Bills Digest no. 55 2014–15
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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.
Tarek Dale
Economics Section
25 November 2014
Contents
The Bills Digest at a glance
Purpose of the Bill
Background
Committee consideration
Policy position of non-government parties/independents
Position of major interest groups
Financial implications
Statement of Compatibility with Human Rights
Key issues and provisions
Date introduced: 22 October 2014
House: House of Representatives
Portfolio: Trade and Investment
Commencement: The Act commences the day after Royal Assent is received.
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 ComLaw website.
The Export Finance and Insurance Corporation (EFIC) is a government funded export credit agency. It provides financial and insurance products to support exporters, subject to requirements in its governing Act (the Export Finance and Insurance Corporation Act 1991) (EFIC Act) and the Minister’s Statement of Expectations.[1]
The Export Finance and Insurance Corporation Amendment (Direct Lending and Other Measures) Bill 2014 (the Bill) makes two substantive changes and minor technical amendments to the EFIC Act.
Schedule 1 – Direct Lending
Schedule 1 of the Bill removes the current legislative restriction on direct lending by EFIC in relation to the export of non-capital goods. This amendment will allow EFIC to provide direct loans in support of non-capital goods exports.
The majority of Australia’s exports are non-capital goods, which typically require shorter loans.[2] EFIC previously argued for this change in the 2012 Productivity Commission inquiry, but the Productivity Commission recommended against any changes in its final report.[3]
Schedule 1 also makes minor technical amendments.
Schedule 2 – Competitive neutrality
Schedule 2 of the Bill enables the Minister to specify a number of payments EFIC must make to the Commonwealth (a debt neutrality charge, guarantee fees and tax-equivalent payments). The current legislation only provides for these payments in relation to a particular type of product (short-term insurance contracts) which EFIC no longer provides.[4] The amendments will enable the Minister to require these payments from EFIC in relation to all of its products.
The change in Schedule 2 reflects a recommendation made by the Productivity Commission in its 2012 inquiry.[5] The former Labor Government accepted that recommendation, and introduced a Bill containing very similar provisions to those in the current Bill. That Bill lapsed with the end of the 43rd Parliament.[6]
The purpose of the Export Finance and Insurance Corporation Amendment (Direct Lending and Other Measures) Bill 2014 (the Bill) is to amend the EFIC Act[7] to:
- allow EFIC to provide direct loans for export transactions involving all goods (not just capital goods)
- extend the competitive neutrality arrangements under the EFIC Act to cover all of EFIC’s operations, not just short-term insurance contracts (which EFIC no longer provides) and
- make minor technical amendments.
EFIC is a government export credit agency that provides finance and insurance support to assist Australian exporters.[8] Australia’s first export credit agency, the Export Payments Insurance Corporation, was established in 1957, and EFIC was established in its current form in 1991, under the EFIC Act.[9] The EFIC Act specifies that EFIC is to ‘perform its functions in such a manner as will best assist the development of Australian export trade’.[10]
EFIC receives equity funding from the Commonwealth, which also guarantees its borrowings (debt funding).[11] Using its funding, EFIC provides finance and insurance products to eligible entities. The EFIC website states that EFIC’s ‘primary purpose is to facilitate and encourage Australian export trade on a commercial basis … specifically, by providing financial services in circumstances where they have been unable to source adequate finance from the private sector. We do not compete with the private sector.’[12] EFIC’s operations are subject to requirements in both the EFIC Act and the Minister’s Statement of Expectations.[13]
Productivity Commission inquiry (2012)
In September 2011 the former Labor Government announced a Productivity Commission inquiry into EFIC.[14] In the inquiry report (released publicly on 26 June 2012), the Productivity Commission recommended that EFIC not be allowed to provide direct loans for non-capital exports, and that EFIC’s competitive neutrality arrangements be extended.[15]
The then Government accepted a number of the Commission’s recommendations in its response to the inquiry, and introduced two Bills to amend the EFIC Act.[16] The first was passed and received Royal Assent to become the Export Finance and Insurance Corporation Amendment (Finance) Act 2013 (2013 Act). The 2013 Act returned $200 million from EFIC to the Commonwealth as a special dividend, as well as allowing the Minister to both direct EFIC to make future special dividends and specify increases in EFIC’s callable capital.[17]
A second Bill, the Export Finance and Insurance Corporation Amendment (New Mandate and Other Measures) Bill 2013 (2013 Bill) was introduced but lapsed at the end of the 43rd Parliament.[18] The 2013 Bill included a number of changes to the EFIC Act which were intended to:
- restrict EFIC’s operations to areas where there was a clear market failure
- ensure it focused its activities on small to medium enterprises
- extend competitive neutrality to all of EFIC’s activities (the provisions were similar to those included in the current Bill) and
- a number of other changes.[19]
National Commission of Audit recommendation (2014)
In its report, the National Commission of Audit recommended that EFIC be abolished:
As noted by the Productivity Commission, virtually all of Australia’s exports by volume and value take place without EFIC’s assistance. Support provided by EFIC has mostly been directed at a small number of large businesses, including major resource projects.
There is no convincing evidence of systemic failures in financial markets that impede their access to finance. In recent years EFIC has earned most of its income through the investment of surplus funds and its capital and reserves, not the provision of financial services.
The Commission considers that EFIC should be abolished as there is little evidence of genuine market failure in the provision of export finance.[20]
Equity injection (2014)
In the 2014–15 Budget the Coalition Government announced that it would provide a $200m equity injection to EFIC.[21] EFIC had previously noted in its 2012–13 annual report that:
EFIC ended the financial year with a cash capital adequacy ratio of 11.3 per cent, or 21.2 per cent when callable capital of $200 million is included. While this aggregate measure is higher than the minimum ratio of around 8 per cent generally required by bank supervisors globally, EFIC experienced a number of breaches of capital-based limits specific to large exposures as a consequence of paying the special dividend.[22]
The Government stated that the injection would allow EFIC to ‘better support Australian exporters and trade’.[23]
Senate Standing Committee for the Scrutiny of Bills
The Senate Standing Committee for the Scrutiny of Bills has not yet reported on this Bill.
The Bill has not yet been debated in the House of Representatives. At the time of writing no public comments have been made by members of the Opposition or cross-bench in relation to the Bill.
The former Labor Party Government accepted the Productivity Commission’s recommendation, and did not extend EFIC’s ability to provide direct loans for exports of non-capital goods.[24] It also introduced a Bill to amend the EFIC Act, which included the same extensions to competitive neutrality (following a Productivity Commission recommendation) as those contained in the Bill.[25]
Australian Chamber of Commerce and Industry
The Australian Chamber of Commerce and Industry supports allowing EFIC to provide direct loans for non-capital exports.[26]
NSW Business Chamber
The NSW Business Chamber also supports allowing EFIC to provide direct loans for non-capital exports. NSW Business Chamber Chief Executive Officer Stephen Cartwright stated:
EFIC provides great support for export oriented SMEs that want to access finance and broadening the range of activities that EFIC can support and eliminating double handling of loan applications will help make this support cheaper and more accessible.[27]
The Explanatory Memorandum for the Bill states that the Bill ‘will have no direct financial impact’.[28] While there are no direct financial implications, the Bill has indirect implications for the Commonwealth in two ways:
- the Commonwealth Government funds EFIC directly through providing capital (direct equity funding), and also guarantees its borrowings (lowering the cost of its debt funding).[29] Changes to EFIC’s operations may impact on EFIC’s costs or profits, in turn impacting on the costs or benefits it provides to the Commonwealth and
- Schedule 2 of the Bill broadens the competitive neutrality requirement, enabling the Minister to inform EFIC in writing of applicable debt neutrality charges or guarantee fees (see below for more detail).[30] This creates the capacity to increase cash-flow from EFIC to the Commonwealth.
The Statement of Compatibility with Human Rights can be found at page 7 of the Explanatory Memorandum to the Bill. 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.
The Parliamentary Joint Committee on Human Rights ‘considers that the bill is compatible with human rights’.[31]
Schedule 1–Direct lending
Schedule 1 of the Bill makes a number of minor technical amendments (items 1, 2 and 5 insert titles for a number of sections in the Act), and removes the requirement that EFIC can only provide direct loans to exporters of capital goods. Currently EFIC is only able to provide direct loans for ‘eligible export transactions’. As defined in the EFIC 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 capital goods produced or manufactured wholly or substantially in Australia; or
(b) the production or manufacture in Australia, wholly or substantially, of capital goods that are to be exported from Australia; or
(c) the supply, installation, erection, operation, maintenance or repair of capital 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 capital 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 capital 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.[32]
(emphasis added)
As defined in the EFIC Act, capital goods are ‘machinery; or any goods or class of goods declared by the Minister, in writing, to be capital goods…’.[33] EFIC has previously described capital goods as ‘goods used to make other goods’.[34]
Previous discussion in 2012 of direct loans to support non-capital goods
Prior to the introduction of the Bill, during the 2012 Productivity Commission inquiry into EFIC, EFIC argued in a submission that the restriction on loans for non-capital goods was ‘a significant and unreasonable restraint on EFIC’s ability to provide direct finance to Australian exporter of commodities and related domestic infrastructure projects’.[35] However, the Productivity Commission concluded that it:
… does not support EFIC performing a direct lending role on the CA [Commercial Account: see the Appendix: the Commercial Account and the National Interest Account to this Digest]. Consequently, the Commission does not support the proposed amendment to the EFIC Act to enable EFIC to support loans for non-capital goods on the CA, nor does the Commission support EFIC relying on the existing provisions of the Act to this effect.[36] (emphasis added).
The Productivity Commission recommended that the ‘Australian Government should not broaden the eligibility criteria under Part 4 of the Act. Specifically, the Act should not be amended to allow EFIC to enter into loans for the export of non-capital goods’.[37] The former Labor Government’s response to the PC report accepted that recommendation.[38]
Amendments in the Bill
Schedule 1, item 3 changes the definition of an ‘eligible transaction’ by replacing ‘capital goods’ with ‘goods’, whilst Item 4 of Schedule 1 repeals the definition of ‘capital goods’.[39] Together these proposed amendments will enable EFIC to provide direct loans in relation to non-capital goods, as well as capital goods.[40]
The Bill’s Explanatory Memorandum states that removing the restriction on funding non-capital exports will increase the number of exporters eligible for EFIC assistance, and ‘should also reduce the time and paperwork required for many transactions EFIC conducts with SMEs’.[41] EFIC has previously commented that:
… delays can arise when EFIC’s support is to be structured as a guarantee to a financial institution (which in turn provides a loan facility to an Australian exporter) rather than the provision of direct finance by EFIC to an Australian exporter, or borrower, because the goods to be exported are not capital goods.[42]
In his second reading speech, the Minister stated:
… under the current EFIC Act, EFIC can lend directly in support of capital goods but not all goods. This means EFIC cannot lend for exports of many of the products in which Australia excels, like pharmaceuticals, or consumer goods like food and wine. For example, this means EFIC can support the export of cows, but not milk. The government has, therefore, decided to enhance EFIC's capacity to support small- and medium-sized businesses by allowing it to lend for the other 95 per cent of exports, thus improving the export potential of Australian small- and medium-sized businesses. To implement this measure, this EFIC Amendment Bill is required to delete the word 'capital' from the definition of an eligible export transaction in the EFIC Act.[43]
Only five per cent of Australia’s exports are capital goods, with the remainder comprised of different categories of non-capital goods.[44] It is unclear what quantity of additional lending EFIC will provide if the current restriction is removed. The Explanatory Memorandum does not include estimates of the expected increase in loans, how this may impact EFIC’s risk profile or profitability, and whether this will result in an increased subsidy in economic terms.[45]
Schedule 2–Competitive neutrality
Schedule 2 makes a number of amendments to expand the competitive neutrality provisions contained in the EFIC Act to encompass all of EFIC’s operations, not just short-term insurance contracts.
The current legislation
Not all of EFIC’s activities are subject to the Commonwealth Government’s competitive neutrality arrangements.[46] Competitive neutrality arrangements ‘seek to ensure that government businesses do not enjoy competitive advantages over their private sector competitors’.[47] Currently EFIC is exempt from a number of State and Commonwealth taxes, giving it an advantage over private sector providers.[48]
While EFIC does not currently provide short-term credit insurance products, the current legislation allows the Minister to direct EFIC to make a number of payments to the Commonwealth in relation to short-term insurance contracts. These payments include:
- a debt neutrality charge[49]
- guarantee fees and[50]
- tax-equivalent payments.[51]
EFIC’s short-term credit insurance business
The legislative framework enables the Minister to set payments from EFIC in relation to a specific product: short term insurance contracts.[52] EFIC sold its short term insurance contract business in 2003, and currently lists only medium-term insurance as a product.[53] Prior to the sale of that business, EFIC made tax-equivalent payments of $2 million in the 1999–2000 financial year, and $0.8 million in the 2000–01 financial year.[54]
The Productivity Commission recommendation and the 2012 Labor Government response
In its 2012 inquiry, the Productivity Commission recommended:
The Australian Government should amend the Export Finance and Insurance Corporation Act 1991 (EFIC Act) to ensure EFIC’s activity on the commercial account complies with competitive neutrality arrangements. This will require EFIC to pay a tax-equivalent charge and a debt neutrality fee.[55]
The former Labor Government accepted that recommendation.[56] A Bill was introduced which included very similar provisions to those in this Bill, but lapsed with the end of the 43rd Parliament.[57]
Proposed changes in the Bill
Schedule 2, items 1 to 3 remove various references to ‘short-term insurance contracts’ in sections 61A, 62A and 63A of the EFIC Act. The effect of these changes is to extend the Minister’s powers to set a debt neutrality charge, guarantee fee and tax-equivalent payments across all of EFIC’s operations, not just short-term insurance contracts.
The current sub-section 63A(2) of the EFIC Act requires the Minister, when setting the tax-equivalent payment for short-term insurance contracts, to have regard ‘to the purpose of ensuring that EFIC does not enjoy a net competitive advantage over other insurers’ because of its exemption from income tax.[58] Item 2 amends the sub‑section so that the Minister must have regard to competitive neutrality when setting tax-equivalent payments for all of EFIC’s products, not just short-term insurance contracts.
Item 4 specifies that tax equivalent payments will apply from the start of the financial year starting on or after the commencement of the Schedule. Item 5 specifies that the changes to sections 61A, 62A and 63A of the EFIC Act[59] will not affect the continuity of previous arrangements or determinations in force under those sections.
The Bill does not appear to contain any provisions that differentiate between the Commercial Account and the National Interest Account (see the Appendix: the Commercial Account and the National Interest Account to this Digest for more detail) in relation to competitive neutrality. However, the Minister may choose to specify in his or her instructions that only the Commercial Account will be liable for the competitive neutrality charges.
EFIC operates using two accounts, the Commercial Account and the National Interest Account. The table below outlines some of the major distinctions between the Commercial Account and the National Interest Account.
Table A1: The Commercial Account and the National Interest Account
| |
Commercial Account (CA) |
National Interest Account (NIA) |
| Exposure (a) |
$1.87 billion |
$867 million
‘… almost all loans to sovereign countries or their agencies’ |
| Rationale (b) |
A commercial basis, obtaining a rate of return to reflect the risk undertaken |
Transactions that are deemed ‘in the national interest’. Two factors often drive referrals to the NIA:
- commercial or political risks levels too great for the CA, or
- amounts that are too large for the CA (c) |
| Gains and losses (b) |
EFIC is initially liable for any losses on the CA |
‘EFIC is reimbursed for any losses on the NIA, remits any profits to the Australian Government and receives a fee for its administration’ |
| Directions from the Minister (b) |
The Minister ‘cannot require EFIC to obtain ministerial for a particular transaction, or direct EFIC to enter into a particular transaction’ |
‘The Minister can approve, or direct, transactions on the NIA that are in the national interest…’ |
| Applications referred by EFIC to the Minister |
- |
EFIC may refer applications to the Minister for consideration under the NIA, regardless of whether EFIC can provide the proposed loan or guarantee under the CA (d) |
Sources: (a) EFIC, Annual report 2013–2014, 2014, pp. 18–19; (b) PC, Australia’s export credit arrangements, op. cit., p. 55; (c) EFIC, Response to the Productivity Commission draft report: supplementary submission, 26 March 2012, p. 17 (d) EFIC Act, section 25.
Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.
[23]. Australian Government, Budget measures: budget paper no. 2: 2014–15, op. cit., p. 234. For a detailed discussion of the equity injection see E Karanikolas and K Swoboda, ‘Export Finance and Insurance Corporation—capital injection’, Budget review 2014–15, Research paper series, 2013–14, Parliamentary Library, Canberra, 2014, pp. 106–107, accessed 20 November 2014.
[37]. Ibid., recommendation 10.1, p. 307.
[40]. It appears that the proposed amendments will enable EFIC to provide direct loans for non-capital goods on both the Commercial Account and the National Interest Account (subject to any other relevant requirements); see the Appendix: the Commercial Account and the National Interest Accountto this Digest for the distinctions between the two.
[44]. Ibid.; Parliamentary Library estimates based on Australian Bureau of Statistics (ABS), International trade in goods and services, Australia, September 2014, cat. no. 5368.0, ABS, Canberra, 2014, Table 31 – Merchandise Exports: Broad Economic Category. Capital goods comprise ‘Capital goods (excl. transport equipment, parts and accessories’, ‘Parts and accessories for capital goods (excl. transport equipment, parts and accessories)’, and ‘Industrial transport equipment (excl. passenger motor cars, parts and access)’. ABS statistical definitions may not exactly match the legislative definition of capital goods, or the proportion of goods EFIC is able to support under the current legislation.
[45]. Explanatory Memorandum, Export Finance and Insurance Corporation Amendment (Direct Lending and Other Measures) Bill 2014, op. cit. Under the current system EFIC can provide guarantees to financial institutions, which can then lend to the relevant exporter, or buyer of the exporter’s goods. However, even with a guarantee provided by EFIC, it is unlikely that a financial institution will lend at a rate below its cost of capital (the cost of debt and equity funding), or a risk-free benchmark rate (such as Government bonds). As a government funded organisation (directly through equity funding, and with a government guarantee on borrowing), EFIC has a lower cost of capital than many private sector providers. If it were to offer a direct loan at a lower rate than that offered by financial institutions (even with an EFIC guarantee), then the change might result in a subsidy increase.
[52]. Export payments insurance contracts are defined in the EFIC Act as insurance for an exporter against the risk that an importer will not pay (EFIC Act, section 14). Short term insurance contracts are defined as export payments insurance contracts for contracts with an initial payment term of less than 360 days (EFIC Act, section 3).
[54]. EFIC, 2000 annual report, EFIC, Sydney, 2000, pp. 67 and 71; EFIC, 2001 annual report, EFIC, Sydney, 2001, p. 59.
[57]. Parliament of Australia, ‘Export Finance and Insurance Corporation Amendment (New Mandate and Other Measures) Bill 2013 homepage’, op. cit. The wording of the substantive provisions is identical between the two Bill; however the previous Bill included consequential amendments to the Corporations Act 2001 (Cth) and the Insurance Contracts Act 1984 (Cth), while the current Bill includes a transitional provision, and an application provision specifying that tax-equivalent payments will only apply from the financial year starting on or after commencement.
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