On 23 June 2000 the Australian Department of Foreign Affairs and Trade (DFAT) began a review of the future role of the Export Finance and Insurance Corporation (EFIC) in supporting Australian exporters, investors and banks in overseas markets. The re-examination of EFIC's ?raison d'etre' raised the possibility that the private sector would take over much of the government institution's responsibilities, and that the organization would be considerably downsized. EFIC ultimately came out of the review process with its mission and remit largely intact. Encouraged by the review findings, EFIC is now considering new products and services to help its customers' export businesses.

EFIC is a self-funding corporation wholly owned by the Australian Commonwealth Government. It is, as Michael Clarey, head of Project Finance and Structured Trade at the organization, points out, something of a hybrid. ?We're a bit like a combination of US Eximbank and the Overseas Private Investment Corporation. We do everything from insurance schemes to export financing and investment.? EFIC's main product lines are export finance guarantees, credit finance and guarantees, political risk insurance, medium term payment insurance, export working capital guarantees, bonds and even direct loans.

As a result of the DFAT review there are indeed some areas in which EFIC will scale back its activities. A key focus of the review was the significant changes in export credit and finance services in recent years. To quote from the report summary: ?These changes are particularly evident in export credit insurance, where there has been considerable growth in private market capacity and international competition in the industry. The industry is now dominated by a small number of major companies that are investing large amounts in information technology products and services, including for smaller exporters. These developments are changing the face of this business and will offer significant benefits to firms that can access them.?

To ensure that Australian exporters can benefit from the rapid developments in the private sector, the Government has decided that EFIC will enter into an alliance with a suitable private insurer by the end of 2001, but the alliance will only be relevant to short term export credit insurance business and therefore will not impinge on the institution's project finance activities, says Clarey

Although EFIC does not like to overemphasize its direct lending activities, one of the most recent project finance transactions that EFIC has been involved in is the $371 million deal to fund the rehabilitation and expansion of the North Luzon Expressway in the Philippines. EFIC provided a $55 million, 12-year, direct term loan facility to the project company. The transaction also featured direct loans from the Asian Development Bank and the International Finance Corporation.

EFIC is rarely a lender in project finance transactions, stressed Clarey, ?the Luzon tollway deal was, in fact, a big exception to the rule.? But if the organization is involved in lending, it is most likely to do so for infrastructure developments like the Philippine road deal rather than for mining or oil and gas projects. ?That's because the private sector is better equipped than we are to determine if resource projects are going to be economically viable,? Clarey explains.

Clarey stresses, however, that EFIC's role is better suited to being a provider of PRI insurance for major projects particularly those in the oil, gas and mining sectors. EFIC actually acted as the PRI coordinator role in the Alumbrera project in Argentina. This emphasis on PRI is particularly relevant, say financiers because of the increasing reluctance on the part of bank lenders to take developing country risk. Clarey confirms, ?this seems to be the particular product most in demand from both investors and bank lenders.?

In recent years Clarey notes that demand for project support, direct lending or otherwise, has reduced largely due to the economic slowdown in Asia since 1997. Infrastructure, oil and gas and (Asian deals despite the regional economic problems) have been the main focus of activity for EFIC's project finance-related business since 1998. Nevertheless for the 12 months ended June 30 2001, new commitments (across all business lines and not just project related support) was A$370 million ($190 million) well up on the volume of new commitments in the year previous.

The reason for EFIC's more critical position in the market: a heightened aversion to risk amongst private sector companies and finance houses. ?The global slowdown,? says Angus Armour, general manager export finance, ?and particularly the profit downgrades announced by prominent companies in some major overseas markets also seems to be causing some exporters to reassess the risks in their overseas sales to normally reliable buyers.?

As part of the DFAT review, the market gap between what the private sector was able to provide in the way of export credit insurance and what exporters demanded was calculated. The review estimated the current market gap to range between A$640 million and $900 million. Due to the expansion of private sector insurance the gap has reduced almost every year since 1997 when the gap was estimated to have been between 47% and 80% of exports supported.

Political and commercial risk insurance may continue to be the staple of EFIC activity but the Australian institution is also considering an equity product to add to its menu of services. What EFIC is considering is directly investing in select projects (on similar lines to Canada's Export Development Corporation or the International Finance Corporation) with the cash coming directly from its own balance sheet. ?The equity product idea is in the earliest stages of review,? says Clarey, ?and will be debated by a large number of separate government departments.? The product must first be approved by EFIC's senior management and the EFIC Board. Finally, the Minister for Trade will have to approve the new product line. Despite the long process to approval, Clarey adds, ? we see it as a legitimate extension of what we do, since we are already effectively taking quasi-equity risks.?