Bills Digest No. 94, 2012–13

20 March 2013

Export Finance and Insurance Corporation Amendment (Finance) Bill 2013

Eugenia Karanikolas
Economics Section 

Date introduced: 13 February 2013

House: House of Representatives

Portfolio: Trade and Competitiveness

Commencement: On the day after 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 http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose of the Bill

The purpose of the Export Finance and Insurance Corporation Amendment (Finance) Bill 2013 (the Bill) is to amend the Export Finance and Insurance Corporation Act 1991 (the Act)[1] to:

·         give authority to the Minister to raise the limit on the Export Finance and Insurance Corporation’s (EFIC) called capital, when necessary, so that EFIC is able to meet its prudential obligations and

·         require EFIC to pay the Commonwealth a one-off dividend of $200 million from EFIC’s surplus capital before the end of the 2012–13 financial year.

Background

Export Finance and Insurance Corporation

EFIC is the Government export credit agency that provides export related services including finance and insurance to Australian exporters and investors in overseas markets.[2] EFIC was established in 1991.[3] The agency has a mandate to operate in circumstances where the private sector is not able or not willing to provide support.[4]

Inquiry into Australia’s Export Credit Arrangements

On 1 September 2011, the Government announced an inquiry by the Productivity Commission (the Commission) into the EFIC.[5] The EFIC had last been examined in 2006 by the Department of Foreign Affairs and Trade (DFAT).[6] In its report DFAT recommended that a more detailed and independent review of EFIC be carried out in 2009–10.[7]

The Government asked the Commission to undertake a public inquiry into Australia’s arrangements for the provision of export credit through EFIC including:

·         reviewing the rationale for government involvement in the provision of export finance and insurance, and assessing current arrangements against the requirements of the EFIC Act

·         assessing EFIC’s management of credit and funding risks

·         reviewing EFIC’s pricing and service arrangements and assessing their impact on incentives for Australian exporters to access private sector providers of export finance and insurance products

·         reviewing EFIC’s exemption from competitive neutrality policy and

·         assessing the interactions between EFIC and other government programs and considering alternatives that would achieve EFIC’s objectives.[8]

The Commission’s report, with 22 recommendations, was released in June 2012.[9]

Government response

The Government announced its response to the Commission’s report on 29 January 2013, stating that it agreed in whole or in part with the 16 out of the 22 recommendations made.[10] The Government has made a commitment to reform EFIC by:

·         requiring that the agency returns surplus capital to the Australian Government[11]

·         devoting more of EFIC’s resources to help small to medium sized exporters[12] and

·         removing EFIC’s ‘market-gap’ mandate and applying a new market failure test to determine whether EFIC’s involvement in the market is required.

Whilst this Bill deals only with the first reform, the Government has signalled its intention to introduce more legislative changes to EFIC to implement the other recommendations of the Commission that have been accepted by the Government.[13]

Committee consideration

House of Representatives Selection Committee

At the time of writing this Bills Digest, the House of Representatives Selection Committee had not considered the Bill.

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills has advised that it has no comment on the Bill.[14]

Parliamentary Joint Committee on Human Rights

Despite the requirement under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government did not provide a statement assessing the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.

Notwithstanding this omission on the Government’s behalf, the Parliamentary Joint Committee on Human Rights assessed that the Bill does not appear to raise any human rights concerns. However, the Committee noted that it intends to write to the Trade Minister to:

…draw his attention to the requirement under the Human Rights (Parliamentary Scrutiny) Act 2011 for all bills to be accompanied by a statement of compatibility even where the conclusion is that the bill does not engage or limit any human rights. The purpose of requiring a statement of compatibility is to ensure that a review of any potential human rights concerns has been carried out before the bill is introduced into the Parliament and at the stage the relevant policy is being developed.[15]

Policy position of non-government parties/independents

The Coalition does not oppose the Bill but has noted that its support stems from the need to see the budget returning to surplus.[16]

Position of major interest groups

It does not appear that any of the major interest groups have made comments about this Bill.

Financial implications

According to the Explanatory Memorandum:

The Bill allows for the payment of a $200 million special dividend (treated as revenue for budget purposes) from EFIC’s surplus capital in the 2012-13 financial year. The Bill will also allow for future special dividends from EFIC to be directed by the Minister.

The new power to increase callable capital through a legislative instrument will have no direct financial impact.[17]

The Government’s proposal to require EFIC to return excess capital to the Commonwealth follows one of the recommendations made in the Productivity Commission report into EFIC, released on June 2012.[18] As stated in the Explanatory Memorandum, the $200 million coming from EFIC’s excess capital will be treated as revenue to the Government.

Key issues and provisions

Under existing subsection 54(5) of the Act, the EFIC Board may determine that the money and other assets of EFIC are excessive, having regard to the expected liabilities, losses and claims of and against EFIC. In that case, the Board may determine the amount which represents the extent to which the money and assets are excessive.

Having made such a determination, an amount is payable by EFIC to the Commonwealth which is the lesser of:

·         the amount equal to EFIC’s called capital at the time when the determination was made or

·         the amount that has been determined by the Board as excessive.

Existing subsection 54(8) provides that EFIC’s called capital at any time must not exceed $200 000 000.

Item 4 of Schedule 1 of the Bill repeals and replaces subsection 54(8) to provide a second option relating to EFIC’s called capital requirements. The existing requirement that EFIC’s called capital must not exceed $200 million remains as proposed paragraph 54(8)(a) of the Act. However, proposed paragraph 54(8)(b) of the Act gives the Minister the authority to raise the limit on the called capital by legislative instrument.

According to the Explanatory Memorandum, this legislative power should only be exercised after agreement is obtained from the Prime Minister, the Treasurer and the Minister for Finance and Deregulation.[19]

Item 6 of Schedule 1 of the Bill inserts proposed section 55A of the Act to deal with EFIC’s payment of additional dividends to the Commonwealth. Under this provision, EFIC will be required to pay the Commonwealth $200 million before the end of the 2012–13 financial year. This is a one-off payment, however, the proposed legislation does give authority to the Minister to request EFIC to pay a specified amount at a future point in time.

This measure was first announced in the 2012 Budget and is in line with the Productivity Commission’s recommendation for EFIC to be required to return surplus capital to the Government.[20]

In its report, the Commission commented that as of June 2011, EFIC’s capital adequacy ratio including its callable capital was 34.6 per cent. This, according to the Commission, was:

…well above the minimum level specified by Australian Prudential Regulation Authority guidelines and EFIC’s internal benchmarks. The extra capital held by EFIC has an opportunity cost that is borne by the taxpayer.[21]

The Commission report went on to say:

Capital requirements are imposed by regulators on financial institutions principally to protect depositors. They also benefit shareholders. However, for shareholders, there is a trade-off between the benefits of maintaining high levels of retained capital and the cost of doing so. Although it is necessary that EFIC maintains capital to meet appropriate prudential standards, retaining capital to the extent that it is inefficiently used and generates a low rate of return compromises EFIC’s claim that it is a successful commercial enterprise.[22]

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

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ISSN 1328-8091

[1].              The text of the Export Finance and Insurance Corporation Act 1991 can be viewed at: http://www.comlaw.gov.au/Details/C2012C00160/Download

[2].              Export Finance and Insurance Corporation website, viewed 18 March 2013, http://www.efic.gov.au/Pages/homepage.aspx

[3].              Parliamentary Research Service, Export Finance and Insurance Corporation Bill 1991, Department of the Parliamentary Library, Canberra, 3 October 1991, viewed 18 March 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbillsdgs%2FW5L00%22

[4].              This is known as the ‘market gap mandate’. For more information on what is expected by EFIC see: C Emerson (Minister for Trade), ‘Statement of Expectations’, 19 July 2011, viewed 18 March 2013, http://www.efic.gov.au/about/governance/Documents/Minister-for-Trade-Statement-of-Expectations-19-July-2011.pdf?utm_source=seo&utm_medium=EFIC-Board&utm_campaign=seo-efic-expectations-PDF-110824

[5].              B Shorten (Assistant Treasurer) and C Emerson (Minister for Trade), Productivity Commission inquiry into the Export Finance and Insurance Corporation, media release, 1 September 2011, viewed 18 March 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F1060836%22

[6].              M Vaile (Deputy Prime Minister and Minister for Trade), Review of the Export Finance and Insurance Corporation, media release, 9 March 2006, viewed 18 March 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F951J6%22

[7].              Department of Foreign Affairs and Trade (DFAT), Review of the Export Finance and Insurance Corporation, Commonwealth of Australia, Canberra, 2006, p. 11, viewed 18 March 2013, http://www.dfat.gov.au/publications/corporate/review-of-the-export-finance-and-insurance-corporation.html

[8].              Productivity Commission (PC), Australia’s export credit arrangements, Inquiry report no. 58, Commonwealth of Australian, Canberra, 31 May 2012, p. 48, viewed 16 March 2013, http://www.pc.gov.au/projects/inquiry/export-credit/report

[9].              For information on the list of recommendations and findings made by the Commission see: Productivity Commission, Australia’s export credit arrangements, 31 May 2012, pp. 33–43, viewed 18 March 2013, http://www.pc.gov.au/__data/assets/pdf_file/0017/117530/03-export-credit-recommendations.pdf

[10].              C Emerson (Trade and Competitiveness Minister), EFIC reforms to help business in Asia, media release, 29 January 2013, viewed 16 March 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F2193100%22 and Department of Foreign Affairs and Trade, Government response: Productivity Commission review Australia’s export credit arrangements: the Export Finance and Insurance Corporation’s mandate and scope of operations, DFAT, viewed 18 March 2013, http://www.dfat.gov.au/publications/efic/government-response-to-PC-Review-EFIC.pdf

[11].              This change relates to the Productivity Commission’s recommendation 8.3 and its finding that the Government does not appear to have received a sufficient rate of return for the risk incurred from guaranteeing EFIC’s operations.

[12].              The Commission recommended that small to medium sized businesses be defined under EFIC’s Statement of Expectations to include entities employing less than 100 full-time equivalent employees or having a yearly turnover of no more than $50 million (recommendation 5.1). The Commission commented that the only possible reason for having an agency like EFIC is for it to provide support to newly exporting small to medium sized businesses, because they have limited experience in gaining access to capital and insurance. Legislation on this issue is expected to be introduced in Parliament in the week of 18 March 2013. For more information see: C Emerson, ‘Second reading speech: Export Finance and Insurance Corporation Amendment (Finance) Bill 2013’, House of Representatives, Debates, 13 March 2013, p. 123, viewed 16 March 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F004ccb33-581e-44b3-8c5c-bbb56bbc99f3%2F0268%22

[13].              Ibid.

[14].              Senate Standing Committee for the Scrutiny of Bills, Alert Digest No. 2 of 2013, 27 February 2013, p. 18, viewed 19 March 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=scrutiny/alerts/2013/index.htm

[15].              Parliamentary Joint Committee on Human Rights, Third report of 2013, Senate, Canberra, 13 March 2013, viewed 14 March 2013, http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=humanrights_ctte/reports/2013/3_2013/index.htm

[16].              J Bishop, ‘Second reading speech: Export Finance and Insurance Corporation Amendment (Finance) Bill 2013’, House of Representatives, Debates, 13 March 2013, p. 120, viewed 16 March 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F004ccb33-581e-44b3-8c5c-bbb56bbc99f3%2F0266%22

[17].              Explanatory Memorandum, Export Finance and Insurance Corporation Amendment (Finance) Bill 2013, viewed 16 March 2013, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fems%2Fr4968_ems_e1e2fed2-6d28-49dc-a79f-92cf52ec68a5%22

[18].              Productivity Commission, Australia’s export credit arrangements, op. cit.

[19].              Explanatory Memorandum, op. cit., p. 2.

[20].              Productivity Commission, Australia’s export credit arrangements, op. cit., recommendation 8.3, p. 38.

[21].              Ibid., finding 8.2, p. 37.

[22].              Ibid., p. 258.