Effectiveness of the Export Finance and Insurance Corporation
Entities audited: Export Finance and Insurance Corporation
Introduction
6.1
The Export Finance and Insurance Corporation (Efic) is the Australian Government’s export credit agency that sits within the Foreign Affairs and Trade portfolio. The Efic is classified as a corporate Commonwealth entity under the Public Governance, Performance and Accountability Act 2013.
6.2
The primary purpose of Efic is to provide financial solutions and support to Australian export businesses that are unable to secure funding from the private sector, with the objective of facilitating and encouraging Australian export trade and to encourage private financiers in Australia to finance or assist in financing exports.
6.3
The Efic is classified by the Department of Finance (Finance) as a material agency with risk weighted assets of $2.7 billion, exposure on its Commercial Account of $2 billion and available capital of $674.5 million as at
30 June 2018.
6.4
The Efic was established in its current form on 1 November 1991 under the Export Finance and Insurance Corporation Act 1991 (Efic Act) as a corporation wholly owned by the Australian Government. On 4 April 2019, the Export Finance and Insurance Corporation (Efic) Amendment (Support for Infrastructure Financing) Bill 2019 was passed enacting a number of new measures impacting Efic such as a new trading name, additional capital and a new focus on the Pacific region.
6.5
The ANAO had noted that due to timing the amendments were not considered within the scope of the audit. One consequence of this is that the audit refers to the entity as Efic. Following the passage of the Bill, on 1 July 2019 Efic changed its name to Export Finance Australia. As the audit references Efic, the Committee will primarily use this name in this report.
Audit Scope
6.6
The Efic was selected for audit as it is responsible for the investment and management of over $5 billion in funds on behalf of the Australian public. The audit assessed whether Efic’s mandate and purposes are being met effectively. To form a conclusion against the audit objective, the ANAO considered if:
Efic is operating within its prescribed mandate;
Efic is effectively managing its financial and service delivery functions; and
Efic is meeting its statutory and prudential responsibilities.
6.7
The audit was conducted at a cost to the ANAO of approximately $308 855 and engaged five people as part of the audit team.
Overall Audit Conclusion
6.8
The audit concluded that Efic was:
effectively undertaking its functions, except for its annual performance statement reporting.
operated within its prescribed mandate. It has developed a framework to interpret, operationalise and comply with each mandate requirement.
effectively managing its financial and service delivery functions, and the evidence can support a view that Efic is operating on an appropriately commercial basis.
meeting its statutory and prudential management responsibilities, however Efic’s annual performance statement reporting should be enhanced to enable a more comprehensive assessment of overall progress against its purpose.
6.9
The ANAO made one recommendation, suggesting that Efic include both quantitative and qualitative performance measures in their annual performance statements. The ANAO stated that this would enable Efic to comprehensively assess progress against purpose. The Efic agreed to this recommendation.
6.10
The Efic confirmed that this recommendation has been actioned and qualitative reporting had been included in the latest Annual Report
(2018-19).
Governance
6.11
The audit found that Efic has established governance structures that are aligned to its statutory obligations. The Board is adequately supported by the Board Audit and Risk Committee, internal management committees and the Executive.
6.12
The Efic has also established a framework with an internal compliance document to define how Efic intends to operationalise its Statement of Expectation requirements.
Risk Management
6.13
The audit concluded that Efic meets its risk management obligations and manages its credit, funding and other risks effectively.
6.14
Under section 62 of the Efic Act, the Australian Government explicitly guarantees the due payment by Efic of any money that becomes payable, including its borrowings from third parties. The Efic has a credit rating of AAA by Standard and Poor’s. The Efic delivers its functions through the use of two main accounts: the Commercial Account and the National Interest Account.
6.15
The Commercial Account is the primary operating account for transactions entered into by Efic, where the risks are underwritten by Efic as a corporation. The majority of transactions are undertaken on Efic’s Commercial Account (90.7 per cent). The National Interest Account is an account for undertaking transactions under ministerial direction where such transactions are deemed to be in the national interest. Risks relating to these transactions are underwritten by the Australian Government (as opposed to Efic as an individual corporation).
6.16
One area identified as suitable for improvement was the transaction level assessment of market gap. The ANAO found that for SME transactions where there is a private relationship banker, Efic informs an applicant’s relationship banker of proposed financing to test the market gap and to determine the bank’s willingness to provide finance. The Efic does not require a response from the relationship bank to confirm the market gap, nor do they actively follow this up before it proceeds with the transaction. In 61 per cent of completed SME transactions subject to audit testing, no response from the relationship bank was received before Efic entered into the transaction.
6.17
The ANAO determined that in order to ensure that there is a market gap Efic could act to ensure that a response is received from the relationship bank of each applicant confirming that their bank will not finance the export transaction. In relation to risk management and communication with banks prior to formalising arrangements, the ANAO stated:
The process for what are called corporate solvent and project finance transactions is quite detailed. These are larger financial transactions for businesses with an annual turnover of over $150 million. There is quite substantial engagement back and forth with banks et cetera. With small to medium enterprise businesses, there is a process where there's communication with the relationship bank to determine whether that relationship bank is willing to finance. The current process is that, if no response is received, then the matters will progress. What we identified is more a suggestion for improvement—in future, waiting on the confirmation to be received before proceeding.
6.18
Finally, the audit found that Efic has appropriate structures for understanding and applying requirements in relation to environmental and social standards. The Efic complies with the Organisation for Economic Co-operation and Development Recommendation of the Council on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence. The Efic also voluntarily applies the Equator Principles, a global benchmark risk management framework, to identify and manage environmental and social risks in projects.
Performance Measurement and Management
6.19
In 2017–18, Efic financially supported 160 Australian export businesses (direct exporters and businesses within the export supply chain) providing a total of $194 million in facilities in relation to $1.39 billion in export contracts. The Efic received $13.9 million in revenue (post tax) from its Commercial Account transactions, and paid a $5.8 million dividend to the Australian Government out of its prior year net profit. The Efic further provided $32.3 million of revenue from the National Interest Account to the Australian Government in 2017–18.
6.20
At the public hearing, Efic shared that in 2018-19 they ‘supported 107 businesses through 147 transactions. This support amounted to
$377.6 million in financing facilities issued in the financial year that helped businesses realise a total of $2.29 billion in export contracts’.
6.21
The ANAO found that Efic is operating on an appropriately commercial basis. In line with its mandate, Efic generates sufficient reserves to sustain and expand its operations and undertakes its functions with the objective of not undercutting private sector financiers.
6.22
The audit suggested that there is a need for Efic to ensure an appropriate balance is maintained between its commercial objectives and its fulfilment of government expectations surrounding the facilitation and encouragement of private sector support for Australian export trade. This was acknowledged by Efic at the public hearing.
Benchmarking
6.23
The ANAO found that Efic engages consultants and utilises its internal audit function to undertake regular reviews of its operational compliance and effectiveness, including benchmarking against better practice/other entities in the export sector.
Reporting
6.24
The audit concluded that Efic meets relevant legislative requirements regarding accountability, management and performance, however as identified in the sole recommendation, Efic’s annual performance reporting should be enhanced in relation to the completeness of assessment information.
6.25
Following the audit recommendation, Efic has introduced qualitative reporting into Annual Performance Statements. Efic informed the Committee that “new reporting demonstrates and better articulates how we support Australian businesses and jobs in Australia”.
6.26
The Efic conducts treasury activities in accordance with a control framework approved by its Board and applies Anti-Money Laundering and Counter Terrorism Financing assessment procedures to each transaction.
Stakeholder Engagement
6.27
The ANAO found that Efic engages effectively with government and external stakeholders to execute its mandate through activities closely overseen by responsible managers. Marketing campaigns and initiatives are used by Efic to extend knowledge of its support offering to exporters in new and existing industries. The Efic proactively engages with export businesses to facilitate potential applications.
6.28
The Efic confirmed there are no barriers to the informal and formal communication processes with Austrade, Tourism Australia, the Department of Industry, Innovation and Science, and the Department of Foreign Affairs and Trade:
It would be fair to say that the relationship with Austrade is very strong and there are very formal processes, and informal processes, in place for that engagement. We have effectively a partnering arrangement with them where we share details of potential clients and customers with each other and we engage in marketing activities together, conference opportunities together. Our CEOs have a very close relationship and therefore opportunities to enhance both our operations start at the very top and filter all the way down. In relation to our department, at the board level the Secretary of the Department of Foreign Affairs and Trades sits on our board, or their alternative, which therefore keeps them very much informed about what's going on at a board level. We have daily engagements with the department around day-to-day activities and more formal engagement with the Department of Foreign Affairs and Trade, Treasury, PM&C, the department of industry.
Concluding Comment
6.29
The Committee acknowledges Efic’s strong governance, risk management and stakeholder engagement practices. The Committee welcomes Efic’s consistent use of benchmarking activities to inform lending practices. The Committee commends Efic for incorporating the audit recommendation in a timely and fulsome manner.