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EXPORT MARKET DEVELOPMENT GRANTS AMENDMENT BILL 2001

2001


THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA





HOUSE OF REPRESENTATIVES



EXPORT MARKET DEVELOPMENT GRANTS AMENDMENT BILL 2001







EXPLANATORY MEMORANDUM





(Circulated by authority of the Minister for Trade, The Hon Mark Vaile MP)

ISBN: 0642 457883

EXPORT MARKET DEVELOPMENT GRANTS AMENDMENT BILL 2001

OUTLINE

1. The purpose of this Bill is to amend the Export Market Development Grants Act 1997
to:

(a) Extend the Export Market Development Grants (EMDG) scheme to the end of the 2005/06 financial year and provide for a review of the scheme with the results to be made public by 30 June 2005

(b) Lower the minimum expenses requirement for an applicant to $15,000 whilst retaining the Act’s current $2,500 minimum grant provision for all successful applicants except for those subject to the Act’s export performance requirements

(c) Remove the requirement that expenses claimed for consultant expenses should only be for short term consulting assignments; merge the consultant expenses category with the overseas representation expenses category; and limit the combined eligible expenses for these two categories to $250,000 for a grant year

(d) Expand the trade fairs expense category to include seminars, in store promotions, international forums, private exhibitions and similar promotional events

(e) Remove the provision that applicants seeking to meet grants entry requirements must be given at least 28 days in which to provide any information requested by Austrade

(f) Remove the requirement that first-time EMDG applicants must register their intention to lodge a claim for a particular grant year

(g) Clarify the rule for measuring exports of external services exporters for the purposes of the $25 million export earnings ceiling amount, and base the measurement on the consideration received before deducting any payments made outside Australia in relation to the services

(h) Require that eligible expenses claimed by services exporters must be for the promotion of exports where the exporter has a contractual relationship with an overseas resident

(i) Prevent payment of grants for the promotion of any form of pornographic material, distributed by whatever means, with a classification equivalent to the X-rating for films

(j) Require all applicants to have an Australian Business Number in order to be eligible to receive a grant

(k) Provide that those educational services exporters seeking an EMDG grant and subject to Commonwealth education services export regulatory provisions must have appropriate accreditation enabling them to legally promote to foreign residents at the time they become entitled to receive a grant and until they are paid the grant

(l) Provide that the Act’s insolvency provisions apply only to businesses that are insolvent at the time they become entitled to receive a grant and which do not at that time have a current certification from an authorised person to the effect that their debts can be paid as and when they become payable

(m) Change the rules applying to claims for marketing visit expenses where relatives travel together during overseas visits by reducing the time required for related travellers to have been full-time employees of the applicant prior to the joint travel

PURPOSE OF THE BILL

2. Item (a) - Extend the Export Market Development Grants Scheme: Under the existing legislation, the 2000-2001 grant year is the final grant year. This Bill extends the scheme for five years until the 2005/2006 financial year.

3. Item (b) - Lower the minimum expenses requirement for an applicant to $15,000 whilst retaining the Act’s current $2,500 minimum grant for all successful applicants except for those subject to the Act’s export performance requirements: Currently the Act requires that applicants must spend at least $20,000 on eligible promotional activities during a grant year. Once this minimum level of expenses has been achieved by an applicant, its grant is based on 50% of its eligible expenses for the grant year less $7,500, subject to whether or not the applicant is subject to the Act’s export performance requirements. Under this current formula, an applicant whose expenditure just reaches the $20,000 minimum threshold will receive a grant of $2,500, which is effectively the minimum grant provided for under the general workings of the scheme.

4. This Bill lowers the $20,000 threshold to $15,000 and so provides better access to the scheme for small businesses and emerging exporters. To ensure that this measure provides smaller claimants with access to a worthwhile amount of grant, this Bill provides that the minimum grant for all claimants not affected by the exporter performance test, including those in this lower expenditure range, will continue to be $2,500. This provision will not affect the grants of claimants whose grants would otherwise be assessed as being over $2,500, and will be beneficial to claimants spending under $20,000. However, the $2,500 minimum will not apply to claimants who, under the operation of the Act’s export performance test, have a grant entitlement of under $2,500.

5. Item (c) - Remove the requirement that expenses claimed for consultant expenses should only be for short term consulting assignments; merge the consultant expenses category with the overseas representation expenses category; and limit the combined eligible expenses to $250,000 for a grant year: The current Act lists six categories of eligible expenses. One of these is the expense of engaging a consultant on a short-term basis to work on market research or marketing activities. There is presently no cap on the amount able to be claimed for this expense category. The Act does not currently provide for ongoing consulting arrangements to be supported under the scheme.

6. Another category of eligible expense under the current Act is that of maintaining an overseas representative on a long-term basis. This category of expense is currently capped to a limit of $200,000 per grant year. This Bill removes the requirement that consultant expenses must be short-term only in order to be eligible, provides that the existing overseas representation expenses category is to be combined with the broadened consultant category with combined expenses up to a limit of $250,000 per grant year being allowable. For first time applicants amalgamating two years’ expenses, a limit of $250,000 for combined expenses incurred in the grant year and the immediately preceding year will apply. This provision will be of benefit to many applicants engaging consultants on a long term basis or to those incurring overseas representation expenses beyond the present ceiling of $200,000.

7. Item (d) - Expand the trade fairs expense category to include seminars, in-store promotions, international forums, private exhibitions and similar promotional events: The current Act lists trade fairs as an eligible expense category but does not specify that expenses incurred on seminars, in-store promotions, international forums, private exhibitions or similar promotional events are eligible for EMDG purposes. This Bill expands the present trade fair expense category so that expenses incurred on these related promotional activities may be eligible for grant purposes.

8. Item (e) - Remove the provision that applicants seeking to meet grants entry requirements must be given at least 28 days in which to provide any information requested by Austrade: First-time grants applicants are currently required to meet grants entry requirements. In determining whether an applicant meets these requirements, Austrade may request the applicant to provide additional information. In these circumstances, the current Act provides that Austrade must give the applicant at least 28 days in which to provide any requested information.

9. In all other circumstances (i.e apart from grants entry) where Austrade requires grant applicants to provide specified information, there is no time limit specified in the legislation. Rather, Austrade negotiates a suitable timeframe with the client, taking into account the applicant’s circumstances, and in accord with the normal rules of administrative and procedural fairness. This negotiated approach has proved satisfactory to both applicants and Austrade, while the “at least 28 days” approach applying to grants entry has proved to be cumbersome and to result in considerable processing delays.

10. This Bill provides for an alignment of the rules applying to the time allowed by Austrade to applicants responding to any type of Austrade information request by removing the specified period (28 day) requirement for applicants seeking to meet the Act’s grants entry requirements.

11. Item (f) - Remove the requirement that first-time EMDG applicants must register their intention to lodge a claim for a particular grant year: Currently, intending first-time claimants are required to register their intent to claim a grant by June 30 of the relevant grant year. This facilitates client education and scheme administration, but also means that claimants who fail to register by the due date are unable to apply for a grant, even though otherwise eligible. This Bill therefore removes references to registration in the Act so first-time claimants will not be legally required to register, (although Austrade will continue to encourage them to take advantage of its continuing first-time client registration and education program on a voluntary basis).

12. Item (g) - Clarify the rule for measuring exports of external services exporters for the purposes of the $25 million export earnings ceiling amount, and base the measurement on the consideration received before deducting any payments made outside Australia in relation to the services: Currently, in order to target the scheme to smaller and emerging exporters, all applicants except approved trading houses and approved bodies are subject to the requirement that their export earnings for the grant year (together with, where relevant, the exports of related companies that claim for the same grant year) do not exceed $25 million.

13. However, the current formula for measuring export earnings for an external service exporter provides for an exporter’s assessed export earnings amount to be reduced because of payments made outside Australia in relation to the exported service. This allows businesses which are in fact larger exporters (over $25m exports p.a) to reduce their assessed export earnings below $25m by making payments offshore, and thus access grants which are intended to be available only to smaller exporters. This Bill therefore provides that the test for measuring exports of external services exporters for the purposes of the $25 million export earnings ceiling amount will be based on the consideration received during the year for the supply of services before deducting any payments made outside Australia in relation to those services.

14. Item (h) - Require that eligible expenses claimed by services exporters must be for the promotion of exports where the exporter has a contractual relationship with an overseas resident: The Act currently requires services to be supplied by the applicant to another person for consideration.

15. Under the current rules, however, an applicant exporting services is not required to actually sell services or to be the principal in export transactions. The rules for services exporters are therefore different to the rules for exporters of all other product categories (goods, intellectual property and know-how). This allows some businesses which are not principals in the export transaction to receive a grant, contrary to the general requirement that grants be restricted to applicants who have a contractual relationship to supply to an overseas resident for consideration.

16. Under the current rules, services applicants for EMDG grants can claim for promotional expenses for services exports where another person will supply the services in a contract with the customer, meaning that there may be some lack of clarity as to which party is actually the exporter and which party bears most of the associated risk. The possibility also arises of more than one business claiming grants for the promotion of the same exports. The lack of a test for principal status or for ownership of the services also causes uncertainty in measuring export earnings at s.10 of the Act.

17. This Bill provides that services exporters will only receive EMDG grants for expenses incurred on promoting exports if they are the principal in the transaction, that is, where they actually sell to a foreign customer or - in the case of applicants supplying eligible tourism services in Australia - where they are to have a contract of sale with the Australian resident customer. The amendment will also apply to the measurement of export earnings, with only those exports where the applicant has a contract of sale with the customer qualifying as eligible export earnings.

18. Item (i) - Prevent payment of grants for the promotion of any form of pornographic material, distributed by whatever means, with a classification equivalent to the X-rating for films: The current rules exclude from eligibility any expenses related to the promotion of X-rated films. This Bill extends this exclusion to the export of pornography of any type, including that distributed over the Internet or by any other means.

19. Item (j) - Require all applicants to have an Australian Business Number in order to be eligible to receive a grant: Currently, grant applicants are not obliged to provide their ABN. However, the ABN is intended to serve as an identifier for business dealings with Commonwealth Government agencies, and assists in indicating whether or not an enterprise is carrying on business in Australia. This Bill makes the holding of an ABN an essential eligibility criteria for EMDG applicants. In the case of Approved Joint Venture applicants, where not all members may be eligible for an ABN, the Joint Venture’s nominated contact member will be the only entity that is required to have an Australian Business Number.

20. Item (k) - Provide that those educational services exporters seeking an EMDG grant and subject to Commonwealth education services export regulatory provisions must have appropriate accreditation enabling them to legally promote to foreign residents at the time they become entitled to receive a grant and until they are paid the grant: Currently, the Act specifies a range of circumstances in which applicants are not entitled to receive a grant - where the applicant has ceased to be a resident of Australia, where the applicant is subject to the disqualifying conviction provisions of the Act or where the applicant is under insolvency administration - even if these circumstances occurred after the grant year in question but before the grant was actually paid. Section 56 of the Act also provides for no grant being payable where an applicant has engaged in promotional or business activities which were illegal and were carried out during the grant year.

21. An exception arises in the case of educational institutions. Most educational institutions claiming for EMDG grants need to be registered on the Commonwealth Register of Institutions and Courses for Overseas Students under the Education Services for Overseas Students (Registration of Providers and Financial Regulation) Act 1991 (ESOS Act) in order to legally be able to promote their courses to foreign residents. Applicants may have this registration suspended or cancelled from the Commonwealth Register of Institutions and Courses for Overseas Students if they fail to comply with either a Commonwealth requirement under the ESOS Act or a State/Territory registration requirement. If they are not appropriately registered during the grant year, these applicants would be subject to the existing illegal activities provisions as found at section 56 of the EMDG Act. However, under the current rules, where such an applicant becomes deregistered after the grant year – rather than during it – it may still be entitled to receive a grant for that grant year, even though it is no longer legally entitled to promote education services overseas. This may result in the payment of grants which will not yield any future public benefit by way of increased export activity.

22. This Bill introduces a measure to prevent the payment of grants to educational institutions that are not, or cease to be, legally permitted to promote their courses to foreign residents after the grant year. This amendment will specifically apply to those educational institutions required to be registered on the Commonwealth Register of Institutions and Courses for Overseas Students under the Education Services for Overseas Students (Registration of Providers and Financial Regulation) Act 1991 (ESOS Act). Any EMDG applicant required to be registered under this Act but which becomes deregistered at the time it becomes entitled to receive a grant or at any time afterwards before that grant is paid will not be entitled to receive the grant.

23. Item (l) - Apply the Act’s insolvency provisions only to businesses that are insolvent at the time they become entitled to receive a grant and which do not at that time have a current certification from an authorised person to the effect that all their debts can be paid as and when they become payable: Currently, applicants for a grant are generally required to be solvent both when they apply for a grant and also when they become entitled to receive a grant.

24. There are however several anomalies resulting from this requirement arising from the wording of the current Act. For instance, if a technically insolvent body corporate applicant has become entitled to a grant, that applicant may still receive the grant if it had presented an appropriate certificate from its administrator at the time of applying, stating that its debts can be paid as and when they become payable. However, this provision is not available to body corporate applicants that were insolvent at the time of applying and then become solvent before becoming entitled to a grant, but which had not provided Austrade with an appropriate certificate until after applying for a grant.

25. The insolvency rules are intended to prevent insolvent firms from receiving grants, while not disadvantaging firms that have had financial difficulties but have emerged from them. This Bill removes the anomalies mentioned above by streamlining the Act’s solvency requirements.

26. Item (m) – Change the rules applying to claims for marketing visit expenses where relatives travel together during overseas visits by reducing the time required for related travellers to have been full-time employees of the applicant prior to a visit: The current qualifying period for the travel costs of relatives employed in the business is five years. This Bill shortens the qualifying period to one year, in order to improve access to the scheme for businesses which legitimately involve spouses and other family members in the business and in its export promotion activities.

FINANCIAL IMPACT

Expenditure under the EMDG Act is capped through annual Appropriation Acts. The extension of the scheme to grant year 2005/06 will cost $150m in each of the financial years 2002/2003 until and including 2006/2007.

REGULATION IMPACT STATEMENT

Background

The EMDG scheme is the primary Commonwealth Government program of financial assistance for export promotion. It was first introduced in 1974 and has been reviewed a number of times since then. The most recent review - here called the "EMDG Review” - was carried out in 1999-2000 by the Austrade Board. The Minister for Trade, Mr Vaile MP, tabled the report of that Review in Parliament in August 2000. The report is available at http://www.austrade.gov.au/ExportAssistance. While not supporting the continuation of the scheme for an indefinite period, the Review recommended the continuation of the scheme for a further five years and that it be reviewed by the end of the fourth year.

The problem

 
While exporting benefits Australia economically, a number of market failures and obstacles discourage Australian firms from entering into export markets:

• Risk. SMEs, because of their size and range of activities, face particular difficulties in embarking upon an exporting venture. Small businesses tend to be undiversified, and so have less scope for reducing risk by engaging in a number of ventures.

• Knowledge. Australian SMEs may be keen to export but lack access to information about exporting and export opportunities.

  Finance. Smaller enterprises may be less able to access funding for export programs than larger businesses.

  Language/cultural barriers. Many opportunities for Australian exports are in markets where language or culture present formidable obstacles for a small firm acting alone.

  Remoteness. In many countries, a firm can export by driving a truck across a bridge. Australian firms must overcome our geographical remoteness from our major markets.

  Reputational externalities. Australia has an excellent reputation as a supplier of agricultural and mineral products, but less so as a supplier of high technology goods. It is difficult for a single firm to overcome this, and if it invests in doing so, many of the benefits of the improved reputation of Australian products may be captured by other firms.
 
These market failures and obstacles increase the time, cost and risk of entering into export business.

Since the scheme was first introduced in 1974, many government initiatives have improved the business environment for Australia’s exporters. These initiatives include the floating of the dollar, financial deregulation, microeconomic reform, waterfront reform, industrial relations reform, tariff reductions, improvements in the macroeconomic environment, and initiatives to open up overseas markets through bilateral, regional and multilateral efforts. These changes have substantially improved Australia’s export culture.

However, at the same time, the world trading environment has grown increasingly competitive, and smaller businesses still face considerable obstacles in establishing export markets.

Objectives

 
The Government’s primary objective, as set out in the EMDG Act, is to:
 
“Bring benefits to Australia by encouraging the creation, development and expansion of foreign markets for Australian goods, services, intellectual property and know-how”.

with the benefits sought including the further development of export culture in Australian business, the development of new exporters, the diversification of exporters into new markets, the generation of additional exports and jobs within Australia, and greater innovation in Australian business.

Options

The Government’s objective can be met in a number of ways. And as mentioned above, the Government has introduced several significant initiatives to improve Australia’s export performance. These include the floating of the Australian dollar, financial deregulation, microeconomic reform, waterfront reform, industrial relations reform, tariff reductions, improvements in the macroeconomic environment, and initiatives to open up overseas markets through bilateral, regional and multilateral efforts.

The introduction of these initiatives might be taken to suggest that the rationale for a government program like the EMDG scheme may not be as strong now as it was when the scheme was established in 1974, or when it was previously reviewed and extended.

However, the Government believes that there is still a strong rationale for an EMDG style scheme, given that the specific problems listed above continue to confront many small and medium sized enterprises (SMEs) seeking to export from Australia, and that the EMDG Review concluded that the EMDG scheme is an effective and well targeted means of encouraging SMEs into export.

There are a number of possible alternatives to the continuation of the scheme. These include: allowing the scheme to lapse; placing greater emphasis on trade policy; offering tax deductions to exporters; introducing a discretionary scheme; or introducing an exporter loans scheme.

While several alternatives to the EMDG scheme were discussed during the EMDG Review process, there was little support for them and they were not canvassed in the Review report. It is clear however that the alternatives to the EMDG scheme mentioned in the paragraph above have significant drawbacks.

• Do nothing - allow EMDG to lapse. This would reduce the funding available to Australian SMEs entering into export by around $150m per annum, and would cause a significant reduction in the number of Australian firms entering export. Abandoning the scheme without providing an alternative would provide a negative – and incorrect – signal to Australia’s export sector.

• Greater emphasis on trade policy. It might be argued that further Government efforts to reduce barriers to accessing foreign markets, or to persuade foreign governments to reduce assistance to (say) their agricultural producers, would remove or reduce the need for an EMDG scheme. The Government already pursues a vigorous and active trade policy which is progressively opening up overseas markets for Australian goods and services. Market access initiatives and the EMDG scheme are complementary policy strategies, the former aiming to open up overseas markets to our exporters, the latter attempts to overcome market failures.

• Tax deductions for export promotion expenditure. Such an approach would have several drawbacks: increased complexity in tax legislation and administration; potentially weakened accountability and targeting of benefits; benefits only available to firms making a taxable profit.

• A discretionary grants scheme. Grants could be allocated, not by legislated criteria as under the EMDG scheme, but instead by Ministers or officials exercising discretion based on merit principles. Drawbacks here would be higher administration and compliance cost, weakened accountability, potential allegations of unfairness or bias, and lack of industry certainty as to entitlement to grants.

• Exporter loans schemes. Loans schemes will tend to allocate funds to the more established firms (as these will be assessed as better credit risks), and therefore are a less effective means of providing incentives to the small/emerging exporter sector which the Government wishes to target than is a grants scheme.

The costs and benefits of these alternatives are difficult to quantify, as in each case the cost is largely a function of the funding that a government might choose to allocate to them. In each case, however – with the exception of trade liberalisation initiatives, which complement and enhance the incentives provided by EMDG – experience suggests that it is highly unlikely that these options would yield the estimated (by Professor Bewley – see below) $12 in additional exports for every $1 grant provided by government.

Impact assessment

The EMDG Review Steering Committee was formed in 1999, with 10 members including key business representatives and representatives from the Treasury, Department of Foreign Affairs and Trade, Department of Finance and Administration, Department of Industry, Science and Resources, and Austrade. PricewaterhouseCoopers (PWC), was commissioned to undertake a survey and econometric analysis, and Austrade’s Chief Economist, Mr Tim Harcourt, was asked to prepare a paper on the benefits of supporting export promotion.
 
To assist the Austrade Board and the Steering Committee with the Review, four major sources of information were used. The sources were as follows:

1. Export Market Development Grants data. Comprehensive historical data was extracted from the EMDG database and analysed to provide comparative and trend data on various aspects of EMDG applicants and recipients. This data confirmed that:

• most EMDG applicants are small and medium, rather than large enterprises, with the majority of recipients employing less than 25 employees

• the majority of EMDG applicants have export earnings under $5 million ie. they are smaller exporters most able to benefit from and in need of the EMDG incentive

• an increasing percentage – currently 22 per cent – of applicants are located in regional and rural areas, reflecting the success of government initiatives to increase uptake of the scheme outside the capital cities

• the EMDG applicant population has changed over time, with a greater proportion of applicants coming from the service and IT sectors, reflecting the broader changes in the composition of Australian industry.

2. Survey of Export Market Development Grant users and non-users. A survey was conducted to obtain comparative behavioural data on current EMDG users, past EMDG users and non EMDG users, and to enable conclusions to be drawn about the effectiveness of the EMDG scheme and the role it plays in encouraging Australian exporters to develop export markets. Approval to conduct the survey was obtained from the Australian Bureau of Statistics Statistical Clearing House (Approval Number 00494–01). Just under 5,000 survey forms were distributed and a third of these were completed and returned, as shown in the following table.

Table: EMDG Survey Responses: By group (users, past users and non-users)

• The survey results showed that EMDG is a significant factor influencing businesses to seek out and develop export markets, supporting commercial decision making rather than adversely influencing it.

• They also indicated that the scheme has contributed to employment as well as export growth.

3. Econometric analysis. The econometric analysis was carried out by Professor Ronald Bewley, Professor of Econometrics at the University of New South Wales. Particular answers sought included: ‘does receipt of a grant cause firms to increase their marketing expenditure?’ and ‘does increased marketing expenditure result in higher exports?’.

• This analysis showed that business is investing the full value of grants back into export promotion activities and that this additional promotion is resulting in additional exports for Australia.

• Professor Bewley estimated that:

“...in 1997/98, $133.7 million provided in grants resulted in $135 million in additional export promotion and this resulted in an estimated $1.69 billion in additional exports for Australia. The Board notes that the Bewley analysis suggests that this is more than $12 in additional exports for every $1 grant provided by government. The evidence from the survey suggests that increased exporting activity is contributing to the adoption of best practice activities and that EMDG recipients are generally more export and best practice focussed than non-EMDG recipients”. (Review report p. 15)

4. Public submissions. In December 1999 and January 2000, advertisements inviting public submissions were run in all major national, State and regional newspapers. Letters were also sent to current EMDG clients and a notice was posted on the Austrade website.

Consultation

In total, 245 public submissions were received from interested parties, representing a wide range of exporters, industry associations, EMDG consultants and Government bodies as shown in the Review booklet. The thirty five submissions received from associations and industry groups incorporated the views of their large memberships.

The public submissions were overwhelmingly supportive of the continuation of the scheme, while in most cases proposing some changes to scheme parameters and rules, in particular broadening access to the scheme and increasing the benefits offered by it. Five submissions suggested that the scheme does not help.

Industry and stakeholders were also offered the chance to comment on the Review recommendations after they were published.

• The response from industry and stakeholders to the recommendations of the Review was very positive. (45 post -submission comments received) Most active correspondents by industry were tourism (9), manufacturing (9) and wine (6) industries.

• The Review recommendation to continue the scheme for 5 years received overwhelming support. Most correspondents also supported the other recommendations contained in the review, while some advocated further changes to scheme rules.

However, the methodology used in the EMDG Review came under criticism from the Productivity Commission in its submission of March 2000.

The Productivity Commission stated that it is “important to assess the effects of grants payments in inducing additional marketing expenditure and exports. This requires the development of an improved methodology to overcome shortcomings in the form of analysis used in the [1994] review”.

This issue was addressed during the Review by Professor Bewley in his econometric analysis, which is published in full in the Review report. This analysis employed techniques not used in the previous, 1994 analysis: “Unlike in 1994, the new survey data contain information on expenditure patterns in three years (1996/97, 1997/98 and 1998/99) and so the opportunity to pool the data in a fixed effects regression model arose”. (p. 234) Professor Bewley concluded that “in 1997/98, $133.7 million provided in grants resulted in $135 million in additional export promotion and this resulted in an estimated $1.69 billion in additional exports for Australia”.

The Productivity Commission also raised the need for the Government to assess whether assistance in the form provided by the EMDG scheme yields net benefits to the economy as a whole, rather than just to certain exporters. Such an assessment requires that account be taken of all relevant costs – such as those associated with raising the revenue to finance the scheme and compliance and administration costs – not just the effects of the scheme in increasing marketing expenditure and exports.

The Austrade Board addressed this issue through the Review process, by commissioning Mr Tim Harcourt, Austrade’s Chief Economist, to prepare for it a paper on “The benefits of supporting export promotion”. The resulting paper, which is published in its entirety in the Review report:

• highlights the microeconomic gains accruing from firms entering into export

• discusses market failures, obstacles to exporting, ’new economy’ and macroeconomic (balance of payments) arguments for exporting

• notes linkages between the growth of exports as a percentage of GDP, the unprecedented growth of multifactor productivity in Australia during the 1990s, and innovation and exporting

• and concludes that “the EMDG scheme helps provide a positive net benefit to aggregate productivity, the nation’s stock of ‘knowledge capital’ and rising living standards for all Australians”. (p. 151)

Conclusion

In August 2000, the Government considered the outcomes of the EMDG Review, which showed that:

• the EMDG scheme was effectively meeting the Government’s objectives

• the overwhelming response from public submissions was that EMDG is encouraging businesses to seek out and develop export markets

• the PricewaterhouseCoopers report, including the econometric analysis from Professor Bewley, demonstrated that EMDG is effective

• the Review survey results showed that EMDG is a significant factor influencing businesses to seek out and develop export markets, supports commercial decision making rather than adversely influencing it, and influences the development of an export culture

• the econometric analysis by Professor Bewley showed that business is investing the full value of grants back into export promotion activities, that this additional promotion is resulting in additional exports for Australia, and that EMDG is effectively meeting the financial needs of business.

Given these findings, and the fact that the current approach offers clear accountability and transparency through the application of legislated rules, relatively low compliance and administration costs (capped at 5% of total grants budget), and accurate targeting of funds to the small/emerging export target group, the Government therefore announced that the scheme would be continued for another five years.
 

Implementation and review

The continuation of the scheme will involve the continued administration of the scheme by the Australian Trade Commission. Small business will continue to access the scheme by making applications to Austrade using a standard application form.

The EMDG Review recommended that the scheme have a sunset clause. The Government therefore agreed to the recommendation that the scheme be extended to June 2006, but with a legislated requirement for a scheme review to report by June 2005.

In preparing the 2005 review, Austrade will seek advice from relevant agencies on survey design and statistical analysis methodology.

ABBREVIATIONS

The following abbreviations are used in this explanatory memorandum:

NOTES ON CLAUSES

Clause 1 This Act may be cited as the Export Market Development Grants Amendment Act 2001.

Clause 2 The Act commences on the day on which it receives the Royal Assent.

Clause 3 There is only one Schedule amending the Export Market Development Grants Act 1997.


SCHEDULE 1 – Amendment of the Export Market Development Grants Act 1997

Item 1 This amendment requires that a review of the EMDG Scheme must commence by not later than 1 January 2005.

Item 2 This amendment requires that Austrade must complete the review and provide a written report to the Minister not later than 30 June 2005.

Item 3 This amendment extends the tenure of the scheme so that grant years starting on 1 July 2001 until the grant year starting on 1 July 2005 are included as grant years under the Act.

Item 4 This amendment reduces the level of minimum eligible expenses required to be incurred by a grant applicant from $20,000 to $15,000.

Item 5 This amendment reflects the amendment at Item 6 that provides for a minimum $2,500 grant amount for all applicants except for those who are grantees for three or more grant years and who are subject to the Act’s export earnings performance requirements – refer to subsection 63(3).

Item 6 The Act has no defined minimum grant requirements although in practice the present minimum grant for all applicants except those who are grantees for three or more grant years and who are subject to the Act’s export earnings performance requirements is $2,500 – refer to subsection 63(3). The current minimum grant arises from the required $20,000 minimum expenses amount and the application of subsection 63(1) of the Act as follows:

$20,000 ÷ 2 = $10,000
$10,000 - $7,500 = $2,500.

This amendment provides for a continuation of the current minimum grant provision of $2,500 for all applicants except for those whose grants are reduced by the exporter performance test at subsection 63(3).

Example: Applicant is not subject to the exporter performance requirements and incurs $16,000 expenses in a grant year. Applying the standard formula to calculate the applicant’s provisional grant:

$16,000 ÷ 2 = $8,000
$8,000 -$7,500 = $500

Because the applicant’s provisional grant is less than $2,500, this amendment provides for it to receive a grant of $2,500.

Item 7 This amendment derives from Item 6 and specifies that an applicant’s provisional grant is to be the lower of the $2,500 amount and the amount worked out by the exporter performance test calculation at subsection 63(3) of the Act. This amendment refers to the operation of subsection 63(2) of the Act which provides for an amount of 3% of the amount calculated at subsection 63(1) of the Act where an applicant elects not to claim expenses of communication (refer to item 3 of the section 33 table). Some applicants but not all will have included communications in their claimed expenses.

Example 1: Applicant A is not subject to the exporter performance requirements and incurs $17,000 expenses with communications expenses being included within this amount. Its grant will be calculated as follows:

$17,000 ÷ 2 = $8,500
$8,500 - $7,500 = $1,000

Because Applicant A had communications expenses included in its claimed amount, subsection 63(2) is not applied. Because its provisional grant amount is less than $2,500, subsection 63(2A) will operate to provide that A receives a grant of $2,500.

Example 2: Applicant B is not subject to the exporter performance requirements and incurs $19,950 expenses with no communications expenses included in this amount. Its grant will be calculated as follows:

$19,950 ÷ 2 = $9,975
$9,975 - $7,500 = $2,475

Because Applicant B had no communications expenses in its claimed amount, the application of subsection 63(2) provides for it to receive an additional 3% allowance ($74). B’s grant is therefore (2,475 + 74) or $2,549. Given that this amount already exceeds $2,500, subsection 63(2A) will not apply, and so B will receive a grant of $2,549.

Item 8 This Item reflects Item 9 which has the effect of combining two of the expense categories described in the s.33 table (overseas representatives and short term consultancy categories) and modifying the rules for the latter. This Item changes the overseas representatives expense category in the table from item 1 to Item 1A.

Item 9 This Item amends the existing table of eligible expense categories at s.33 of the Act. The existing short term consultant expense category is currently at item 6 in the s.33 table. This Item relocates the expense category to item 1B in the table and removes the requirement that consultant expenses should be limited to short term consultant assignments only. Apart from this change, all existing provisions are to be retained for determining what are eligible consultant expenses under the Act.

Another of the existing expense categories is overseas representation expenses. This Item does not change the rules applying to overseas representation expenses except for changing the limit on the present maximum expenses ceiling of $200,000 for any grant year.

Although the overseas representation expense category is item 1A and the consultant expenses category is item 1B in the section 33 table, this Item combines these two expense categories into one for the purposes of applying a ceiling of $250,000 combined expenses for any grant year. First-time applicants for a grant combining two years’ expenses in terms of paragraph 29(c)(i) of the Act are limited to claiming a total of $250,000 for the combined two years’ expenses incurred on item 1A and item 1B activities.

Item 10 Refer to Item 9.

Item 11 The Act has six existing eligible expense categories listed in the section 33 table. Item 5 of this table provides for expenses in relation to participating in a trade fair and for those relating to providing promotional literature and advertising material to be eligible expenses. This Item separates these two broad types of activity so that the trade fairs category becomes item five in the renumbered section 33 table and the promotional literature and advertising material category becomes item six in the table. The Item also expands the existing trade fair expenses category so that applicants incurring expenses in relation to seminars, in-store promotions, international forums, private exhibitions or similar promotional events can have these expenses allowed for grant purposes.

Item 12 This Item aligns the rules applying to the time allowed by Austrade to applicants responding to any type of Austrade information request under the Act. It removes the specified period (28 day) requirement for applicants seeking to meet the Act’s grants entry requirements.

Item 13 Sections 18 and 19 respectively of the existing Act defines who is subject to the current registration requirement and also defines the registration requirements. This Item deletes the reference to registration. Intending first-time applicants presently subject to the Act’s registration and grants entry requirements will, in relation to the 2001-2002 grant year onwards, only be required to meet the grants entry requirements.

Items 14 to 21 Refer to Item 13.

Item 22 Refer also to Item 23. This Item relates to calculating exports of external services exporters for the purposes of the $25 million export earnings ceiling amount and provides that the calculation will be based on the consideration received during the year for the supply of services before deducting any payments made outside Australia in relation to the services.

Example:
Applicant C earns $30 million from an agricultural development project in the Middle East in a grant year. It pays out $10 million to foreign residents for fuel and for leasing machinery used for the particular agricultural project. For the purposes of the $25 million export earnings ceiling amount, Applicant C is deemed to have export earnings in the grant year of $30 million.

Item 23 Subsection 10(1) of the Act currently defines how export earnings are to be calculated for the various purposes of the Act. This Item refers to Item 22 and provides that, for the purposes of the $25 million export earnings ceiling amount calculation for external service exporters, the measurement will be the consideration received during the year for the supply of services before deducting any payments made outside Australia in relation to the services.

Item 24 Section 10 of the Act contains a table that explains how to calculate export earnings for EMDG applicants exporting the various eligible product categories under the Act. This Item clarifies the definition of eligible external services. It changes the present requirement that an external services exporting applicant has to supply an eligible external service to instead require that the applicant must have sold the service to a foreign resident. This Item is related to Item 36 which, correspondingly, limits grants to those expenses incurred by an applicant in promoting exports where it intends to sell to foreign residents. Items 25 to 34 inclusive are equivalent provisions dealing with calculating the export earnings for applicants exporting other categories of services.

Items 25 to 34 Refer to Item 24.

Item 35 Subsection 25(2) of the existing Act defines an eligible tourism service. An Australian tourism services supplier can supply services to an inbound tour operator which in turn can supply the service to a foreign resident. Both the supplier and the inbound tour operator can receive grants under the Act’s existing provisions. This Item does not change this position. It reflects the changed definitions in Items 24 to 34 inclusive and should also be read in conjunction with Item 36.

Item 36 In order to be eligible for grant purposes, expenses must be incurred for an “approved promotional purpose” under the Act. The existing paragraph 37(d) of the Act requires an applicant to incur expenses on promoting services that it intends to supply. This Item clarifies the requirement that an applicant should have to supply these services in a principal capacity, that is, where it intends to actually sell the services. The Item is linked to the export measurement requirements at section 10 of the Act and Items 24 to 34 inclusive.

Item 37 This amendment adds to the list of types of expenses that are excluded expenses at Section 40 of the Act. The current list has expenses associated with promoting “X”-rated films as one of its exclusions but the rules do not prevent applicants claiming expenses relating to other forms of pornography export such as publications, computer games, material distributed via the internet and telephone sex services. The excluded products will be those where the content is equivalent or rated more highly than the presently excluded “X”-rated film category.

Item 38 This amendment defines the types of pornographic material for which no EMDG support will be provided. The exclusions are based on other Commonwealth Government legislation that defines, classifies and limits access to pornography. See Items 39 – 46 for the cross-references to this other legislation.

Items 39 to 46 Refer to Item 38.

Item 47 This amendment provides that a grant, or an advance on account of a grant, is not payable to any applicant if that applicant (or, in the case of Approved Joint Ventures, that Joint Venture’s nominated contact member) does not have an Australian Business Number when that applicant becomes entitled to the grant or an advance on account of a grant.

Item 48 Refer to Item 47.

Item 49 This Item applies to those educational institutions providing courses to overseas students in Australia which are required to be registered under the Education Services for Overseas Students (Registration of Providers and Financial Regulation) Act 1991 (ESOS Act). Any EMDG applicant required to be registered under this Act but which is deregistered at the time it becomes entitled to receive a grant or at any time thereafter, will not be entitled to receive a grant. No grant recovery action will be taken should a grant recipient subject to registration under the ESOS Act subsequently become deregistered.

Items 50 to 59 Refer to Item 49.

Item 60 Under the existing Act, applicants are required to be solvent on two occasions, namely when they apply for a grant and when they become entitled to receive a grant. This Item requires applicants to be solvent only when they become entitled to receive a grant.

There is no change made to any of the Act’s definitions of insolvency and technically insolvent body corporate applicants will continue to have the right to obtain appropriate certification under the existing Act’s Section 15 so that they can be accepted as solvent businesses.

Items 61 to 63 Refer to Item 60.

Item 64 This Item applies to claims for marketing visit expenses where relatives travel together or meet each other during overseas visits. It reduces the time required for related travellers to have been full-time employees of the applicant prior to any such visit. The current qualifying period for the travel costs of relatives employed in the business is five years immediately prior to the joint travel. This Item shortens the qualifying period to one year immediately prior to the joint travel.

Example 1: Applicant A claims for marketing visit expenses of a Mr A and a Mrs A, both of whom are directors of the applicant company. Each travelled for eligible purposes under the Act. Mr A travelled for three weeks and visited the UK and the USA. Mrs A travelled for one week only, to the UK where she travelled with Mr A visiting potential customers and promoting the firm’s export business. Mr A has been a full-time employee of the applicant for 10 years but Mrs A only started working for the applicant six months prior to the visit. In this case, under the proposed amendment (and under the current rules as well), the marketing visit expenses of only one of the travellers will be allowed.

Example 2: Applicant B claims for marketing visit expenses of a Mr B and a Mrs B, both of whom are directors of the applicant company. Each travelled for eligible purposes under the Act. Mr B travelled for three weeks and visited the UK and the USA. Mrs B travelled for one week only, to the UK where she travelled with Mr B visiting potential customers and promoting the firm’s export business. Mr B has been a full-time employee of the applicant for 10 years, while Mrs B started working for the applicant two years prior to the visit. In this case, under the proposed amendment, the marketing visit expenses of both of the travellers will be allowed, as long as the appropriate substantiation requirements and other provisions of the Act are met.

Item 65 This Item refers to amendments to Diagrams 1 and 2 in the Reader’s Guide. The Diagram 1 amendment derives from Item 47 which provides that a grant, or an advance on account of a grant, is not payable to any applicant if that applicant (or, in the case of Approved Joint Ventures, that Joint Venture’s nominated contact member) does not have an Australian Business Number when that applicant becomes entitled to the grant or an advance on account of a grant. The Diagram 2 amendment derives from Item 13 which removes the Act’s existing registration requirements and from Item 60 which requires applicants to be solvent only when they become entitled to receive a grant and not at the time of applying for the grant.

Item 66 This amendment to Diagram 3 in the Reader’s Guide derives from Item 35 which clarifies the definition of what is an eligible tourism service

Item 67 This amendment to Diagram 4 in the Reader’s Guide is based on Item 4 which reduces the level of minimum eligible expenses required to be incurred by a grant applicant from $20,000 to $15,000. It also corrects an incorrect cross reference in the current Act. The box worded “Were the expenses for maintaining an overseas representative or providing free samples? (Section 31)” should refer to Section 33 rather than Section 31.

Item 68 With the exception of amendments made by Item 37 (Publications, films and computer games of certain classifications etc), Item 47 (Requirement for an ABN) and Item 49 (Providers of courses to overseas students), the provisions of this amendment bill apply to any grant year that commences on or after 1 July 2001

Item 69 The amendment made by Item 37 applies to expenses incurred on or after 1 July 2001.

Item 70 The amendments made by Item 47 (Requirement for an ABN) and by Item 49 (Providers of courses to overseas students) applies in relation to a grant, or an advance on account of a grant, in respect of a grant year that commences on or after 1 July 2001.

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