Australia's export credit arrangements

Inquiry report

Released 26 / 06 / 2012

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Government response

Key points
Contents

The ExportFinance and Insurance Corporation (EFIC) has been established to facilitate andencourage Australian export trade through the provision of financial services.EFIC is expected to conduct its origination business (loans, guarantees,insurance) on a commercial basis. EFIC also manages the national interestaccount.
Virtually all ofAustralia’s exports, by volume and value, take place without EFIC’s assistance.EFIC’s support goes to relatively few firms and often on a repeat basis. Byvalue most of the support is targeted to large corporate clients. These clientsaccount for more than three quarters of the value of EFIC’s signings in 2010–11.
Over the pastfive years, EFIC has earned most of its income through the investment ofsurplus funds and its capital and reserves, not the provision of financialservices. EFIC’s commercial account operations have yielded a low rate ofreturn, with some facilities subsidised by taxpayers.
EFIC’scommercial account objective should be to efficiently address the limitednumber of market failures that impede otherwise commercially viable exporttransactions.
While few, ifany, markets conform to the competitive ideal, there is no convincing evidenceof systemic failures that impede access to finance for large firms or forresource-related projects in Australia.
- EFIC should not continue to provide facilities tolarge corporate clients or for resource related projects in Australia,including suppliers to those projects, on the commercial account.
Financialmarkets may be affected by information-related failures. These are likely to belimited to small and medium-sized enterprises (SMEs) with limited exportexperience or attempting to access emerging export markets.
Accordingly,EFIC’s role should be to demonstrate to the private sector that providingexport finance to such newly exporting SMEs can be commercially viable.
To fulfil thisdemonstration role, EFIC should provide export finance services on the samebasis as the private sector. This means:
- setting prices to cover the expected full economiccosts of provision; and
- being subject to competitive neutralityarrangements, including earning an appropriate return on equity, setting pricescommensurate with risk, and paying a tax equivalent charge and a debtneutrality fee.
EFIC’scommercial account product range should normally be limited to guarantees,including the provision of bonds on behalf of the exporter.
- When directed by the Minister, the product rangemay extend to reinsurance for a limited period, to cover sovereign and countryrisk insurance provided to newly exporting SMEs by the private sector, whenfinancial markets in the buyer’s country are temporarily disrupted.
Measures should beintroduced to enhance the transparency of EFIC’s activities to the Minister,the Australian Government and the public.

Preliminaries
- Cover, Copyright, Letter, Terms of reference, Contents and Abbreviations
Overview - including key points
Findings and recommendations
Chapter 1 Introduction
- 1.1 Background to this inquiry
- 1.2 What has the Commission been asked to do?
- 1.3 Conduct of the inquiry
Chapter 2 Export Finance and Insurance Corporation
- 2.1 The role of international trade in the economy
- 2.2 Export Finance and Insurance Corporation
Chapter 3 Private sector provision of export finance and insurance
- 3.1 The role of finance and insurance in trade
- 3.2 Finance and insurance markets
- 3.3 Comparison of products offered by EFIC and private providers
- 3.4 Difference in coverage between EFIC and the private sector
- 3.5 Alternatives to using export finance and insurance products
- 3.6 In sum
Chapter 4 Analytical framework
- 4.1 What are the policy design questions?
- 4.2 Rationale for intervention
- 4.3 Achieving cost-effectiveness
- 4.4 Distributional effects
Chapter 5 Economics of export finance and insurance
- 5.1 National interest rationales
- 5.2 Broader rationales suggested for export support
- 5.3 Specific problems in export finance and insurance markets
Chapter 6 Pricing of export credit
- 6.1 What is a subsidy and how could it arise?
- 6.2 How does EFIC price its products?
- 6.3 Analysis of whether EFIC's products are priced efficiently
Chapter 7 Economic impacts of current arrangements
- 7.1 The market gap
- 7.2 EFIC's role in the allocation of resources in the economy
- 7.3 EFIC and the incentives of others
- 7.4 In sum
Chapter 8 Financial management and performance
- 8.1 Risk management
- 8.2 Dividends
- 8.3 EFIC's treasury
- 8.4 EFIC's financial performance
Chapter 9 Governance arrangements
- 9.1 The importance of good governance
- 9.2 EFIC's governance arrangements
- 9.3 Are EFIC's external governance arrangements adequate?
- 9.4 Are EFIC's internal governance arrangements adequate?
- 9.5 The national interest account
- 9.6 EFIC's environmental and social responsibilities
- 9.7 Confidentiality and disclosure issues
- 9.8 In sum
Chapter 10 A future role for EFIC: limited support for SMEs
- 10.1 Changing EFIC's scope of operations
- 10.2 Structural and operational reform of EFIC
- 10.3 Next steps
Appendix A Conduct of the inquiry
Appendix B Estimating export credit subsidies
Appendix C Approaches of other ECAs: similarities and differences
Appendix D Other government bodies
Appendix E EFIC's environmental and social policy
References

Australia's export credit arrangements

Inquiry report

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