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Wednesday, 25 November 1959

Mr McEWEN (Murray) (Minister for Trade) . - by leave - I move -

That the bill be now read a second time.

In March last when I introduced amendments to this act to enable the liability and capital limits of the Export Payments Insurance Corporation to be doubled, I indicated that the functions of this corporation were being reviewed to determine whether its powers needed to be extended to meet the full requirements of exporters and to make the maximum contribution to export earnings. This bill is the result of that review, which has been made by the Government assisted by the advice of the Consultative Council of the Export Payments Insurance Corporation and of industry organizations, including the Export Development Council.

The bill proposes, first, that the corporation be authorized to offer a higher percentage cover in certain circumstances than the present maximum of 85 per cent.; and secondly, that the corporation be permitted access to the recently established short-term money market to enable it to make maximum use of its investible funds.

The functions of the corporation do not overlap with those of commercial insurers, as the latter do not cover the business of export payments insurance. The corporation commenced operations in September, 1957. Its value has been readily appreciated by Australian exporting industries. Policies to a value of over £40,000,000 have been issued. The steady growth of the corporation's business is shown by the fact that on 30th June, 1959, the corporation had current at that date policies to a value of over £21,000,000, or almost twice the value of policies current at 30th June of the previous year.

At present the corporation is authorized under section 16 of the act to grant cover up to 85 per cent, of a loss. This maximum applies regardless of the nature of the cause of the loss. The first amendment proposes that that maximum should continue to apply where the loss arises from the insolvency of the buyer or from the failure, through protracted default, of the buyer to pay. These are classified as " commercial " causes of loss.

The other risks against which the corporation grants insurance are commonly referred to as " political risks ", since they relate to acts of governments or situations of a political character. Examples of such risks are exchange transfer blockages, the imposition or variation of import restrictions, wars and revolutions. The bill proposes that in the case of such political risks, the corporation be authorized to grant cover up to 90 per cent, in the pre-shipment period and up to 95 per cent, in the postshipment period in the case of contracts relating to the sale and export of goods.

For commercial risks, the practice of other export payments insurance schemes is based on the view that to move above 85 per cent, for these risks could encourage an exporter to be less than prudent in export transactions which involve risks of this nature. The Government accepts this view and no change from the existing maximum permissible cover for this class of risk is proposed.

The political risks covered by Export Payments Insurance Corporation are of such a nature that, generally speaking, the exporter can do little to protect himself against them. For this reason, it is proposed to give the exporter in suitable cases a higher indemnity against losses occasioned by these risks than would be available against losses due to commercial causes.

The reason for the lower percentage maximum in the pre-shipment period for political risks is that the exporter is at that stage in a position to ensure that shipment takes place and all conditions are complied with by the importer. By bearing a minimum of 10 per cent, of any possible loss himself, the exporter is provided with an inducement to conduct his transactions on sound business lines. Moreover, in the event of the frustration of the contract before shipment of the goods as a result of the occurrence of one of the causes of loss covered, he still has possession of the goods and is in a better position to minimize the loss likely to be sustained. These considerations have less relevance after the goods have been shipped and are outside the physical and, perhaps also, the legal control of the exporter.

The distinction in time between preshipment and post-shipment cover does not apply to three types of guarantees insured by the corporation, namely stockholding guarantees, processing guarantees, and services guarantees. These kinds of guarantees are covered by section 16 (4) of the bill. In the first two of these types of guarantees, the corporation does not assume liability until after the goods are landed in the overseas country where the goods are to be processed or held in stock. In a services guarantee, that is one relating to royalty payments or, more commonly, payments due to an Australian firm for technical investigations and design or for the construction of projects overseas, the corporation assumes liability only after the contract has been signed by the parties concerned and approved by the corporation. The bill provides that in the case of these three types of guarantees, the corporation could issue cover up to 85 per cent, against commercial risks and up to 95 per cent, against political risks.

There is one other point in relation to commercial and political risks. When the overseas buyer is a governmental buyer or a buyer backed by a government guarantee, the concept of commercial risks is inappropriate. It would be impracticable for the Export Payments Insurance Corporation to determine in any particular case whether the failure or refusal of the government buyer was due to a capricious default, or whether it was really due to a government action or decision which might not be made apparent. Accordingly, it is proposed to treat all risks associated with this type of buyer as political risks. In this we would be following the same practice as the United Kingdom Export Credits Guarantee Department.

In proposing this amendment to the maximum percentage cover which the corporation is authorized to grant, the Government has acted in accordance with the recommendation of the Consultative Council of the Export Payments Insurance Corporation.

Mr Haylen - Are you referring to a buyer going back on his word in an official capacity?

Mr McEWEN - No. This relates to a variety of things that could occur as a result of action taken by another government. The Export Payments Insurance Corporation, a body of eight prominent business people and two senior government officials, was established by the Government in 1957 to advise on all matters relating to the corporation. Similarly, when the Export Development Council was recently examining the facilities available to Australian exporters, it too, recommended an increase in the maximum percentage cover. As honorable members are aware, the Export Development Council was created to advise the Government on matters relating to export. It has already amply demonstrated its value by the advice it has given the Government on many aspects of the drive to increase our export earnings.

I would emphasize that the percentages of cover specified in the bill are the maximum permissible limits. The corporation would determine, on the merits of each transaction, the appropriate percentage of cover to grant against the various risks. Of course, the corporation is free to decide from whom it will accept risks and in respect of which countries it will accept them or reject them.

The arrangements outlined in this bill should enable the corporation to increase its effective contribution to the export drive. The second amendment proposes that the corporation be given greater investment flexibility by enabling it to invest temporarily surplus funds on the short-term money market. Because of the nature of its business, the corporation will, on occasions, have funds on hand, whether from the proceeds of maturing securities, from recoveries or otherwise, which will not be required for the settlement of claims for a short interval.

Under the act as it stands, the corporation already has certain powers for the investment of such moneys in that they may be placed on fixed deposit with the Commonwealth Bank or with any other bank approved by the Treasurer, or they may be invested in securities of the Commonwealth. It will often happen, however, that the corporation will have funds available for such short periods that it would not be possible to leave them on fixed deposit with a bank for the normal three months minimum period, or to obtain Commonwealth securities of the appropriate maturity. There will thus be times when the corporation will have funds from which an income might be earned if a suitable avenue for their investment on a short-term basis were available. Facilities of the desired type are provided by the dealers on the recently established short-term money market. By lending funds to dealers in that market the corporation would be able to earn a reasonable rate of return on such funds.

The bill empowers the Treasurer to determine both the persons to whom the corporation may lend and also the conditions under which such loans may be made, provided always that the loans are made upon the security of securities of the Commonwealth. The Treasurer proposes, upon the passage of this bill, to give approval for the Export Payments Insurance Corporation to lend to dealers on the short-term money market approved by the Commonwealth Bank, such loans to be against Commonwealth securities with not more than three years to maturity.

In commending the bill to the House, I emphasize that the functions of the corporation will remain under review with the object of ensuring that, consistent with commercial prudence and the " non-profit, nonloss " basis on which this corporation was established, it will continue to operate to meet all reasonable requirements of the Australian exporter.

Debate (on motion by Mr. Haylen) adjourned.

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