This report reviews the government’s role in the provision of export credits, and its support for Australian exports and overseas investments through financial products and services.
Key points• The Export Finance and Insurance Corporation (EFIC) has been established to facilitate and encourage 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 interest account.
• Virtually all of Australia’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. By value most of the support is targeted to large corporate clients. These clients account for more than three quarters of the value of EFIC’s signings in 2010-11.
• Over the past five years, EFIC has earned most of its income through the investment of surplus funds and its capital and reserves, not the provision of financial services. EFIC’s commercial account operations have yielded a low rate of return, with some facilities subsidised by taxpayers.
• EFIC’s commercial account objective should be to efficiently address the limited number of market failures that impede otherwise commercially viable export transactions.
• While few, if any, markets conform to the competitive ideal, there is no convincing evidence of systemic failures that impede access to finance for large firms or for resource-related projects in Australia. – EFIC should not continue to provide facilities to large corporate clients or for resource-related projects in Australia, including suppliers to those projects, on the commercial account.
• Financial markets may be affected by information-related failures. These are likely to be limited to small and medium-sized enterprises (SMEs) with limited export experience or attempting to access emerging export markets.
• Accordingly, EFIC’s role should be to demonstrate to the private sector that providing export finance to such newly exporting SMEs can be commercially viable.
• To fulfil this demonstration role, EFIC should provide export finance services on the same basis as the private sector. This means:– setting prices to cover the expected full economic costs of provision; and– being subject to competitive neutrality arrangements, including earning an appropriate return on equity, setting prices commensurate with risk, and paying a tax-equivalent charge and a debt neutrality fee.
• EFIC’s commercial 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 range may extend to reinsurance for a limited period, to cover sovereign and country risk insurance provided to newly exporting SMEs by the private sector, when financial markets in the buyer’s country are temporarily disrupted.
• Measures should be introduced to enhance the transparency of EFIC’s activities to the Minister, the Australian Government and the public.