2 October 2008

RELATED expertise

The Mortimer review of export policies and programs, entitled Winning in World Markets (“Mortimer Report”) was released on 1 September 2008. It provides an export blueprint for small to medium enterprises (“SMEs”) that are or might become exporters over the next 5 years, and makes important recommendations about how they can be supported in the future.

Where are we now - no ideas and no money?   

Australia has suffered declining export growth and loss of global market share over the last decade.

The Mortimer Report identifies factors that are hampering our export growth. It draws on the OECD’s Draft Report on the Top Barriers and Drivers to SME Internationalisation and the Export Finance and Insurance Corporation (“EFIC”) report Global Readiness Index, which were both released earlier this year. Collectively these reports identify the major barriers to the cross-border expansion of Australian companies as being a lack of experience and understanding of export and cross-border investment; difficulties in securing finance; and difficulties in identifying opportunities and partners.

The Report notes a relative decline in Commonwealth government assistance for trade and investment compared with other forms of business assistance. Most markedly, it notes that there has been a decrease in funding for the attraction of foreign direct investment (“FDI”) of 80% over the last year.

Delving deeper, the Report finds that most of the trade assistance during FY2007 was in the nature of exemption from import duties and GST for re-exported goods, with little going towards investment. On a more positive note, it also finds that an increasing proportion of research and development (“R&D”) expenditure has been funded by industry, and that the ratio of R&D spending to GDP is growing strongly, to the extent that it is at or above the OECD average.

Funding requirements and constraints on overseas expansion, vary according to the type of exporter concerned.

  • Exporters with turnover under AUD10 million are likely to be constrained by lack of access to capital. They tend to rely on the uncertain, underfunded and “after the event” Export Market Development Grants scheme.
  • New exporters lack information and access to working capital.
  • Exporters seeking expansion tend to rely on retained earnings and lack access to alternative finance to fund their activities.
  • Financial institutions do not generally accept offshore assets as security for finance.

Difficulties in raising finance in the market are worsened, according to the Mortimer Report, by a lack of managerial skill in properly presenting business plans to financiers, and a lack of understanding of international markets by local branch staff.

Current assistance schemes             

Financial assistance schemes presently in place include the EMDG scheme (enabling up to eight grants to be made equivalent to 50% of eligible expenses over $10,000); products offered by EFIC (which the private market generally does not supply); tax concessions for individuals abroad; export-specific tariff concessions (principally aimed at re-exported goods); and some State and Territory programs.

The EMDG scheme was left substantially over-subscribed and under-funded last year. The Report notes that uncertainty as to the amount and payment of grants payments, and the fact that grants are paid well after the expense is incurred, compound the lack of attraction of the scheme to many SMEs.

As a side note, we trust that this is not meant to suggest that similar subsidy proposals implemented by Australia might not fall foul of WTO obligations. Government financial contributions contingent upon export performance, or involving benefits which are specific to certain industries, are non-compliant with WTO rules. Special care will need to be directed towards the design and degree of any programs which might emanate from the recommendations of the Report.

Let's sell to East and South Asia...               

The Mortimer Report recognises that “dynamic, outward-looking companies” drive higher levels of competitiveness and productivity. It says Australia’s goal must be to stabilise the current account deficit to match the rate of growth of GDP, which is likely to require a trade surplus of around 1% of GDP. It is said that this will mainly occur in rural products, manufactures and services.

Our trade with East and South Asia, the region that will produce the world’s largest middle class consumer market, is expected to approach our level of trade with North America or Europe over the next few decades. The Report therefore supports a policy orientation towards East and South Asia, particularly China, India, Japan, ASEAN nations and the Republic of Korea.

…But not forget about America and Europe       

At the same time the Report proposes greater investment in the North American and European markets, to reinforce the long term competitive position of specific sectors.

Services are important...               

The Report notes that trade within industries, in services particularly, is growing. Export of services should be especially promoted, extending beyond tourism and education to others with knowledge-intensive characteristics, such as financial services (especially funds management), and professional and business services, including agribusiness.

…As well as specific target areas             

Certain growth areas are suggested and each of these is to be supported. These include automotive products and services in South Africa, Middle East and Russia and mining technology and services in sub-Saharan Africa and Latin America. The Report also says that by attracting more FDI from North America, Europe and East Asia, Australia can improve its export performance in high tech-intensive sectors, particularly automotive industry products, medical and scientific instruments, processed food, and renewable and low-emissions energy goods, services and technologies.

The Report recommends adopting policies and programs aimed at gaining a lead in low carbon technologies and industrial processes to supply to other economies, particularly in our region.  The Report says that this should be achieved in a way that does not reduce the competitiveness of our companies by imposing costly climate change measures to which other producers are not subject.

The observations of the Report also lend support to the need for well-targeted infant industry assistance packages to attract and develop technology transfer and to help companies to commercialise more efficiently. Coupled with a regulatory environment aimed at creating a strong home market, this gives the green light to some visionary policies.

Mortimer recommendations - "four pillars"                

The Report stresses that funding for investment in Australia and offshore should be treated as vital to our global economic engagement, and that the development of competitive industries and firms must be supported. It concludes that the aim of the various financial assistance schemes on offer must be to encourage exporters to export and to commit resources to achieve that goal.

The recommendations are based on four ‘pillars’:

  • improving our international competitiveness and diminishing impediments within Australia;
  • improving market access;
  • enhancing market development through export and investment facilitation programs and targeted strategies; and
  • improving coherence and coordination between all levels of government to ensure the efficient and effective deployment of effort and resources.

The general theme of the recommendations is one of coherence and co-ordination, where available resources should be mobilised, for example by bringing together government and business representatives at a high level, to achieve major commercial outcomes, and to create and maintain a national strategic focus.

Austrade and EFIC need to step up to the mark              

Austrade, which now combines Invest Australia’s functions, is seen as the central focus and co-ordinator for all export and investment, in a co-ordinated and co-operative system including existing, industry-specific facilitation initiatives, and by reaching State and Territory programs as well.

The Report insists that Austrade’s strong overseas network should be maintained, but that there should be a reallocation of resources to ensure a clear focus on growth markets for Australia.

Gaps in the finance market are to be filled by an Austrade advisory and referral role, but otherwise the market must better fulfil its financing role, in tandem with specific financial assistance schemes. The aim of these schemes must be clearly targeted and properly formulated to encourage exporters to export and to commit resources towards that goal. Clear objectives should be articulated, within a set time frame and value.

The Report recommends that the EMDG scheme be retained, most likely with eligibility adjusted. The current cap (indexed) is to be retained; the maximum number of grants is to be reduced to five; and the minimum expenses threshold is to be increased from $10,000 to $30,000.

The Report further recommends that EFIC should be retained and expanded, and that it should continue to operate on a self-funding basis. The main limitation on EFIC was identified as a lack of awareness of its products. No recommendations specifically address that but, in our view, this should fall to EFIC and to Austrade to rectify.

Three new finance options are canvassed:

  • a simplified version of the EMDG scheme enabling payment to be made when incurred by new exporters;
  • a fund for internationalising businesses providing concessional loans with a possibility of taking royalties and options on future sales; and
  • a venture capital development fund, requiring private investment to match that of the Commonwealth.

In summary - a call for strategic support for SME exporters          

The Mortimer Report calls upon the government to take a long hard look at its commitment to SME exporters, and to finesse the way that government support can be integrated and improved in the future.

Export-oriented businesses will look forward to the government’s response to the Report with very keen interest.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

© Moulis Legal 2008