Budget Review 2014–15 Index

Eugenia Karanikolas and Kai Swoboda

The Government has announced that it will provide a $200 million equity injection to the Export Finance and Insurance Corporation (EFIC). EFIC is the Government export credit agency that provides export related services including finance and insurance to Australian exporters and investors in overseas markets. The agency has a mandate to operate in circumstances where the private sector is either not able or not willing to provide support.[1]

The National Commission of Audit recommended the abolition of EFIC based on its observations that most of Australia’s exports take place without EFIC’s assistance and ‘the support it provides mostly goes to a small number of large businesses’.[2] Specifically, businesses in the mining sector received the greatest amount of support, accounting for 44.4 per cent of the value of signings, followed by those in the construction sector.[3]

Rationale

The rationale for returning the $200 million is to ‘reverse the decision of the previous Government to take a one-off special dividend from EFIC’ and, according to the Minister for Trade, to ‘support small and medium size businesses to successfully grow their exports’.[4]

As discussed below, the decision appears to go even further than a request from the EFIC Board to double its callable capital—funds that can be accessed by EFIC if required, up to a maximum of $200 million (or a higher amount as determined by the Minister)—and to be at odds with the Productivity Commission’s recommendation for EFIC to return $200 million in surplus capital.

Inquiry into EFIC

In September 2011, the former Government announced it had requested that the Productivity Commission (the Commission) undertake an inquiry into Australia’s arrangements for the provision of export credit provided through EFIC.[5] The Commission’s report was released in June 2012. In brief, the Commission recommended that EFIC’s mandate be changed to require that it re-orient its resources to addressing market failures, including information gaps, experienced by newly exporting small and medium size enterprises (SME). This recommendation was based on the finding that EFIC was providing its services to large projects including many in the resources sector where there was little evidence to suggest that there was market failure. It noted, for example that:

The fact that some transactions (or projects) are unable to attract private sector support is not a market failure and may reflect assessments by market participants of the expected return of the transaction. [6]

In addition, the Commission recommended that EFIC be required to return surplus capital to the Government as it imposed an opportunity cost borne by taxpayers.[7] In particular, it noted that as of June 2011, EFIC’s capital adequacy ratio including its callable capital was 34.6 per cent, ‘well above’ the minimum level set by the Australian Prudential Regulation Authority (APRA) and even EFIC’s internal benchmarks.

In response to the Commission’s recommendations, the former Government introduced two pieces of legislation to amend the Export Finance and Insurance Corporation Act 1991 (EFIC Act) and, in summary, to: allow for a $200 million one-off dividend to be paid to the Government; give authority to the Minister to increase the limit of EFIC’s called capital when necessary; impose a requirement on EFIC to focus on SMEs; and restrict EFIC’s mandate so that it provides services only when there is a ‘market failure’.[8] The Bill providing for the $200 million dividend was enacted in March 2013, with the dividend paid in June 2013.[9]

Request for additional callable capital

Unlike private sector financial providers, EFIC’s capital adequacy is not directly regulated. Instead, EFIC’s board is given responsibility under the EFIC Act to ensure, ‘according to sound commercial principles that the capital and reserves of EFIC at any time are sufficient’.[10] In its most recent annual report, EFIC noted that it ‘guides itself in fulfilling this obligation by setting its own regulatory standards drawing upon both the standards of [the Australian Prudential Regulation Authority] and those set by the Bank for International Settlements through the Basel Committee on Banking Supervision’.[11] Key measures established by EFIC in meeting these requirements are that a minimum capital adequacy ratio of 16 per cent (including callable capital of $200 million) or 8 per cent (excluding callable capital) is maintained.[12]

EFIC’s capital adequacy as at 30 June 2013 was 11.3 per cent (excluding the callable capital) and 21.2 per cent (including callable capital).[13] In its 2012–13 Annual Report, EFIC noted that it had ‘experienced a number of breaches of capital-based limits specific to large exposures as a consequence of paying the special dividend’ and the Board had written to the Minister to request that the Government provide an additional $200 million of callable capital to bring the total callable capital to $400 million.[14]

Accounting for the $200 million withdrawn and then restored

For budget accounting purposes, EFIC sits outside the general government sector.[15] As such, its day to day operations and financial position do not directly impact the budget bottom line. In the 2012–13 Budget, the withdrawal of $200 million cash from EFIC was treated as a ‘special dividend’ and was recorded as a revenue gain to the Budget underlying cash balance and fiscal balance.[16] In the 2014–15 Budget, the reversal of this transaction is being treated as a capital injection, therefore having no direct impact on the underlying cash balance or fiscal balance.[17]

There is some flexibility in the use of reporting standards in the budget in the treatment of dividends and capital injections. These assessments require judgements about the nature of the transaction, including factors such as the impact on the entity’s operations and its ongoing financial performance.[18]

In classifying the $200 million as a ‘special dividend’, EFIC had sufficient retained earnings (accumulated profits) in 2012–13 to cover the $200 million payment ($302 million as at June 2012 and $98 million as at June 2013 after the payment was made).[19] This provides a basis for arguing that it was a return of profit rather than of contributed capital. In classifying the return of the $200 million as a capital injection, EFIC’s general profitability supports the view that the injection is not being used to fund ongoing operating deficits—one consideration when determining whether or not the payment may be a grant.

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