insurance
and financial services and products for currently eligible transactions
Increased eligibility to access
EFIC’s insurance and financial services and products
Competition consequences
Employment consequences
Date introduced: 9
November 2016
House: House of
Representatives
Portfolio: Foreign
Affairs and Trade
Commencement: The
day after the Act receives Royal Assent.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent,
they become Acts, which can be found at the Federal Register of Legislation
website.
All hyperlinks in this Bills Digest are correct as
at April 2017.
The Bills Digest at a glance
The Export
Finance and Insurance Corporation Amendment (Support for Commonwealth Entities)
Bill 2016 (Cth) has two main purposes:
- to
permit the Export Finance and Insurance Corporation (EFIC) to provide
specialist financial advice to Commonwealth government bodies, subject to
ministerial approval
- to
substantially broaden the definition of ‘eligible export transactions’ such
that a wider range of businesses will be able to receive a range of insurance
and financial services and products from EFIC, as the ‘Australian connection’ required
to access EFIC’s assistance will be relaxed under the amendments proposed by
the Bill.
The amendments raise a number of issues relating to the
potential future operation of EFIC. In relation to providing specialist
financial advice to Commonwealth bodies, there is no indication of the likely
frequency that Commonwealth bodies may need such advice. As the amendments
cover a vast proportion of government bodies, there is the potential that EFIC
may have to devote substantial resources in providing specialist financial
advice. There has been no indication at this stage that EFIC will receive
additional funding in order to provide this extension in its services. In that
case it would need to be funded from within EFIC’s existing resources. The
practical effect may be some displacement of resources and reduction in focus on
the provision of export credit to eligible export businesses. Additional issues
with the proposed amendments include whether EFIC is the most appropriate
agency to provide such specialist financial advice, and compliance with
competitive neutrality when specialist financial advice services are provided.
Additionally, the amendment is important as it has the
potential to assist a larger range of export-focused businesses, and in
particular, businesses that do not have a strong Australian connection. A
further issue is that although the purported rationale for the amendment is to
assist small and medium enterprises, there is nothing in the Bill that
constrains EFIC from providing insurance and financial services and products to
a business of any size.
Purpose of
the Bill
The purpose of the Export
Finance and Insurance Corporation Amendment (Support for Commonwealth Entities)
Bill 2016 (Cth) (the Bill) is to amend the Export Finance and
Insurance Corporation Act 1991 (Cth) (the Act). The Bill has two main
purposes:
- to
permit the Export Finance and Insurance Corporation (EFIC) to assist government
bodies by providing services in relation to financial arrangements and
agreements
- to
amend the definition of ‘eligible export transactions’.
Structure
of the Bill
The Bill contains one Schedule. Items 1 and 3–8
relate to permitting EFIC to provide services in relation to financial
arrangements and agreements to government bodies, and for consequential
purposes. Item 2 amends the current definition of eligible export
transactions.
Background
Background information is provided below on three key
aspects of EFIC that are relevant to the proposed amendments:
- EFIC’s
insurance and financial services and products
- concept
of a ‘market gap’
- EFIC’s
funding constraint.
EFIC’s insurance
and financial services and products
EFIC can provide a range of insurance and financial
services and products under Part 4 of the Act. Specifically, EFIC can provide:
- export
payments insurance contracts
- guarantees
and subsidies in relation to loans to Australian suppliers
- guarantees
and subsidies in relation to loans to overseas buyers
- guarantees
to co-lenders in relation to export transactions
- tender
guarantees and performance guarantees
- reinsurance
of guarantee, insurance, et cetera, relating to export business
- loans
to finance eligible export transactions.
Whether a particular service or product can be provided
depends on whether the transaction is an ‘eligible export transaction’ or a
transaction that involves the ‘Australian export trade’. By the definitions in
section 3 of the Act, all eligible export transactions are a subset of
Australian export trade. Currently, the bottom four services in the above list
are eligible for EFIC funding based on the transaction in question being an
eligible export transaction.
Concept of
the ‘market gap’
Though not legislated, it is expected that EFIC will
operate on a commercial basis and:
EFIC must not provide financial services or products on its
Commercial Account (CA) unless EFIC is satisfied that private sector providers
are unable or unwilling to support financially viable business activities. EFIC
should ensure its activities fill the ‘market gap’ where private sector finance
is not forthcoming.[1]
The Commercial Account covers EFIC’s insurance and
financial services and products it can offer under Part 4 of the Act. EFIC has
agreed that it will only provide insurance and financial services and products
where there is a market gap.[2]
From an economic perspective, EFIC’s role should ideally not be based on a
market gap, but rather on market failure. The importance of this distinction
was made in a Productivity Commission review of EFIC in 2012.[3]
The market gap concept is defined above. A market failure is one where there is
a failure of economic agents to produce socially optimal outcomes. Government intervention
may be justified to ‘correct’ market failures, but only where the intervention
generates a net benefit to the economy (which includes the cost of the
intervention).
The Productivity Commission noted that in instances where
EFIC operates on a market gap basis it unduly distorts resource allocations in
the economy, and the larger the operations, the larger are the (multiplied)
market distortions.[4]
In the context of the Bill, the market gap is effectively increased as EFIC can
provide a wider range of insurance and financial services and products to
existing eligible businesses, as well as providing insurance and financial
services and products to newly eligible businesses. As such, there are
increased risks that EFIC will operate in an enlarged market gap and create
more distortions throughout the economy.
EFIC’s lending
constraint
EFIC’s finances for certain eligible export transactions
are limited by the operation of sections 68 and 69 of the Act, as well as by
the Export Finance
and Insurance Corporation Regulations 1991 (Cth) (the Regulations).
Section 68 provides for a contingent liability ceiling for contracts
entered into and guarantees given under Part 4, and also provides for a
separate contingent liability ceiling for contracts of insurance entered into.
Currently, under the Regulations, the total contingent liability for contracts
entered into and guarantees given is $4.9 billion,[5]
and the total contingent liability for contracts of insurance is $1.15 billion.[6]
Section 69 of the Act provides for a limit to be imposed on the total amount of
money lent by EFIC under Part 4 that is not repaid or written off. The Regulations
currently prescribe $1.8 billion as the limit of total amount of loans
under Part 4 of the Act.[7]
Committee
consideration
Selection
of Bills Committee
The Selection of Bills Committee referred the Bill to the Senate
Standing Committees on Foreign Affairs, Defence and Trade Legislation Committee
for inquiry.[8]
Senate Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills had
no comment on the Bill.[9]
Foreign Affairs, Defence and Trade Legislation
Committee
The Bill was referred to the Foreign Affairs, Defence and
Trade Committee, chaired by Senator Back, on 24 November 2016 for
report by 7 February 2017.[10]
The principal issues for consideration by the Committee were:
- to
investigate whether there are unintended negative consequences of allowing EFIC
to provide loans to projects which are not located in Australia and
- to
establish whether accompanying checks and balances should be legislated.[11]
Submissions
A submission by the
Department of Foreign Affairs and Trade (DFAT) stated that in relation to the
proposed Commonwealth entities function:
This change would offer opportunities to lower government
service delivery costs by leveraging existing resources within the
Commonwealth, thereby avoiding the need to establish new institutions for every
government financing programme.[12]
In relation to changing the definition of ‘eligible export
transactions’, DFAT submitted:
... Efic would be able to more efficiently and effectively
support a wider range of [small to medium sized enterprises] SMEs, including
those involved in—or seeking to be involved in—global supply chains, SMEs
investing overseas to expand their sales, or SMEs looking to provide services
directly to retail customers. Although Efic already has the ability to provide
guarantees to these innovative SMEs, the Bill will allow Efic to better meet
their needs through the provision of direct loans.[13]
The Australian Grape and Wine Authority expressed strong
support for the Bill and noted that currently EFIC cannot provide assistance to
companies involved in promoting wine unless they have an export contract, and
similarly EFIC cannot currently provide support to businesses who seek to
promote export sales through investing in wine tourism in Australia.[14]
The Australian Grape and Wine Authority considered that the proposed amendments
‘would allow EFIC to provide assistance to companies involved in wine tourism
which would ultimately help to drive wine exports’.[15]
The Australian Fair Trade & Investment Network Ltd did
not object to the introduction of the Commonwealth entities function, but did
express concern at the changed definition of ‘eligible export transactions’,
specifically:
Such a change would mean that export earnings flowing to
Australia could be the sole criteria for Efic support, without the current
requirements for production of goods or services in Australia and other
Australian inputs.
We believe this change is unacceptable. The current
Australian content requirement in the legislation as interpreted in the Efic
guidelines is modest and should be retained. Its removal would provide an
incentive for off shoring and place firms providing employment in Australia at
a disadvantage.[16]
With regards to the proposed amendment to the definition
of ‘eligible export transactions’, the ACTU stated:
... we cannot agree with an amendment whose purpose is to
remove Efic’s requirement to lend to companies that make items that are
“produced or manufactured wholly or substantially in Australia” and allow loans
instead to “any transaction (including the rendering of a service) involving a
benefit flowing directly or indirectly from overseas to a person carrying on
business or other activities in Australia.”[17]
Committee’s
Report
The Foreign Affairs, Defence and Trade Committee reported
on 7 February 2017.[18]
Senators from the Labor Party, the Australian Greens and the Nick Xenophon Team
issued dissenting reports.
Majority
government report
The majority Government members concluded that the Bill
should be passed.[19]
On particular elements of
the Bill they made the following comments:
The Committee considered ‘that EFIC has adequate
arrangements in place to ensure that it upholds operational, social and
environmental obligations in its transactions.’ As such, additional checks and
balances need not be legislated.[20]
With regard to concerns raised by submitters that EFIC may
be diverted from its core role of facilitating and encouraging Australian
export trade, the Committee was ‘satisfied that EFIC is aware of its primary
purpose and will take steps to minimise the impact of work it performs for the
Commonwealth on its capacity to assist exporters.’[21]
The Committee endorsed:
... the view of the Export Council of Australia that it should
be mandatory for Commonwealth entities to cover Efic's costs in relation to
assistance and support, consistent with the obligations on industry and
business which pay an application fee to cover Efic's costs in assessing
applications for loans or guarantees.[22]
The Committee encouraged the Minister to give consideration
to the inclusion of provisions in the Bill to give effect to this proposal.
The Committee acknowledged concerns regarding EFIC's due
diligence on previous overseas projects, in particular where human rights
violations have been reported. However, the Committee was satisfied that ‘EFIC
has a sound framework in place to ensure it upholds best-practice environmental
and social standards in its transactions ...’[23]
The Committee supported the amendment to the local content
requirement.[24]
Labor
Senators dissenting report
Labor Senators were concerned about the amendment to the
local content requirements. They endorsed the concerns raised in submissions
from the Australian Fair Trade and Investment Network, the Australia Institute,
and the ACTU that the changes could mean that EFIC loans and guarantees go to
projects that do not have positive effects on employment in Australia. Labor
Senators recommended:
Any company wishing to access a loan or guarantee from Efic
for an overseas project must demonstrate that the loan or guarantee will result
in a growth of jobs in Australia. Such a test should be legislated in the Act.[25]
Australian
Greens Senators dissenting report
The Australian Greens do not support the Bill in its
current form.
Their concerns include that the Bill does not address EFIC’s
shortcomings, which were brought to light in the inquiry. These include:
- EFIC’s
inability to assess the impact of its investments, including in relation to
human rights violations that have been connected to projects assisted by EFIC[26]
- EFIC’s
poor transparency and accountability practices[27]
- EFIC’s
funding of fossil fuel projects, which the Senators consider to be an
unwarranted subsidy to that industry.[28]
The Australian Greens are also concerned that the Bill
will lead to further offshoring of Australian manufacturing.[29]
Nick Xenophon
Team dissenting report
Senator Xenophon does not support the Bill in its current
form. In relation to the first amendment that allows EFIC’s financial
capabilities to be applied for the benefit of other Commonwealth financing
programs, even where there is no connection with exports, Senator Xenophon
recommends:
Efic should and needs to remain tightly focussed on
facilitating export trade, and the first amendment should be opposed.[30]
Senator Xenophon also considers:
Removing the local content requirements attached to Efic
support is not in the national interest and the second amendment should be
opposed.[31]
Financial
implications
The Government considers that the Bill will have no direct
financial impact.[32]
However, it should be noted that the amendments have the potential to affect
the Commonwealth’s fiscal position.
Firstly, the amendments associated with EFIC’s
Commonwealth entities function permit EFIC to levy fees in relation to
that function. EFIC is exempt from taxation, but is required to make tax-equivalent
payments to the Commonwealth in respect of its activities,[33]
and as such, levying fees may be subject to a tax-equivalent payment. However,
whenever EFIC engages in its Commonwealth entities function, it is by
definition not providing insurance and financial services and products to
eligible export businesses (for which it also charges fees). There is an issue
then as to whether the fees levied under EFIC’s Commonwealth entities
function are the same as those when it provides insurance and financial
services and products. Therefore, it is unclear whether the net effect would be
to change the Commonwealth’s fiscal position.
Secondly, the amended definition of ‘eligible export
transactions’ has the potential to change EFIC’s funding mix and thereby alter
the level of fees received for each insurance and financial service and product
it provides. In turn this may alter the profitability of EFIC and as such alter
the amount of tax-equivalent payment it must pay to the Commonwealth. The
amended definition also expands EFIC’s role to assist a broader range of export‑focused
businesses. To the extent that those newly eligible businesses receive
insurance and financial services and products from EFIC, EFIC’s profitability
may increase and as a result, EFIC may be liable to make a larger
tax-equivalent payment, which in turn affects the level of Commonwealth
finances.
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bill’s compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[34]
Parliamentary
Joint Committee on Human Rights
The Parliamentary Joint Committee on Human Rights considered
that the Bill did not raise human rights concerns.[35]
Key issues
and provisions
The Bill contains one Schedule. Items 1 and 3–8 relate
to permitting EFIC to provide services in relation to financial arrangements
and agreements to government bodies, and for consequential purposes. Item 2
amends the current definition of ‘eligible export transactions’.
Ability of
EFIC to provide services to government bodies
Item 1 proposes to insert three new definitions
into subsection 3(1) of the Act.
A definition of Commonwealth company is
inserted which is consistent with the definition of Commonwealth company
in the Public Governance,
Performance and Accountability Act 2013 (Cth) (PGPA Act). The PGPA
Act defines a Commonwealth company as a Corporations Act
company that the Commonwealth controls. However, it does not include a company
that is a subsidiary of a Commonwealth company, a corporate Commonwealth
entity, or the Future Fund Board of Guardians.[36]
A definition of Commonwealth entity is
inserted which is consistent with the definition of Commonwealth entity
in the PGPA Act. The PGPA Act defines a Commonwealth entity
as a Department of State, a Parliamentary Department, a listed entity, a body
corporate that is established by a law of the Commonwealth, or a body corporate
that is established under a law of the Commonwealth (other than a Commonwealth
company) and is prescribed by an Act or the rules to be a Commonwealth entity.
However, the High Court and the Future Fund Board of Guardians are not Commonwealth
entities.[37]
The definitions are to be included in the Act so that EFIC
can provide assistance to various Commonwealth bodies, where that assistance
relates to financial arrangements and agreements.
Item 1 also proposes to introduce a definition of EFIC’s
Commonwealth entities function. It is defined to mean the function as
set out in proposed paragraph 7(1)(dc). Item 3 proposes to insert
paragraph 7(1)(dc) which, as directed by the Minister, would permit
EFIC to assist Commonwealth entities and Commonwealth companies ‘in performing
their functions or achieving their purposes by providing services in relation
to financial arrangements and agreements’. Item 4 limits the operation
of item 3 by explicitly stating that the services that EFIC may provide
do not extend to the provision of loans, insurance or guarantees.
In effect, items 1 and 3–4 permit EFIC to provide a
range of advisory and oversight services in relation to financial arrangements
and agreements that other Commonwealth bodies may utilise from time to time.
The amendments do not directly give EFIC (or Commonwealth bodies) the power to
access EFIC’s assets so as to be able to provide loans, insurance or guarantees
directly to Commonwealth bodies.
Item 5 proposes to amend EFIC’s primary duties
under subsection 8(3) of the Act. Currently subsection 8(3) provides for a
limited application of EFIC’s primary duties in relation to EFIC’s Northern
Australia economic infrastructure function.[38]
In relation to that function, EFIC’s only primary duty is to comply with any
Ministerial directions given under section 9 of the Act. Item 5 proposes
to also include EFIC’s Commonwealth entities function under
subsection 8(3). Item 5 clarifies the application of current subsection
8(3) by providing that subsection 8(1) and subparagraphs 8(2)(b)(i) and (iii)
do not apply in relation to EFIC’s Northern Australia economic infrastructure
functions or to EFIC’s Commonwealth entities function. The effect
of item 5 thus ensures that both EFIC’s Northern Australia economic
infrastructure functions and EFIC’s Commonwealth entities function
need to comply with any Ministerial directions given under section 9,[39]
as well as to ensure that EFIC provides both of those functions as efficiently
and economically as possible.[40]
Item 6 proposes to amend the ability of the
Minister to give Ministerial directions to EFIC. Currently, the Act provides
that, except as expressly provided in the Act, EFIC is not subject to the
direction of the Minister.[41]
The Minister may give a written direction to EFIC with respect to the
performance of its functions or the exercise of its powers if the Minister is
satisfied that it is in the public interest to do so.[42]
However, paragraph 9(5)(a) clarifies that the Ministerial directions power is
not intended to authorise a direction requiring the Minister’s approval for
EFIC to enter into a particular contract, or provide a particular guarantee, or
a loan. Paragraph 9(5)(b) further provides that the Ministerial directions
power is not intended to give power to the Minister to determine that EFIC is
or is not to enter into a particular contract, guarantee or loan. Subsection 9(6)
provides that subsection 9(5) does not apply in relation to EFIC’s Northern
Australia economic infrastructure functions. As such, the Minister may
currently give directions to EFIC that cover the scope of subsection 9(5) in
relation to EFIC’s Northern Australia economic infrastructure functions.
Item 6 has the effect of adding EFIC’s
Commonwealth entities function to subsection 9(6). Therefore, the
Minister may give directions to EFIC that require the Minister’s approval for
EFIC to enter a particular contract, provide a particular guarantee, or provide
a particular loan in relation to EFIC’s Commonwealth entities function. The
Minister may also provide a written direction to EFIC which determines that
EFIC is or is not to enter into a particular contract, or give a particular
guarantee, or make a particular loan in relation to EFIC’s Commonwealth
entities function. As explained in relation to item 4, above, EFIC’s
Commonwealth entities function does not include the provision of loans,
insurance or guarantees.
Item 7 replaces the heading to section 84A and item
8 amends subsection 84A(1) so that EFIC may levy fees for EFIC’s
Commonwealth entities function in addition to its existing ability to
charge for its Northern Australia economic infrastructure functions.
Rationale
for the amendment
The Explanatory Memorandum to the Bill provides that items
1 and 3–8 are intended:
... to allow Efic to offer its specialist financial
capabilities in the operation and administration of Commonwealth financing
programs, where there is no connection to exports. Following Efic’s provision
of services to the Northern Australia Infrastructure Facility (“the NAIF”),
Commonwealth departments have expressed interest in leveraging Efic’s expertise.[43]
Key issues
and consequences of the amendment
Current
arrangements for accessing specialist financial capabilities
It is not possible to ascertain either the extent of
Commonwealth financing programs or what various Commonwealth bodies currently
do when specialist financial capabilities are required. However, it is
important to gather information on both of these factors as they help to establish
whether there is in fact an issue with Commonwealth bodies’ sourcing of
specialist financial capabilities, as well as the magnitude of that problem.
Moreover, the amendment seems to presuppose one of two things: either currently
Commonwealth bodies are entering into financing programs without specialist
financial capabilities, or specialist financial advice is being sought from
elsewhere, namely the private sector.
The
specialist financial capabilities that EFIC possesses
There is no information provided in the Explanatory
Memorandum as to what specialist financial capabilities EFIC possesses that
other Commonwealth bodies have an apparent deficit of. This issue is relevant
in considering whether there are net benefits to the community in recruiting staff
with specialist financial capabilities to other Commonwealth bodies. In part,
this relates back to the issue outlined above that there is a dearth of
information about the volume of Commonwealth financing programs which require
specialist financial capabilities. If providing financing programs is a core
role for certain Commonwealth bodies, it is unclear as to whether it might be
more efficient to hire additional expert resources permanently to undertake
those roles. If Commonwealth bodies are involved in financing programs
infrequently then an alternative option may have been to engage a third party to
provide those specialist financial capabilities. However, from an economic
perspective, this alone may not be a compelling reason for EFIC to specifically
provide those services. The services should be provided by the provider that
results in the greatest net benefit to the Australian community.
Are EFIC’s
specialist financial capabilities fit for other Commonwealth bodies’ purposes?
It is unclear whether EFIC’s specialist financial capabilities
are appropriate and can be easily transferred to financial programs that take
place entirely within Australia. For instance, there may be particular
financial issues that only arise in the context of domestic transactions, and
it may be the case that EFIC does not have capabilities in those domestic
transaction issues.
A related point is that although EFIC possesses specialist
financial capabilities, those capabilities relate to export contracts (although
it may have acquired some expertise as a result of its Northern Australia
Infrastructure Fund role). As noted in the Explanatory Memorandum to the Bill,
the objective of the amendments is to allow EFIC to provide its specialist
financial capabilities to ‘Commonwealth financing programs, where there is no
connection to exports.’[44]
There is an issue as to whether EFIC is the most appropriate body to provide
specialist financial advice in relation to programs with no relation to
exports, given that the capabilities that EFIC possesses have been based solely
on export trade (with the recent exception of its role in the Northern
Australia Infrastructure Fund).
Alternative
providers with specialist financial capabilities
Given the amendments, presumably an entity (or several
different entities) is currently providing its specialist financial
capabilities to Commonwealth bodies when they engage in financial programs. The
alternative is that Commonwealth bodies are currently engaging in financial
programs without specialist financial capabilities which may raise concerns
about the operation of these particular government programs if it were the
case. The Explanatory Memorandum to the Bill indicates that the public service
most likely self-administers financial arrangements.[45]However
that indicates that the public sector is not currently providing all of this
service as it would otherwise appear odd that EFIC would also be required to
provide the same service to Commonwealth bodies. It is therefore possible that
the current provision of specialist financial advice emanates from the
private sector. As such, the effect of the amendments would mean that EFIC
would be in direct competition with the private sector in providing specialist
financial capabilities to Commonwealth bodies which are engaged in financing
programs. In turn, with the effect of the amendments permitting EFIC to compete
with the private sector, EFIC’s actions would be potentially subject to
competitive neutrality. Competitive neutrality ensures that public sector
entities do not enjoy net competitive advantages over private sector
competitors simply by virtue of public sector ownership.[46]
EFIC is already subject to competitive neutrality in the conduct of its current
activities.[47]
Item 8 permits EFIC to charge fees for providing EFIC’s
Commonwealth entities function, although the only fee constraint is
that it must not be such as to amount to taxation. The Explanatory Memorandum to
the Bill provides that the ‘amendment should lower government service delivery
costs’, implying that the fees charged by EFIC are expected to be lower than
the fees currently paid for, or the costs of internally delivering, such
services.[48]
If EFIC’s fees are lower (than fees paid by Commonwealth bodies to private
sector financial service providers) as a result of its public ownership then a
competitive neutrality issue may arise. As noted in the Competitive Neutrality
Policy Statement, ‘it is precisely situations of loss, or not full cost recovery
[of user charging], which raise the most serious competitive neutrality
concerns’.[49]
The
opportunity cost of EFIC providing its specialist financial capabilities to
Commonwealth bodies
Like all government agencies, EFIC has finite resources. Ideally
EFIC’s resources should be devoted to areas that provide the greatest net
benefit to the Australian community. If EFIC were to provide its specialist
financial capabilities to Commonwealth bodies administering financing programs,
it would be providing less insurance and financial services and products to
business transactions which are eligible for EFIC’s assistance. There is
nothing in the Explanatory Memorandum to the Bill that suggests that this
trade-off has been assessed.
Amendments
to the current definition of ‘eligible export transactions’
Item 2 proposes to amend the current definition of
‘eligible export transactions’ under subsection 3(3) of the Act. That
subsection currently provides a detailed definition of what amounts to an
‘eligible export transaction’:
(3) For the
purposes of this Act, a transaction is an eligible export transaction if, in
whole or in part, it involves, is associated with, or is incidental or related
to:
(a) the export from Australia of goods
produced or manufactured wholly or substantially in Australia; or
(b) the
production or manufacture in Australia, wholly or substantially, of goods that
are to be exported from Australia; or
(c) the
supply, installation, erection, operation, maintenance or repair of goods
produced or manufactured wholly or substantially in Australia and exported from
Australia; or
(d) the rendering in
Australia or a foreign country:
(i) of
any services in or in connection with the supply, installation, erection,
operation, maintenance or repair of goods produced or manufactured wholly or
substantially in Australia and exported from Australia; or
(ii) of
any construction, technological, managerial or other services (whether in
connection with such goods or otherwise) for a person carrying on business in a
foreign country or for the government, or an agency of the government, of that
country or of any political subdivision of that country.
In summary, the subsection defines an ‘eligible export
transaction’ as a transaction, that in whole or in part, involves, is
associated with, or incidental or related to goods or services that have some
sort of Australian rule of origin or local content (‘Australian connection’).
That is with the exception of subparagraph 3(3)(d)(ii) which relates to the
provision of specified services for a person carrying on business in a foreign
country or for the government, a government agency, or any political
subdivision of a foreign country.
Item 2 proposes to maintain the introductory
sentence relating to proximity, but repeal the remainder of the definition and
replace it with ‘Australian export trade’. Amended subsection 3(3) would
provide:
For the purposes of this Act, a transaction is an eligible
export transaction if, in whole or in part, it involves, is associated with, or
is incidental or related to Australian export trade.
Australian export trade is defined in subsection 3(4), and
‘... includes a reference to any transaction (including the rendering of a
service) involving a benefit flowing directly or indirectly from overseas to a
person carrying on business or other activities in Australia.’
Item 2 has the potential to change EFIC’s funding
mix as it broadens EFIC’s remit to finance eligible export transactions in that
transactions will no longer need to have an ‘Australian connection’ in the way
required by the current definition. All that would be required is that the
transaction conforms to the definition of Australian export trade.
Rationale
for the amendment
It was stated in the Explanatory Memorandum to the Bill
that item 2 will ‘enable the Government to better support access by
innovative Australian SMEs [small and medium enterprises] to global markets.’
The Government noted that the changed definition:
... more appropriately focuses on the actual benefits flowing
back to Australia from the export trade, rather than the place of manufacture
or purchase. This would allow Efic to more effectively support a wider range of
SME exporters, in particular those in global supply chains, or those looking to
provide services to overseas customers directly. The amendment is consistent
with the value of exports for Australia being increasingly derived from
innovation, design or intellectual property, rather than traditional assembly.[50]
Key issues
and consequences of the amendment
Broader access
to EFIC’s insurance and financial services and products for currently eligible transactions
EFIC can provide certain insurance and financial services
and products to eligible export transactions (as defined with the requisite
Australian connection). Those services are highlighted in the background
section above. Currently, eligible transactions defined as part of the Australian
export trade can only be provided with an export payments insurance contract
and/or guarantees and subsidies in relation to loans to Australian suppliers.
The effect of the amendment is to merge the distinction between Australian
export trade and eligible export transactions. Therefore, transactions that
already satisfy the definition of Australian export trade will now be eligible
to receive a wider range of insurance and financial services and products from
EFIC, including loans. For example, the Explanatory Memorandum provides that
the ‘... amendment is estimated to save up to $12,000 per application by
providing EFIC the ability to provide a direct loan rather than just a
guarantee.’[51]
It is clearly anticipated that the amendment may shift current eligible
transactions from being granted guarantees to being directly granted loans.
The shift is noteworthy for two reasons: firstly, it may change
the profile of EFIC’s involvement in eligible transactions; and secondly it may
change demand on EFIC’s insurance and financial services and products. Where
EFIC currently provides a guarantee, such guarantees generally relate to a
situation where a third party has provided a loan. While this situation will
still occur under the changes proposed by the Bill, it is clear that the effect
of the amendment is to potentially remove the need for an intermediary. This
may change EFIC’s funding mix.
Currently under the regulations, EFIC can only provide 23
per cent of its total liability in loans, whereas it can currently provide 62
per cent of its total liability in guarantees. The current allocation makes
sense as EFIC’s role is to facilitate the private sector to fund persons
involved in eligible transactions.[52]
However, if eligible transactions are now provided with loan funding directly
by EFIC rather than having EFIC guarantee loans of third parties, it may mean
that other transactions which are unable to access third-party loans (and be
guaranteed by EFIC) are unable to seek loan finance directly from EFIC as a
result of other transactions taking up the available funding pool.
Increased
eligibility to access EFIC’s insurance and financial services and products
While item 2 purports to allow EFIC to provide
insurance and financial services and products to a wider range of exporters, it
does not necessarily flow that those exporters are SMEs, or that they are
involved in global supply chains. Indeed, all that is required is that the
business is carrying on Australian export trade. There are no legislative
requirements for eligibility regarding business size, and there are no
legislative requirements that in some way constrain EFIC’s ability to only provide
insurance and financial services and products to businesses that are involved
in global supply chains. On a plain reading of the Bill, it would appear that
EFIC could provide insurance and financial services and products to large
businesses, as well as (or separately) to businesses that are not involved in
global supply chains.
At least part of the rationale for the amendment as stated
in the Explanatory Memorandum to the Bill above is that it reflects the
changing nature of Australia’s export trade from traditional assembly towards
exports derived from innovation, design or intellectual property. While item
2 certainly removes the current requirement of traditional assembly (the
Australian connection), it does not constrain EFIC to potentially provide
insurance and financial services and products only to exports derived from
innovation, design or intellectual property. Moreover, the Explanatory
Memorandum does not present any evidence to suggest that exports derived from
innovation, design or intellectual property are in some way impeded due to a
lack of available insurance and financial services and products in the private
market, and that therefore EFIC has to ‘step in’ to provide those services and
products (that is, fulfilling its market gap role—see background section above).
Indeed, an unintended consequence of item 2 could be that EFIC’s
insurance and financial services and products role expands into areas where
there is no market gap (notwithstanding whether a market gap exists more
broadly for EFIC’s current activities).
Competition
consequences
By increasing access to EFIC’s insurance and financial
services and products under Part 4 of the Act, item 2 will likely
increase demand for EFIC to provide those services and products to newly
eligible persons. The effect of the additional demand can be expected to mean
that existing eligible persons would now have to compete for EFIC’s limited
funds (see background section) with newly eligible persons. Given that EFIC has
limited capacity to provide insurance and financial services and products, at
the margin, this would mean that EFIC would be required to decide between
currently eligible persons (that is, those with a sufficient Australian
connection—generally in traditional assembly) and newly eligible persons (that
is, those who meet the less restrictive definition of Australian export trade).
It is therefore entirely possible that EFIC may decide to provide services
and/or products to persons who have little to no Australian connection (in the way
required by the current definition), to the exclusion of persons who do have
such a connection. It is worth noting that such an outcome would remain
entirely consistent with the functions and primary duties of EFIC.[53]
Employment
consequences
The current legislative focus on making EFIC’s ability to
provide insurance and financial services and products conditional on Australian
content, is that the legislation—at least implicitly—is focused on assisting in
the facilitation of Australian employment. When EFIC was first provided
statutory direct lending powers in 1974, it was noted:
The Government considers that in the initial stages of its
operations, the Corporation should be required to submit concessional loan
transactions to the Government for consideration. In the case of transactions
with developed countries at concessional interest rates, approval to the
provision of the necessary finance will be given only where the Government is
satisfied that the financing of a particular transaction would be of material
assistance to the establishment or maintenance of an export market, to the
development of an Australian industry or to the maintenance of employment in a
particular industry or area in Australia.[54]
Part of the purported rationale for the amendment recognises
the shift from traditional assembly towards higher value-adding activities such
as research and development and after-sales services. In turn, the rationale
for the amendment at least in part is that it will assist in the facilitation
of Australian innovation (broadly conceived). However, assisting innovation
does not necessarily accord with assistance to Australian employment (to the
extent that EFIC’s activities should be governed by such a requirement in any
event).
[1]. A
Robb (Minister for Trade and Investment), Statement
of expectations of Export Finance and Insurance Corporation (EFIC), letter
to A Mohl (Chairperson, EFIC), 13 November 2014, p. 1.
[2]. J
Millar (Chairperson, EFIC), Statement
of intent: Export Finance and Insurance Corporation, letter to A Robb
(Minister for Trade and Investment), Sydney, 26 February 2016,
p. 1.
[3]. Productivity
Commission (PC), Australia’s
export credit arrangements, Inquiry report, 58, PC, Canberra, 31 May 2012.
[4]. Ibid.,
p. 201.
[5]. Export Finance and
Insurance Corporation Regulations 1991 (Cth), subregulation 5(1).
[6]. Ibid.,
subregulation 5(2).
[7]. Ibid.,
regulation 6.
[8]. Senate
Selection of Bills Committee, Report,
9, 2016, The Senate, 24 November 2016.
[9]. Senate
Standing Committee for the Scrutiny of Bills, Alert
digest, 9, 2016, The Senate, Canberra, 23 November 2016, p. 3.
[10]. Senate
Foreign Affairs, Defence and Trade Legislation Committee, Export
Finance and Insurance Corporation Amendment (Support for Commonwealth Entities)
Bill 2016 [provisions], The Senate, Canberra, February 2017.
[11]. Senate
Selection of Bills Committee, Report,
9, 2016, op. cit., p. 4.
[12]. Department
of Foreign Affairs and Trade, Submission
to Senate Foreign Affairs, Defence and Trade Committee, Inquiry into the
provisions of the Export Finance and Insurance Corporation Amendment (Support
for Commonwealth Entities) Bill 2016, submission no. 1, 22 December 2016,
p. 2.
[13]. Ibid.,
p. 3.
[14]. Australian
Grape and Wine Authority, Submission
to Senate Foreign Affairs, Defence and Trade Committee, Inquiry into the
provisions of the Export Finance and Insurance Corporation Amendment (Support
for Commonwealth Entities) Bill 2016, submission no. 2, 10 January 2017,
p. 2.
[15]. Ibid.
[16]. Australian
Fair Trade and Investment Network, Submission
to Senate Foreign Affairs, Defence and Trade Committee, Inquiry into the
provisions of the Export Finance and Insurance Corporation Amendment (Support
for Commonwealth Entities) Bill 2016, submission no. 7, January 2017,
p. 4.
[17]. Australian
Council of Trade Unions, Submission
to Senate Foreign Affairs, Defence and Trade Committee, Inquiry into the
provisions of the Export Finance and Insurance Corporation Amendment (Support
for Commonwealth Entities) Bill 2016, submission no. 11, 17 January 2017,
p. 1.
[18]. Senate
Foreign Affairs, Defence and Trade Legislation Committee, Export
Finance and Insurance Corporation Amendment (Support for Commonwealth Entities)
Bill 2016 [provisions], The Senate, Canberra, 7 February 2017.
[19]. Ibid.,
p. 17.
[20]. Ibid.,
paragraph 2.58, p. 16.
[21]. Ibid.,
paragraph 2.59, p. 16.
[22]. Ibid.,
paragraph 2.60, p. 16.
[23]. Ibid.,
paragraph 2.62, p. 16.
[24]. Ibid.,
paragraph 2.63, p. 16.
[25]. Ibid.,
paragraph 1.10, p. 20.
[26]. Australian
Greens, Dissenting report, Senate Foreign Affairs, Defence and Trade
Legislation Committee, Export
Finance and Insurance Corporation Amendment (Support for Commonwealth Entities)
Bill 2016 [provisions], The Senate, Canberra, paragraph 1.3, p. 21.
[27]. Ibid.,
paragraph 1.4, p. 21.
[28]. Ibid.,
paragraphs 1.5–1.8, pp. 21–22.
[29]. Ibid.,
paragraph 1.9, p. 22.
[30]. Nick
Xenophon Team, Dissenting report, Senate Foreign Affairs, Defence and Trade
Legislation Committee, Export
Finance and Insurance Corporation Amendment (Support for Commonwealth Entities)
Bill 2016 [provisions], The Senate, Canberra, paragraph 1.8, p. 24.
[31]. Ibid.,
paragraph 1.18, p. 25.
[32]. Explanatory
Memorandum, Export Finance and Insurance Corporation (Support for
Commonwealth Entities) Bill 2016, p. 3.
[33]. Export Finance and
Insurance Corporation Act 1991 (Cth), sections 63 and 63A.
[34]. The
Statement of Compatibility with Human Rights can be found at page 7 of the Explanatory
Memorandum to the Bill.
[35]. Parliamentary
Joint Committee on Human Rights, Report,
9, 2016, The Senate, Canberra, 22 November 2016, p. 39.
[36]. Public Governance,
Performance and Accountability Act 2013 (Cth), subsection 89(1).
[37]. Ibid.,
section 10.
[38]. ‘Northern
Australia economic infrastructure’ has the meaning set out at subsection 3(2)
of the Northern
Australia Infrastructure Facility Act 2016 (Cth). EFIC’s Northern
Australia economic infrastructure functions are to assist the Northern
Australia Infrastructure Facility in the performance of its functions (paragraph
7(1)(da) of the Act).
[39]. Export Finance and
Insurance Corporation Act 1991 , paragraph 8(2)(a).
[40]. Ibid.,
subparagraph 8(2)(b)(ii).
[41]. Ibid.,
subsection 9(1).
[42]. Ibid.,
subsection 9(2).
[43]. Explanatory
Memorandum, Export Finance and Insurance Corporation (Support for
Commonwealth Entities) Bill 2016, op. cit., p. 2.
[44]. Ibid.
[45]. Explanatory
Memorandum, Export Finance and Insurance Corporation (Support for
Commonwealth Entities) Bill 2016, op. cit., p. 2.
[46]. Commonwealth
competitive neutrality policy statement, [AGPS, Canberra], June 1996,
p. 4.
[47]. Ibid.,
p. 27.
[48]. Explanatory
Memorandum, Export Finance and Insurance Corporation (Support for
Commonwealth Entities) Bill 2016, op. cit., p. 2.
[49]. Commonwealth
competitive neutrality policy statement, op. cit., p. 7.
[50]. Explanatory
Memorandum, Export Finance and Insurance Corporation (Support for Commonwealth
Entities) Bill 2016, pp. 2–3.
[51]. Ibid.,
p. 3.
[52]. See,
for example, Export
Finance and Insurance Corporation Act 1991 (Cth), paragraph 7(1)(b),
sub-paragraph 8(2)(b)(i), cf paragraph 7(1)(a), subsection 8(1). In providing
guarantees rather than loans, EFIC would also appear to be in stronger
compliance with its mandate to operate in the market gap.
[53]. Export Finance and
Insurance Corporation Act 1991 (Cth), subsection 7–8.
[54]. J
Cairns, ‘Second
reading speech: Export Finance and Insurance Corporation Bill 1974’, House
of Representatives, Debates, 30 October 1974, p. 3040.
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