This chapter outlines the key issues raised with the Committee as well as the Committee's views and recommendation.
Infrastructure in the Indo-Pacific region
Jubilee Research Australia, the Australian Conservation Foundation and ActionAid Australia argued that:
[i]nfrastructure investments in the Indo-Pacific region should be led by the priorities of the relevant country, not by the national interest of Australia or the commercial interests of Australian businesses'. Australia's Pacific neighbours have clear priorities for infrastructure investment, and supporting these initiatives should be prioritised.
Jubilee Research Australia, the Australian Conservation Foundation and ActionAid Australia submitted that 'EFA should give consideration to these priorities alongside Australia's national interest'. It was recommended that EFA's Statement of Expectations should be 'amended to require EFA to consider whether a project to be financed (including where the financing is an equity investment) delivers benefits for the recipient nation'.
DFAT responded to this suggestion by noting that:
The Minister’s Statement of Expectations requires EFA to “reasonably satisfy itself through due diligence…[that] the infrastructure project is appropriate for the relevant nation and the governance surrounding project procurement is sound”. EFA’s due diligence processes include debt sustainability analysis and compliance with a range of international economic, financial, environmental and social risk standards.
Constraints on equity power
DFAT and EFA also advised the Committee that '[t]he Government will instruct EFA to ensure equity investments are only considered for significant transactions that support Australia’s national interests'. In addition:
Constraints will also be placed on the use of the equity power, including through a direction from the Minister for Trade, Tourism and Investment and an updated Statement of Expectations to EFA. These constraints are:
Equity investments will be limited to the National Interest Account (i.e. the Australian Government – not EFA – will make the final decision on equity investments);
Equity investments will be limited to a minority interest unless there is a compelling reason otherwise;
Equity investments should be $20 million or higher unless there is a compelling reason otherwise;
EFA will only bring forward proposals where other financing options are unavailable or inadequate;
EFA will ensure equity investments have appropriate exit arrangements and target commercial rates of return; and
EFA will encourage participation from the private sector and like-minded Governments and multilateral bodies.
These constraints will ensure EFA is not crowding out private finance, but instead filling a gap in the market. Debt solutions like loans, guarantees, and bonds will continue to be the mainstay of EFA’s support to Australian exporters and for overseas infrastructure development in the region.
Jubilee Research Australia, the Australian Conservation Foundation and ActionAid Australia suggested that the enhancement of EFA's powers should come with an 'enhancement of EFA's transparency and accountability, both to Australian taxpayers and to communities overseas'. It was suggested that one way this could be achieved is by removing EFA's partial exemption from the Freedom of Information regime.
DFAT responded that EFA is subject to a range of transparency and governance requirements, in addition to being accountable to the Minister for Trade, Tourism and Investment and to the Parliament. DFAT provided the following detail:
Within eight weeks of a transaction being signed, EFA is required to publish detailed information on its website about each transaction. These details include the name of the client, the sector, the goods/services or overseas infrastructure involved, the country, the type of facility and the value of the facility of the export of overseas infrastructure support.
EFA also publishes an annual report, which provides details on the transactions EFA finances. EFA discloses its proposed involvement in transactions with the potential for significant environmental and/or social impacts on its website prior to making a decision on the provision of finance.
Importantly, DFAT noted:
Like other financial institutions – including banks, export credit agencies and multilateral development finance institutions – EFA must respect the commercial-in-confidence information of its customers. This means it is not always able to disclose details of transactions under consideration. EFA is obliged to safeguard its customers’ legitimate financial or business interests. Without the ability to protect commercial-in-confidence information, EFA would not be able to operate.
The Committee notes that DFAT has commissioned Mr Stephen Sedgwick AO to conduct an independent review into the infrastructure investment operations of EFA, following the 2019 amendments to the EFIC Act to enhance EFA's ability to finance infrastructure projects. The Committee also notes that this review was agreed as part of the Government's July 2019 response to the Senate Foreign Affairs, Defence and Trade Legislation Committee Report on the proposed amendments.
The Terms of Reference for the review are:
Consider the operation of EFA's overseas infrastructure financing functions and the extent to which it has supported the Government's aims and the infrastructure needs of our Pacific neighbours.
Examine the impact of amendments made by items 1, 2, 4 to 9, 11 and 12 of the Export Finance and Insurance Corporation Amendment (Support for Infrastructure Financing) Bill 2019 (the Bill) on EFA's ability to finance overseas infrastructure projects.
Consider the views of a wide range of stakeholders, including those who provided submissions to the 2019 Senate Committee inquiry into the Bill.
Not consider the operations of the Australian Infrastructure Financing Facility for the Pacific.
Environmental and social aspects
Jubilee Research Australia, the Australian Conservation Foundation and ActionAid Australia, while acknowledging that 'the equity finance amendment to EFA is not designed with increased fossil investment in mind', suggested that a trigger be included which relates to climate change and financial risk.
They recommended that a new Schedule 3 be inserted into the Bill 'to introduce a requirement to consider Australia’s commitments relating to climate change'. In addition, it recommended inserting in Schedule 3 that 'EFIC is to perform its functions in a way that contributes to Australia's implementation of the Paris Agreement'.
It was noted by DFAT and EFA that in performing its functions, EFA must also have regard to Australia’s international commitments relating to:
sustainable lending practices;
environmental and social issues;
the prevention of bribery and corruption; and
the security of 5G networks and future communication technologies.
Providing further detail on its environmental and social assessment processes, DFAT and EFA advised the Committee:
EFA will continue to conduct rigorous due diligence for equity investments in a manner which is consistent with its high standards for assessing debt transactions. This includes robust environmental and social risk assessments…
Jubilee Research Australia, the Australian Conservation Foundation and ActionAid Australia were of the view that Environmental and Social Review Policy and Procedures should be strengthened.
In a supplementary submission responding to the concerns raised by Jubilee Research Australia, the Australian Conservation Foundation and ActionAid Australia, DFAT confirmed:
Export Finance Australia (EFA) assesses requests for its financing support on a case-by-case basis, consistent with its mandate to support Australian export-related businesses and overseas infrastructure development that delivers benefits to Australia. There are a range of policies and directives that EFA must take into account when assessing fossil fuel-related transactions and projects. These include its Ministerial Statement of Expectations, as well as international standards and benchmarks EFA is required to have regard to, such as the OECD Arrangement on Officially Supported Export Credits, the World Bank’s International Finance Corporation (IFC) Performance Standards and the OECD Common Approaches. In addition, EFA is a signatory to the Equator Principles, a risk management framework for determining, assessing and managing environmental and social risk in projects.
EFA will assess equity investments by conducting appropriate due diligence. This includes due diligence on environmental and social issues, which includes consideration of climate-related risks.
In relation to the suggestion that EFIC perform its functions in a way that contributes to Australia's implementation of the Paris Agreement, DFAT advised:
Export Finance Australia is already required by law to have regard to Australia’s obligations under international agreements and will continue to support projects on a case-by-case basis that are consistent with Australia’s international obligations. The Australian Government is responsible for Australia’s Paris Agreement implementation and commitments.
DFAT further detailed how EFA’s policy and procedure is consistent with international practice:
The Statement of Expectations requires EFA’s Policy and procedures for environmental and social review of transactions (the Policy) to be consistent with international best-practice environmental and social standards, including the:
IFC Performance Standards, which define responsibilities for managing environmental and social risks;
OECD Guidelines for Multinational Enterprises, a comprehensive set of recommendations on responsible business conduct;
Equator Principles, a risk management framework adopted by financial institutions for determining, assessing and managing environmental and social risk in projects; and
OECD Common Approaches, which seeks to align OECD export credit agencies’ environmental and social due diligence practices through information sharing and monitoring of projects.
Responding to the suggestion that Environmental and Social Review Policy and Procedures should be strengthened DFAT reiterated that:
the Minister’s Statement of Expectations requires EFA to apply a range of international standards and benchmarks for the assessment of projects and to make public its Policy and procedures for environmental and social review of transactions (the Policy). EFA’s Policy is reviewed at a minimum of every five years with feedback sought from interested parties as part of the review process.
The Committee notes that as outlined in the government's 2017 Foreign policy white paper, Australia is committed to working with regional partners to build an Indo-Pacific that is safe, secure, and prosperous. This Bill enhances EFA's ability to support infrastructure development in the Indo-Pacific and export-linked projects in Australia.
In 2019, the government provided EFA with the power to support overseas infrastructure projects in our region that benefit Australia or Australians. The Committee notes that this requires a range of funding and financing options.
In broadening its financing powers to include equity, EFA will be able to make investments in a greater range of infrastructure projects, and at an earlier stage of development. Notably, equity investments will be reserved for exceptional circumstances.
The Committee therefore supports providing EFA with a new overseas equity investment power and a stand-alone guarantee power in order to expand its range of capabilities and bring it into alignment with international and domestic peers.
The Committee notes that the Bill will enhance EFA's role in supporting Australia's economic growth and facilitating stronger links between Australian businesses and the Indo-Pacific region.
Importantly, the Bill maintains EFA's robust processes for assessing commerciality, risk and environmental and social impacts. EFA will continue to conduct rigorous due diligence for equity investments in the same manner as other transactions. This includes robust environmental and social risk assessments.
The Committee notes that the issues raised with the Committee will be further considered as part of the independent review into the infrastructure investment options of EFA which is being undertaken by Mr Stephen Sedgwick AO.
The Committee recommends that the Bill be passed.
Senator the Hon Eric Abetz