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Export Finance and Insurance Corporation Amendment (Support for Commonwealth Entities) Bill 2016



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ISSN 1328-8091

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BILLS DIGEST NO. 89, 2016-17 6 APRIL 2017

Export Finance and Insurance Corporation Amendment (Support for Commonwealth Entities) Bill 2016 Paul Davidson Economics Section

Contents

The Bills Digest at a glance ................................................... 3

Purpose of the Bill ............................................................... 4

Structure of the Bill ............................................................. 4

Background ......................................................................... 4

EFIC’s insurance and financial services and products ............. 4

Concept of the ‘market gap’ .................................................... 4

EFIC’s lending constraint ......................................................... 5

Committee consideration .................................................... 5

Selection of Bills Committee.................................................... 5

Senate Standing Committee for the Scrutiny of Bills .............. 5

Foreign Affairs, Defence and Trade Legislation Committee ............................................................................... 5

Submissions ........................................................................... 6

Committee’s Report .............................................................. 7

Majority government report ................................................... 7

Labor Senators dissenting report ............................................ 7

Australian Greens Senators dissenting report ......................... 7

Nick Xenophon Team dissenting report .................................. 8

Financial implications .......................................................... 8

Statement of Compatibility with Human Rights .................... 9

Parliamentary Joint Committee on Human Rights .................. 9

Key issues and provisions..................................................... 9

Ability of EFIC to provide services to government bodies ....... 9

Rationale for the amendment ............................................. 10

Key issues and consequences of the amendment .............. 10

Date introduced: 9 November 2016

House: House of Representatives

Portfolio: Foreign Affairs and Trade

Commencement: The day after the Act receives Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at

April 2017.

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Current arrangements for accessing specialist financial capabilities .......................................................... 10

The specialist financial capabilities that EFIC possesses ... 10

Are EFIC’s specialist financial capabilities fit for other Commonwealth bodies’ purposes? ................................... 11

Alternative providers with specialist financial capabilities ........................................................................ 11

The opportunity cost of EFIC providing its specialist financial capabilities to Commonwealth bodies ............... 12

Amendments to the current definition of ‘eligible export transactions’ .......................................................................... 12

Rationale for the amendment ............................................. 12

Key issues and consequences of the amendment .............. 13

Broader access to EFIC’s insurance and financial services and products for currently eligible transactions ....................................................................... 13

Increased eligibility to access EFIC’s insurance and financial services and products ......................................... 13

Competition consequences ............................................... 14

Employment consequences .............................................. 14

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The Bills Digest at a glance The Export Finance and Insurance Corporation Amendment (Support for Commonwealth Entities) Bill 2016 (Cth) has two main purposes:

• to permit the Export Finance and Insurance Corporation (EFIC) to provide specialist financial advice to Commonwealth government bodies, subject to ministerial approval

• to substantially broaden the definition of ‘eligible export transactions’ such that a wider range of businesses will be able to receive a range of insurance and financial services and products from EFIC, as the ‘Australian connection’ required to access EFIC’s assistance will be relaxed under the amendments proposed by the Bill.

The amendments raise a number of issues relating to the potential future operation of EFIC. In relation to providing specialist financial advice to Commonwealth bodies, there is no indication of the likely frequency that Commonwealth bodies may need such advice. As the amendments cover a vast proportion of government bodies, there is the potential that EFIC may have to devote substantial resources in providing specialist financial advice. There has been no indication at this stage that EFIC will receive additional funding in order to provide this extension in its services. In that case it would need to be funded from within EFIC’s existing resources. The practical effect may be some displacement of resources and reduction in focus on the provision of export credit to eligible export businesses. Additional issues with the proposed amendments include whether EFIC is the most appropriate agency to provide such specialist financial advice, and compliance with competitive neutrality when specialist financial advice services are provided.

Additionally, the amendment is important as it has the potential to assist a larger range of export-focused businesses, and in particular, businesses that do not have a strong Australian connection. A further issue is that although the purported rationale for the amendment is to assist small and medium enterprises, there is nothing in the Bill that constrains EFIC from providing insurance and financial services and products to a business of any size.

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Purpose of the Bill The purpose of the Export Finance and Insurance Corporation Amendment (Support for Commonwealth Entities) Bill 2016 (Cth) (the Bill) is to amend the Export Finance and Insurance Corporation Act 1991 (Cth) (the Act). The Bill has two main purposes:

• to permit the Export Finance and Insurance Corporation (EFIC) to assist government bodies by providing services in relation to financial arrangements and agreements

• to amend the definition of ‘eligible export transactions’.

Structure of the Bill The Bill contains one Schedule. Items 1 and 3-8 relate to permitting EFIC to provide services in relation to financial arrangements and agreements to government bodies, and for consequential purposes. Item 2 amends the current definition of eligible export transactions.

Background Background information is provided below on three key aspects of EFIC that are relevant to the proposed amendments:

• EFIC’s insurance and financial services and products

• concept of a ‘market gap’

• EFIC’s funding constraint.

EFIC’s insurance and financial services and products EFIC can provide a range of insurance and financial services and products under Part 4 of the Act. Specifically, EFIC can provide:

• export payments insurance contracts

• guarantees and subsidies in relation to loans to Australian suppliers

• guarantees and subsidies in relation to loans to overseas buyers

• guarantees to co-lenders in relation to export transactions

• tender guarantees and performance guarantees

• reinsurance of guarantee, insurance, et cetera, relating to export business

• loans to finance eligible export transactions.

Whether a particular service or product can be provided depends on whether the transaction is an ‘eligible export transaction’ or a transaction that involves the ‘Australian export trade’. By the definitions in section 3 of the Act, all eligible export transactions are a subset of Australian export trade. Currently, the bottom four services in the above list are eligible for EFIC funding based on the transaction in question being an eligible export transaction.

Concept of the ‘market gap’ Though not legislated, it is expected that EFIC will operate on a commercial basis and:

EFIC must not provide financial services or products on its Commercial Account (CA) unless EFIC is satisfied that private sector providers are unable or unwilling to support financially viable business activities. EFIC should ensure its activities fill the ‘market gap’ where private sector finance is not forthcoming. 1

The Commercial Account covers EFIC’s insurance and financial services and products it can offer under Part 4 of the Act. EFIC has agreed that it will only provide insurance and financial services and products where there is a

1. A Robb (Minister for Trade and Investment), Statement of expectations of Export Finance and Insurance Corporation (EFIC), letter to A Mohl (Chairperson, EFIC), 13 November 2014, p. 1.

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market gap.2 From an economic perspective, EFIC’s role should ideally not be based on a market gap, but rather on market failure. The importance of this distinction was made in a Productivity Commission review of EFIC in 2012.3 The market gap concept is defined above. A market failure is one where there is a failure of economic agents to produce socially optimal outcomes. Government intervention may be justified to ‘correct’ market failures, but only where the intervention generates a net benefit to the economy (which includes the cost of the intervention).

The Productivity Commission noted that in instances where EFIC operates on a market gap basis it unduly distorts resource allocations in the economy, and the larger the operations, the larger are the (multiplied) market distortions.4 In the context of the Bill, the market gap is effectively increased as EFIC can provide a wider range of insurance and financial services and products to existing eligible businesses, as well as providing insurance and financial services and products to newly eligible businesses. As such, there are increased risks that EFIC will operate in an enlarged market gap and create more distortions throughout the economy.

EFIC’s lending constraint EFIC’s finances for certain eligible export transactions are limited by the operation of sections 68 and 69 of the Act, as well as by the Export Finance and Insurance Corporation Regulations 1991 (Cth) (the Regulations). Section 68 provides for a contingent liability ceiling for contracts entered into and guarantees given under Part 4, and also provides for a separate contingent liability ceiling for contracts of insurance entered into. Currently, under the Regulations, the total contingent liability for contracts entered into and guarantees given is $4.9 billion,5 and the total contingent liability for contracts of insurance is $1.15 billion.6 Section 69 of the Act provides for a limit to be imposed on the total amount of money lent by EFIC under Part 4 that is not repaid or written off. The Regulations currently prescribe $1.8 billion as the limit of total amount of loans under Part 4 of the Act.7

Committee consideration Selection of Bills Committee The Selection of Bills Committee referred the Bill to the Senate Standing Committees on Foreign Affairs, Defence and Trade Legislation Committee for inquiry.8

Senate Standing Committee for the Scrutiny of Bills The Senate Standing Committee for the Scrutiny of Bills had no comment on the Bill.9

Foreign Affairs, Defence and Trade Legislation Committee The Bill was referred to the Foreign Affairs, Defence and Trade Committee, chaired by Senator Back, on 24 November 2016 for report by 7 February 2017.10 The principal issues for consideration by the Committee were:

• to investigate whether there are unintended negative consequences of allowing EFIC to provide loans to projects which are not located in Australia and

• to establish whether accompanying checks and balances should be legislated.11

2. J Millar (Chairperson, EFIC), Statement of intent: Export Finance and Insurance Corporation, letter to A Robb (Minister for Trade and Investment), Sydney, 26 February 2016, p. 1. 3. Productivity Commission (PC), Australia’s export credit arrangements, Inquiry report, 58, PC, Canberra, 31 May 2012. 4. Ibid., p. 201.

5. Export Finance and Insurance Corporation Regulations 1991 (Cth), subregulation 5(1). 6. Ibid., subregulation 5(2). 7. Ibid., regulation 6. 8. Senate Selection of Bills Committee, Report, 9, 2016, The Senate, 24 November 2016. 9. Senate Standing Committee for the Scrutiny of Bills, Alert digest, 9, 2016, The Senate, Canberra, 23 November 2016, p. 3. 10. Senate Foreign Affairs, Defence and Trade Legislation Committee, Export Finance and Insurance Corporation Amendment (Support for

Commonwealth Entities) Bill 2016 [provisions], The Senate, Canberra, February 2017. 11. Senate Selection of Bills Committee, Report, 9, 2016, op. cit., p. 4.

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Submissions A submission by the Department of Foreign Affairs and Trade (DFAT) stated that in relation to the proposed Commonwealth entities function:

This change would offer opportunities to lower government service delivery costs by leveraging existing resources within the Commonwealth, thereby avoiding the need to establish new institutions for every government financing programme. 12

In relation to changing the definition of ‘eligible export transactions’, DFAT submitted:

… Efic would be able to more efficiently and effectively support a wider range of [small to medium sized enterprises] SMEs, including those involved in—or seeking to be involved in—global supply chains, SMEs investing overseas to expand their sales, or SMEs looking to provide services directly to retail customers. Although Efic already has the ability to provide guarantees to these innovative SMEs, the Bill will allow Efic to better meet their needs through the provision of direct loans.

13

The Australian Grape and Wine Authority expressed strong support for the Bill and noted that currently EFIC cannot provide assistance to companies involved in promoting wine unless they have an export contract, and similarly EFIC cannot currently provide support to businesses who seek to promote export sales through investing in wine tourism in Australia.14 The Australian Grape and Wine Authority considered that the proposed amendments ‘would allow EFIC to provide assistance to companies involved in wine tourism which would ultimately help to drive wine exports’.15

The Australian Fair Trade & Investment Network Ltd did not object to the introduction of the Commonwealth entities function, but did express concern at the changed definition of ‘eligible export transactions’, specifically:

Such a change would mean that export earnings flowing to Australia could be the sole criteria for Efic support, without the current requirements for production of goods or services in Australia and other Australian inputs.

We believe this change is unacceptable. The current Australian content requirement in the legislation as interpreted in the Efic guidelines is modest and should be retained. Its removal would provide an incentive for off shoring and place firms providing employment in Australia at a disadvantage. 16

With regards to the proposed amendment to the definition of ‘eligible export transactions’, the ACTU stated:

… we cannot agree with an amendment whose purpose is to remove Efic’s requirement to lend to companies that make items that are “produced or manufactured wholly or substantially in Australia” and allow loans instead to “any transaction (including the rendering of a service) involving a benefit flowing directly or indirectly from overseas to a person carrying on business or other activities in Australia.”

17

12. Department of Foreign Affairs and Trade, Submission to Senate Foreign Affairs, Defence and Trade Committee, Inquiry into the provisions of the Export Finance and Insurance Corporation Amendment (Support for Commonwealth Entities) Bill 2016, submission no. 1, 22 December 2016, p. 2.

13. Ibid., p. 3. 14. Australian Grape and Wine Authority, Submission to Senate Foreign Affairs, Defence and Trade Committee, Inquiry into the provisions of the Export Finance and Insurance Corporation Amendment (Support for Commonwealth Entities) Bill 2016, submission no. 2, 10 January 2017, p. 2.

15. Ibid.

16. Australian Fair Trade and Investment Network, Submission to Senate Foreign Affairs, Defence and Trade Committee, Inquiry into the provisions of the Export Finance and Insurance Corporation Amendment (Support for Commonwealth Entities) Bill 2016, submission no. 7, January 2017, p. 4.

17. Australian Council of Trade Unions, Submission to Senate Foreign Affairs, Defence and Trade Committee, Inquiry into the provisions of the Export Finance and Insurance Corporation Amendment (Support for Commonwealth Entities) Bill 2016, submission no. 11, 17 January 2017, p. 1.

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Committee’s Report The Foreign Affairs, Defence and Trade Committee reported on 7 February 2017.18 Senators from the Labor Party, the Australian Greens and the Nick Xenophon Team issued dissenting reports.

Majority government report The majority Government members concluded that the Bill should be passed.19

On particular elements of the Bill they made the following comments:

The Committee considered ‘that EFIC has adequate arrangements in place to ensure that it upholds operational, social and environmental obligations in its transactions.’ As such, additional checks and balances need not be legislated.20

With regard to concerns raised by submitters that EFIC may be diverted from its core role of facilitating and encouraging Australian export trade, the Committee was ‘satisfied that EFIC is aware of its primary purpose and will take steps to minimise the impact of work it performs for the Commonwealth on its capacity to assist exporters.’21

The Committee endorsed:

… the view of the Export Council of Australia that it should be mandatory for Commonwealth entities to cover Efic's costs in relation to assistance and support, consistent with the obligations on industry and business which pay an application fee to cover Efic's costs in assessing applications for loans or guarantees. 22

The Committee encouraged the Minister to give consideration to the inclusion of provisions in the Bill to give effect to this proposal.

The Committee acknowledged concerns regarding EFIC's due diligence on previous overseas projects, in particular where human rights violations have been reported. However, the Committee was satisfied that ‘EFIC has a sound framework in place to ensure it upholds best-practice environmental and social standards in its transactions …’23

The Committee supported the amendment to the local content requirement.24

Labor Senators dissenting report Labor Senators were concerned about the amendment to the local content requirements. They endorsed the concerns raised in submissions from the Australian Fair Trade and Investment Network, the Australia Institute, and the ACTU that the changes could mean that EFIC loans and guarantees go to projects that do not have positive effects on employment in Australia. Labor Senators recommended:

Any company wishing to access a loan or guarantee from Efic for an overseas project must demonstrate that the loan or guarantee will result in a growth of jobs in Australia. Such a test should be legislated in the Act. 25

Australian Greens Senators dissenting report The Australian Greens do not support the Bill in its current form.

Their concerns include that the Bill does not address EFIC’s shortcomings, which were brought to light in the inquiry. These include:

18. Senate Foreign Affairs, Defence and Trade Legislation Committee, Export Finance and Insurance Corporation Amendment (Support for Commonwealth Entities) Bill 2016 [provisions], The Senate, Canberra, 7 February 2017. 19. Ibid., p. 17. 20. Ibid., paragraph 2.58, p. 16. 21. Ibid., paragraph 2.59, p. 16. 22. Ibid., paragraph 2.60, p. 16. 23. Ibid., paragraph 2.62, p. 16. 24. Ibid., paragraph 2.63, p. 16. 25. Ibid., paragraph 1.10, p. 20.

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• EFIC’s inability to assess the impact of its investments, including in relation to human rights violations that have been connected to projects assisted by EFIC26

• EFIC’s poor transparency and accountability practices27

• EFIC’s funding of fossil fuel projects, which the Senators consider to be an unwarranted subsidy to that industry.28

The Australian Greens are also concerned that the Bill will lead to further offshoring of Australian manufacturing.29

Nick Xenophon Team dissenting report Senator Xenophon does not support the Bill in its current form. In relation to the first amendment that allows EFIC’s financial capabilities to be applied for the benefit of other Commonwealth financing programs, even where there is no connection with exports, Senator Xenophon recommends:

Efic should and needs to remain tightly focussed on facilitating export trade, and the first amendment should be opposed. 30

Senator Xenophon also considers:

Removing the local content requirements attached to Efic support is not in the national interest and the second amendment should be opposed. 31

Financial implications The Government considers that the Bill will have no direct financial impact.32 However, it should be noted that the amendments have the potential to affect the Commonwealth’s fiscal position.

Firstly, the amendments associated with EFIC’s Commonwealth entities function permit EFIC to levy fees in relation to that function. EFIC is exempt from taxation, but is required to make tax-equivalent payments to the Commonwealth in respect of its activities,33 and as such, levying fees may be subject to a tax-equivalent payment. However, whenever EFIC engages in its Commonwealth entities function, it is by definition not providing insurance and financial services and products to eligible export businesses (for which it also charges fees). There is an issue then as to whether the fees levied under EFIC’s Commonwealth entities function are the same as those when it provides insurance and financial services and products. Therefore, it is unclear whether the net effect would be to change the Commonwealth’s fiscal position.

Secondly, the amended definition of ‘eligible export transactions’ has the potential to change EFIC’s funding mix and thereby alter the level of fees received for each insurance and financial service and product it provides. In turn this may alter the profitability of EFIC and as such alter the amount of tax-equivalent payment it must pay to the Commonwealth. The amended definition also expands EFIC’s role to assist a broader range of export-focused businesses. To the extent that those newly eligible businesses receive insurance and financial services and products from EFIC, EFIC’s profitability may increase and as a result, EFIC may be liable to make a larger tax-equivalent payment, which in turn affects the level of Commonwealth finances.

26. Australian Greens, Dissenting report, Senate Foreign Affairs, Defence and Trade Legislation Committee, Export Finance and Insurance Corporation Amendment (Support for Commonwealth Entities) Bill 2016 [provisions], The Senate, Canberra, paragraph 1.3, p. 21. 27. Ibid., paragraph 1.4, p. 21. 28. Ibid., paragraphs 1.5-1.8, pp. 21-22. 29. Ibid., paragraph 1.9, p. 22. 30. Nick Xenophon Team, Dissenting report, Senate Foreign Affairs, Defence and Trade Legislation Committee, Export Finance and Insurance

Corporation Amendment (Support for Commonwealth Entities) Bill 2016 [provisions], The Senate, Canberra, paragraph 1.8, p. 24. 31. Ibid., paragraph 1.18, p. 25. 32. Explanatory Memorandum, Export Finance and Insurance Corporation (Support for Commonwealth Entities) Bill 2016, p. 3. 33. Export Finance and Insurance Corporation Act 1991 (Cth), sections 63 and 63A.

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Statement of Compatibility with Human Rights 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.34

Parliamentary Joint Committee on Human Rights The Parliamentary Joint Committee on Human Rights considered that the Bill did not raise human rights concerns.35

Key issues and provisions The Bill contains one Schedule. Items 1 and 3-8 relate to permitting EFIC to provide services in relation to financial arrangements and agreements to government bodies, and for consequential purposes. Item 2 amends the current definition of ‘eligible export transactions’.

Ability of EFIC to provide services to government bodies Item 1 proposes to insert three new definitions into subsection 3(1) of the Act.

A definition of Commonwealth company is inserted which is consistent with the definition of Commonwealth company in the Public Governance, Performance and Accountability Act 2013 (Cth) (PGPA Act). The PGPA Act defines a Commonwealth company as a Corporations Act company that the Commonwealth controls. However, it does not include a company that is a subsidiary of a Commonwealth company, a corporate Commonwealth entity, or the Future Fund Board of Guardians.36

A definition of Commonwealth entity is inserted which is consistent with the definition of Commonwealth entity in the PGPA Act. The PGPA Act defines a Commonwealth entity as a Department of State, a Parliamentary Department, a listed entity, a body corporate that is established by a law of the Commonwealth, or a body corporate that is established under a law of the Commonwealth (other than a Commonwealth company) and is prescribed by an Act or the rules to be a Commonwealth entity. However, the High Court and the Future Fund Board of Guardians are not Commonwealth entities.37

The definitions are to be included in the Act so that EFIC can provide assistance to various Commonwealth bodies, where that assistance relates to financial arrangements and agreements.

Item 1 also proposes to introduce a definition of EFIC’s Commonwealth entities function. It is defined to mean the function as set out in proposed paragraph 7(1)(dc). Item 3 proposes to insert paragraph 7(1)(dc) which, as directed by the Minister, would permit EFIC to assist Commonwealth entities and Commonwealth companies ‘in performing their functions or achieving their purposes by providing services in relation to financial arrangements and agreements’. Item 4 limits the operation of item 3 by explicitly stating that the services that EFIC may provide do not extend to the provision of loans, insurance or guarantees.

In effect, items 1 and 3-4 permit EFIC to provide a range of advisory and oversight services in relation to financial arrangements and agreements that other Commonwealth bodies may utilise from time to time. The amendments do not directly give EFIC (or Commonwealth bodies) the power to access EFIC’s assets so as to be able to provide loans, insurance or guarantees directly to Commonwealth bodies.

Item 5 proposes to amend EFIC’s primary duties under subsection 8(3) of the Act. Currently subsection 8(3) provides for a limited application of EFIC’s primary duties in relation to EFIC’s Northern Australia economic infrastructure function.38 In relation to that function, EFIC’s only primary duty is to comply with any Ministerial directions given under section 9 of the Act. Item 5 proposes to also include EFIC’s Commonwealth entities function under subsection 8(3). Item 5 clarifies the application of current subsection 8(3) by providing that subsection 8(1) and subparagraphs 8(2)(b)(i) and (iii) do not apply in relation to EFIC’s Northern Australia

34. The Statement of Compatibility with Human Rights can be found at page 7 of the Explanatory Memorandum to the Bill. 35. Parliamentary Joint Committee on Human Rights, Report, 9, 2016, The Senate, Canberra, 22 November 2016, p. 39. 36. Public Governance, Performance and Accountability Act 2013 (Cth), subsection 89(1). 37. Ibid., section 10. 38. ‘Northern Australia economic infrastructure’ has the meaning set out at subsection 3(2) of the Northern Australia Infrastructure Facility Act

2016 (Cth). EFIC’s Northern Australia economic infrastructure functions are to assist the Northern Australia Infrastructure Facility in the performance of its functions (paragraph 7(1)(da) of the Act).

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economic infrastructure functions or to EFIC’s Commonwealth entities function. The effect of item 5 thus ensures that both EFIC’s Northern Australia economic infrastructure functions and EFIC’s Commonwealth entities function need to comply with any Ministerial directions given under section 9,39 as well as to ensure that EFIC provides both of those functions as efficiently and economically as possible.40

Item 6 proposes to amend the ability of the Minister to give Ministerial directions to EFIC. Currently, the Act provides that, except as expressly provided in the Act, EFIC is not subject to the direction of the Minister.41 The Minister may give a written direction to EFIC with respect to the performance of its functions or the exercise of its powers if the Minister is satisfied that it is in the public interest to do so.42 However, paragraph 9(5)(a) clarifies that the Ministerial directions power is not intended to authorise a direction requiring the Minister’s approval for EFIC to enter into a particular contract, or provide a particular guarantee, or a loan. Paragraph 9(5)(b) further provides that the Ministerial directions power is not intended to give power to the Minister to determine that EFIC is or is not to enter into a particular contract, guarantee or loan. Subsection 9(6) provides that subsection 9(5) does not apply in relation to EFIC’s Northern Australia economic infrastructure functions. As such, the Minister may currently give directions to EFIC that cover the scope of subsection 9(5) in relation to EFIC’s Northern Australia economic infrastructure functions.

Item 6 has the effect of adding EFIC’s Commonwealth entities function to subsection 9(6). Therefore, the Minister may give directions to EFIC that require the Minister’s approval for EFIC to enter a particular contract, provide a particular guarantee, or provide a particular loan in relation to EFIC’s Commonwealth entities function. The Minister may also provide a written direction to EFIC which determines that EFIC is or is not to enter into a particular contract, or give a particular guarantee, or make a particular loan in relation to EFIC’s Commonwealth entities function. As explained in relation to item 4, above, EFIC’s Commonwealth entities function does not include the provision of loans, insurance or guarantees.

Item 7 replaces the heading to section 84A and item 8 amends subsection 84A(1) so that EFIC may levy fees for EFIC’s Commonwealth entities function in addition to its existing ability to charge for its Northern Australia economic infrastructure functions.

Rationale for the amendment The Explanatory Memorandum to the Bill provides that items 1 and 3-8 are intended:

… to allow Efic to offer its specialist financial capabilities in the operation and administration of Commonwealth financing programs, where there is no connection to exports. Following Efic’s provision of services to the Northern Australia Infrastructure Facility (“the NAIF”), Commonwealth departments have expressed interest in leveraging Efic’s expertise.

43

Key issues and consequences of the amendment

Current arrangements for accessing specialist financial capabilities It is not possible to ascertain either the extent of Commonwealth financing programs or what various Commonwealth bodies currently do when specialist financial capabilities are required. However, it is important to gather information on both of these factors as they help to establish whether there is in fact an issue with Commonwealth bodies’ sourcing of specialist financial capabilities, as well as the magnitude of that problem. Moreover, the amendment seems to presuppose one of two things: either currently Commonwealth bodies are entering into financing programs without specialist financial capabilities, or specialist financial advice is being sought from elsewhere, namely the private sector.

The specialist financial capabilities that EFIC possesses There is no information provided in the Explanatory Memorandum as to what specialist financial capabilities EFIC possesses that other Commonwealth bodies have an apparent deficit of. This issue is relevant in considering

39. Export Finance and Insurance Corporation Act 1991 , paragraph 8(2)(a). 40. Ibid., subparagraph 8(2)(b)(ii). 41. Ibid., subsection 9(1). 42. Ibid., subsection 9(2). 43. Explanatory Memorandum, Export Finance and Insurance Corporation (Support for Commonwealth Entities) Bill 2016, op. cit., p. 2.

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whether there are net benefits to the community in recruiting staff with specialist financial capabilities to other Commonwealth bodies. In part, this relates back to the issue outlined above that there is a dearth of information about the volume of Commonwealth financing programs which require specialist financial capabilities. If providing financing programs is a core role for certain Commonwealth bodies, it is unclear as to whether it might be more efficient to hire additional expert resources permanently to undertake those roles. If Commonwealth bodies are involved in financing programs infrequently then an alternative option may have been to engage a third party to provide those specialist financial capabilities. However, from an economic perspective, this alone may not be a compelling reason for EFIC to specifically provide those services. The services should be provided by the provider that results in the greatest net benefit to the Australian community.

Are EFIC’s specialist financial capabilities fit for other Commonwealth bodies’ purposes? It is unclear whether EFIC’s specialist financial capabilities are appropriate and can be easily transferred to financial programs that take place entirely within Australia. For instance, there may be particular financial issues that only arise in the context of domestic transactions, and it may be the case that EFIC does not have capabilities in those domestic transaction issues.

A related point is that although EFIC possesses specialist financial capabilities, those capabilities relate to export contracts (although it may have acquired some expertise as a result of its Northern Australia Infrastructure Fund role). As noted in the Explanatory Memorandum to the Bill, the objective of the amendments is to allow EFIC to provide its specialist financial capabilities to ‘Commonwealth financing programs, where there is no connection to exports.’44 There is an issue as to whether EFIC is the most appropriate body to provide specialist financial advice in relation to programs with no relation to exports, given that the capabilities that EFIC possesses have been based solely on export trade (with the recent exception of its role in the Northern Australia Infrastructure Fund).

Alternative providers with specialist financial capabilities Given the amendments, presumably an entity (or several different entities) is currently providing its specialist financial capabilities to Commonwealth bodies when they engage in financial programs. The alternative is that Commonwealth bodies are currently engaging in financial programs without specialist financial capabilities which may raise concerns about the operation of these particular government programs if it were the case. The Explanatory Memorandum to the Bill indicates that the public service most likely self-administers financial arrangements.45However that indicates that the public sector is not currently providing all of this service as it would otherwise appear odd that EFIC would also be required to provide the same service to Commonwealth bodies. It is therefore possible that the current provision of specialist financial advice emanates from the private sector. As such, the effect of the amendments would mean that EFIC would be in direct competition with the private sector in providing specialist financial capabilities to Commonwealth bodies which are engaged in financing programs. In turn, with the effect of the amendments permitting EFIC to compete with the private sector, EFIC’s actions would be potentially subject to competitive neutrality. Competitive neutrality ensures that public sector entities do not enjoy net competitive advantages over private sector competitors simply by virtue of public sector ownership.46 EFIC is already subject to competitive neutrality in the conduct of its current activities.47 Item 8 permits EFIC to charge fees for providing EFIC’s Commonwealth entities function, although the only fee constraint is that it must not be such as to amount to taxation. The Explanatory Memorandum to the Bill provides that the ‘amendment should lower government service delivery costs’, implying that the fees charged by EFIC are expected to be lower than the fees currently paid for, or the costs of internally delivering, such services.48 If EFIC’s fees are lower (than fees paid by Commonwealth bodies to private sector financial service providers) as a result of its public ownership then a competitive neutrality issue may arise. As noted in the Competitive Neutrality Policy Statement, ‘it is precisely situations of loss, or not full cost recovery [of user charging], which raise the most serious competitive neutrality concerns’.49

44. Ibid.

45. Explanatory Memorandum, Export Finance and Insurance Corporation (Support for Commonwealth Entities) Bill 2016, op. cit., p. 2. 46. Commonwealth competitive neutrality policy statement, [AGPS, Canberra], June 1996, p. 4. 47. Ibid., p. 27. 48. Explanatory Memorandum, Export Finance and Insurance Corporation (Support for Commonwealth Entities) Bill 2016, op. cit., p. 2. 49. Commonwealth competitive neutrality policy statement, op. cit., p. 7.

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The opportunity cost of EFIC providing its specialist financial capabilities to Commonwealth bodies Like all government agencies, EFIC has finite resources. Ideally EFIC’s resources should be devoted to areas that provide the greatest net benefit to the Australian community. If EFIC were to provide its specialist financial capabilities to Commonwealth bodies administering financing programs, it would be providing less insurance and financial services and products to business transactions which are eligible for EFIC’s assistance. There is nothing in the Explanatory Memorandum to the Bill that suggests that this trade-off has been assessed.

Amendments to the current definition of ‘eligible export transactions’ Item 2 proposes to amend the current definition of ‘eligible export transactions’ under subsection 3(3) of the Act. That subsection currently provides a detailed definition of what amounts to an ‘eligible export transaction’:

(3) For the purposes of this 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 goods produced or manufactured wholly or substantially in Australia; or

(b) the production or manufacture in Australia, wholly or substantially, of goods that are to be exported from Australia; or

(c) the supply, installation, erection, operation, maintenance or repair of 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 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 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.

In summary, the subsection defines an ‘eligible export transaction’ as a transaction, that in whole or in part, involves, is associated with, or incidental or related to goods or services that have some sort of Australian rule of origin or local content (‘Australian connection’). That is with the exception of subparagraph 3(3)(d)(ii) which relates to the provision of specified services for a person carrying on business in a foreign country or for the government, a government agency, or any political subdivision of a foreign country.

Item 2 proposes to maintain the introductory sentence relating to proximity, but repeal the remainder of the definition and replace it with ‘Australian export trade’. Amended subsection 3(3) would provide:

For the purposes of this 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 Australian export trade.

Australian export trade is defined in subsection 3(4), and ‘… includes a reference to any transaction (including the rendering of a service) involving a benefit flowing directly or indirectly from overseas to a person carrying on business or other activities in Australia.’

Item 2 has the potential to change EFIC’s funding mix as it broadens EFIC’s remit to finance eligible export transactions in that transactions will no longer need to have an ‘Australian connection’ in the way required by the current definition. All that would be required is that the transaction conforms to the definition of Australian export trade.

Rationale for the amendment It was stated in the Explanatory Memorandum to the Bill that item 2 will ‘enable the Government to better support access by innovative Australian SMEs [small and medium enterprises] to global markets.’ The Government noted that the changed definition:

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… more appropriately focuses on the actual benefits flowing back to Australia from the export trade, rather than the place of manufacture or purchase. This would allow Efic to more effectively support a wider range of SME exporters, in particular those in global supply chains, or those looking to provide services to overseas customers directly. The amendment is consistent with the value of exports for Australia being increasingly derived from innovation, design or intellectual property, rather than traditional assembly.

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Key issues and consequences of the amendment

Broader access to EFIC’s insurance and financial services and products for currently eligible transactions EFIC can provide certain insurance and financial services and products to eligible export transactions (as defined with the requisite Australian connection). Those services are highlighted in the background section above. Currently, eligible transactions defined as part of the Australian export trade can only be provided with an export payments insurance contract and/or guarantees and subsidies in relation to loans to Australian suppliers. The effect of the amendment is to merge the distinction between Australian export trade and eligible export transactions. Therefore, transactions that already satisfy the definition of Australian export trade will now be eligible to receive a wider range of insurance and financial services and products from EFIC, including loans. For example, the Explanatory Memorandum provides that the ‘… amendment is estimated to save up to $12,000 per application by providing EFIC the ability to provide a direct loan rather than just a guarantee.’51 It is clearly anticipated that the amendment may shift current eligible transactions from being granted guarantees to being directly granted loans.

The shift is noteworthy for two reasons: firstly, it may change the profile of EFIC’s involvement in eligible transactions; and secondly it may change demand on EFIC’s insurance and financial services and products. Where EFIC currently provides a guarantee, such guarantees generally relate to a situation where a third party has provided a loan. While this situation will still occur under the changes proposed by the Bill, it is clear that the effect of the amendment is to potentially remove the need for an intermediary. This may change EFIC’s funding mix.

Currently under the regulations, EFIC can only provide 23 per cent of its total liability in loans, whereas it can currently provide 62 per cent of its total liability in guarantees. The current allocation makes sense as EFIC’s role is to facilitate the private sector to fund persons involved in eligible transactions.52 However, if eligible transactions are now provided with loan funding directly by EFIC rather than having EFIC guarantee loans of third parties, it may mean that other transactions which are unable to access third-party loans (and be guaranteed by EFIC) are unable to seek loan finance directly from EFIC as a result of other transactions taking up the available funding pool.

Increased eligibility to access EFIC’s insurance and financial services and products While item 2 purports to allow EFIC to provide insurance and financial services and products to a wider range of exporters, it does not necessarily flow that those exporters are SMEs, or that they are involved in global supply chains. Indeed, all that is required is that the business is carrying on Australian export trade. There are no legislative requirements for eligibility regarding business size, and there are no legislative requirements that in some way constrain EFIC’s ability to only provide insurance and financial services and products to businesses that are involved in global supply chains. On a plain reading of the Bill, it would appear that EFIC could provide insurance and financial services and products to large businesses, as well as (or separately) to businesses that are not involved in global supply chains.

At least part of the rationale for the amendment as stated in the Explanatory Memorandum to the Bill above is that it reflects the changing nature of Australia’s export trade from traditional assembly towards exports derived from innovation, design or intellectual property. While item 2 certainly removes the current requirement of traditional assembly (the Australian connection), it does not constrain EFIC to potentially provide insurance and financial services and products only to exports derived from innovation, design or intellectual property.

50. Explanatory Memorandum, Export Finance and Insurance Corporation (Support for Commonwealth Entities) Bill 2016, pp. 2-3. 51. Ibid., p. 3. 52. See, for example, Export Finance and Insurance Corporation Act 1991 (Cth), paragraph 7(1)(b), sub-paragraph 8(2)(b)(i), cf paragraph 7(1)(a), subsection 8(1). In providing guarantees rather than loans, EFIC would also appear to be in stronger compliance with its mandate to operate

in the market gap.

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Moreover, the Explanatory Memorandum does not present any evidence to suggest that exports derived from innovation, design or intellectual property are in some way impeded due to a lack of available insurance and financial services and products in the private market, and that therefore EFIC has to ‘step in’ to provide those services and products (that is, fulfilling its market gap role—see background section above). Indeed, an unintended consequence of item 2 could be that EFIC’s insurance and financial services and products role expands into areas where there is no market gap (notwithstanding whether a market gap exists more broadly for EFIC’s current activities).

Competition consequences By increasing access to EFIC’s insurance and financial services and products under Part 4 of the Act, item 2 will likely increase demand for EFIC to provide those services and products to newly eligible persons. The effect of the additional demand can be expected to mean that existing eligible persons would now have to compete for EFIC’s limited funds (see background section) with newly eligible persons. Given that EFIC has limited capacity to provide insurance and financial services and products, at the margin, this would mean that EFIC would be required to decide between currently eligible persons (that is, those with a sufficient Australian connection— generally in traditional assembly) and newly eligible persons (that is, those who meet the less restrictive definition of Australian export trade). It is therefore entirely possible that EFIC may decide to provide services and/or products to persons who have little to no Australian connection (in the way required by the current definition), to the exclusion of persons who do have such a connection. It is worth noting that such an outcome would remain entirely consistent with the functions and primary duties of EFIC.53

Employment consequences The current legislative focus on making EFIC’s ability to provide insurance and financial services and products conditional on Australian content, is that the legislation—at least implicitly—is focused on assisting in the facilitation of Australian employment. When EFIC was first provided statutory direct lending powers in 1974, it was noted:

The Government considers that in the initial stages of its operations, the Corporation should be required to submit concessional loan transactions to the Government for consideration. In the case of transactions with developed countries at concessional interest rates, approval to the provision of the necessary finance will be given only where the Government is satisfied that the financing of a particular transaction would be of material assistance to the establishment or maintenance of an export market, to the development of an Australian industry or to the maintenance of employment in a particular industry or area in Australia.

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Part of the purported rationale for the amendment recognises the shift from traditional assembly towards higher value-adding activities such as research and development and after-sales services. In turn, the rationale for the amendment at least in part is that it will assist in the facilitation of Australian innovation (broadly conceived). However, assisting innovation does not necessarily accord with assistance to Australian employment (to the extent that EFIC’s activities should be governed by such a requirement in any event).

53. Export Finance and Insurance Corporation Act 1991 (Cth), subsection 7-8. 54. J Cairns, ‘Second reading speech: Export Finance and Insurance Corporation Bill 1974’, House of Representatives, Debates, 30 October 1974, p. 3040.

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