20 April 2009
Panel discussion at the Park Hyatt launch of the EFIC 2009 Global Readiness Index
Interviewees: Peter Hartcher; Angus Armour, CEO EFIC; Peter Fitzgerald, CEDA; Chris Ogilvy, Ai Group; Ian Murray, AIEx; Simon Crean, Minister for Trade
PETER HARTCHER: Panel discussion now. So on the stage we'll have our panellists join Simon. If you could come up please, gents. So we're going to have a conversation here for a few minutes and then we'll take questions from the audience. So have a think, have a listen and see if there's something you'd like to ask one or more of our panellists.
So let me introduce people. Our host for the day on the end day, Angus Armour. Angus is the managing director of EFIC. He's been with EFIC for many moons and before that I think did similar work for the government of Canada.
We have Ian Murray. Ian is the executive director of the Australian Institute of Export and before that I think did time at Johnson and Johnson. Yep. Peter Fitzgerald is the Victorian state director of CEDA, the Committee for the Economic Development of Australia after a long career with Mobil, Peter.
Chris Ogilvy, the managing director of FANTEC, a manufacturer of fans and ventilation systems and that's his day job. His other capacity in which we see him here today is as the Victorian president of the Australian Industry Group, Chris.
So I'm going to start with a question Angus for you about the survey. You know, I'm a journalist. Journalists are supposed to ask uncomfortable questions. I'm going to ask you one, Angus. The - you do export finance for a living. You've produced a survey which finds that companies want to export and they need finance. If McDonald's produce a report telling us that companies - you know, that consumers wanted more hamburgers we'd look sceptically at that. Can you tell us about why we should have confidence in the robustness of your findings?
ANGUS ARMOUR: That's a good question Peter. I expect actually our colleagues in finance and Treasury will interrogate on me on this same point, if not the media. I think the key points that underline the robustness of the work that we've presented today, in fact are the partners, some of who are on the stage with us now.
It was a great collaborative effort involving our national partners, AIEx, AIG, CEDA but if you look at the back page of that report and you see VECCI, the Victorian government, we pulled those respondents across the economy using a lot of different sources. So Peter they weren't just our sources. These were people who actually invested the time, took the effort to express their views and I think their views are actually quite compelling from the research that Roger presented.
PETER HARTCHER: Simon, a question for you based on your comments about protectionism. Not in this survey, but I saw in a Journal of Commerce survey of several hundred US exporters. They were asked to rank what they saw as the major obstacles or problems in the future with export.
First was, similarly, state of the financial system. Second was, I think 26 per cent of American exporters were worried mainly about protectionism. Simon, you talked about the G20 pulling countries back from protectionism and yet we know that in between G20 meetings, 17 of those same 20 countries actually implemented some form of protectionist measure.
What do you think the outlook is? Can governments be kept honest and, as part of that, what about the Australian story where, as we're going to see more companies closing, businesses going out of production, how do you contain the hysteria that occurs in the Australian system, especially in the Australian media, but in the political debate as well, whenever that happens and pressure for more protectionism?
SIMON CREAN: On the first question about am I confident that we can rein in the protectionist pressures, totally no, but significantly yes. The reason for that is we have in place a rules based system that puts a break on the protectionist tendencies. It is the WTO and there are effective disciplines within that system.
Why am I so committed to achieving the Doha conclusion along with the Government and many other countries and, importantly now, Obama himself has joined the call for this. It's not just the stimulus factor that I talked about there, the multiplier if you like, it's also that we introduce stronger rules.
Interestingly, one of the trade measures that was of concern to our dairy industry, export credits, export subsidies in the European market, at the moment that's WTO-compatible. Under Doha, in the future it won't be and as for the question about how do we contain it in Australia, I think apart from the Aussie slouch hats, what's the other big industry that's pushing for this at the moment? It's the steel industry. But because of the restructuring that I was part of in the ACTU in the '80s and that the former Labor government was instrumental in reshaping the steel industry, that industry now exports in total $1.8 billion and some $500 million of it to the US.
If it were not for the US Free Trade Agreement, that $500 million would be at risk from the Buy America campaign. It's the sanction of the agreement that gives us the cushion. But what would be disastrous for this country would be for us in the name of embracing a buy Australia campaign, we would invite and get the retaliatory measure. We would be caught up in a downward spiral of protectionism that would kill this country.
And that's why I make the point in my speech about we've got to understand that trade is important and trade isn't just exports. It's what you do with your imports and it's the way you fit into global supply chains, even if that means investment.
PETER HARTCHER: I have a question. We heard in Simon's speech - we heard you talk Simon about the importance of Asia, new free trade agreement between Australia, New Zealand and the countries of ASEAN; on that subject we have on the panel Chris Ogilvy whose company does already substantial business in Asia.
Chris, what's the on-the-ground outlook for Australian companies wanting to export, already exporting, or investing in ASEAN and Asia more broadly? On the face of it, you know, developing Asia, growth is holding up better than it is anywhere else in the world, but once you take China out of that the numbers collapse and the growth prospect is actually slower than it is for sub-Saharan Africa. But how does it look on the ground?
CHRIS OGILVY: Well certainly, for our business we've seen, like a lot of other manufacturing organisations, a maturing. We've enjoyed a strong decade of growth and we've consolidated our position, as have a number of other businesses in Australia.
The point the minister made was that there's a certain cap on the size of this market and therefore to continue our growth we need to look offshore. I think we've established a very strong base and I think a lot of Australian companies have, where they've moved forward variously into parts of Asia.
In our particular case, we've established a forward position of assembly manufacturing in KL. We've had a network of agents for some 20 years throughout Asia and we are seeing continuing growth in those markets. So looking to the next horizon for our growth prospect is the immediacy of Asia, and the fact that we've got a lot of other Australian businesses already operating up there.
I think one aspect that perhaps doesn't get as much coverage, certainly for a lot of the engineering skills, we're a very multicultural country and therefore a lot of the staff that we're recruiting from the various universities and schools are quite comfortable with going into parts of Asia, maybe their own home country. We have Australian colleagues who are also Chinese working in Guangzhou and we have a number of our younger engineers who are looking to move into appointments in the future throughout the Asia region. I think that's probably a similar picture for a number of Australian enterprises.
PETER HARTCHER: Okay. I don't know about you, I found the results of the survey quite surprising. The very large numbers of Australian exporters and Australian companies who aren't yet exporting, saying they're prepared to export and grow into the very teeth of a storm, the worst storm we've seen, any of us have seen in our lifetimes.
Peter though, I think it probably doesn't surprise you because I think you did some work at CEDA a few years ago about export as a strategic imperative for Australian companies. Is that what we're seeing now that this is a survival necessity, not just a sort of an export as an optional extra? Or is there some other explanation for what you're seeing in this survey?
PETER FITZGERALD: Peter, it does support our research of 2007 where basically we saw organisations looking well beyond our shores in terms of export opportunities as well as importers. So it really just validates that position. But it's quite interesting in terms of those decisions are not reactionary decisions, they're strategic decisions. So organisations build these views and intent over some time and often, very importantly, they link back to their experience in their own market place and in Australia we've had open market for some time.
So people that are succeeding here in Australia are very much exposed to genuine competition, global competition. So they've got every reason to believe that they can be confidently able to move into new territories.
So to me it's that momentum that's been building and the continuation of that conference. I don't think people want to lose that intent as they've been investing and experiencing success, so they want to maintain that edge.
It's a bit like organisational talent. Twelve months ago - I'm involved in a number of CEO round tables within CEDA - one of the key issues for leaders within organisation was about being able to attract and retain talent. That was their bottleneck I guess in terms of future growth. Those discussions now are that, yes, we're going through a tough time but they're committed to that talent, the good ones that they're obviously thinking about. I see exactly the same with this - these markets. There's organisations that are putting in the work, they still - they see the opportunity going forward and they want to commit and work to that. So it is a strategic intent.
PETER HARTCHER: The elephant in the room if you like in this survey is the problem - the primary problem is finance, getting access to credit. So this is something that I'd like to throw open to all of you and, Ian, you might want to start on this since you haven't had a chance.
But what are the solutions? Is this something where we again turn to the Government for solutions, is this something that the private sector just has to tough out, is there something more that can be done in the private sector, in the financial sector? Let's have your thoughts, please.
IAN MURRAY: I'll start with the easy part.
PETER HARTCHER: Please do.
IAN MURRAY: I'm not at all surprised that the survey showed this result. When you've been with an organisation that for 50 years has been doing education and training primarily on the export process, and a big part of that process of course is the financial management of your international trade.
So it doesn't surprise me at all that this through - this came up as being, the financial aspect of it came up as being the primary concern because I think if you went back three, four, five years you'd still find it was the primary concern. It's just changed a bit because of the current economic environment.
I'd also like to, just in saying that, commend EFIC for doing this study because I think too often we look at some of the other aspects of doing business overseas, the marketing aspects, the geographic aspects and a whole lot of different things without looking at the financial parts of it.
I'm not surprised, just to go back to your previous question, that people are optimistic. Exporters tend to be optimistic anyway in a lot of things that they do, and in the research that we've done, people have said to us, well, we've just been through some really good times, the best times we've probably had for a long, long time.
We're going through rough times now but we're preparing ourselves for what will be, we believe, a good future, and the future is definitely there. But to go back to your specific point, I think finance is something that is a critical issue.
I would even say it's a critical issue - I think it was David Garner said to me when I first met him, he said why is it that so few Australian companies get into export? I said one of the major points is the fact that it's really difficult for small to medium sized countries - companies. If you're out in Wetherill Park in New South Wales and you've hocked your house for the last 20 years, and you've just seen light at the end of the tunnel from your domestic business and it's going well, and the concept of hocking your house for another 20 years is the option for going offshore, it's a hard decision to make to go into the export business.
And I think it's even - it's a factor for growth, but it's also a factor for a lot of companies getting into export. The factor of finance is something that really I think, government and the banking sector really needs to address.
PETER HARTCHER: Any other contributions on that subject? Angus.
ANGUS ARMOUR: I probably should say something shouldn't I? Peter, to come back to your question, it wasn't a surprise to us that finance came forward as a critical issue. It wasn't a surprise to us that it had increased significantly in the current context.
We were surprised frankly by the level of commitment shown by the companies and took actually a great deal of heart from that. But in terms of resolving that issue of access to finance, our philosophy, and it's a philosophy that we've had for a long time, is it's about partnership between the people who can help.
Now EFIC has a role. The minister outlined in his speech that we have facilities now that we use to help people and we're in the process of developing more and revisiting what we've got. Now that's incumbent on us like a business, we have to keep challenging what we're doing.
But we need to work with the private sector banks. We need to work with the associations represented here to reach their membership and make sure that we identify what the true problems are. We can't do it ourselves, we need to work in partnership.
That's why Headway as a product had nine banks sign on as distributors. It's going to be taking what we've learnt from that survey and saying okay, what more can we do? Let's take heart from the fact that 30 per cent were able to get the debt finance they needed from their Australian bank. What can we do to double that number? That's really the challenge for us and it is a challenge for us that we need to embrace now.
SIMON CREAN: I think Peter, two points. I'm not surprised about the finance dimension because finance would have been an issue without the global financial crisis given that we're talking about small businesses in the main.
Headway was an important part of developing this partnership with the banking sector. This is essentially dealing with a market failure in normal circumstances, the market failure being, I think, the point that was made in the presentation earlier.
How do you get bank finance from a financial institution here if you're investing overseas and you've got no bricks and mortar backing it here? How do you get the finance overseas if there's no track record overseas?
So I believe it's more than just the Headway product. I think that the EFIC mandate needs to be widened to embrace itself as more than just a financier or guarantor of product markets. It's got to come to grips with the new form of trade which is about investment.
Now that said, that's normal market failure. What we're dealing with, with the global financial crisis, is a market failure of a much greater proportion and interestingly enough, if you look at the global financial crisis, liquidity access to capital, all of those sorts of things, really hard to come by in any market anywhere in the world.
In its own sort of way trade finance is one of the least risky because you've got collateral. It's either on the water or it's going to turn up at some market somewhere. Yet trade finance is being caught up with it.
If trade finance is the multiplier - if trade is the multiplier of domestic economic activity, we have to work on plugging that market failure.
Now, for Australia therefore, even though we're relatively better placed, I think we do need to understand the fact that businesses that could be chasing that market share at the moment - and I know a number of them - can get access in some cases to international liquidity for you know, up to half the proposition, but the domestic banks can't make up the rest of the debt.
Now, what do we do in those circumstances? We're out there telling them to chase market share, they say we want to chase market share, the bank says it's bankable, but we can't go the full extent.
I think that's the market failure that again we have to plug in the current circumstances and if as a government, we're prepared to do it, quite frankly, for commercial property, if we're prepared to do it for financing arrangements for autos, why don't we be prepared to be more creative? I
If the bank's are prepared to do it, if what's being looked for is a bridge, plugging the gap, that's what I think the challenge in the current circumstances is to some of the bigger options. And that's where I believe EFIC, maybe other institutions, we've had to come up with other solutions in other areas, but I think EFIC with its proven track record, I think it is a very professional body. I think that it runs its book profitably. It hasn't exposed the Government, any of the national interest account things, we have to take back to Cabinet essentially and make the judgement call. But we would only do it, based on the expertise and the rigour that EFIC, a well developed, a well honed organisation can give us. So think that there is going to be an increasing role for EFIC in the short term, and so there should be, because it works.
PETER HARTCHER: So can I ask you something, there's two things there. You've talked about broadening the mandate for EFIC to deal with the pre existing problem, so I presume that's your job as the minister. The second part of it is, you're talking about really creating a new mechanism. Now I think I might hear the sound of breaking news here, but are you talking - are you actually actively proposing a new mechanism?
SIMON CREAN: No, I don't know that it necessarily needs a new mechanism. It is capable of being done - it is capable of being done through existing instruments. But it still requires a proper appreciation of the current climate, as distinct from normal - normally functioning economy. That's the big difference today.
PETER HARTCHER: Are you talking about the Government getting together with the banking system to provide more export finance, is that the essence of what you're proposing?
SIMON CREAN: I think the export - I mean globally the export fina…the trade finance issue has got this injection of the 250. I'm not - we continue to monitor, at least EFIC does and I keep in close contact with them about the impact on trade finance per se. I guess what I'm talking about, is the market failure, which is really is what EFIC was established to plug.
Governments of all persuasions have understood the importance. It's just that under the previous government, some its powers were stripped away because of the belief that the market would fund everything. And quite frankly, it did up until nine or 12 months ago. Now, that's the problem.
So how do we respond to that circumstance quickly? That's the issue, and it doesn't necessarily mean having to change the function. The issue of changing the function, the legislative framework goes to, I think, a realisation that trade has changed from product markets to investment. It's a different proposition, and that has to be picked up in the normal course of events. But what we're dealing with here is a far more fundamental market failure, it is about liquidity, and does that create the opportunity for a different type of partnership, using the existing structures.
PETER HARTCHER: We have a few minutes for questions. Who would like to start, there's plenty of material to work with there. Down in the front here, first, yes. And if you - there's a microphone coming and if you could please identify yourself, name and affiliation. Thank you.
QUESTION: I'm Roger Bell I've got the best job in this place, because I'm retired. But I've previously worked for EFIC, I've worked for academic institutions, I've worked in export. I was talking to an exporter - sorry, I was talking to an academic in China last week and I said, how's things going up there, and he said there's a lot of investment companies running away, he's in Guangzhou, and I said, what do you mean? He said a lot of companies are choosing to basically leave their investments rather than pick up the employment obligations, which will interest you, from your historical background, towards their employees. I said, are there Australian companies amongst those, he said he wasn't aware of it, which I was pleased about.
How do you think when you're talking finance, the Government could assist companies when they have these sorts of things, where there's no collateral to provide your finance against? And as a sort of side issue, it seems the Government's come up with a lot of guarantees over the years, or recently to various parties, how far does the Government feel that it can guarantee finances? Because I know from my days when I worked at EFIC, that once the Government will put a guarantee against something the banking industry looks on it much, much more favourably. Thank you.
PETER HARTCHER: Thanks Roger. I presume you're directing that to Simon, are you?
QUESTION: I suppose I was looking at you Simon, yes.
SIMON CREAN: I think the answer in the current circumstances is always going to be driven by the case-by-case circumstance. And I think we have to look at those and have a mechanism for dealing with them on a case-by-case basis that effectively gets you back to the position, but for this gap, would it go ahead. And if that's the case, what are the mechanisms to deal with that gap? I don't think it can be dealt with in any other way than on a case-by-case basis.
But I think that the answer to your question, on assume we've returned to normalcy, I think that increasingly we do have to accept this argument, that direct investment out of Australia now equals investment into Australia. Why? Because businesses understand they have to invest - Australian businesses have to invest overseas, either because it gets them closer to the local market, or because it gives them a better position in terms of global supply chains.
Now this is an issue that we inevitably have to face up to. But it comes back to the point, the threshold point I think that you were referring to, no collateral over there, and no bricks and mortar here. The banks here won't do it, the banks over there won't. Is there a role in that sense? That's what we've been talking to EFIC about and that's what I was trying allude to in terms of, what I would argue is a, regardless of the global financial crisis, a market gap now.
PETER HARTCHER: Okay. Let's try and keep the questions snappy if we can to work through a few. Yes, just here, thanks.
QUESTION: Thank you, Tim Piper from the Australian Industry Group.
If I can direct this question to this Minister, Mr Crean. Thank you, a number of your comments today have been very supportive of the position that we've been adopting in terms of the EMDGs and other areas. I must say in terms of the finance comment that's been made here, it's not surprising to us at all, because it's just indicative of what's ha-happening around Australia domestically, as well as from an export perspective. When companies of $600 million are likely to be made insolvent, because of changes in processes within banks, it really does make life difficult for companies. So it doesn't surprise me we're seeing this from an export point of view.
I am asking about EMDGs minister, you were very supportive of the EMDG scheme. It has been a popular scheme amongst export companies for many years, but it's also one that is - its future is uncertain I guess, is the best of way of putting it, and that's probably through budgetary issues. You sound supportive of it. Is the Government in its next budget going to be equally supportive of it, because so many companies do rely on it around Australia to help them finance their next position, in terms from an export point of view?
SIMON CREAN: Well look, I always say this Tim: you don't make commitments unless you're prepared to fund them. And I think the great problem with the EMDG, because it's a retrospective payment, it's a very hard scheme to explain, unless you're in it. I know Ian understands it because they're always lobbying us about it, as is ACCI, as is AIG.
But what we're essentially stuck with at the moment is the fact that the second tranche, which is about to fall due, currently can only be funded to the tune of 30 to 50 per cent, because changes that were made to the scheme, that people acted on for 2007-'08 were promised by the previous government and never funded. That's the problem.
We come into government - and tell me, quite apart from the fact that previous government when it came in not only didn't honour promises that they'd made, it cut what we'd locked into place. Now, we're expected to pay for their folly. That's the problem I've got in the budget process. That's the problem; no matter what merit there is in terms of the EMDG and the fact that it is a successful scheme, and I believe it is. It's got a big multiplier itself, people bank it. They make cer…they make decisions about the following year, based on the certainty for this year, I get all of that.
But trying to explain to colleagues that we should be paying for the previous government's folly or failure is a very hard ask. But I'm in there fighting for it. That's what I'm telling you. And I made the down payment last year, before this global financial crisis hit. I made the commitment in last year's budget to make sure that next year, our changes when people act on them, you know, will be funded. So, I'll honour my side of the equation. Question: can you pick up the pieces? Very, very difficult.
PETER HARTCHER: Simon, you realise you're shattering all our preconceptions about politicians dodging questions and avoiding answers. You're taking them head on.
Okay. We have time for a couple more. One here, yes?
QUESTION: John Doherty from Westpac. So don't shoot me.
As also a former employer of EFIC back in the '90s, I guess it beckons the question that banks are always going to be commercial in the way they look at a credit, and notwithstanding that a lot of export companies have trade cycles that they've got to fund, which is always an immediate need and banks will look at the commerciality of a transaction, what prevents EFIC having some form of limited export bank licence?
PETER HARTCHER: Who wants to tackle that one? Angus?
ANGUS ARMOUR: Well practically John, we're not regulated - John and I used to work together when we both had more hair. So we've known each other for a while. We're not actually regulated through APRA, we are regulated through the EFIC Act. If - I think the minister has alluded to the fact that if there's a compelling need, if there is a gap developing, that's perhaps temporary, but over a number of years, or perhaps structural, might take longer to work through than - this is a time to put propositions forward. So if you've got that idea, then send it to us.
PETER HARTCHER: Okay. Last question, I think. It's going to be up here, thank you.
QUESTION: Hi, Phil Cubbin, from ANZ. ANZ of course is very supportive of trade finance, given our own strategy and presence in the region.
But my question is really to you Minister Crean if I may. The Free Trade Agreement with China, in context of the very large scale investment proposals, that there seems to be a lot of interest in at the moment from Chinese companies into Australia, particularly resources, how important is it for that Free Trade Agreement to progress and does the current environment help or hinder that process?
SIMON CREAN: I think the conclusion of the Free Trade Agreement with China is important, because if we can do it, it sends another one of those important signals, the signals about market liberalisation, but significantly with what will - it's already been, but will become again, our largest trading partner. I think it sends that signal of confident.
But I'm not going to conclude a free trade deal just for the sake of it. It has to be a quality one and it has to be consistent with multi lateral principles and I've said two important things to the Chinese, that as difficult as agriculture is on their side, there is no way we will settle for less of an outcome on agriculture than they gave New Zealand. That's the first point. So, if they're not prepared to embrace that, forget about it. We'll go off and concentrate more of our effort on Korea and someone else.
The second point, though, is that they have to be meaningful outcomes on services and interestingly I think the current climate, to answer the second part of your question, helps in this regard. Because China's offensive interest is investment, so is ours. And the point that I've tried to make is that investment is a two way street. The interdependency of investment between our two economies is quite significant and until last year, Australia had more investment in China, than China in Australia.
Last year saw the bigger - the big leap essentially around a number of resource activities, something close to $30 billion approved. One project alone equals that this year, it's called Chinalco. Now that's the magnitude of it. Each of those things has to be considered through the FIRB process, not the trade - the free trade agreement process. But my point is, is that if we're understanding the interdependency of our two economies, beyond agriculture, beyond product markets, beyond services to include investment, then let's try and put a new framework in place that defines the principles behind that fact.
So if you like, the second point is there's got to be outcomes on services and we need to develop an investment framework. I think establishing that investment framework, can go a long way to helping understand why it is important for Australia to be embracive of investment from China and to overcome what we're experiencing at the moment, this xenophobic reaction by virtue of the magnitude of the investment, not the principle.
So what I want to try and do, is to get a much more structured framework, in which we get a better understanding of the importance of investment, but fundamentally, that investment is a two way street, not just a case-by-case approach based on the size of their investment.
PETER HARTCHER: Okay. I'm told we have time for one more question. So we're going to have the last question is over here.
QUESTION: Thank you very much. My name is Bob Whites and I'm a CEO of a software company called eB2Bcom, so I'm actually one of those classic SMEs. We do a lot of exporting, but it's mainly on an opportunistic basis, rather than an organised one. But first of all minister, I would to say, thank you very much for your frank comments and your assessment of the financing issue, it is absolutely spot on. The access to finance for a company like ours is just - there's no access to the finance, because there just isn't. So we've been funding it ourselves.
The irony is, when I approached EFIC, they said well great, we can help you with a guaranteeing of finance, who do you get finance from at the moment, and I said it's basically my house. So there's no way I can get a guarantee. So the comments, minister, of enabling or broadening the brief of EFIC or another enterprise to perhaps fill that market failure, as you so accurately assess it, is spot on.
PETER HARTCHER: Is there a question there?
QUESTON: My question is, that was the first one, is there going to be any change in that. Secondly, I would like to know why EFIC doesn't classify ICT exports in a category. I feel a little bit of an orphan here, because I manufacture once and sell hundreds of thousands of times, theoretically. There's no plant costs, there's no ongoing costs, I could sell from an SME 30 or 40 million a year, by multiplying effect. Why isn't there an ICT category in the EFIC world?
PETER HARTCHER: Sounds like one for you, Angus.
ANGUS ARMOUR: The fellow that can best answer that in fact was holding the microphone for him just a moment ago, that was Gary(*) but we certainly as an industry track ICT. So we have individuals within EFIC who have ICT responsibilities. May have not reported on it in the data, but we can extract that data for you.
QUESTION: [Inaudible question]ANGUS ARMOUR: We will take that on notice for next year. Thank you.
PETER HARTCHER: You guys can take that one outside. We have to leave it there. Thank you everybody. Thank you to all our panellists. I think we can all agree that we've heard a particularly gritty, real and interesting set of exchanges this afternoon. So thank you to everybody.
[ENDS]
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