|Title||Foreign Affairs, Defence and Trade Legislation Committee
Export Finance and Insurance Corporation Amendment (New Mandate and Other Measures) Bill 2013
|Committee Name||Foreign Affairs, Defence and Trade Legislation Committee
Rhiannon, Sen Lee
Eggleston, Sen Alan
CRAWFORD, Mr Dougal Finlay, Senior Adviser Government, Industry and International Relations, Export Finance and Insurance Corporation
GEROVICH, Mr Sam, First Assistant Secretary, Trade and Economic Policy Division, Department of Foreign Affairs and Trade
LAWLESS, Mr Patrick, Assistant Secretary, Resources, Competitiveness and Trade Analysis Branch, Department of Foreign Affairs and Trade
McGRATH, Ms Angela, Director, Trade Finance Section, Department of Foreign Affairs and Trade
PARSONS, Mr Jan, Director, Environmental and Technical Review, Export Finance and Insurance Corporation
CHAIR: Welcome. I remind senators that the Senate has resolved that an officer of a department of the Commonwealth or of a state shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Officials of the department are also reminded that any claim that it would be contrary to the public interest to answer a question must be made by a minister and should be accompanied by a statement setting out the basis for the claim. I invite you to make an opening statement.
Mr Gerovich : Thank you very much for giving us the opportunity to appear today. In my role, I have oversight of a wide range of economic and trade issues, including EFIC. I have only been in the role for four days, so I will defer to my DFAT colleagues to answer any detailed questions you might have on the bill. We also, of course, have officers from EFIC, but I still wanted to be here in person to underline that DFAT understands the important role that the Senate committee has in assessing the bill that has been put forward to reform EFIC. I should also note that the bill was passed without amendment by the House of Representatives yesterday.
DFAT lodged a written submission to this committee about the bill, so I will not waste your time by repeating that. Instead, I thought I could summarise what the bill is aiming to achieve. First, it will require EFIC to focus more of its resources on helping small and medium enterprises. Second, if the bill is passed it will mean that EFIC will only be allowed to provide insurance and other financial services or products on its commercial account where a market failure exists making it unlikely that the products or services would be provided by the private sector. Third, the bill provides for arrangements to be put in place to ensure that EFIC's activities on its commercial account are consistent with the principle of competitive neutralityâthat is, that EFIC does not enjoy a net competitive advantage over its potential private sector competitors. Fourth, the bill allows for a limited expansion of EFIC's guarantee powers to allow EFIC more scope to assist Australian companies who are participating in global value chainsâthat is, Australian companies that are not just exporting from Australia but also involving themselves in various stages of the production or distribution processes offshore. Finally, the bill will remove the government member from the EFIC on board. The aim of that is to strengthen the independence of EFIC's commercial activities from government.
As an overall comment, I would say that the bill does not propose a major overhaul of EFIC but rather a reorientation of its operations towards those exporters who face genuine market failures in accessing finance, particularly small and medium sized enterprises operating in emerging markets.
CHAIR: Thank you all for being here today. I know it was short notice, but it is important for us to have this hearing. Why is this bill time sensitive?
Ms McGrath : As you know, this bill is really the culmination of a review process that began with the Productivity Commission's review, which was announced in September 2011. That was quite a long time ago. The review process obviously has created some uncertainty for EFIC and its clients. We think it is important that these reforms are bedded down as soon as possible to ensure that EFIC and its clients have some certainty about how EFIC will operate in the future. We have aimed for the reforms to be in place for the new financial year so that EFIC can undertake its business and its clients can approach EFIC on the basis of its new mandate from as close to the start of the new financial year as possible.
CHAIR: You say that the bill is in response to the Productivity Commission's report. We had a summary of the recommendations and those recommendations that were noted, agreed or disagreed. Can you take us through the process of how the government has prepared the response to the Productivity Commission and help us understand why some recommendations were agreed in part?
Senator RHIANNON: Could I just add a request which I think goes with that question? When you answer that, could you explain the difference between 'agreed in part' and 'noted'? I understand 'agreed'. Does agreed mean that you will act on it and you will do it? What does noted mean and what does agreed in part mean?
Ms McGrath : The final report of the Productivity Commission was released in May 2012 and tabled in parliament fairly soon after that. Once the report was out there the Department of Foreign Affairs and Trade basically established an interdepartmental committee, recognising that the response to the Productivity Commission report required a whole-of-government approach. EFIC was also invited to participate in parts of those IDC meetings, and we had a number of those leading ultimately to a cabinet process to agree on a response. Obviously, the IDC also considered the range of submissions that had been received by the Productivity Commission. We discussed in detail all the recommendations of the Productivity Commission and what impact they would have on Australian exporters.
In terms of the responses to the recommendations, 'agreed' essentially means that the government agrees with the recommendation and is prepared to implement the recommendation. Some of those recommendations that the government has agreed to, but not all of them, require legislative change. Those that do require legislative change are part of this bill. 'Agreed in part' generally means there are parts of the recommendation that the government does accept, but perhaps not all of it.
Senator RHIANNON: Considering the shortness of time, would you take on notice to supply us with what you agree with in part and what bits you do notâfor example, 6.2 you have agreed in part. Would you take it on notice for that table to tell us which bits you agree with and which bits you do not agree with. I am just conscious of time.
Ms McGrath : Yes. I guess the 'noted' isâ
Senator RHIANNON: That you are not going to do anything?
Ms McGrath : No, it does not necessarily mean that. It means that we note the recommendation, and very often that means that we need to think about the detail of how we could take on board what some of the Productivity Commission has said.
Senator RHIANNON: If you could expand on the noted, if it is possible.
CHAIR: Whatever you can do for us would be good. Does the bill pick up all the legislative requirements of the recommendations that have been agreed by the government? Does this bill deal with it all?
Ms McGrath : That is correct. Any of the recommendations that the government agreed to that require legislative change to implement are contained in this bill.
CHAIR: Thank you for that. That would be very helpful. You had the opportunity to read the other submissions to the inquiry, I am sure, and you have had the opportunity to listen to our previous witnesses. I think probably the most sensible use of our time is to just give you an opportunity to respond to those concerns. On the first concern around the issue of transparency in decision making by EFIC and the concerns that have been raised in many submissions around the blanket exemption to freedom of information, if you could elaborate on what your thinking is around that and respond to the fact that Australia's blanket exemption is not consistent with other countries, that would be helpful.
Mr Lawless : It is true that there is an exemption. EFIC of course is not the only government agency that has that exemptionâthere is a list of several pages of government agencies that have some type of exemption from the FOI Act. My other comment would be our sense that if you are going to review FOI exemptions that should probably be part of an overall review of FOI legislation, which this portfolio does not cover. That is covered by the Attorney-General's Department.
CHAIR: I do not want you to squib on this. One of the specific recommendations of the Productivity Commission was around the FOI issues and we are very interested in understanding why the government has not acknowledged that and that in its greater Operation Sunlight or whatever it was calledâthe big transparency measures of the governmentâthis recommendation was not considered to be an important one.
Mr Lawless : The FOI legislation was reviewed in 2009 and the EFIC exemption was retained then. My understanding is that it is to do with commercial-in-confidence and politically sensitive material, which EFIC deals with all the time. That is my understanding of the core reason why it has been maintained over successive years.
Senator RHIANNON: Considering there is commercial-in-confidence provisions in the FOI Act, are you saying that that would not cover you adequately and, if that is your argument, how doesn't it cover you?
Mr Lawless : It has obviously been judged to be not sufficient over successive reviews, also taking into account that EFIC does disclose a certain amount of what it does and how it makes its decisionsâand they can elaborate on the detail of how they do that. I understand the question, but so far it has been taken that the exemption is still justified.
Senator RHIANNON: How do you judgeâmaybe this is a question to the EFIC peopleâthat the commercial-in-confidence provisions in the FOI do not cover you or are not what you need?
Mr Crawford : I am not an expert on the FOI Act so I will probably have to take that on notice. I will just note, however, around the FOI Act that I think you have to consider also the commercial-in-confidence issues for Australian exporters and Australian companies.
Ms McGrath : Can I just add that the FOI legislation, the whole framework, is currently being reviewed again by Dr Alan Hawke and that review process called for submissions. I do not think there were submissions from Jubilee in that, but we think that is the appropriate process for considering EFIC's exemption and to look at EFIC's exemption in isolation without looking at the broader FOI framework, which is what Dr Hawke would have done as part of his review. We think that is a more appropriate way to look at this FOI exemptions that EFIC currently has.
Senator RHIANNON: Can I move on to some of the environmental aspects. I note that the Australian government policy has a commitment to reduce greenhouse gas emissions by 80 per cent by 2050. When you are making your judgements about the support that you will give to applicants, how do you factor in our climate change responsibilities?
Mr Parsons : The benchmark EFIC uses when we undertake an environmental and social review of a project is the IFC performance standards. One of the performance standards, performance standard 3, deals with greenhouse gas emissions and how projects deal with those. Depending on the quantum of emissionsâI forget the exact trigger nowâone of the requirements of performance standard 3 for projects that have high emissions is that they have to consider alternatives in the way they are managing it and that is part of the environmental assessment process.
Senator RHIANNON: When you say 'alternatives' do you mean offsets?
Mr Parsons : It could be offsets or it could be, 'Have we considered alternative power sources that may be less emitting?' It depends entirely on the project that is being considered, but there is a process under the performance standards for greenhouse gases to be examined and considered and that is what we rely on when we look at projects.
Senator RHIANNON: But if the project is all about digging up fossil fuels, considering they are such an enormous contributor to greenhouse gas emissions, does that mean that your benchmark is too high?
Mr Parsons : I am sorry. I do not understand the question.
Senator RHIANNON: If we are examining how a project is judged in terms of its contribution to greenhouse gas emissions and some of the projects that you are supporting are to expand fossil fuel sources, do we have a contradiction there?
Mr Parsons : I do not think so. At the moment the OECD export credit agencies have a small working group looking at how the ECAs as a grouping are addressing greenhouse gas emissions and what sorts of limits we can apply on how we should be examining these. So there is a whole OECD-ECA general approach being considered for that.
Senator RHIANNON: Can you take on notice how you do it currently? I think you said you do have to make a judgement with regard to your projects with regard to greenhouse gas emissions. Is that correct?
Mr Parsons : That is correct.
Senator RHIANNON: So could you take on notice how you undertake that work?
Mr Parsons : As I say, we use the IFC performance standard and that sets out a system and a process for examining these and then there are guidelines which are attached to that for various industries.
Senator RHIANNON: Could you supply that to us?
Mr Parsons : Sure.
Senator RHIANNON: Thank you. Why is EFIC exempt from the EPBC Act? Is that something you still think is necessary?
Mr Parsons : It is not.
Senator RHIANNON: That is not correct?
Mr Parsons : My understanding is it is not exempt from the act. It was one of the things we were going to mention today.
Senator RHIANNON: If you could expand on that, that would be good.
Mr Lawless : Our understanding is that it is not.
Ms McGrath : That is right. There is no exemption for EFIC. The EPBC Act focuses on activities rather than entities. I think EFIC can talk about what they do in complying with the EPBC Act, but it does apply to their Australian operations.
Senator EGGLESTON: That is a very important point, because it can only apply in Australia one would have thoughtâor is it applied to projects you might be financing somewhere in Asia or somewhere else?
Mr Parsons : Obviously the EPBC Act only applies in Australia. We cannot apply it to foreign jurisdictions, but for our international work again one of the IFC performance standards covers biodiversity. So we look at it but not using the Australian act but using an international standard.
Senator EGGLESTON: Which is?
Mr Parsons : The IFC performance standards. The International Finance Corporation is part of the World Bank. There is a set of international standardsâ
Senator EGGLESTON: So they have a set of standards for various things, do they?
Mr Parsons : Yes, performance standards basically for international projects and they cover off a whole range of environmental and social issues. They are regarded as the best practice for international projects.
Senator EGGLESTON: Could you give us on notice a copy of those standards and what they cover?
Mr Parsons : Sure.
Senator EGGLESTON: You obviously comply with them, do you?
Mr Parsons : We use them as a benchmark for international projects.
Senator EGGLESTON: You use them as a guide in effect but you are not compelled toâ
Mr Parsons : No. We have committed to using them as a usual benchmark. If there are higher standards, such as in some of the EU countries, we will use those standards but we have committed to use them as our benchmark and, if the projects which we are looking at do not meet those benchmarks, we have said we will decline support to those transactions.
Senator EGGLESTON: They are the rules that apply in the country where the project is going to be established?
Mr Parsons : There are two separate things. Firstly, there are the host country standards. We look at two aspects: we look at the host country standards, which is generally whether it has an approval within the country, and then we apply the IFC performance standards, which may be more stringent or less stringent than the host country's. In either case we will take the more stringent of those two standards.
Senator EGGLESTON: You are not operating in a vacuum, you are actually applying the standards which is important for us to know.
Mr Parsons : Yes, and as I said the IFC performance standards are regarded as the best practice for international financiers to use when benchmarking projects.
CHAIR: Going to EFIC's policies and procedures for environmental and social review of transactions, how long have the policy and procedure been in operation?
Mr Parsons : We have had a policy since about 2000. It has gone through various iterations over time. The current one, which the board adopted in 2011, is about our fourth or fifth iterationâdo not quote me on those numbers, but it has gone through several iterations.
CHAIR: Is there a mechanism to review the workings policy or is there an opportunity for an external independent review?
Mr Parsons : There is, yes. Part of our policy is a commitment to engage an independent expert every two years to audit how we have applied and used that policy. We had our first audit last year. It was made public in December, and it found that we had applied the policy and procedure appropriately. In undertaking the audit, they had access to all our projects and all our files. They selected which ones they wanted to look at, mostly concentrating on the ones with potentially higher impacts. They went through the information we had used, the benchmarks we had used and the conclusions we reached as a result of the benchmarking. Their audit report was that we had complied with our policy in all the projects they examined. That report has been made public.
That is part of our transparency, because a lot of the comments have been that EFIC is not a transparent organisation. Amongst the OECD export credit agencies, which are our peers, we are probably the most transparent. In undertaking our policy and procedure we have benchmarked ourselves against that. We provide more information, we provide more certainty through our published policy and procedure, which had external input from CSOs, particularly through the external independent audit. Because there are certain limitations on the information we can provide publicly, we decided to get somebody external to come in and look at that to give external people, such as you, certainty that we are doing it appropriately. People were saying there is no certainty, so our policy commitment to undertake the audit was an attempt to respond to that query about certainty.
CHAIR: How long has the multi-stakeholder forum been operating?
Mr Parsons : The multi-stakeholder forum came out of the consultation we had when we were doing our policy review. At that time we and the CSOs decided the process was working well and we should do it more frequently on a more formal basis. We decided after that to do it every six months, and we have had three now. The next one is due about the middle of this year.
CHAIR: How do you shape an agenda for those forums? Is it around specific policy issues? I am thinking about the discussion we had this morning on the concern about the risk being left in developing countries where there are cost overruns and that poor countries hold the debt if there are overruns or difficulties with a project. Is that the kind of topic that you would be exploring?
Mr Parsons : The topics are entirely open. We send round an invitation with some suggested topics and participants in the group are free to raise any topic for discussion. On the commentary that the people in the country become liable for the debt, most of our transactions are commercial and we deal with a commercial entity. It is the commercial entity that is liable for the debt.
Senator RHIANNON: But if there are disasters, like those in PNG that caused environmental damage, it is the country that picks that up. If Companies go broke after local damage has been caused, who picks up that tab? It is the locals, isn't it?
Mr Parsons : If damage has been caused and the project is still up and running, then it is the project's liability to fix up the damage.
Senator RHIANNON: But would you not acknowledge that there are so many examplesâand this is one of the issues with extractive companiesâwhen there is a long track record of damage caused. They walk away and the country carries the burden for a long time.
Mr Parsons : That is historically the case. In modern lawâthe current standardsâwhen financiers are involved in a project they require extractive industries to have a decommissioning plan to be in place and funded as part of the transactions in these projects. At any point in time, if the project falls over for whatever reason, there has to be access to means to rehabilitate whatever state the project was in when the project fell over.
Senator RHIANNON: So with recent examples in PNG, the Philippines et cetera are you confident that the local damage to people and the environment has been covered?
Mr Parsons : Not all projects because not all projects are undertaken according to the international benchmarks. But performance standards now require--
Senator RHIANNON: But I am wondering whether where EFIC money is required you are confident that in the last five years local damage has been covered by this decommissioning.
Mr Parsons : I cannot think of one that has been decommissioned in recent times but, yes, there are provisions even in host-country legislation for rehabilitation or through the commitments made by the project.
Senator EGGLESTON: So you are the financier, not the actual project operator. Do you have a responsibility to deal with the kind of issues that Senator Rhiannon is raising? Is that not the responsibility of the operator of the project? You would be the financier, I would have thought.
Mr Parsons : As financiers, we do not operate projects.
Senator EGGLESTON: Yes, I know. That is the distinction I am making.
Mr Parsons : It depends on what type of facility we are providing. For example, if we are providing a performance bond to an Australian exporter, saying they can build this widget, then obviously we have no relationship with the project. But if we go to the other extreme, which is project finance where we have a direct relationship with the project operators, under the legal agreements we do have some access to get the project to undertake certain remedial works if things go wrong.
Senator EGGLESTON: And some liability? Is that written into it?
Mr Parsons : Liability?
Senator EGGLESTON: Liability. Penalties if various things are not done, for example, and in what jurisdiction would that be.
Mr Parsons : The ultimate penalty from the financing point of view is an eventual default.
Senator EGGLESTON: Yes, but that is not what Senator Rhiannon is talking about. She is talking about restitution and things like that.
Mr Parsons : Again, under the IC performance standards for extracting industries, there is a requirement for decommissioning plans to be in place at any one point of time.
Senator EGGLESTON: Can you accept some degree of responsibility for that as the financier? That is my question. Yes or no.
Mr Parsons : Again, the responsibility does not come back to us because we are purely financiers. We do not operate. But we require that the project has those plans in place before we finance.
Senator RHIANNON: Can we go back to the transparency issue? Mr Parsons, you said something to the effect that EFIC is one of the most transparent of the credit agencies. But I notice that there are recommendations from the Productivity Commission that address this issue and were not picked up in the legislation. Some of them were not agreed to, like 9.3. That recommendation was that the minister should table EFIC's corporate pay in parliament and that, in due course, the act should be amended to require this. Also, 9.7 covers issues to do with transparency. Those recommendations have not been picked up. Considering that you are not covered by the FOI act and other credit agencies are, I find it hard to understand how you can suggest that EFIC has such high levels of transparency.
Ms McGrath : Perhaps I could step in here. There are a number of recommendations that Jubilee, when they were talking a little earlier, said would require legislative change that actually will not. The fact that they are not contained in this bill does not mean that they will not happen. For instance EFIC will be tabling its corporate plan in the parliament from now on and there are a number of other things that we are working through in terms of reporting and disclosure requirements that will be covered in a statement of expectation as well. We have certainly taken note of the recommendations that the Productivity Commission has made and, where we can, we are looking at improvements. But they do not necessarily require legislative change.
Senator RHIANNON: Does DFAT also put forward that EFIC is one of the most transparent of the credit agencies, considering the FOI Act does not cover you?
Ms McGrath : I do not know.
Mr Lawless : I think that our view is that EFIC operates in accordance with our international obligations in these areas.
Senator RHIANNON: But is EFIC one of the most transparent of the ECAs?
Mr Lawless : I do not know.
CHAIR: Can we go back to the bill and the definition of 'market failure'. I recall that in one of the submissions General Electric made the point that the definition of 'market failure' needs to be considered. In your own submission you made the comment that:
â¦ 'market failure' will be defined through a legislative instrument. This will allow the definition to be adjusted if necessary over time to respond to changing international financial practices and market characteristics.
There was another comment about the difference between 'market failure' and 'market gap'. Would you like to make a comment on the way in which the bill has been drafted to define market failure?
Ms McGrath : Yes. EFIC currently operates on the basis of a market gap and the Productivity Commission was quite concerned about that and basically said it was a very vague concept and that it needed to be tightened up and that EFIC should be operating on the basis of market failure only. The government accepted that and has sought to create a new mandate for EFIC through this legislation whereby EFIC will be operating on the basis of market failure. 'Market failureâ is a narrower concept than 'market gap'. 'Market gap' basically means that EFIC can provide finance whenever the private sector does not. So if the private sector is not providing the finance required by an exporter then that satisfies the market gap mandate. We think the market failure test is more rigorous. The legislation does not actually set out the detail of the market failure test and that is what we will be putting in a legislative instrument. The response that the government released in January this year does set out a number of criteria that would be part of a market failure test. They are really around inadequate information. Market failure is where the market is failing to deliver the finance that a viable exporter requires, generally because of inadequate informationâit might be inadequate information about the exporter themselves or it might be inadequate information about the buyer of the export in the case of finance to a buyer or it might be inadequate information about the export or investment market that the export is going to and that the investment is being made in. It is a tighter concept. It is really around inadequate information causing market failures.
CHAIR: On the issue of allowing EFIC to support suppliers in domestic supply chains for major export projects, which is what Mr Gerovich was explaining in his initial statement, can you go to the rationale for the changes in item 9 of the bill allowing EFIC to provide a guarantee to a foreign subsidiary of an SME carrying on business in Australia and then the caveat set out in item 10 of the bill in terms of the expansion of powers.
Ms McGrath : That item basically provides EFIC with a limited expansion of their powers, but an expansion of their powers nevertheless, and it only applies to EFIC providing guarantees. Currently EFIC can only provide guarantees to entities that are doing business in Australia, so if they have a global supply chain that goes beyond Australia they can only deal with the entity in Australia.
CHAIR: Can you give us a practical example of why this change is necessary?
Ms McGrath : It just provides greater flexibility. For EFIC to have to always go through the Australian parent in Australia is not always the most optimal way of financing a particular transaction. If they have a distribution chain that goes through another country and they want to set up warehousing, or whatever it might be, in another countryâperhaps EFIC can help hereâit is more optimal for EFIC to deal directly with the subsidiary. But you will note in the bill there are a number of caveats around that. The caveats are that it can only provide the guarantee to a subsidiary of an Australian business, so it has to still have that link to a business in Australia, and that benefits need to flow back from the guarantee to Australia. It might be exports and export dollars flowing back or it could be other forms of revenue if it is an investment in another country.
Mr Crawford : The issue that often arises when small to medium enterprises are looking to tap into the regional or global value chainsâfor example, by putting in a warehouse in Asia somewhereâis that Australian banks are not willing to take security on that asset when they are providing the finance. The ability for the Australian export credit agency to provide the guarantee and take that risk on the foreign subsidiary or warehouse, or whatever it is, can offer opportunities for some small to medium enterprises, subject to a range of constraints, to access global value chains and improve their distribution networks or expand their export markets.
CHAIR: Do you have applications in front of you at the moment that you would be considering under these new arrangements?
Mr Crawford : Not that I am aware.
Senator EGGLESTON: Can I ask you about your responses to the Productivity Commission's draft report. These are some points: the commission finds that EFIC is likely to be competing with the private sector; it finds that EFIC's return on equity is less than the Australian banks', and suggests the cause is that EFIC is underpricing risk; it recommends that EFIC restrict whatever support it provides to SMEs with a turnover of less than $25 million, preferably with a limited credit history and no export experience, and recommends that EFIC support be restricted to a guaranteed product. Do you want to respond to those points for the record?
Ms McGrath : Yes. You will see that there are a number of those, or at least elements of what the Productivity Commission recommended, that the government has taken up in its final response. Some of those require legislative change. In terms of SMEs, we actually came up with a different, slightly higher threshold for what an SME is. But we agree that EFIC's focus really should be on SMEs and that it should only be providing support to any of its clients on the basis of market failure, so where it is providing support to a non-SME it has to meet that overarching market failure test. I am sorry, what were some of the other things you mentioned?
Senator EGGLESTON: That EFIC is likely to be competing with the private sector.
Ms McGrath : Another element, and quite an important element, of the government's response is that competitive neutrality principles will now apply to EFIC. That is something that required change to the legislation. EFIC will be required to make tax equivalent payments and debt neutrality charges to remove any competitive advantage that it might have over the private sector.
Senator EGGLESTON: Are you happy with those changes? Do they enhance your effectiveness?
Ms McGrath : Happy with theâ
Senator EGGLESTON: EFIC. Is EFIC happy?
Mr Crawford : Are we happy with the changes? I think it is not for EFIC to comment on government policy.
Senator EGGLESTON: We are asking for our information within this committee whether these changes are going to be easy for you to work with or more difficult?
Mr Crawford : EFIC will work to ensure the changes are implemented.
Senator RHIANNON: On Senator Eggleston's point about SMEs, I notice that in his opening remarks Sam Gerovich mentioned that you will be focusing more resources on SMEs; Ms McGrath has said something similar. From the Productivity Commission we are reading that there needs to be substantial reorientation and we have waiting for us a bill that has been before the House since February. Then in May we read in the paperâthat was the first I knew of the details about itâabout this huge project you are looking to fund, this $5 billion Rio Tinto mine plan for Mongolia. It seems that so often we hear statements made about commitment to SMEs and international standards around the environment et cetera, but what actually happens is that the projects that roll out so often do not fit with that. Could you comment on that, please?
Mr Gerovich : Can I say that additionally that my understanding is that EFIC is considering support for that project on its commercial account on the basis of the current market gap mandate. While the matter is for the EFIC board to determine, I think DFAT would note how important this project is for a country like Mongolia, given the very strong focus that it has on its mining sector and that this would be the largest single investment in the country's history. The Mongolian government itself has a 34 per cent share in the project. It is also worth noting, I think, that EFIC's support assumes significant Australian participation in the development of the project, including by a large number of Australian SMEs. Of course, projects like these in countries like Mongolia are always a challenge, but EFICs involvement inevitably raises the bar in terms of environmental and social considerations.
Mr Crawford : To be honest, I could not have said it better myself.
Senator RHIANNON: Could you also answer it in the context of SMEs? That is what I was also addressing in that question. We have had two witnesses say there is a focus on SMEs. How do you lock that in if it is not in legislation? Because so much of the support ends up going to big projects. You are saying there is this commitment to SMEs: how do we ensure that happens?
Ms McGrath : That is in the legislation. Until the legislation passes EFIC continues to operate under its current mandate. Once this legislation passesâassuming this legislation is passedâEFIC will be required to focus on SMEs. More importantly, given that it is an overarching test, we expect that the market failure test will in itself bring more focus on SMEs, because, as the Productivity Commission said, market failures are most likely to occur for SMEs in accessing finance and they are less likely to occur for non-SMEs, although even non-SMEs when they are operating in very difficult markets can also face market failures in accessing finance and other products.
Senator RHIANNON: Coming back to the proposed legislation, it is not obligatory. From my recollection there is a fairly wide focus on SMEs. I understand from what has just been said that the Rio Tinto project is yet to be decided.
Mr Crawford : The EFIC board has approved a direct loan of $100 million for project finance for the Oyu Tolgoi project, but we have not yet provided an offer. The project sponsors are aware of our approval, but there is no commitment until documents are signed.
Senator RHIANNON: Thank you for sharing that. Would that decision have been made if the bill had already been passed?
Mr Crawford : How I can answer that is that it is not correct to say EFIC is currently not focused on SMEs. EFIC is very focused on SMEs and has been for a while. For example, we have a dedicated SME team within EFIC, which includes offices in Melbourne and Perth. In 2011-12, 90 per cent of the total number of facilities EFIC signed were with SMEs.
Senator RHIANNON: In money terms?
Mr Crawford : In money terms, that accounts for almost $200 million.
Senator RHIANNON: In percentage terms?
Mr Crawford : That is roughly 20 per cent of that year.
Senator RHIANNON: Where does the 80 per cent go?
Mr Crawford : To larger transactions. I must emphasise the support EFIC provides for those large transactions is underpinned by Australian content in this transactions. A lot of that Australian content comes from Australian SMEsâAustralian mining service providers and suchlike.
Senator RHIANNON: What year was that?
Mr Crawford : It was 2011-12.
Senator RHIANNON: Now we are getting legislation with a focus, are you looking to change that percentage, the 20:80 split? If we are going to focus on it, does that mean a greater percentage will go to SMEs? Do you have some targets you are aiming to meet to achieve that focus?
Mr Crawford : I emphasise again: we are focused on SMEs and we are doing a lot for SMEs. A large marketing campaign on the resource sector supply chain for SMEs is currently ongoing. With the new mandate, as we said before, EFIC will be given a limited expansion of its guarantee powers to better support Australian SMEs looking to access global value supply chains.
Senator RHIANNON: That is good to hear, but at the end of the day so much of this comes down to monetary terms. When I hear the word 'focus' it sounds like you are giving it a lot of attention. When I hear '20 per cent' it sounds like you have not got there yet. Is that a fair definition? If it is, how do you plan to achieve your focus?
Mr Parsons : All statistics can be misleading. They are just numbers that can be interpreted in different ways. The 80 per cent went to a larger project, but that larger project is being supported by multiple small to medium Australian companies. In support of a larger project, because we have the Australian content requirements for large projects, it comes back down to small to medium projects. In which bucket do you want to put the SME factor?
Senator RHIANNON: So I can understand that better, let's go to the Rio Tinto project, a $5 billion big mine. You said you were putting $100 million into that possibly?
Mr Crawford : Possibly, yes.
Senator RHIANNON: Where do the SMEs come into the $100 million that goes to Rio Tinto? How are they benefitting from EFIC's work?
Mr Parsons : The $100 million is contingent on Australian input. That Australian input is largely made up of small contracts. I do not know the number of small explorers.
Senator RHIANNON: If you can give that as an example, because I think that might help answer the question. Rio Tinto is a huge, huge companyâI think it is the fifth-largest mining multinationalâand they see EFIC's money and support is going to that. You say your focus is on SMEs; I am happy to accept that. But because you are then saying that the SMEs benefit from these big transactions, my question is: can you give us a specific example?
Mr Crawford : I can give you one example: the PNG LNG project, which EFIC was involved in with other ECAs. Australian contractors have won or are the preferred tenderers for over US$1 billion worth of work on that project. That figure is slightly out of date, but that is what we announced when we announced the transaction. There were some press releases around the transaction.
Mr Gerovich : I might add, based on my own Mongolia experienceâI was ambassador there until recentlyâthat there are a very large number of Australian mining services companies operating in Mongolia and it would be expected that quite a number of them would get the smaller contracts associated with Oyu Tolgoi. Companies like Aqua-Terra, which is in water and waste management, some of the mines construction companies, mining equipment providersâthere is a very large number of Australian companies that are based there now that are looking to take part in the bigger mining projects that take place in Mongolia.
Senator RHIANNON: But isn't that incidental to EFIC? Wouldn't that happen at any rate? That is the bit I am trying to understand. Is your support to the companies that you have just mentioned part of what EFIC is doing helping those companies get in the door?
Mr Crawford : EFIC is providing support for the project to enable it to get off the ground, along with other ECAs, and in the case of Oyu Tolgoi the World Bank. If that support was not there the project potentially would not go ahead and that potentially would mean that those contracts would not be clinched by Australian companies.
Mr Parsons : Just to add, because we have this requirement for Australian content, that obliges those companies to seek out Australian content to meet the requirements. So without EFIC's support those contracts might not necessarily come back to Australian companies. But because EFIC has provided that funding it obliges the large companies to seek that Australian come 10th.
Senator EGGLESTON: Do you monitor that?
Mr Gerovich : Yes, we do.
CHAIR: We are over time for this hearing, but I want to come back to the submissions. Several of the submissions raised the issue of concerns about a need for statutory recognition of EFIC's international and human rights obligations. The Productivity Commission recommended that EFIC's compliance with its:
â¦ international obligations, including human rights obligations â¦ should be included in its internal audit program with outcomes publicly reported, including in EFICâs annual report.
What is the current practice?
Mr Lawless : My understanding is that the EFIC Act already requires EFIC to have regard to more of Australia's international obligationsâI mean discharging its functionsâit is section 8 of the Act. The second thing is that the minister's statement of expectations also reminds it that it has to operate in compliance with our international obligations. So it is a general, blanket obligation to operate. It does not specify, but it is all our international obligations.
CHAIR: In your annual report do you make the effort of reporting and responding to those international obligations in any way?
Ms McGrath : That is one way of putting it.
Mr Parsons : You talked about an audit. The audit we took last year of compliance with our policy and procedure for environmental and social reviewâI do not distinguish environmental, social and human rights; they are intertwined. By undertaking an environmental and social review we examine human rights issues at a project level from an economic, cultural and social perspective. We had an independent audit of that and it is publicly available.
CHAIR: In the annual report, which was the other suggestion of the Productivity Commissionâin the next annual report is it intended that EFIC may be a bit more expansive about its awareness of Australia's international obligations?
Mr Parsons : We have been reporting in our annual report for many years now a corporate responsibility section which goes through our response to our environmental and social review of transactions, including human rights, and how EFIC has incorporated consideration of those aspects into its business.
CHAIR: The time for the hearing has well and truly expired. Thank you, very much, for your evidence today. You have taken some questions on notice. The secretariat may seek some further clarification. Mr Gerovich, I want you to understand that because this bill is still before the Senate we are not able to ask questions in estimates about this bill, but there will definitely be questions more generally about the role and operation of EFIC.
Mr Gerovich : Right.
Mr Parsons : Could I clarify the date for questions on notice?
CHAIR: Yes, the 31st. That will enable us to have our report finalised for tabling in parliament.
Committee adjourned at 11:00