The Export Finance and Insurance Corporation Amendment (New Mandate and Other Measures) Bill 2013 (Cth) (a link is here) was introduced into the House of Representatives on 20 March 2013.
The Bill proposes to amend the Export Finance and Insurance Corporation Act to limit the focus of the Export Finance and Insurance Corporation (“EFIC”), Australia’s export credit agency, to assisting small and medium enterprises (“SMEs”) with turnover of less than $100 million or fewer than 100 full-time equivalent employees. The Bill will likely reduce the amount of EFIC’s Commercial Account that is allocated to supporting non-SMEs, and may prevent domestic businesses with contracts to provide goods and services to exporters from seeking EFIC support.
Changes in response to Productivity Commission report
The Bill would implement the Government’s response to the Productivity Commission’s inquiry into Australia’s export credit arrangements (see our alert on the report here). The Productivity Commission recommended that EFIC’s top priority should be to provide financing to SMEs engaged in export activities.
The Commission opposed EFIC providing further support to large commercial clients or for domestic resource-related projects, including suppliers to those projects, on its Commercial Account. We previously noted that this position did not reflect the commercial realities of financing major resources projects (a link is here). We also urged caution before changing EFIC’s current mandate in a submission to the Productivity Commission (a link to our submission is here). Our submission was one of many which questioned the Commission’s reasoning and conclusions in the draft report. However, neither the Commission (in its final report) nor the Government (in this Bill) was persuaded to change their position materially.
New focus on financing SMEs
The explanatory memorandum states that the Bill is intended to “reorient EFIC’s operations on its Commercial Account towards supporting commercially viable export-focused SMEs seeking to access export finance”.
The definition of SME has not been finalised (the Minister will prescribe the details of an eligible SME’s maximum revenue or number of employees in a future legislative instrument). However, the Government has indicated that an SME will be defined as having annual turnover of less than $100 million or fewer than 100 full-time equivalent employees (the Government’s policy proposal is outlined here).
EFIC will be required to focus on providing insurance and other financial services and products to SMEs. “Focus” is not defined, and may give EFIC some discretion to decide how much of its activity will involve SME clients. The explanatory memorandum states that EFIC will not be prohibited from providing finance to non-SMEs. However, it appears that EFIC is expected to allocate more time and resources to supporting SMEs than other businesses.
EFIC will also be empowered to provide export credit to foreign subsidiaries of Australian SMEs, subject to certification that there will be no net reduction in the number of Australian employees during the term of the guarantee.
EFIC support only in the event of “market failure”
EFIC will only be permitted to provide financing to a business from its Commercial Account when a private provider is unlikely to do so, due to a “market failure”. This will be a stricter requirement than EFIC’s current practice of filling “market gaps”.
“Market failure” will be defined in a legislative instrument to be made by the Minister. The explanatory memorandum suggests that a “market failure” may exist when companies are doing business in emerging markets, or cannot fully fund a project with private sector financing. Whether this will result in a significant change in EFIC’s current practices (as the Commission had hoped) remains to be seen.
EFIC guarantees limited to contracts “integral to” export activity
EFIC is currently able to guarantee export contracts, export transactions, and contracts “associated with such a transaction”.
Under the Bill, EFIC will only be able to guarantee contracts that are “integral to” an export contract or export transaction. This change is designed to ensure that EFIC only guarantees the contracts of domestic suppliers that provides goods or services which are sufficiently important to Australian exports.
There is no further clarity about what contracts will be considered “integral”. EFIC may no longer provide support to previously eligible Australian businesses, for example, those that have domestic contracts to provide mining services or other support to the export-focused energy and resources sector. It is to be hoped that this does not impact on EFIC’s ability to act as a link to foreign export credit agencies in major infrastructure projects (as noted in our earlier alert and submission).
What happens next?
The Bill has been referred to the Senate Foreign Affairs, Defence and Trade Legislation Committee for further analysis. The Committee is due to report on the Bill by 14 May 2013.