annual report - export finance australia · export finance business overview report of operations...

Annual Report

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2004Level 10 Export House, 22 Pitt Street, Sydney NSW 2000

Tel +61 2 9201 2111 or tollfree 1800 887 588 Fax +61 2 9251 3851 Email [email protected]

For further information, please contact EFIC or visit

www.efic.gov.au Australia's Export Credit Agency

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MissionProfilePerformance Against Principal ObjectivesYear in ReviewExport Finance Business OverviewReport of Operations

Summary and Statement by the BoardAn Overview of EFIC’s RoleExport Finance BusinessCredit Insurance BusinessCorporate Matters

Appendices1. Corporate Governance 2. Board Membership 3. Organisational Structure 4. EFIC’s Exposures 5. Export Finance Facilities Signed in the Year Ended 30 June 2004 6. Environment Report 7. New Borrowings 8. Other Miscellaneous Information 9. EFIC: A Ten Year Summary

Financial Statements for the year ended 30 June 2004Results at a Glance

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contents

Results at a Glance

Commercial and National Interest Accounts 2003/04 2002/03$ million $ million

Exports and overseas contracts supported

Credit insurance 1,835 6,741

Export finance 411 453

Total 2,246 7,194

Exposures at year end

Export finance loans 2,054 2,286

Credit insurance rescheduled debts 647 689

Export finance guarantees, bonds, insurances 617 725

Credit insurance - 1,192

Less reinsured (mainly credit insurance) (148) (1,255)

Total retained risks 3,170 3,637

Revenue

Interest income 166 202

Interest expense (124) (161)

Premiums and fees 32 47

Less premiums and fees ceded to reinsurers (8) (22)

Net revenue 66 66

Profit

Commercial Account 28 26

National Interest Account 22 16

Total 50 42

Dividends paid during year (Commercial Account only) 15 10

Equity at end of year (Commercial Account only) 266 254

Return on average equity

(Commercial Account only) 11% pa 10% pa

Number of staff at year end 57 110

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To support the growth ofAustralian businessesinternationally.

We seek to create opportunities for our clients when the private market lacks capacity or willingness, filling the ‘market gap’.

We bridge the gap by drawing on over 45 years experience in assessingrisk in markets around the world. By providing structured finance andinsurance solutions, risk managementservices and advice, we act as acatalyst to help our clients and alliesdevelop new markets and build privatemarket capacity.

Intensively managing risk allows EFIC to be self-sustaining in its operationsand, through our work, to contribute tothe community in Australia and overseas.

missionAustralia’s export

credit agency

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2

South America (1%)

$33 million

North America (8%)

$303 million

As at 30 June 2004, EFIC managed $3.6 billion exposures across 43 countries.

profile

3

Africa (2%)

$59 million

Middle East (5%)

$188 million

Europe (22%)

$788 million

Pacific (1%)

$50 million

Asia (61%)

$2,170 million

Performance AgainstPrincipal Objectives . . . . . . . . . . . . . .

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Performance Against Principal Objectives R

> Support more exports and encourage growth in the number of small to medium-sized clients.

> In relation to EFIC’s short-term Commercial Account credit insurance alliance, work with Atradius (formerly Gerling NCM) to help achieve agreed performance benchmarks and thus enable the sale of the business within the two-year Alliance period.

> Generate sustainable profit at the highest possible level within the constraint of providing support on prices and terms consistent with EFIC’s mandate and competitive with other export credit agencies.

Results Key Performance Indicators R

For the Corporation> Support $2.5 billion of exports on the Commercial Account.> The successful implementation of the Alliance within the established timetable and the

sale of the Credit Insurance business in 2003.> For each business, achieve budgeted financial outcomes on the Commercial Account.> High quality advice to the satisfaction of the Minister.

For Export Finance > Sign $504 million of new facilities.> Support $0.9 billion of exports and overseas contracts.

For Credit Insurance> Prior to the sale, support $1.6 billion of exports.

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Principal Objectives

Outcomes R

By the Corporation > Supported exports of $2.2 billion.> EFIC’s short-term Commercial Account Credit Insurance business was sold on 30 September 2003,

after a 20 month Alliance achieved the performance benchmarks.> The Corporation’s profit was $27.7 million, which was more than budget.> No qualitative client satisfaction survey was carried out during the year due to the sale of the Credit Insurance business.

There was no negative trend in business during the transition. > Provided advice in a number of areas, notably in relation to the Alliance. Operational matters were also dealt with

including the management of the National Interest Account, including the safety net credit insurance facility for Iraq.

By Export Finance> Signed $91 million of new facilities on the Commercial Account and $5 million on the National Interest Account.> The new signings on both the Commercial and National Interest Accounts will support $523 million of exports and

overseas contracts.> Generated profits of $23.4 million on the Commercial Account and $22.6 million on the National Interest Account,

which were significantly more than budget.

By Credit Insurance> Supported $1.8 billion of exports on the Commercial Account over a 3 month period. > Generated a profit of $4.3 million, which was significantly more than budget.

> Provide quality services to exporters at a sustainable cost.

> Provide quality services to the Government in assessing, implementing and administering the National Interest Account.

Performance Against Principal Objectives. . . . . . . . . . . . . .

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Year in Review

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From LeftMr Angus Armour Managing DirectorMr Peter Young ChairpersonMr Ian Knop Deputy Chairperson

Year in ReviewIn the past year, EFIC supported $2.2 billion of exportswhile recording total profits of $50.3 million on EFIC’sCommercial Account and the National Interest Accountthat we manage for the Australian Government.

In the Export Finance business, the value of newfacilities signed in the year was significantly belowour average of the past five years. This was due to various factors including elections in key marketsthat delayed the progress of projects, and increasedprivate market capacity in some markets. From the perspective of the value of export contractssupported, however, the Export Finance businessunderpinned $523 million of export contracts in a cross-section of countries in Asia, Africa, the Middle East, Europe and North America.

On 30 September 2003, EFIC’s Credit Insurancebusiness was sold to Gerling NCM, which wassubsequently renamed Atradius. The sale of theCredit Insurance business followed a comprehensivereview of domestic and international developmentsin the export credit insurance and financial servicesindustries by EFIC and the Australian Government.The review found considerable private marketcapacity had developed for this business. Thereview also found that it would not be practical for a business of EFIC’s scale to fund the informationtechnology investment necessary to offer bestpractice short-term export credit insurance productsand services to Australian exporters.

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Year in Review. . . . . . . . . . . . . .. . . . . . . . . . . . . .

During the year, Mr Frank Levy’s term as a Directoron EFIC’s Board came to an end. In his six years as a Director, Mr Levy made a significant contributionto EFIC over a period of great change.

Ewen Waterman, Robin Cumming and Geoff Hickeyalso left the Corporation with the sale of the CreditInsurance business. They contributed enormously tothe Corporation as members of the Executive duringa challenging period. Also, our colleagues in theDepartment of Foreign Affairs and Trade contributedsignificantly to EFIC during the year, particularlyduring the sale process. And of course, we wouldlike to thank our colleagues at Atradius and wishthem well in their objective of expanding theAustralian credit insurance market, as we work toincrease Australia’s export and investment successthrough EFIC.

The Australian Government, through its NationalInterest Account, will continue to have available thecapacity to provide short-term credit insurance ininstances where market disruptions diminish theprivate sector’s capacity to provide the necessarysupport for Australian exporters.

EFIC has undergone significant change through this sale process, both institutionally and from theperspective of its business profile and client base.This has been a year of rebuilding for EFIC, includingthe re-branding of EFIC’s corporate identity and the introduction of the Australian Government logo,and revisiting the risk management disciplinesunderpinning EFIC’s activities to ensure that theyremain robust in the context of our ongoingoperations. This necessitated some structuralchanges, and along with the impact of the sale,EFIC has moved to a corporation with 57 staff as against 110 staff prior to the sale.

The forecast for the next 12 months is encouraging,particularly the potential for growth in new markets.EFIC is focused on its mandate from Government: to support the growth of Australian businessesinternationally, particularly in the ‘market gap’ whereprivate sector capacity is insufficient or unavailable.Market volatility and the risks inherent in EFIC’smandate and resulting portfolio will continue topresent challenges going forward. Intensivelymanaging these risks allows EFIC to fulfil anothercritical element of its mandate: to be self-sustainingin its operations and contribute to the community in Australia and overseas.

Many people helped meet the challenges of thepast year.

Within EFIC, our staff made the difference both by achieving the Alliance targets and by maintainingclient satisfaction during a turbulent period. Our staffalso had significant success in promoting the profileof the ‘new’ EFIC, and introducing a number of key systems that will provide the platform for cost-effective growth and management of the risks in our portfolio.

Year in Review. . . . . . . . . . . . . .. . . . . . . . . . . . . .

During the past 12 months, transactions werecompleted in a number of different countries, with a focus on South East Asia and the Middle East. A list of transactions for the 12 months to 30 June 2004 is shown in the table on the next page.

EFIC's experience is that no two clients are thesame and no two transactions are alike. TheCorporation’s broad range of products and flexibleapproach enable it to structure financing andinsurance solutions tailored to the individual client,transaction and market.

Products include:

> Direct Loans> Project Finance> Export Finance Guarantees> Documentary Credit Guarantees and Finance> Bonds, including Performance, Advance Payment

and Warranty Bonds> Medium-Term Payments Insurance> Political Risk Insurance

As part of EFIC’s ongoing commitment to developingnew products, in March 2004 EFIC introduced apolitical risk insurance policy for Plant and Equipmentto meet the specific needs of the mining, engineeringand construction sectors.

EFIC is committed to increasing Australia's exportsand overseas investments by delivering flexible andprudent finance and insurance solutions to its clients.

In the Export Finance business, the Structured Tradeand Project Finance team originates, structures andexecutes transactions for clients across a range ofindustries. The Portfolio Management team managesthe ongoing transaction risks of a project's performance.Together, they form specialist sector teams.

These teams are organised along industry lines,enabling sector specialists to develop a deeperunderstanding of industry requirements and client needs.

Industry specialists are grouped in the followingsector teams:

> Information Technology, Communications and Defence

> Natural Resources> Infrastructure, Construction and Engineering> Shipping and Transport> Manufacturing and Services

EFIC’s clients work in competitive and difficultmarkets often involving significant risk. TheCorporation’s expertise and experience from workingon complex transactions in these markets can helpprovide Australian businesses with the financialsupport, risk mitigation strategies, knowledge andnetworks required to compete successfully.

Intensively managing project risks by proactivelyidentifying and managing the full spectrum oftransaction risks relating to the portfolio is a key strength of EFIC's Export Finance business. This involves working closely with co-financiers,borrowers and exporters throughout the life of the facility to ensure successful outcomes.

Export Finance Business

Export Finance BusinessOverview

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Exporter/Investor

Almos Systems Pty Ltd


EW Cox International Pty Ltd

Financial Network Services Pty Ltd

Gold Peg International Pty Ltd

Gulf Smelter Services Pty Ltd

Innovonics Limited

McConnell DowellConstructors (Aust) Pty Ltd

McConnell Dowell Constructors (Aust) Pty Ltd

Mincom Ltd

Multiplex Engineering Pty Ltd

Oceanis Australia Ltd

Refrigeration Engineering Pty Ltd

Thales ATM Pty Ltd

The Marketplace Co Ltd

Voest Alpine Mining &Tunnelling Pty Ltd

*NB The Report of Operations and Appendix 5 provide further detail on the export finance facilities signed and sectors supported for financial year 2003/04

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Export Finance BusinessOverview. . . . . . . . . . . . . .

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Transactions on the Commercial Account for year ended 30 June 2004

Country

Kuwait

Kuwait

United States of America

Indonesia

Japan

Bahrain

United Kingdom

Mozambique

Laos


Mozambique

Thailand

Malaysia

Vietnam

Philippines

Russia

Goods

Weather observation systems

Meteorological data processing systems

Crane, hoist and monorail equipment

Core banking system software

Food processing equipment

Plant for processing bath

Rail carriage CCTV’s

Construction of gas pipeline

Supply and installation of structural, mechanical piping works

Supply and installation of Ellipse software package

Engineering, procurement and construction services

Procurement, design and construction of aquarium

Design, manufacture and supply of refrigeration compressor

Air traffic management system

Consultancy services for implementation of wholesale electricity spot market project

Coal mining vehicles

Facility

Bond

Bond

Bond

Loan

Bond

Bond

Bond

PRI Debt

Bond

Bond

Bond

EFG

Bond

UCI

MTI

DCG

EFG indicates Export Finance Guarantee MTI indicates Medium-term Payments Insurance

DCG indicates Documentary Credit GuaranteeUCI indicates Unfair Bond Calling Insurance

Bond indicates Bonding facilityPRI indicates Political Risk Insurance

EFIC is well regarded for its experience in supportinga number of large mining, oil and gas projects overthe past decade. With commodity prices expectedto remain relatively strong and the global demand forenergy expected to continue to grow strongly, EFICanticipates that natural resources projects andrelated contracting services will be among the mostactive sectors during the next 12 months. EFIC is currently reviewing the project finance, bonding and political risk insurance needs of more than twodozen Australian resource and related contractingcompanies in over a dozen countries.

Natural ResourcesThe Information Technology, Communications andDefence team has helped Australian companiesgrow their export businesses over many years. It is active in most sub-sectors of the technologyindustry with transactions in the past year includingthe provision of a direct loan to an Indonesian bankto support the export of a core banking softwarepackage by an Australian software specialist.

Additionally, EFIC provided unfair bond calling insuranceto cover an exporter implementing an air trafficmanagement system in Vietnam, two bond facilitiesfor an overseas buyer of a weather observationsystem and meteorological data processing systemin Kuwait and medium-term payments insurance for an Australian exporter establishing the necessaryinfrastructure and interfaces for a wholesaleelectricity spot market in the Philippines.

Information Technology,Communications and Defence


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Financial Network Case Study R Services Pty Ltd

When Financial Network Services Pty Ltd (FNS) won a contract with PT Bank Negara Indonesia TBK (BNI), BNI sought a Direct Loan from EFIC to finance its purchase of IT software under the contract.

EFIC provided a direct loan to BNI, Indonesia’s second largestbank, for over A$9 million, enabling the bank to purchase a banking software package (BANCS) from FNS.

FNS’ BANCS solution has allowed BNI to centralise operationsand control and audit all accounts from the bank’sheadquarters in Jakarta.

“EFIC has helped us expand into the Asia Pacific regionwhere we are now considered to be the leading internationalsupplier of banking software”, says Tony Ward, ManagingDirector, FNS.

BNI joins a long list of banks in the Asia Pacific region to adopt FNS’ software, including the State Bank of India, the world’s third largest bank in terms of infrastructure.

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Case Study R Oceanis Australia Pty Ltd

When Australian exporter Oceanis Australia Pty Ltd (Oceanis)required project finance to construct the Siam Ocean WorldAquarium, EFIC provided a flexible Export Finance Guarantee.

Siam Ocean World is the first aquarium to be built in Bangkokand reinforces Oceanis’ position as Asia Pacific’s largestowner and operator of aquariums.

“This is the first time Oceanis has undertaken business inThailand. EFIC’s assistance enabled us to continue to growour market in Asia, which is part of our worldwide expansionprogram,” said Oceanis’ Managing Director, Peter O’Brien.

EFIC provided DBS Thai Danu Bank Public Company Limitedwith a Thai Baht Export Finance Guarantee for a portion of theproject finance required to develop the project. As Bangkok’sfirst aquarium, EFIC’s due diligence was focused onunderstanding the potential in Thailand for this venue andthen structuring the facility around associated cash flows from the project.

EFIC was keen to work with a Thai bank as it enabled the finance to be provided in local currency. Matching theproject’s revenue stream was a major benefit as it eliminatedforeign currency risk for Oceanis.

Voest Alpine Mining & Case Study R Tunnelling Pty Ltd

Voest Alpine Mining & Tunnelling Pty Ltd (Voest Alpine),through ABN AMRO Bank NV (ABN AMRO), sought aDocumentary Credit Guarantee from EFIC for non-paymentrisks associated with Voest Alpine’s export of undergroundcoal mining vehicles to Russia.

Voest Alpine is a world-leading supplier of continuous miners,road headers and diesel equipment to the mining industry. The company is part of the multi-national group, Sandvik AB,and designs and manufactures the leading-edge vehicles and other mining products in Australia.

Voest Alpine signed a contract with a Russian buyer,Evrazholding, for the purchase of diesel powered undergroundcoal mining vehicles. Evrazholding arranged payment supportin the form of a Letter of Credit (L/C) through its bank, whileABN AMRO confirmed and negotiated the L/C.

EFIC provided a guarantee to ABN AMRO of the paymentobligations of Evrazholding’s bank in respect of Evrazholding’spurchase of the vehicles, which assisted Voest Alpine tofurther penetrate an increasingly important mining market.

McConnell Dowell Case Study R Constructors (Aust) Pty Ltd

EFIC’s Political Risk Insurance product supported McConnellDowell's involvement in construction of the Mozambique toSouth Africa natural gas pipeline.

Political Risk Insurance (PRI) for the project was split between a number of export credit agencies, Multilateral InvestmentGuarantee Agency (MIGA) and the World Bank. EFIC adapted its standard PRI cover to provide reinsurance to MIGA, whichprovided an umbrella PRI policy for debt to the project. Thepipeline links the Temane Gas Field to Sasol's PetrochemicalPlant at Secunda in Mpumalanga.

EFIC’s reinsurance cover provides protection against non-commercial risks of transfer restriction, expropriation, war andcivil disturbance, and breach of contract, and was provided tocover Standard Corporate and Merchant Bank (SCMB), one ofthe lenders providing debt finance to the Republic of MozambiquePipeline Investments Company (Pty) Ltd. The benefit to SCMBwas that it only had to negotiate one policy document with MIGA.

EFIC's flexibility and good relationships with MIGA and the otherexport credit agencies providing PRI for the project contributedto the high calibre political risk cover provided. This project willunlock significant socio-economic and environmental benefits to the people of Mozambique and South Africa.

EFIC has a long history of supporting Australia’sexport trade in the transportation sector, particularlyin the shipbuilding industry. Over the past sevenyears the Corporation has supported the export of vessels valued at almost $1.5 billion.

EFIC’s industry specialists work with Australianshipbuilders and their overseas customers tostructure complex arrangements that meet theirneeds for innovative and flexible financing solutions.

Over many years, EFIC has built strong relationshipswith Australia’s world-leading exporters and theshipping sector has traditionally been one of EFIC’sstrongest performers. While the large catamaran fastferry sector has been in the doldrums in recent years,there are now several transactions in the pipeline.

Shipping and TransportExport credit agencies (ECAs), including EFIC, playan important role in this sector due to the largefunding requirements of significant capital-intensiveinfrastructure projects and the limits on commercialbank appetite for uncovered term financing inemerging markets.

It is important that EFIC is involved early in thetendering process, as it is often a requirement when tendering that the contractor, exporter orinvestor demonstrate ECA support in the form of pre-completion performance support, projectfinance and/or political risk insurance.

Infrastructure projects are often large, complex andinvolve suppliers and sponsors from a number ofcountries. EFIC is experienced in working withdomestic and international financial institutions, ECAsand multilateral agencies to structure sophisticatedand comprehensive financial packages.

Infrastructure, Construction and Engineering


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Manufacturing and Services

The Marketplace Case Study R Company Pty Ltd

EFIC provided Medium Term Export Credit Insurance to TheMarketplace Company Pty Ltd (M-co) for its contract to establisha wholesale electricity spot market in the Philippines.

M-co successfully tendered to assist National TransmissionCorporation (Transco) in the Philippines implement a wholesaleelectricity spot market. Under the contract, M-co will play akey role in project managing the market operator’s readiness,overseeing delivery and testing of the market systems andproviding training to market participants and operations staff.

EFIC provided M-co with Medium Term Export Credit Insurancewhich covers against non-payment arising from definedpolitical and commercial risks, thereby reducing the financialrisk for M-co in the transaction.

The New Zealand Export Credit Office (NZECO) is alsoparticipating in this transaction by providing reinsurance to EFIC.

“This contract is a significant milestone in M-co’s journey in playing a key role in the development of Asian energymarkets,” says Philip Bradley, M-co’s Chief DevelopmentOfficer. “Risk mitigation strategies, such as EFIC’s MediumTerm Export Credit Insurance, has helped M-co withstand the uncertainties of today’s markets.”

EFIC's Manufacturing and Services team worksclosely with clients across a wide range of industriesto help them grow their increasingly important exportbusinesses.

A growing number of overseas buyers in themanufacturing and services sectors are nowrequiring exporters to supply them with bonds as security for advance payments or in support of their performance obligations under a contract.

EFIC’s support for Australian companies in this sectorover the past year confirmed this. All EFIC’stransactions in this sector involved the provision of bonding facilities to overseas buyers in countriessuch as Malaysia, Japan, Bahrain and the United States.


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A notable achievement was the sale of the CreditInsurance operations of the Corporation during the year. The Alliance with Atradius (formerly GerlingNCM) progressed well during the year and thedecision to proceed with the sale of the CreditInsurance business to Atradius was announced in August 2003, with the sale taking place inSeptember 2003.

This sale profoundly changes the nature of EFIC’s operations and re-focuses the activities of the Corporation on the Government’s mandate to profitably support Australian exporters in the ‘market gap’, where the commercial market is unable to provide the necessary support.

The Board of EFIC submits this Report of Operationsand the Financial Report under Section 9 of the Commonwealth Authorities and Companies Act 1997 and has prepared the two reports inaccordance with the Finance Minister’s Orders. The Corporation’s performance against its principalobjectives in the year ended 30 June 2004 is setout on pages 4 and 5 of this Annual Report and is to be regarded as forming part of the Report of Operations.

Signed for and on behalf of Members of the Boardin accordance with a resolution of the Board:

Peter YoungCHAIRPERSON

Angus ArmourMANAGING DIRECTOR

20 AUGUST 2004

EFIC recorded a total profit of $50.3 million whilesupporting A$2.2 billion of Australian exports.Highlights from the year include the following:

> Profit on Commercial Account activities of $27.7 million was $7 million ahead of budget(2002/03: $25.5 million), made up of an ExportFinance profit of $23.4 million (2002/03: $28.7million) and a Credit Insurance profit of $4.3 million(2002/03: a loss of $3.2 million).

> Profit on the National Interest Account of $22.6 million was $4.4 million ahead of budget(2002/03: $16.4 million). The profit derived fromactivities under the National Interest Account is transferred to the Australian Government anddoes not form part of EFIC’s net profit or reserves.

> Total new Export Finance facilities of $96 million(2002/03: $473 million), supporting exportcontracts of $523 million (2002/03: $2.1 billion),were lower than budgeted due to a range offactors including delays or unforeseen events inkey projects, the strength of the Australian dollaras well as economic and political uncertainty inoverseas markets. From the perspective of thepast five years, however, the level of exportcontracts supported was a good result.

> Supported total exports of $2.2 billion during theyear (2002/03: $7.2 billion), the fall representingthe sale of the Credit Insurance business inSeptember 2003.

As in previous years, the Export Finance businesswas the major influence on the Corporation’s profit.While total income increased, the important factorin determining Export Finance profitability is theprovisioning for impairment and loss. On theCommercial Account, the general provision for lossis affected by both the risk, size and tenor of theportfolio. The charge for general provision for losseswas $3.5 million, which compared with a write-back of $5.2 million in the previous financial year.

Report of Operations

Report of OperationsSummary and Statement by the Board

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Report of OperationsAn Overview of EFIC’s Role. . . . . . . . . . . . . .

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EFIC’s Annual Report is tabled in the Federal Parliament.

Any budgetary appropriation in respect of EFICwhich relates to the National Interest Account, iseffected through the Department of Foreign Affairsand Trade and is scrutinised by Parliament.

Operations

In 2003/04 EFIC operated two businesses in supporting Australian exports:

> Export Finance, under which EFIC providesmedium to long-term finance facilities (generally for more than two years) to the buyers ofAustralian exports, or to their financiers, to assist with the purchase of exports. The exports financed this way are usually capitalgoods and services rather than commodities orconsumables. The finance is normally provided as a loan to an overseas buyer or as a guaranteeto a bank lending to an overseas buyer. Thisbusiness also provides: performance and othertypes of bonds; medium-term political riskinsurance in respect of overseas investments,debt, and plant and equipment; export workingcapital guarantees; and other medium-terminsurances such as export credit insurance forpayment terms of more than two years; and

> Credit Insurance, until 30 September 2003,under which EFIC provided short-term exportcredit insurance to Australian exporters and banksagainst non-payment by overseas buyers oroverseas banks in respect of Australian exports.The business insured payment terms up to twoyears, but usually they were less than 180 days.

EFIC operates on a commercial basis charging itsclients fees and premiums and earns interest on itsloans and on the investment of its capital, reservesand working capital. EFIC aims to make a profit aftercovering operating costs, interest expenses and anyclaims or losses incurred in the business. This profitis used partly to pay a dividend to the Commonwealthand partly to build up EFIC’s reserves to enable it torun on a sound financial footing.

EFIC is Australia’s government-owned Export CreditAgency and has carried out its role within variousstatutory frameworks since 1957. EFIC wasestablished in its current form on 1 November 1991under the Export Finance and Insurance Corporation Act 1991 (the “EFIC Act”) as a statutory corporationwholly-owned by the Commonwealth of Australia.

The EFIC Act charges EFIC with undertaking four key functions:

> to facilitate and encourage Australian export tradeby providing insurance and financial services andproducts to persons involved directly or indirectlyin such trade;

> to encourage banks and other financial institutions in Australia to finance or assist in financing exports;

> to manage the Australian Government’s aid-supported mixed credit program (a facility whichhas now been discontinued, although loans arestill outstanding under it); and

> to provide information and advice regardinginsurance and financial arrangements to supportAustralian exports.

Accountability

The Minister for Trade, The Hon Mark Vaile MP, is responsible for EFIC. The Corporation forms partof the portfolio of the Department of Foreign Affairsand Trade.

The Minister has a number of powers in relation to EFIC, as set out in the EFIC Act. The Minister has power to give written directions to EFIC inrespect of the performance of its functions or theexercise of its powers if the Minister is satisfied thatit is in the public interest that directions be given. TheMinister may also approve transactions on the NationalInterest Account as outlined on the next page. Inrelation to the Commercial Account, the Ministercannot require EFIC to obtain the Minister’s approvalfor a particular transaction, or direct EFIC to enterinto a particular transaction.

An Overview of EFIC’s Role

Summary of Results for the Year Ended 30 June 2004

During the year the Export Finance business signed16 new Commercial Account facilities totalling $91 million, underpinning exports and overseascontracts for Australian companies totalling $502 million. This was a reduction from the previousyear when $417 million in facilities were signed,underpinning exports and overseas contracts of$1.9 billion.

The reduction arose from a number of factorsincluding project delays and deferrals, and certaintransactions which ultimately did not require EFICsupport and were underwritten fully by the private sector.

No business was referred to the Minister forconsideration on the National Interest Account

EFIC signed five National Interest facilities totalling $5 million, supporting export contracts of $21 million.These facilities were written under Ministerial Directionsfor facilities which have been in place for some time.This represents a reduction from last year’s signingsof $56 million, which included a single bondingfacility amounting to $52 million.

Outstanding exposures to counter-parties on boththe Commercial Account and the National InterestAccount continued to decrease. Over 2003/04 theCommercial Account exposures declined by 8% to$924 million, while on the National Interest Accountthey fell by 11% to $2,394 million. The decline inexposures mainly reflects the low level of signingsand some facilities being paid out early as a result ofincreased private sector appetite for some of the risks.

The Export Finance business contributed $23.4million to the profit compared with $28.7 million inthe previous year. The reduction was mainly driven by a higher charge to general provision for losses (as explained in the Provision for Loss section of thisreport). This year’s charge was $3.5 million comparedwith the write-back of $5.2 million in the previous year.

Export Finance BusinessAt 30 June 2004, EFIC’s equity, including retainedprofits, totalled $266 million. In addition, the EFIC Act provides that $200 million of callable capital isavailable to EFIC from the Commonwealth, whichhelps underpin EFIC’s activities in supporting exports.

The Commonwealth also guarantees to EFIC’screditors the payment of all monies payable by EFIC. This guarantee has never been called.

Regulations under the EFIC Act set upper limits onthe amount of money that EFIC can lend and on thevalue of contracts entered into and guarantees givenby EFIC. EFIC operates within these ceilings.

EFIC writes most new transactions on itsCommercial Account, where the EFIC Board andmanagement take the decisions on the businessentered into and where the risks and financial resultsare to EFIC’s account.

The EFIC Act also provides for EFIC to enter intotransactions on the National Interest Account. The Minister for Trade takes the decisions regardingtransactions and EFIC manages the day-to-dayoperation of National Interest business. NationalInterest transactions usually occur where the size or risk exceeds EFIC’s commercial parameters, and where the Minister considers them to be in the public interest.

The Australian Government is responsible for the financial consequences of National Interesttransactions. EFIC remits to the AustralianGovernment the revenue from the portfolio and the Australian Government reimburses EFIC for thecosts of servicing the portfolio and for any lossesarising from the portfolio.

The results of the Commercial Account and theNational Interest Account are identified separately inEFIC’s financial statements. Because the AustralianGovernment is responsible for the National InterestAccount, EFIC’s net operating profit reflects only itsCommercial Account activities.

Report of OperationsAn Overview of EFIC’s Role

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Report of OperationsExport Finance Business. . . . . . . . . . . . . .

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EFIC also experienced a write-back of $0.3 million to specific provisions in the current year. The write-back includes recoveries of approximately $1 millionon loans previously provided for.

The National Interest Account recorded a profit of $22.6 million.

New Business and Exports Supported

The list of facilities signed during the year is inAppendix 5. The main sector for signings in terms ofvalue was the construction sector which accountedfor 56% of total signings. The information technologyand mining sectors were dominant in terms of numbers,and contributed six of the 16 facilities signed. Noship facilities were signed during the year, in contrastto the previous year when the ship sector totalled40% of the value of signings. Geographically, thesignings in the past year reverted to the typicalpattern of emerging market projects. The largestmarket for signings was Mozambique where bondingfacilities and political risk insurance totalled $52.9 million.

The following charts illustrate export finance signingsover the year by facility type and by sector supported:

Export Finance Signings by Facility Type R

Export Finance Signings by Sector Supported R

Loans 11% 2% Medium

term Insurance

41% BondsExport finance guarantees 14%

Export workingcapital guarantees 1%

Politicalrisk insurance 31%

Community/Services 11%

5% Mining

56% Construction

Infrastructure 2%

Communication /IT 23%

Manufacturing 3%

For instance, in the Mozambique to South Africanatural gas pipeline project, political risk insurancewas split between a number of ECAs, the MultilateralInvestment Guarantee Agency (MIGA) and the WorldBank. EFIC’s involvement was through reinsuranceto MIGA, which provided political risk insurance debtcover to the project.

This approach reduces the amount of EFIC’sexposure and limits the usage of capital in supportingexport contracts, potentially enabling EFIC to supportmore exports. EFIC also uses risk participation andrisk transfer to help reduce concentrations of risk in terms of individual counter-parties, countries or industrial sectors.

Demand for political risk insurance on overseasinvestments remained relatively low by historicalstandards and it has been a decreasing part of theCorporation’s portfolio. EFIC’s experience is in linewith ECAs worldwide. Transactions in the ‘marketgap’ are by their nature large and lumpy. Whilerecent demand has been modest, EFIC remainscommitted to meeting the needs of its clients for thisproduct. As such, in March 2004, a new politicalrisk insurance policy for plant and equipment wasintroduced to meet the specific needs of the mining,engineering and construction sectors.

EFIC continues to examine a number of productinitiatives in the area of political risk insurance, as this is where it sees a ‘market gap’ in terms ofavailable commercial capacity for terms extendingout to ten years.

EFIC recognises the need to understand both theneeds of its clients and the demands of their industries.While it is well known that EFIC has strong expertisein financing ships and fast ferries (it has financedapproximately $1.5 billion of export contracts in thepast seven years), the Corporation has extensiveexperience in other areas such as transportation,engineering, infrastructure, information technologyand general manufacturing. Given the extendedterms of EFIC’s risk on its medium-term exposures,this expertise is essential to meet the needs of itsclients and manage the Corporation’s risks.

Products and Services

EFIC’s core business is providing finance, insuranceand bonding products to support Australian companiesexporting capital goods or services or investingoverseas. The objective of these products is to mitigatethe risks faced by Australian companies undertakingcontracts and investments overseas, and providefinancing which is competitive with other export creditagencies (ECAs).

EFIC’s charter from the Government is to providethese services on a self-sustaining basis, but not incompetition with the commercial market. EFIC is towork in the ‘market gap’ where commercial marketcapacity is insufficient to support Australian companies.

EFIC’s export finance and medium-term insurance is provided under the “Arrangement” agreed betweenOECD governments for the operation of government-owned ECAs. The Arrangement is aimed at minimisinggovernment subsidies in trade finance and setscertain parameters in relation to direct loans, exportfinance guarantees and medium-term insurance e.g. minimum interest rates and maximum paymentterms. EFIC’s investment insurance and bondingproducts are not addressed in the Arrangement.

In recent years there has been significant year-to-yearvolatility in the products and destination markets ofEFIC’s clients. Typically, the Corporation has beenwriting more export finance guarantees (EFG) thandirect loans, yet in 2003/04 there was only oneEFG. There has been a substantial increase in thenumber of bonds, however, reflecting the significantcontraction in commercial market bonding capacityinternationally in the past few years. Overseas buyersoften require bonds as security for advance paymentsor in support of performance obligations under acontract. EFIC can provide an advance payment orperformance bond required under an export contract,particularly where a buyer is located in an emergingmarket and/or the exporter’s bank or insurer haslimited capacity to provide bonding facilities.

Increasingly, EFIC is not the sole financier in transactionsand the Corporation encourages private sector banksand insurance companies to take part of the risk on the basis of EFIC’s presence in the transactions.

Report of OperationsExport Finance Business

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Report of OperationsExport Finance Business. . . . . . . . . . . . . .

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On the National Interest Account, EFIC has fiveaccounts subject to specific provisions. There were no significant changes to specific provisionscompared with the previous year. EFIC does notmake any general provisions for losses on NationalInterest facilities as the Government reimburses EFIC for any losses.

EFIC continued to monitor closely the financial healthand risk grading of each of the counter-parties to whom it is exposed. At year end, the weightedaverage risk grading of EFIC’s Commercial Accountexposures (including political risk policies andreinsurers) remained at an EFIC risk score (“ERS”) of approximately 4.1. ERS 1 is equivalent to a ratingof AAA/AA (Aaa/Aa) from the major ratings agencies,while ERS 7 is the lowest grade before default. An ERS of 4.1 is marginally below the equivalent of BB/Ba2.

Reschedulings

Indonesia

At 30 June 2004, EFIC’s loans to the IndonesianGovernment were $1,344 million on the NationalInterest Account and $34 million on the CommercialAccount. The National Interest Account loans werenearly all loans supported by aid grants andapproved under the now discontinued DevelopmentImport Finance Facility (DIFF) of AusAid, the AustralianGovernment’s overseas aid agency. The loans havevarious maturities, the longest having a finalrepayment in 2024.

Scheduled payments from Indonesia fromDecember 1998 to December 2003 wererescheduled on three occasions in the Paris Club.The Paris Club is an informal group of officialcreditors whose role is to find co-ordinated andsustainable solutions to the payment difficultiesexperienced by debtor nations. The paymentsrescheduled totalled US$21 million on EFIC’sCommercial Account and US$93 million and

108 million on the National Interest Account.

Outstanding Exposures

Details of exposures on the Commercial Accountand the National Interest Account are set out inAppendix 4.

On the Commercial Account, the majority of the Corporation’s exposure remains predominantly to private sector companies, both clients andreinsurers, although EFIC continues to accept risks on governments and public sector entities indeveloping countries. One of its largest individualexposures is to the Government of Sri Lanka.

On the National Interest Account, nearly all theexposures are to overseas governments.

Provisions for Loss

Over the year, EFIC increased its provisions for losson its Commercial Account export finance by $3.2 million. These provide for possible loan defaultsand claims in relation to “off-balance-sheet” facilitiessuch as export finance guarantees.

The main variables impacting the level of generalprovisions from year to year are the rate of growth in exposures and the risk profile of the portfolio(which in turn is affected by the business mix andforeign exchange rates). In addition to these factors,there was a one-off factor in 2003/04. Earlier in the year, EFIC changed the provisions model touse externally published default probabilities andloss statistics which resulted in an $11.5 millionwrite-back to general provisions.

The movement in the Australian dollar against othercurrencies can also have a significant impact on the level of provisioning. Approximately 98% of EFIC’sCommercial Account facilities are denominated inforeign currencies - 53% are in US dollars and 24%in Euros. This year the impact on provisions of themovement in the Australian dollar was a charge ofless than $1 million. In contrast, the appreciation ofthe Australian dollar in the previous year resulted in a $10 million reduction in provisions.

Claims on the Iraqi Government

Between 1987 and 1992 EFIC paid a number of credit insurance claims on the National InterestAccount in respect of non-payment by the IraqiGovernment for exports from Australia. EFIC and the Government were prevented by the prevailingsituation in Iraq from recovering this money.Following the passage of the UN Resolution No.1546 and transfer of full sovereignty to theinterim Iraqi Government, the restructuring of the Iraqiexternal debt can now proceed with the Paris Clubbeing the likely forum.

In June 2004, the Australian Government announcedthat it will join other governments in forgiving themajority of the Iraqi debts. The exact portion of theforgiveness remains to be determined in Paris Club negotiations.

In the previous year’s financial statements, theclaims on the Iraqi Government were disclosed as contingent assets amounting to US$395 million plus accrued interest. In view of the AustralianGovernment’s decision to forgive a portion of thedebt, it is no longer appropriate to carry a contingentasset in the financial statements.

Russia and Egypt

These debts arose from short-term credit insuranceclaims paid over a decade ago, which are noweffectively long-term loans. These debts did not formpart of the Credit Insurance business that was sold.On the National Interest Account, the rescheduleddebts exposure was $607 million, while on theCommercial Account the exposure was $39 million.

EFIC is owed US$329 million (US$8 million on theCommercial Account and US$321 million on the National Interest Account) by the RussianGovernment as a rescheduled debt repayable with interest by 2016. The debts arose out of credit insurance claims paid in the early1990’s in respect of export sales (mainly of wool,wheat and meat) to the former USSR. The amountshave been subject to several reschedulings at ParisClub meetings of Russia’s sovereign creditors, in 1996 and in 1999. Russia is current with its obligations under the reschedulings.

EFIC is also owed A$113 million and US$39 millionby the Egyptian Government (A$28 million on the Commercial Account and the balance on theNational Interest Account). These amounts arosefrom credit insurance claims paid in respect of wheat exports in the mid 1980’s. The debts were subject to rescheduling (with partial debtforgiveness) at Paris Club meetings of Egypt’ssovereign creditors in 1987 and 1991, and arerepayable by 2016. The rescheduled payments are being made as and when due.

Report of OperationsExport Finance Business

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21

Report of OperationsCredit Insurance Business. . . . . . . . . . . . . .

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The sale did not include the credit insurancerescheduled debts owed by the Russian and EgyptianGovernments, or non-reinsured exposures and receivables.

EFIC also signed a Claims Management Agreementwith Atradius to manage claims and recoveries inrelation to non-reinsured business written prior to the date of sale.

Although EFIC has now left the short-term export Credit Insurance business, in the event of circumstanceswhich lead to commercial credit insurance becomingunavailable, such as a trade finance crisis in a particularcountry or countries, the Government has indicated itswillingness to consider providing safety net cover throughthe National Interest Account.

Summary of Results for the Year Ended 30 June 2004

Exports supported by EFIC’s Credit Insurance businessfor the three months to the date of sale were $1.8 billioncompared with the previous full year’s total of $6.7 billion.

The Commercial Account business made a profit of$4.3 million during the three months to 30 September2003 compared with the loss of $3.2 million in theprevious year.

The profit resulted mainly from one-off factors including$2.5 million from the proceeds of the sale of the business,additional reinsurance commissions and the write-backof claims expenses on business written prior to theAlliance period.

At 30 June 2004 outstanding claims relating to theperiod prior to the sale amounted to $3.1 million ofwhich $1.2 million had been reinsured.

There were no unexpired risks on the short-term exportCredit Insurance business exposures at year end.

After the sale of the Credit Insurance business on the Commercial Account it was not appropriate to have a business segment for credit insurance activities.The rescheduled debts of the Russian and EgyptianGovernments generated by the Credit Insurancebusiness now form part of the remaining ExportFinance business.

Sale of Short-term Export Credit InsuranceBusiness to Atradius

On 30 September 2003 the Credit Insurance businesswas sold to Atradius Credit Insurance NV (Atradius),incorporated in the Netherlands. The sale took placeafter an Alliance period which effectively commenced on1 February 2002 and concluded on the date of sale.

By way of background, in late 2000, following a review ofthe export credit insurance operations, the Governmentannounced that EFIC would enter into an alliance witha suitable private insurer in respect of its short-termexport Credit Insurance business. The alliancearrangement included a commitment by theGovernment for EFIC to sell the Credit Insurancebusiness to the selected alliance partner following a trial period.

In October 2001, following satisfactory completion of apublic tender, EFIC signed an Alliance Agreement withNCM Holding NV (NCM), the large Dutch credit insurer.Under the Alliance, Nederlandsche CredietverzekeringMaatschappij NV (its wholly-owned operating subsidiary)reinsured most of EFIC’s Commercial Account short-term export Credit Insurance business and suppliedEFIC with computer systems and underwritingprocedures to enhance the operations of EFIC’s CreditInsurance business and improve services to clients.

At the same time EFIC, the Government and NCMalso signed a further agreement under which, subjectto certain conditions being met during the Allianceperiod, EFIC would sell its short-term export CreditInsurance business to NCM at the end of the Alliance period.

Subsequent to entering the Alliance with NCM, the Gerling Credit Insurance Group acquired NCM to form Gerling NCM which was subsequentlyrenamed Atradius.

Under the sale agreement Atradius acquired thereinsured short-term export credit insurance portfolioon the Commercial Account and associatedreceivables, and plant and equipment.

Credit Insurance Business

Financial Framework

EFIC carries out its treasury activities within a controlframework approved by the Board and complying with the EFIC Act, the Commonwealth Authoritiesand Companies Act 1997 and approvals of theGovernment. Within this framework EFIC aims tominimise the cost of funding the loan assets of theCorporation on both the Commercial and NationalInterest Accounts and to maximise the return on theinvestment of the funds representing the Corporation’sequity, reserves and working capital. EFIC’s Treasuryunit does not trade speculatively.

Foreign Exchange and Interest Rate Management

The loans EFIC has provided to clients and therescheduled debts are mostly denominated in foreigncurrencies. Currently, taking both National Interest andCommercial Accounts, 67% are denominated in USdollars and 22% are in Euros. EFIC funds its assets inmatched currencies, either by borrowing in theappropriate currency or more usually by borrowing in another currency and using cross-currency swaps or foreign exchange markets to eliminate the foreignexchange exposure. In this way, EFIC’s exposure tomovements in foreign exchange rates are minimised,although as noted previously, foreign exchange ratesdo affect EFIC’s provisioning for loss on theCommercial Account.

Similarly, EFIC uses interest rate swaps and futuresto match the interest rate profiles of its liabilities withthose of its loans.

Note 21 of the Financial Statements provides furtherdetails of EFIC’s financial exposures.

Borrowings

Under the EFIC Act the Commonwealth guaranteesall of EFIC’s liabilities to third parties, including itsborrowings. EFIC borrows within parametersauthorised by the Government. The main borrowinginstruments currently used are medium-term notes in the capital markets and euro-commercial paper.

In 2003/04, EFIC continued to use the Japanesecapital markets, raising $399 million to refinancematuring borrowings. There were two large Uridashiissues to the Japanese retail market and the remainder

Capital Adequacy

Under the EFIC Act, the Board must ensure, accordingto sound commercial principles, that EFIC’s capitaland reserves are sufficient to meet its likely liabilitiesarising out of its financial obligations and to makeadequate provision for defaults in loans extended bythe Corporation. This requirement relates only to itsCommercial Account activities. When making thisassessment, the Board is required to include asequity the $200 million of callable capital which isavailable from the Commonwealth in accordancewith the provisions of Section 54 of the EFIC Act.

EFIC’s medium-term export finance business isessentially like a wholesale corporate bankingbusiness, although the risk profile is different fromthat of a typical bank. (EFIC has a more concentratedportfolio of generally longer-dated and higher-riskexposures, consistent with its role which emphasises the ‘market gap’).

EFIC has therefore based its assessments of capitaladequacy upon the prudential standards andcalculations used for regulating banks. EFIC reportedlast year that the Corporation now uses a model that takes into account the “Basel lI” frameworkbeing implemented for international banks by theBasel Committee on Banking Supervision. EFICassigns risk weights to each of its facilities andcalculates an amount of capital accordingly, with the more riskier, longer-dated facilities requiring more capital than the better, shorter-dated risks.EFIC has used default probability statistics for thevarious risk grades published by the major ratingsagencies to assist it in constructing the model.

The Board is satisfied that during the year EFIC’scapital (including the callable capital) was adequateto support the risks assumed by the Corporation.

EFIC will continue to review its capital adequacy in the light of its risk profile (both current andprojected), the amount of risk concentration in theportfolio and any further developments in externalcomparisons, particularly in relation to Basel II.

EFIC holds no capital against the National InterestAccount business on the basis that the risks areborne by the Australian Government.

Corporate Matters

Report of OperationsCorporate Matters

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Effects of Providing Non-Commercial Services (Community Service Obligations)

While EFIC operates as a commercial business, itsrole includes the delivery of export-related financialand insurance services which may be regarded asnot fully commercial. Services which are not fullycommercial are those which the private sector wouldnot generally undertake on the basis of risk, inadequatecommercial returns or insufficient capacity.

Because EFIC works within the pricing environmentof export credit agencies, the majority of its medium-term export finance business would not be expectedto generate fully commercial returns.

Quantifying the effect of this on its profits requires theCorporation to make a number of significant assumptionsbecause exact commercial pricing comparisons arenot available for this part of EFIC’s business. With thisqualification, EFIC estimates that its CommercialAccount profit in 2003/04 might have been in the orderof $26 million higher if it had been able to charge marketprices which fully reflect the risks of those activities andfully recover the operating costs associated with them.

Employees

The organisational structure is outlined in Appendix 3.

The sale of the Credit Insurance business to Atradiusin September 2003 led to a reduction in staff asindicated in the table below. Despite the sale andthe uncertainty that such a large change created forindividuals, the Export Finance business remainedrelatively stable and continued to focus on deliveringquality service to its clients.

EFIC remains an equal opportunity, discrimination-free employer and regularly reviews its policies andprocedures to ensure that its employees are treatedwith fairness and equity.

Summary statistics related to EFIC’s employees (in full time equivalents) are:

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of the issues were small, highly structured, mainlydenominated in Yen and with an average issue size ofthe equivalent of US$9 million. When coupled with theappropriate cross-currency swaps, these relatively smallissues provided funding at very attractive sub-LIBORmargins. Details of the issues are set out in Appendix 7.

EFIC continued to issue short-term euro-commercialpaper in US dollars and a small amount in Euros.

Section 67 of the EFIC Act provides for theCommonwealth to pay a subsidy to EFIC in respectof loans or guarantees for eligible export transactions.This originally provided a mechanism for EFIC to bereimbursed when fixed rate loans under the OECDArrangement were made at rates lower than theactual funding cost. For some years now, EFIC’sfunding costs have been lower than the interestreceived and the net surplus is being returned to theGovernment, mainly as part of the National InterestAccount profit.

Investments and Liquidity

At 30 June 2004 EFIC held $905 million of cash, bankdeposits and investment securities. Of this amount, $307million represented Commercial Account equity and workingcapital, while the remainder represented liquidity held torefinance borrowings maturing after the financial year end.

During the previous year the Government approvedEFIC’s request to revise the list of the types oforganisations in which EFIC may invest. EFIC may nowinvest in any entity rated at least AA- or Aa3, as wellas authorised deposit-taking institutions (“ADIs”) andAustralian Federal and state governments. Previously,organisations rated at least AA- or Aa3 had to befinancial institutions. EFIC has since re-organised its portfolio of investments, significantly improving its financial returns, while at the same time improvingthe average credit rating of its investments.

Dividends

The EFIC Act requires the Board to make arecommendation to the Minister for Trade on the paymentof a dividend to the Commonwealth. During the yearthe Minister for Trade confirmed that EFIC should pay a dividend of $15.2 million. As at the date of publication,the Board had not yet made a recommendation inrespect of the year ended 30 June 2004.

30 June 03

108

2

110

30 June 04

53

4

57

Employees (excluding short-term)

Short-term contract employees

Total

an instrument entitled ‘Statement of the Powers of Managing Director’. Powers not given to theManaging Director are reserved for the Board.

Principle 2: Structure the Board to add value

> A majority of the Board consists of independentmembers.

• The Chairperson is an independent member.• In addition to their ongoing statutory obligation

to disclose material personal interests when theyarise, Board member independence is regularlyassessed through annual disclosure of externalinterests.

• Different individuals exercise the roles ofChairperson and Managing Director.

• Under the EFIC Act the Minister for Trade appointsBoard members and in these circumstances a Nomination Committee is not considered to be necessary or appropriate.

• With the approval of the Chairperson, a Boardmember in the furtherance of his or her dutiesmay seek independent professional advice atEFIC’s expense.

Principle 3: Promote ethical and responsibledecision-making

> The Corporation provides Board members with a document entitled ‘Corporate GovernanceInformation for Directors’, setting out details of the:

• legal framework in which EFIC and the Boardoperates, including the way that conflicts ofinterest are managed and detailing the statutoryconfidentiality obligations applying to Boardmembers and employees;

• policies and procedures adopted by the Board; and• circumstances under which a Board member

can seek independent legal advice.

Principle 4: Safeguard integrity in financial reporting

> The Managing Director and the Chief OperatingOfficer state in writing to the Board that theCorporation’s financial reports present a true andfair view, in all material respects, of its financialcondition and that the operational results are inaccordance with relevant accounting standards.

The Board of EFIC is responsible for managing theaffairs of the Corporation and oversees its operations.This includes establishing its strategies, monitoring itsperformance, taking decisions on large transactions orexposures, and making dividend recommendations to theGovernment. The Board is responsible for the corporategovernance of EFIC and generally meets monthly.

The Minister responsible for EFIC, the Minister for Trade,appoints the members of the Board. The Ministerappoints the Managing Director after receiving arecommendation from the Board. While the Boardincludes representatives from Government, includingan official Government Member, the majority of theBoard is from the private sector. The Board is non-executive except for the Managing Director, who is a full-time executive.

The membership of the Board is set out in Appendix 2of this report.

The Corporation has adopted a code of conduct for its employees and there are various obligations onemployees and Board members arising from the EFICAct and the Commonwealth Authorities and CompaniesAct 1997 (the “CAC Act”). In addition, the Board isrigorous in ensuring that a Board member does notparticipate in discussions or decisions where thereis, or may be, a conflict between that Member’sinterests and the interests of EFIC or a client of EFIC.

In 2003 the ASX Corporate Governance Councilreleased “Principles of Good Corporate Governanceand Best Practice Recommendations” which providedrecommendations relating to 10 key principles. WhilstEFIC, as a Government-owned corporation, is notrequired to disclose the extent to which its corporategovernance complies with the recommendations, thedetails below demonstrate our commitment to goodgovernance practices.

Principle 1: Lay solid foundations for managementand oversight

> The Board has formally determined its ownresponsibilities and defined the powers of theManaging Director and set those powers out in

Corporate Governance

Appendix 1Corporate Governance

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Appendix 1Corporate Governance. . . . . . . . . . . . . .

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The Committee Chairperson is not Chairperson of the Board. EFIC has a compliance programmeunder the review of the Audit Committee. TheCommittee meets four to six times a year.

> In accordance with the CAC Act, the Auditor-General conducts the annual external audit of the Corporation. The Auditor-General contractedDeloitte Touche Tohmatsu to carry out the auditwork for the review year.

Principle 5: Make timely and balanced disclosure

> EFIC places media releases, corporateannouncements and its Annual Report (incorporatingthe Financial Report) on its website. The CAC Actplaces obligations upon EFIC to keep the Ministerfor Trade and the Minister for Finance informedregarding the operations of the Corporation.

Principle 6: Respect the rights of shareholders

> EFIC has a close working relationship with the Australian Government at various levels.

Principle 7: Recognise and manage risk

> Refer to comments above under Principle 4regarding the Audit Committee and risk management.A key element of EFIC’s risk management andinternal compliance and control system is a formalCredit Policy. EFIC closely manages all types of risk, including operational risk.

> EFIC uses the services of PricewaterhouseCoopers(PwC) to carry out the internal audit function withinthe Corporation. The internal auditor reports to management and is accountable to the AuditCommittee. The Audit Committee is responsiblefor overseeing the scope of the internal audit and recommending to the Board the appointmentor dismissal of the internal auditor. The AuditCommittee has access to the internal auditfunction without the presence of management.

> EFIC’S risk management systems and proceduresare structured. Key requirements of the CAC Act,EFIC Act, other relevant legislation and prudentcommercial practice are taken into account anddocumented in EFIC’s risk management systems.

> EFIC has identified, prioritised and documented allsignificant risks, and documented associated riskmanagement systems. In 2002, EFIC reviewed itsrisk management systems against the principlesof Australian Standard 4360. Given the changesto its risk profile after the sale of its short-termCredit Insurance business, in the first half ofcalendar year 2004 EFIC conducted a further riskand compliance review. The resulting reportacknowledged that risk management culture and practice within EFIC are strong, but noted a number of areas for improvement. At the time of writing, EFIC is working towards implementingan overarching risk and compliance framework.The risk management systems will be subject toperiodic review every 18 months thereafter, or atsuch times that changes in EFIC’s internal orexternal operating environment warrant.

> EFIC’s senior executives, after consultation withtheir direct reports regarding control deficienciesor lapses or compliance breaches or incidents,provide six-monthly written assurances to theAudit Committee regarding the currency of EFIC’srisk profile and effectiveness of compliance andcontrol measures.

> EFIC has had an Audit Committee since inception.Details of Audit Committee members and theirqualifications are listed in Appendix 2. The Boardhas set out the accountabilities of the Committeein a Charter. That Charter is available on EFIC’swebsite. The Committee has broad responsibilitiesto the Board regarding risk oversight andmanagement, including overseeing the work ofboth the external and internal auditors, overseeingthe preparation of comprehensive and accuratefinancial statements and reports, complying withstatutory obligations, ensuring high standards ofbusiness ethics and the effective managementand control of financial risks. All three Committeemembers, including the Committee Chairperson,are independent, non-executive Board members.

Principle 9: Remunerate fairly and responsibly

> In accordance with legislative requirements, theGovernment’s Remuneration Tribunal determinesthe fees and other amounts payable to Boardmembers. The Tribunal also determines theManaging Director’s remuneration package on the recommendation of the Board. In thesecircumstances, with key remuneration decisionstaken outside the Corporation, a RemunerationCommittee is not considered to be necessary or appropriate. Under the EFIC Act, the Boarddetermines the terms and conditions of otheremployees.

> Board members (other than the ManagingDirector) do not receive any performance relatedremuneration. Board members are not entitled to any retirement benefits beyond statutorysuperannuation entitlements. For an explanation of the operations and practices of the RemunerationTribunal, refer to www.remtribunal.gov.au.

Refer to comments under Principle 8 regardingperformance assessment.

Principle 10: Recognise the legitimate interests of stakeholders

Refer to comments under Principle 4 regardingEFIC’s compliance programme.

> EFIC is a statutory authority of the AustralianGovernment. EFIC regularly consults entities andgroups which have an interest in its operations.These include state government departments,business associations and community groups.

Principle 8: Encourage enhanced performance

> EFIC publishes key performance indicators for the Corporation. In the past the Board has regularlyevaluated its own performance. The most recentevaluation was completed in December 2003, at which time an external consultant was used to facilitate the review.

> The most recent Board performance evaluationaddressed issues such as Board composition and skills, quality of information received, rolesand responsibilities, exercise of powers andeffectiveness, operation of meetings, inductionand education, stakeholder obligations and riskmanagement.

> The main findings of the review were that the EFIC Board operates professionally and effectively,and works well as a team.

> The Board assesses the performance of theManaging Director, including eligibility for anyperformance-related remuneration up to theGovernment’s Remuneration Tribunal maximumlimit of 15% of total remuneration.

> The Managing Director, in consultation with the Board, assesses the performance of seniorexecutives under EFIC’s PerformanceManagement Programme.

Appendix 1Corporate Governance

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Appendix 2Board Membership

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Yasmin AllenMEMBER AUDIT COMMITTEE MEMBER

Qualifications: B Com, FAICDDate of birth: 13/02/1964Term of appointment: 03/08/2001 - 02/08/2004Board attendance: 10 of 11Board Audit Committee attendance: 4 of 4Independent Board Member

Experience: Ms Allen has extensive experience in company analysis and strategic advice, with prior roles in investment banking and the brokerageindustry in Australia and overseas, including as VicePresident of Deutsche Bank in Sydney and as aDirector of ANZ Investment Bank. She is a non-executive Director of the Australian Red Cross Blood Service and of Macquarie Specialised Asset Management (and the Chairperson of its Audit Committee) and a Member of the SalvationArmy Investment Advisory Board.

Angus ArmourMANAGING DIRECTOR FROM 31 OCTOBER 2003

Qualifications: B Ec (Hons), MBA, FAIBF, FAICDDate of birth: 06/05/1963Appointed: 31/10/2003Board attendance: 7 of 7

Experience: Mr Armour joined EFIC in 1993 in theProject Finance unit. Prior to joining EFIC, Mr Armourworked for the South Pacific Project Facility of theInternational Finance Corporation (IFC) in Sydney,Australia, providing advisory services to companiesin a cross-section of industries including tourism,agriculture and aviation, and the Export DevelopmentCorporation (EDC) in Canada, focusing on projectand export finance in Latin America as well as assetfinance in the US and Europe. As the ManagingDirector of EFIC, he is also an Ex-officio Member of the Board of Austrade and a member of the TradePolicy Advisory Council.

Peter YoungCHAIRPERSON FROM 23 AUGUST 2002

Qualifications: B Sc, MBADate of birth: 07/02/1945Term of appointment: 11/06/2002 - 23/08/2005Board attendance: 10 of 11 (*see note below)Independent Board Member

Experience: Mr Young has extensive experience in the investment banking industry and is currentlyChairman of Investment Banking at ABN AMRO. Mr Young has significant experience as a companydirector of both private and publicly-ownedcorporations and in applying private sector bankingskills to public sector enterprises. He is currentlyChairman of Delta Electricity, a Trustee of the ArtGallery of New South Wales (and the Chairperson of its Audit Committee) and a Director of theAustralian Business Arts Foundation Limited. *Mr Young was granted leave of absence by the Minister for Trade for the period 7 June to 23 July 2004.

Ian KnopDEPUTY CHAIRPERSON FROM 21 NOVEMBER 2002

Qualifications: B Bus, CPADate of birth: 28/04/1949Term of appointment: 21/11/2002 - 20/11/2005Board attendance: 8 of 11Independent Board Member

Experience: Mr Knop has extensive experience inthe Australian private and public sectors. He is theChairman and Managing Director of Profile Ray andBerndtson, an international executive search andmanagement consulting firm. He is also Chairman of the Ray and Berndtson Asia Pacific Practice anda member of the International Board of Ray andBerndtson. In addition, he is Deputy Chairman ofAurora Energy. Mr Knop is a former Chairman ofSoccer Australia and a former Member of the FIFAWorld Club Championship Organising Committee.He is also a retired Chairperson of the Sydney PortsCorporation and the Australian International HotelSchool and Hotel Kurrajong, Canberra.

Sarah IsraelMEMBER AUDIT COMMITTEE CHAIR

Qualifications: B Bus, FCPA, FAICDDate of birth: 10/09/1950Term of appointment: 17/08/2000 - 07/09/2006Board attendance: 11 of 11Board Audit Committee attendance: 4 of 4Independent Board Member

Experience: Ms Israel has extensive experience in project finance, investment banking and regionaldevelopment. She is currently a Director ofQueensland Sugar Limited (and the Chairperson of its Audit Committee) and Skytrans Airlines, andhas previously been a director and chaired the auditcommittees of several Queensland Governmentagencies. She is a Member of the Audit Committeeof Queensland Transport.

Peter O’ByrneEX-OFFICIO MEMBER

Qualifications: M Com (Hons), FCPA, FAICDDate of birth: 16/12/1949Appointed: 01/05/2002Board attendance: 11 of 11Represents Australian Trade Commission

Experience: Mr O’Byrne is Managing Director of the Australian Trade Commission. He has broadbusiness experience in the Asian, Australian andEuropean markets. Before joining Austrade he ledthe Government-owned ‘Australian HearingServices’, which includes the ‘National AcousticLaboratories’. Mr O’Byrne was previously based in Singapore as Regional Director for the consumergoods company Reckitt & Colman throughout Asia.As the Managing Director of Austrade, Mr O’Byrne is a member of the Trade Policy Advisory Counciland the National Food Industry Strategy.

Dr Ashton Calvert, A.C. GOVERNMENT MEMBER

Qualifications: B Sc, Ph DDate of birth: 09/11/1945Appointed: 10/11/1998Board attendance (including alternates): 10 of 11Represents Australian Government

Dr Calvert was represented by an observer at onefurther meeting.

Experience: Dr Calvert is Secretary of the Departmentof Foreign Affairs and Trade (DFAT) and has adistinguished history of service in the conduct ofAustralia’s international relations. Prior to his currentappointment, Dr Calvert served as AustralianAmbassador to Japan and was Senior Adviser(International Affairs) in the Office of the Prime Minister.

Howard DaviesMEMBER AUDIT COMMITTEE MEMBER

FROM 12 DECEMBER 2003

Qualifications: FAICDDate of birth: 09/10/1946Term of appointment: 11/02/2002 - 10/02/2005Board attendance: 9 of 11Board Audit Committee attendance: 2 of 2Independent Board Member

Experience: Mr Davies has extensive experience in the insurance industry, especially in credit andpolitical risk insurance broking. He was formerlyManaging Director and Chairperson of the insurancebroking business Bain Hogg Australia Ltd. MrDavies holds numerous other directorships andcontinues to provide services to the insurance industry.


28

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

29

Appendix 2Board Membership. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

Ewen WatermanMANAGING DIRECTOR UNTIL 31 OCTOBER 2003

Qualifications: B Ec (Hons)Date of birth: 02/12/1943Term of appointment: 29/10/2001 - 31/10/2003Board attendance: 4 of 4

Experience: Mr Waterman has had an extensivecareer in economics, finance and trade relatedpolicy roles in Australia and overseas. Prior to joiningEFIC, Mr Waterman was Executive Director of Access Economics. Previously, Mr Watermanrepresented Australia and twelve other countries as Executive Director of the International MonetaryFund. Prior to that appointment, Mr Waterman wasDeputy Secretary (Financial) of the CommonwealthTreasury where he worked for 26 years.

Mark PatersonMEMBER

Qualifications: B Bus, FAICDDate of birth: 16/03/1954Term of appointment: 11/02/2002 - 10/02/2005Board attendance: 10 of 11Represents Australian Government

Experience: Mr Paterson is Secretary of theDepartment of Industry, Tourism and Resources(DITR). Before taking up this appointment, Mr Paterson was Chief Executive of the AustralianChamber of Commerce and Industry, a position heheld from June 1996. He is also a former ExecutiveDirector of the Retailers Council of Australia and ofthe Retail Traders Association of NSW. Mr Patersonis a Member of the Tourism Australia Board. He isalso a Member of the Australian Research Counciland the Trade Policy Advisory Council.

Frank LevyMEMBER AND AUDIT COMMITTEE

MEMBER UNTIL 5 DECEMBER 2003

Qualifications: LLB, B ComDate of birth: 27/12/1947Term of appointment: 06/12/1997 - 05/12/2003Board attendance: 4 of 5Board Audit Committee attendance: 2 of 2Independent Board Member

Experience: Mr Levy is Managing Partner ofSackville Wilks & Co., lawyers. He has extensivecommercial experience, especially with familycompanies and small business. Mr Levy hasnumerous proprietary company directorships, anddirectorships and consultancies with several majorprivately owned corporate groups involved in diverseareas of business activities and investments.

The following Board member declared conflicts ofinterest, or potential conflicts of interest, in relation to the proposed EFIC transaction described below.The Board member did not participate in thediscussion or decision relating to the transaction.

> Mr Young, in relation to a proposal involving hisemployer, ABN AMRO Group, and Hellas FlyingDolphins S.A.

Dr Geoff Raby, Deputy Secretary, Department ofForeign Affairs and Trade, was appointed as alternateGovernment Member effective from 18 November2002. Dr Raby attended four meetings.

Transactions with Board MemberRelated EntitiesThe Board members declare that none of them hasany interest in contracts, transactions, arrangementsor agreements with EFIC, other than contractsentered into, or to be entered into, in the ordinarycourse of EFIC’s business.

Note 28 to the Financial Statements sets out theaggregate amount of remuneration received, or dueand receivable, by the Board members during theyear ended 30 June 2004.

Under the EFIC Act, there are a number of financialarrangements between EFIC and the Commonwealthof Australia, including the following:

> The Commonwealth guarantees the payment by EFIC of any money that becomes payable by EFIC to a third party;

> In connection with National Interest transactionsEFIC is indemnified by the Commonwealth;

> EFIC is able to receive interest subsidy from the Commonwealth; and

> EFIC pays the Commonwealth tax equivalentsunder the tax equivalent regime.

The Commonwealth has also issued a conditionalindemnity to Board members and certain seniorexecutives in connection with the Alliance andcontingent divestment involving EFIC’s CreditInsurance business and Atradius, a private sectorinsurer. Material transactions are detailed in theFinancial Report.

Dr Calvert, Mr Paterson, Dr Raby, and areemployees of the Commonwealth. Dr Calvert, Mr O’Byrne, Mr Paterson and Mr Armour are (and Mr Waterman was) Members of the Board of theAustralian Trade Commission, a statutory body of the Commonwealth.

Alternate Government MembersDeclared Potential Conflicts of Interest


30

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

Organisational StructureAngus Armour Managing DirectorSlater SmithGeneral ManagerMichael JacksonChief Operating Officer

John CollinsChief Credit Officer

Peter L’GreenHead, Structured Trade and Project Finance

Enam Choudhury Head, Portfolio Management

Chang FooHead, Product Managementand Risk Transfer

Michael CostaHead, Treasury

Roger DonnellyChief Economist

Claudia BelsGeneral Counsel and Board Secretary

Ralph Hillman Director Government andIndustry Relations

Gabrielle Smith Marketing andCommunications Director

Arun Hemraj Financial Controller

Barbara Richards Head, Human Resources

Marcus RobbieIT Director

Paul AndrewAdministration and PropertyManager

Manages EFIC’s credit and market risk management framework includingtransaction approvals, exposure levels and overall portfolio risk profile.

Works with Australian exporters and investors overseas on the origination,structuring and execution of all new export and project finance transactions.

Manages EFIC’s portfolio of transactions by proactively identifying andmanaging project performance, repayment and operational risks relating to the portfolio.

Develops new products and services and manages EFIC’s portfoliobalance through risk transfer activities.

Minimises the cost of funding and hedging EFIC’s loan assets andmaximises the return on the investment of the funds representing itsequity, reserves and working capital.

Provides advice and country risk assessments to assist in the underwritingof transactions and management of EFIC’s exposures. This advice helps to calibrate such risk parameters as provisioning, country exposure limitsand capital adequacy.

Provides legal services in relation to transactions and advice on generalcorporate and compliance matters.

Manages EFIC’s relationships with government, business councils,industry and trade associations and community organisations.

Develops and implements marketing and communication initiatives tosupport EFIC’s business origination activities, client retention, and EFIC’sbrand and profile.

Responsible for all aspects of financial accounting, managementreporting and taxation, including maintaining the integrity and controlsover the Corporation’s accounting framework.

Supports each business unit through recruitment, employee relations, HR and payroll administration, remuneration benefits, OH&S and staffdevelopment training.

Responsible for the development and support of all EFIC computerinfrastructure, software requirements and core business systems.

Manages EFIC’s property assets and administrative services, includingtelecommunications, corporate insurances, motor vehicle fleet and variouscompliance policies.

Executive Office

Credit

Structured Trade and Project Finance

PortfolioManagement

Product Management and Risk Transfer

Treasury

Economics

Legal

Government and Industry Relations

Marketing

Finance and Administration

Human Resources

InformationTechnology

Administration and Property

Note: Internal Audit and the administration of the SME Working Capital and Bonding are contracted externally.

31

Appendix 3Organisational Structure. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

Export Finance Commercial Account exposures by region at 30 June 2004 R

Export Finance Commercial Accountexposures by Sector at 30 June 2004 R

Export Finance Commercial Account outstanding facilities by type of facilityat 30 June 2004 R

Commercial Account

EFIC’s Commercial Account exposures from its exportfinance products are loans, guarantees, political riskinsurance on investments, related debt and plant andequipment, bonds, medium-term credit insurance andother insurance.

The facilities vary in maturity up to 18 years, but typicalloan and guarantee facilities are for ten years on an amortising basis. The weighted average remainingmaturity of facilities outstanding at 30 June 2004 was 3.7 years.

Apart from political risk insurance, the exposures are mainly risks on the overseas purchasers of Australian capital goods exports, the majority of which are in the private sector.

The distributions by geographical region, industrysector and Commercial Account outstandingfacilities at 30 June 2004 are shown in the adjacent charts.

Export Finance

Appendix 4EFIC’s Exposure

32

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

2% South America

45% Asia

North America 22%

Pacific 2%

Middle East 5%

Europe 24%

4% Other

29% Shippingoperators

9% Defence

7% Transportation

Infrastructure 18%

Banks /government(for ships) 8%

Agriculture 5%

Communications 16% Manufacturing 4%

7% Bonds andmedium term

insurances

59% Export finance guarantees

Loans 34%

Commercial Account

There were no unexpired risks in relation to theshort-term Credit Insurance business at year end, as the business was sold in September 2003. The exposures relating to the rescheduled debts of the Russian and the Egyptian Governments now form part of the remaining business.

Credit Insurance

33

Appendix 4EFIC’s Exposure. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

National Interest Account

The $2.4 billion of National Interest Account exposuresare nearly all loans to sovereign countries or theiragencies. The change in distribution by countrymainly reflected repayments and an appreciation in the Australian dollar.

The exposures arose mainly from two sources:

> loans supported by aid grants made under thenow discontinued Development Import FinanceFacility of AusAid, the Australian Government’soverseas development assistance agency.Reflecting the priorities of Australia’s overseas aid program at the time, these loans includeexposures of $1.3 billion to Indonesia, $0.2 billionto China and $0.1 billion to the Philippines; and

> rescheduled credit insurance debts. In the mid to late 1980s and early 1990s, EFIC paid out credit insurance claims in respect of twocountries, Russia and Egypt. As a result of ParisClub rescheduling, the amounts owing by thesegovernments are now repayable by 2016.

As a measure to reduce risks, we reinsured $65 million of the National Interest exposures in the Philippines during the year.

National Interest exposures at 30 June 2004 R

2% Other

1% PapuaNew Guinea

56% Indonesia

Philippines 5%

Egypt 6%

Reinsurers 3%

China 8%

Russia 19%

Exporter/Investor



EW Cox International Pty Ltd

Financial Network Services Pty Ltd

Gold Peg International Pty Ltd

Gulf Smelter Services Pty Ltd

Innovonics Limited

McConnell DowellConstructors (Aust) Pty Ltd

McConnell Dowell Constructors (Aust) Pty Ltd

Mincom Ltd

MultiplexEngineeringPty Ltd

Oceanis Australia Ltd

RefrigerationEngineering Pty Ltd

Thales ATM Pty Ltd

The Marketplace Co Ltd

Voest Alpine Mining & Tunnelling Pty Ltd

Total signings on Commercial Account

Total signings onNational Interest Account

Total facilities

Transactions on the Commercial Account for year ended 30 June 2004

Appendix 5Export Finance Facilities Signed

34

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

* EFG indicates Export Finance Guarantee MTI indicates Medium-term Payments Insurance

Bond indicates Bonding facilityPRI indicates Political Risk Insurance

DCG indicates Documentary Credit GuaranteeUCI indicates Unfair Bond Calling Insurance

Country

Kuwait

Kuwait


Indonesia

Japan

Bahrain

United Kingdom

Mozambique

Laos


Mozambique

Thailand

Malaysia

Vietnam

Philippines

Russia

Goods

Weather observation systems

Meteorological data processing systems

Crane, hoist and monorail equipment

Core banking system software

Foodprocessing equipment

Plant for processing bath

Rail carriage CCTV’s

Constructionof gas pipeline

Supply and installation of structural, mechanical piping works

Supply and installation of Ellipse software package

Engineering, procurement and construction services

Procurement, design and construction of aquarium

Design, manufacture and supplyof refrigeration compressor

Air traffic management system

Consultancy services for implementation of wholesale electricity spot market project

Coal mining vehicles

Facility*

Bond

Bond

Bond

Loan

Bond

Bond

Bond (3)

PRI Debt

Bond

Bond

Bond

EFG

Bond

UCI

MTI

DCG

Counterparty

Director General of Civil Aviation

Director General of Civil Aviation

Bovis Lend Lease Inc

PT Bank NegaraIndonesia TBK

Sumitomo Corporation

AluminiumBahrain B.S.C

Siemens AGBombardier Transport

Republic ofMozambique

Lane Xang Mineral Ltd

Pinellas SuncoastTransit Authority

Kenmare MomaProcessing (Mauritius)Limited & KenmareMoma Mining(Mauritius) Limited

Siam Ocean World CoLtd

Asean Bintulu FertilizerSdn Bhd

Vietnam Air TrafficManagement

NationalTransmissionCorporation

Alfa Bank

AmountA$ millionequivalent

2.6

1.6

0.2

10.6

0.1

2.1

0.1

29.0

2.0

1.3

23.9

10.3

0.1

2.4

1.6

2.9

90.8

4.7

95.5

Environmentalcategory

(see Appendix 6)

C

C

C

C

C

C

C

A

B

C

A

B

C

C

C

C

35

Appendix 6Environment Report. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

Summary of business supported by EFIC

A list of new medium to long-term facilities signed by EFIC during the reporting period is in Appendix 5.

In summary:

Category A Facilities

In 2003/04 EFIC entered into two Category Atransactions. The decisions to enter into the facilitieswere taken after assessing the environmental andsocial issues that were raised in the respective EAsand, in the case of the pipeline project referred tobelow, a submission received following publication of the EA. EFIC published on its website a formalresponse addressing the issues which were raisedin the submission.

> A Political Risk Insurance (PRI) policy for $29 million equivalent relating to a natural gasproject involving Mozambique and South Africa.Implementation of the project will have materialpositive environmental impacts in the region dueto its contribution to a significant reduction inharmful emissions as the burning of sulphur-richcoal and heavy oils (the current primary energysources in South Africa) will be replaced by low-sulphur, clean-burning natural gas.

The conversion from coal to natural gas atSasolburg is expected to lead to the followingimprovement in air quality:

> overall emissions are expected to decrease by 35%;

> odorous hydrogen sulphide emissions will be eliminated;

> ambient emissions of sulphur dioxide and nitrogenoxides will be reduced by around 17% or 25,000 tonnes;

> annual CO2 emissions could be reduced by 47% or almost 5 million tonnes;

> airborne particulates such as coal ash are expected to decrease by 25%;

> the production of fine ash is expected to be reduced by more than 70%; and

> the closure of coal gasification and other plantswill enable a 50% reduction in solid waste.

EFIC’s Environment Policy

EFIC’s Environment Policy sets out a regime for the determination and assessment of environmentalimpacts associated with potential transactions. TheEnvironment Policy helps the Corporation contributetowards the principles of ecologically sustainabledevelopment. It is through the Environment Policy thatEFIC integrates environmental and social considerationsinto EFIC’s due diligence and decision-making.

The Environment Policy is based upon a screeningprocess that recognises the broad range of impactsthat export transactions and investments can have,the differences between the types of exports thatEFIC facilitates, and the different roles that EFICplays in transactions.

Screening involves a transaction tiering system basedon the degree of environmental impact the transaction islikely to have. Procedures used to assess transactionsdiffer, depending on the category applicable.

EFIC carefully assesses “Category A” transactions, whichare those with potentially the highest environmentalimpact. These assessments are normally made againstthe World Bank Group’s Pollution Prevention andAbatement Handbook. EFIC’s Environment Policy requiresthat an Environmental Assessment (EA) relating toproposed transactions be made available publicly fora 45-day period. Substantive submissions receivedduring the 45-day period are carefully assessed, priorto EFIC making a decision about providing a facility.The EFIC-initiated consultation period is to enablethe Corporation to consult with its stakeholders aspart of its decision-making process. The Corporation’sconsultation is in addition to the primary consultationssponsors undertake ‘in country’ with affectedpeoples, local Non-Government Organisations (NGOs)and the host government. In connection with CategoryA facilities, EFIC imposes contractual conditions tomitigate environmental impacts that may occur.

For the next tier, “Category B” transactions, EFICundertakes internal assessments and considers the imposition of contractual terms as appropriate.

Other than assessment for categorisation purposes,EFIC does not undertake further analysis oftransactions categorised in the third tier, “Category C”.

EFIC’s Environment Report

Category B Facilities

In 2003/04 EFIC entered into two Category Btransactions:

> bonding for $2 million equivalent for a contract for the supply and installation of structural steel,mechanical equipment and piping works at theSepon mine in Laos. This bond was categorisedas Category B as the contract was for the supplyof a copper ore processing plant, the impacts of which are confined to the specific site, and forwhich mitigants had been identified. In any event,comprehensive EAs in connection with the Seponmine had been made available for publiccomment by EFIC in 2002/03; and

> an export finance guarantee for $10.3 millionequivalent in connection with the design andconstruction of an aquarium in Bangkok.

Category C Facilities

EFIC rated the remaining transactions for whichfacilities were provided as Category C.

EFIC monitors implemented Category A and Btransactions for the duration of the EFIC facility to ensure compliance with the terms of the facility,including environmental requirements that may have been applied to the transaction.

Encouraging Environmental Technology Exports

In addition to reviewing transactions for theirenvironmental impact, EFIC seeks to encourage the export of products and services that benefit the environment. We will consider providingextended terms of finance for such exports on a case-by-case basis.

The project will contribute to developing theMozambican economy through the receipt ofsignificant royalty payments as well as dividends,production bonuses and corporate taxes in excessof $2 billion over the life of the project. The projectwill provide contracting opportunities for bothMozambican and South African companies duringthe construction phase. The upstream benefits forlocal enterprises are estimated to be in excess of $1 million per year. The project will create jobopportunities for local employees during constructionand after completion. The project will be a substantialaddition to Mozambique’s infrastructure through the development of roads and water supplies.

> A bond for $23.9 million equivalent relating to the provision of engineering, procurement andconstruction services in relation to a secondproject in Mozambique. The project involves the dredge mining development of a large heavymineral sands deposit located in the Nampulaprovince in north-east Mozambique. The provinceis one of the poorest in the country and is in anarea that has not yet benefited from recent foreigninvestment flows into Mozambique. The projectwill have significant development impactsproviding export and tax revenues, know-how and technology transfer, and infrastructuredevelopment. The infrastructure will includeimproved access to roads, airstrips, electricity,water supply, and telecommunications. The project is expected to create a large number ofdirect and indirect jobs during the constructionphase and while in operation.

During the year EFIC notified stakeholders that it was assessing various other potential Category Aprojects. At year end, in some cases discussionswith clients were continuing. In others, no EFICfacility was required. The status of potential CategoryA facilities is notified in the Environment section ofEFIC’s website from time to time.

Appendix 6Environment Report

36

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

37

Appendix 6Environment Report. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

Climate Change

Addressing human-induced climate change is amajor issue for the 21st century. The balance ofscientific opinion is that global emissions of greenhousegases need to be reduced if changes in climate areto be avoided.

EFIC is closely monitoring developments inconnection with climate change issues, particularlydevelopments in relation to ECAs, internationalfinancial institutions and banks involved in internationalproject finance.

Environment Policy Review

Over the course of the year EFIC was engaged in a review of its Environment Policy.

Compliance Review

The first element of the review involved anassessment by PricewaterhouseCoopers (PwC) of EFIC’s compliance with its Environment Policyover the period from July 2000 (when the Policy wasintroduced) to March 2003. The PwC review reportis currently available at EFIC’s website in theEnvironment section.

Review issues

EFIC invited submissions on its Policy via its website.In addition, 14 international NGOs which focus on export credit agencies were specifically invited to comment on how the 2000 Environment Policycould be improved. Five considered submissionswere received from NGOs. Meetings were held with several Australian NGOs with an interest in EFIC. EFIC also sought comments from theexporters and investors that had applied for a facility relating to a Category A project during thecompliance review period.

Over the course of the review period the AustralianGovernment and EFIC have played an active role indiscussions in the Organisation for Economic Co-operation and Development (OECD) regardingCommon Approaches on the Environment for OECDexport credit agencies. Late in 2003, agreementwas reached on Common Approaches, which setout what are in effect minimum standards for ECAsassessing environmental and social issues relating to significant projects. The Common Approachesrequire ECAs to institute benchmarking againstinternational standards and provide public commentperiods. EFIC’s Environment Policy has containedthese features since 2000.

In accordance with the process published when the review was initiated, EFIC is planning to publish a draft of the amendments proposed to theEnvironment Policy before finalisation.

Appendix 7New Borrowings

38

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

Smaller issues continued to provide extremelyattractive funding costs. Most of the issues were inJapanese Yen and incorporated a callable structure,reflecting institutional investor requirements of theJapanese retail market.

All of the issues were swapped into simple floatinginterest rate obligations at attractive sub-LIBORrates, principally in US dollars, reflecting the currencyof the majority of EFIC’s assets.

There was a small reduction in the asset portfolio inUS dollar terms in 2003/04 and new borrowingswere required only to refinance maturing borrowings.New capital market issues under EFIC’s medium-term note program in the year ended 30 June 2004raised A$399 million compared with A$571 million inthe previous year. EFIC made 15 issues comparedwith 39 in the previous year.

New Borrowings

Term(years) (see note*)

20*

30*

15*

30*

3

20*

1.2

15*

20*

20*

20*

20*

20

15

20*

Amount

JPY

JPY

JPY

JPY

AUD

JPY

NZD

JPY

JPY

JPY

JPY

JPY

JPY

JPY

JPY

Equivalent in US$ million

4.2

4.6

9.2

10.0

112.5

8.9

73.0

4.3

6.5

9.2

4.3

6.7

9.0

8.3

4.5

US$275 million

A$399 million

Total

Equivalent to

0.5b

0.5b

1.1b

1.1b

160.0m

1.0b

120.0m

0.5b

0.7b

1.1b

0.5b

0.8b

1.0b

1.0b

0.5b

NOTE: All the * issues incorporated a structure so that parties other than EFIC can call them prior to the stated maturity. Although the detailedconditions on each issue are different, typically issues can be first called at the end of the first or third years. In EFIC’s funding plans and its financialstatements we assume that the issues mature at the first callable opportunity.

Arranger

Citigroup Global Markets Ltd

Citigroup Global Markets Ltd

Mizuho International plc




National Australia Bank Ltd, London

Nomura International plc

Nomura International plc

Salomon Brothers International

Shinkin International Ltd

Shinkin International Ltd

Societe Generale, Paris

Tokyo-Mitsubishi International plc

Tokyo-Mitsubishi International plc

39

Appendix 8Other Miscellaneous Information. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

Functions, Organisation and Powers

EFIC’s functions and powers are detailed in Sections7 and 11 of the EFIC Act. An organisationalstructure can be found in Appendix 3.

Arrangements for Outside Participation

Persons or bodies outside EFIC may participate in itspolicy formulation or its administration of enactmentsby making representations to the Minister for Tradeor EFIC. EFIC and Commonwealth employees meetperiodically with representatives of relevant industries,exporters’ associations, State authorities and otherbodies outside the Commonwealth administration for discussions on various matters.

EFIC Documents and Publications

EFIC produces a range of publications aimed atinforming exporters about EFIC’s finance andinsurance facilities. Key publications in 2003/04included:

> 2003 Annual Report> EFIC’s Customer Service Charter;> EFIC’s Privacy Policy;> “Market Watch”: monthly analysis of worldwide

developments and why they matter for Australianexporters and investors abroad;

> “Creating Opportunities for Australian companiesexporting and investing Overseas”: a brochureabout EFIC’s services;

> “Export Working Capital Guarantees - A referenceguide for Banks”: a brochure outlining the ExportWorking Capital Guarantee facility for Banks;

> “Export Finance for Small and Medium SizedBusinesses”: a brochure about EFIC’s services for the Small-to-Medium Exporter market; and

> “Export Finance Update”: a newsletter highlightingcompleted Export Finance transactions, informationon new products and services, and Australianexport news.

Facilities for Access

Facilities for inspecting documents are provided at Level 10, Export House, 22 Pitt Street, Sydney, New South Wales.

All EFIC’s employees and Board members, and certainformer employees and Board members, had thebenefit of an indemnity from EFIC during the reportingperiod. The scope of the indemnity is consistent withthe requirements of the Commonwealth Authorities andCompanies Act 1997 in relation to such indemnities. Inaddition, some employees are indemnified by EFICin connection with their roles as safety delegates.

EFIC did not pay any amount in connection with theBoard or employee indemnities during the reportingperiod.

During the year, EFIC maintained, and paid premiumsfor, certain insurance covering its employees andBoard members.

The Commonwealth has issued a conditionalindemnity to Board members and certain seniorexecutives in connection with the Alliance andcontingent divestment involving EFIC’s CreditInsurance business.

Judicial and AdministrativeDecisions and Reviews

EFIC believes that during the year ended 30 June2004, there were no judicial decisions or decisionsof administrative tribunals that have had, or mayhave, a significant impact on its operations.

During the year there have been no reviews of, orreports on, the operations of EFIC by any ParliamentaryCommittee or, as far as EFIC is aware, theCommonwealth Ombudsman.

The Auditor-General provided his annual IndependentAudit Report on EFIC’s financial statements.

Freedom of Information (FOI)

EFIC has provided quarterly reports and an annualreport in relation to FOI requests. There were no FOI requests during the year ended 30 June 2004.

The following statement is provided in accordance with Section 8 of the Freedom of Information Act 1982.

Indemnities and Insurance

Appendix 8Other Miscellaneous Information

40

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

EFIC has an OHS Policy to facilitate the provision ofa safe and healthy work environment for all employees.

EFIC’s OHS Committee meets quarterly to discussOHS issues. The OHS Committee is represented bymanagement and staff, including a nominated Healthand Safety Representative. The Committee managesquarterly workplace inspections and considers thereports that result from the inspections, as well as anyaccident reports, discussing prevention strategies bothon a case-by-case basis and through a formal RiskAssessment process. There were no serious injuriesduring the reporting period. EFIC conducts regulartesting and preventative maintenance on its plantand equipment including air conditioning.

Other Human Resource MattersTraining and development: EFIC facilitates staffdevelopment through various training and developmentprograms and by contributing to the cost of post-graduate studies undertaken by employees byproviding those employees with time off for studyand exams. Other training includes technical skillsdevelopment courses to bridge any gaps identifiedin performance reviews.

Part-time work: at 30 June 2004 EFIC had threeemployees working on a part-time basis.

Work/life balance: EFIC understands the pressuresthat balancing working life and family commitmentscan bring. To assist employees to meet this balance,EFIC provides the following benefits to its staff:

Employee Assistance Program - a professionalcounselling service which is available to allemployees and their immediate families.

Parental Leave - Maternity (3 months paid) and otherparental leave of up to 12 months. Over the past year,five female employees took this leave. Two maleemployees took paid parental leave of up to five days.

Carers Leave - as part of our sick leave benefit, staffare entitled to take part of their sick leave to care forimmediate family members who are ill.

Occupational Health and Safety (OHS)

Freedom of Information Procedures and InitialContact Points

Inquiries concerning access to documents or other matters relating to Freedom of Informationshould be directed to:General Counsel, Legal DepartmentExport Finance and Insurance CorporationLevel 10, Export House, 22 Pitt Street, Sydney, NSW 2000 Telephone (02) 9201 2111 Fax (02) 9251 3851

Particulars of Directions by the MinisterSection 9 of the EFIC Act permits the Minister to issuedirections to EFIC with respect to the performance of itsfunctions or the exercise of its powers. The Minister didnot give any new directions to EFIC under Section 9during the year ended 30 June 2004. On 22 July 2003the Minister revoked a direction that previously requiredEFIC to comply with United Nations Security CouncilResolution 661 (1990) imposing sanctions on Iraq. UNresolution 661 has now been superseded by UnitedNations Security Council Resolution 1483 (2003).

A direction dated 19 March 1992 remains in effectin relation to the following matters:

> EFIC is to participate in the multi-lateral debt reliefprocesses of the Paris Club;

> EFIC is to comply with Australia’s obligationsunder the OECD Arrangement on OfficiallySupported Export Credits; and

> all loans in excess of $50 million which will, or may atsome point in the future, incur an interest subsidyare to be referred to the Minister for approval.

To support EFIC’s participation in the process of the Alliance and contingent divestment of the CreditInsurance business, the Minister for Trade issued aSection 9 direction on 9 July 2001 confirming EFIC’sco-operation with the Commonwealth on thecontingent divestment. The direction continues in force.

EFIC complied with the above Section 9 directionsthroughout the reporting period. It is not possible to assess the financial effect of them on EFIC.

41

Appendix 8Other Miscellaneous Information. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

Commonwealth Disability StrategyEFIC’s actions in relation to the CommonwealthDisability Strategy are:

To include people with disabilities in consultationsabout issues which affect them:

> We provide access to EFIC via the internet and a toll-free phone service that allows concerns or feedback to be provided on any issue;

> Our OHS committee openly consults with staff.

To make information available to people withdisabilities in accessible formats:

> The most effective means of providing informationin accessible formats is through our website. Weare W3 / Priority 1 compliant with the guidelines ofthe National Office for the Information Economy.

To provide complaints and grievance mechanismsthrough which people can raise concerns:

> EFIC provides both internal and external complaintsmechanisms. Our Customer Service Charterprovides a mechanism for clients to providefeedback if they are unhappy with EFIC’s service.

Flexible work arrangements - EFIC gives employeesthe opportunity to work flexible working hourswherever possible.

Annual Leave - It is EFIC’s policy that staff take aminimum of two weeks consecutive leave each year,to ensure that each person has adequate time off.

Equal Employment Opportunity (EEO): A keyobjective of our EEO program is to ensure that ourrecruitment procedures and practices encourageequal employment opportunity. EFIC regularly trainsall employees, including management, on EEO andAnti-discrimination.

Our Workforce: Our workforce continues to have a diverse profile. As in previous years, over 40% of employees, or one of their parents, were born in a non-English speaking country.

While employees at EFIC can be grouped into variousclassifications (e.g. managers and administrators,professionals and associated professionals, clericaland service workers), due to EFIC’s size and thegenerality of these classifications the statisticsshown below are grouped by salary ranges:

Representation of Workforce as at 30 June 2004 Commonwealth Equal Opportunity Act 1973

Employee Diversity Profile

Female Male NESB ATSI PWD Total

Up to $45,000 3 (100%) 0 (0%) 3 (100%) 0 nil 0 nil 3 (5%)

$45,001 - $70,000 13 (72%) 5 (28%) 8 (44%) 0 (nil) 0 (0%) 18 (32%)

$70,001- $100,000 9 (64%) 5 (36%) 5 (36%) 0 (nil) 0 (nil) 14 (25%)

$100, 001 & Above 4 (18%) 18 (82%) 8 (36%) 0 (nil) 0 (nil) 22 (39%)

Totals 29 (51%) 28 (49%) 24 (42%) 0 (nil) 0 (nil) 57

Ann

ual S

alar

y E

arni

ngs

Interpretation: NESB Non English Speaking Background ATSI Aboriginal or Torres Strait Islander PWD People With a Disability(Part time employees are represented as 1 and not the full time equivalent eg. 0.6)

Years ended 30 June: 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995$m $m $m $m $m $m $m $m $m $m

Commercial Account

Exports supported

> Export Finance 391 345 455 341 405 351 302 491 652 414

> Credit Insurance 1,835 6,710 6,736 6,366 5,456 6,055 6,626 5,933 6,125 5,661

Total 2,226 7,055 7,191 6,707 5,861 6,406 6,928 6,424 6,777 6,075

New political risk insurances 29 32 8 26 0 0 1 285 162 72

Net interest income 17.7 18.0 16.6 18.4 16.8 17.1 23.2 21.5 21.1 15.7

Premiums, fees and other income 28.1 39.1 35.5 36.3 36.7 42.9 39.3 40.7 38.6 34.8

Total revenue 45.8 57.1 52.1 54.7 53.5 60.0 62.5 62.2 59.7 50.5

(Charge) / credit for loss provisions (3.0) (0.5) (8.5) (23.0) 0.6 (11.3) (50.8) (29.5) (23.6) (20.5)

Effect of reinsurance (2.7) (6.9) (2.0) - - - - - - -

Operating expenses (12.4) (24.2) (22.1) (21.5) (23.5) (22.3) (21.2) (23.5) (23.5) (19.9)

Operating profit before tax 27.7 25.5 19.5 10.2 30.6 26.4 (9.5) 9.2 12.6 10.1

Abnormal item - - - - - - - 33.8 - -

Income tax expense - - - (0.8) (2.0) (0.1) - - - -

Operating profit- of the Corporation 27.7 25.5 19.4 9.4 28.6 26.3 (9.5) 43.0 12.6 10.1

Dividend (paid the following year) Not yet 12.7 9.7 4.7 14.3 13.1 - 4.6 12.6 -decided

Special dividend 2.5 - - - - - - - - -

Equity 266.2 253.7 237.9 210.6 205.9 191.6 175.1 184.5 186.1 186.1

Return on average equity (% pa) 11% 10% 9% 5% 14% 14% (5)% 23% 7% 6%

Dividend payout ratio Not yet 50% 50% 50% 50% 50% n/a 50% 100% 0%decided

Commercial Account client facilities outstanding (before provisions)

Loans 274 309 368 483 409 431 530 444 2,111 2,083

Guarantees and other off

balance sheet exposures 529 611 753 722 590 704 655 488 431 355

Exposures reinsured 82 48 15 - 103 - - - - -

Export Finance facilities 885 968 1,136 1,205 1,102 1,135 1,185 932 2,542 2,438

Rescheduled debts 39 41 44 46 43 39 40 38 37 37

Retained credit insurance exposures - 16 125 1,310 1,027 1,237 1,841 1,539 1,418 1,591

Reinsured credit insurance exposures - 1,176 1,137 - - - - - - -

Credit Insurance facilities 39 1,233 1,306 1,356 1,070 1,276 1,881 1,577 1,455 1,628

Total exposures 924 2,201 2,442 2,561 2,172 2,411 3,066 2,509 3,997 4,066

Note: on 30 June 1997 the Government transferred $1,879 million of loans under the Development Import Finance Facility (DIFF) from the Commercial

Account to the National Interest Account.

Appendix 9EFIC: A Ten Year Summary

42

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

43

Appendix 9EFIC: A Ten Year Summary. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

Years ended 30 June: 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995$m $m $m $m $m $m $m $m $m $m


Exports supported

> Export Finance 20 108 31 54 106 235 395 103 74 39

> Credit Insurance - 31 9 62 405 1,088 236 633 421 71

Total exports supported 20 139 40 116 511 1,323 631 736 495 110

New political risk insurances - - - - - - 63 236 60 -

Net interest income

(including grant amortised) 24.4 22.9 22.9 27.2 21.5 28.8 7.8 (0.7) 8.2 2.5

Premiums and fees 5.4 6.9 7.5 11.4 21.9 23.3 26.1 12.3 6.0 4.6

Foreign exchange variations (2.3) (13.6) (8.7) 9.7 3.2 (2.7) 3.2 0.2 0.2 0.5

Total revenue 27.5 16.2 21.7 48.3 46.6 49.4 37.1 11.8 14.4 7.6

(Charge)/credit for loss provisions (0.2) 5.8 2.9 (3.9) (6.5) 5.9 (0.6) (3.9) 4.6 (3.7)

Operating expenses (4.7) (5.6) (5.7) (5.8) (6.1) (6.5) (6.5) (4.2) (2.5) (2.5)

Operating profit/(loss) attributable

to the Commonwealth 22.6 16.4 18.9 38.6 34.0 48.8 30.0 3.7 16.5 1.4

National Interest Account client facilities outstanding (before provisions)

Loans 1,715 1,977 2,378 2,700 2,494 2,361 2,576 2,028 155 147

Off balance sheet exposures 6 35 1 5 25 253 343 245 112 56

Reinsured facilities 66 31 66 90 90 - - - - -

Export Finance facilities 1,787 2,043 2,445 2,795 2,609 2,614 2,919 2,273 267 203

Rescheduled debts 607 648 772 860 725 613 650 550 523 565

Off balance sheet exposures - - 5 - 249 418 171 482 277 29

Credit Insurance facilities 607 648 777 860 974 1,031 821 1,032 800 594

Total National Interest facilities 2,394 2,691 3,222 3,655 3,583 3,645 3,740 3,305 1,067 797

Statement by Board Members 46Independent Audit Report 47Statement of Financial Performance 49Statement of Financial Position 50Statement of Cash Flow 51Schedule of Commitments 53Schedule of Contingencies 53

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .

contents

44

. . . . . . . . . . . . . .

. . . . . . . . . . . . . .Financial Statements

Notes to and forming part of the Financial StatementsNote 1 Summary of significant accounting policies 54

2 Operating profit 583 Claims expense 604 Taxation 605 Cash and liquid assets 606 Receivables from other financial institutions 607 Other assets 618 Investment securities 619 Loans and rescheduled debts 62

10 Total provision for losses on client exposures 6311 Impaired loans 6312 Property plant and equipment 6413 Payables to other financial institutions 6514 Other liabilities 6515 Provisions 6516 Borrowings 6617 Contributed equity 6718 Reserved and retained profits 6719 Equity 6720 Average balance sheet and related interest 6821 Financial instruments and client exposures 6822 International financial reporting standards (IFRS) 7423 Segment information 7524 Divestment of the credit insurance business 7625 Remuneration of auditors 7726 Number of employees 7727 Remuneration of executives 7828 Remuneration of board members 7929 Related party information 7930 Reconciliation of operating profit to net cash flows from operating activities 80

45

Financial Statements

46

In the opinion of the Members of the Board of the Export Finance and Insurance Corporation:(a) the accompanying financial report is drawn up so as to give a true and fair view of the performance

of the Corporation for the year ended 30 June 2004 and the financial position of the Corporation at 30 June 2004;

(b) the financial report gives a true and fair view of the matters required by Schedule 1 of theFinance Minister’s Orders made under the Commonwealth Authorities and Companies Act 1997;

(c) the financial report has been made out in accordance with applicable Australian Accounting Standards;

(d) there are reasonable grounds to believe that the Corporation will be able to pay its debts as andwhen they become due and payable.

Signed in accordance with a resolution of the Board

Peter YoungCHAIRPERSON

Angus ArmourMANAGING DIRECTOR

30 JULY 2004

STATEMENT BY BOARD MEMBERS

INDEPENDENT AUDIT REPORTTo the Minister for Trade

Matters relating to the Electronic Presentation of the Audited Financial Report

This audit report relates to the financial statements published in both the annual report and on the website of theExport Finance and Insurance Corporation for the year ended 30 June 2004. The Board of the Export Financeand Insurance Corporation is responsible for the integrity of both the annual report and the web site.

The audit report refers only to the statements named below. It does not provide an opinion on any otherinformation which may have been hyperlinked to/from the audited financial statements.

If the users of this report are concerned with the inherent risks arising from electronic data communications theyare advised to refer to the hard copy of the audited financial statements in the Export Finance and InsuranceCorporation’s annual report.

Scope

The financial statements comprise:> Statement by Board Members; > Statements of Financial Performance, Financial Position and Cash Flows; > Schedules of Commitments and Contingencies; and> Notes to and forming part of the Financial Statements

for the Export Finance and Insurance Corporation, for the year ended 30 June 2004.

The members of the Board of the Export Finance and Insurance Corporation are responsible for the preparationand true and fair presentation of the financial statements in accordance with the Finance Minister’s Orders. Thisincludes responsibility for the maintenance of adequate accounting records and internal controls that aredesigned to prevent and detect fraud and error, and for the accounting policies and accounting estimatesinherent in the financial statements.

Audit approach

I have conducted an independent audit of the financial statements in order to express an opinion on them toyou. My audit has been conducted in accordance with the Australian National Audit Office Auditing Standards,which incorporate the Australian Auditing and Assurance Standards, in order to provide reasonable assuranceas to whether the financial statements is free of material misstatement. The nature of an audit is influenced byfactors such as the use of professional judgement, selective testing, the inherent limitations of internal control,and the availability of persuasive, rather than conclusive, evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. While the effectiveness of management’s internal controls overfinancial reporting was considered when determining the nature and extent of audit procedures, the audit wasnot designed to provide assurance on internal controls.

I have performed procedures to assess whether, in all material respects, the financial statements presents fairly,in accordance with the Finance Minister’s Orders made under the Commonwealth Authorities and CompaniesAct 1997, Accounting Standards and other mandatory financial reporting requirements in Australia, a view whichis consistent with my understanding of the Export Finance and Insurance Corporation’s financial position, and ofits performance as represented by the statements of financial performance, and cashflows.

47

48

The audit opinion is formed on the basis of these procedures, which included: > examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the

financial report; and

> assessing the appropriateness of the accounting policies and disclosures used, and the reasonableness ofsignificant accounting estimates made by the Board of the Export Finance and Insurance Corporation.

Independence

In conducting the audit, I have followed the independence requirements of the ANAO, which incorporateAustralian professional ethical pronouncements.

Audit Opinion

In my opinion, the financial statements: (i) have been prepared in accordance with the Finance Minister’s Orders made under the Commonwealth

Authorities and Companies Act 1997 and applicable Accounting Standards; and

(ii) give a true and fair view, of the matters required by applicable Accounting Standards and other mandatoryprofessional reporting requirements in Australia, and the Finance Minister’s Orders, of the financial positionof the Export Finance and Insurance Corporation as at 30 June 2004, and its financial performance andcash flows for the year then ended. Australian National Audit Office Ian P. Goodwin Executive DirectorDelegate of the Auditor-General CANBERRA 30 July 2004

Australian National Audit Office

Ian P. GoodwinEXECUTIVE DIRECTOR

DELEGATE OF THE AUDITOR-GENERAL

CANBERRA

30 JULY 2004

--- COMMERCIAL ACCOUNT NATIONAL INTEREST ACCOUNT TOTAL

30 June 30 June 30 June 30 June 30 June 30 June2004 2003 2004 2003 2004 2003

Note $m $m $m $m $m $m

Export Finance business

Interest income 2(i) 47.3 47.8 119.1 151.2 166.4 199.0

Interest expense 2(ii) (29.6) (32.5) (94.7) (128.3) (124.3) (160.8)

Net interest income 17.7 15.3 24.4 22.9 42.1 38.2

Premium, fees and other revenue 1(c), 2(iii) 19.6 19.5 6.1 7.8 25.7 27.3

Less ceded to reinsurers (1.7) (1.4) (0.7) (1.2) (2.4) (2.6)

Net revenue 35.6 33.4 29.8 29.5 65.4 62.9

(Charge)/credit to provisions 2(iv) (3.2) 2.9 (0.2) 5.8 (3.4) 8.7

Foreign exchange losses — (0.4) (2.3) (13.6) (2.3) (14.0)

Operating expenses 2(v) (9.0) (7.2) (4.7) (5.2) (13.7) (12.4)

Profit from Export Finance activities 23.4 28.7 22.6 16.5 46.0 45.2

Credit Insurance business Discontinued Operations

Premiums, fees and other revenue 1(c), 2(iii) 6.0 19.6 — 0.3 6.0 19.9

Less ceded to reinsurer (6.0) (19.4) — — (6.0) (19.4)

Net revenue — 0.2 — 0.3 — 0.5

Claims expense 1(t), 2(iv) 0.2 (3.0) — — 0.2 (3.0)

Reinsurer’s share of claims expense 1.2 4.0 — — 1.2 4.0

Net claims credit/(expense) 1.4 1.0 — — 1.4 1.0

Operating expenses 2(v) (3.4) (17.0) — (0.4) (3.4) (17.4)

Reinsurance commissions 3.8 9.9 — — 3.8 9.9

Underwriting profit/(loss) 1.8 (5.9) — (0.1) 1.8 (6.0)

Profit on sale of business 2.5 — — — 2.5 —

Allocated interest income 2(i) — 2.7 — — — 2.7

Profit/(loss) before income tax from Credit Insurance activities 4.3 (3.2) — (0.1) 4.3 (3.3)

Profit on ordinary activitiesbefore income tax expense 27.7 25.5 22.6 16.4 50.3 41.9

Income tax expense(Credit Insurance only) 1(h), 4 — — — — — —

Profit on ordinary activitiesafter income tax expense 27.7 25.5 22.6 16.4 50.3 41.9

National Interest profit attributable directly to the Commonwealth — — (22.6) (16.4) (22.6) (16.4)

Net profit attributable to theCommonwealth as shareholder 27.7 25.5 — — 27.7 25.5

Total changes in equity other thanthose resulting from transactions withthe Commonwealth as owner 27.7 25.5 — — 27.7 25.5

The accompanying notes form an integral part of this financial report. 49

STATEMENT OF FINANCIAL PERFORMANCEfor the year ended 30 June 2004

50

STATEMENT OF FINANCIAL POSITION30 June 2004

COMMERCIAL ACCOUNT NATIONAL INTEREST ACCOUNT TOTAL



Assets

Cash and liquid assets 1(l), 5 4.2 0.9 — — 4.2 0.9

Receivables from otherfinancial institutions 1(m), 6 168.5 28.9 — — 168.5 28.9

Other assets 7 89.6 46.0 215.4 165.3 305.0 211.3

Investment securities 1(n), 8 732.2 552.2 — — 732.2 552.2

Loans and rescheduled debts 1(o), 9 277.4 307.5 2,008.2 2,174.0 2,285.6 2,481.5

Amount owing by theCommonwealth — — — 3.8 — 3.8

Property, plant and equipment 1(q), 12 27.6 29.8 — — 27.6 29.8

Total assets 1,299.5 965.3 2,223.6 2,343.1 3,523.1 3,308.4

Liabilities

Payables to other financial institutions 13 360.7 343.3 — — 360.7 343.3

Other liabilities 1(j), 14 108.1 119.9 111.2 195.0 219.3 314.9

Provisions 1(s), 1(t), 15 30.3 35.1 0.2 — 30.5 35.1

Borrowings 1(u), 16 534.2 213.3 2,102.5 2,148.1 2,636.7 2,361.4

Amount owing to the Commonwealth — — 9.7 — 9.7 —

Total liabilities 1,033.3 711.6 2,223.6 2,343.1 3,256.9 3,054.7

Net assets 266.2 253.7 — — 266.2 253.7

Equity

Contributed equity 17 6.0 6.0 — — 6.0 6.0

Reserves 18 77.4 77.4 — — 77.4 77.4

Retained profits 18 182.8 170.3 — — 182.8 170.3

Total equity 19 266.2 253.7 — — 266.2 253.7

The accompanying notes form an integral part of this financial report.



$m $m $m $m $m $m

Cash flows from operating activities

Inflows:Premium and fees received (grossed up

for goods and services tax) 20.5 40.8 0.8 2.1 21.3 42.9

Interest received 46.9 49.8 49.8 46.4 96.7 96.2

Insurance claim recoveries 2.8 3.7 — — 2.8 3.7

Sundry income (grossed up for goods andservices tax) 2.5 2.4 — — 2.5 2.4

Net decrease/(increase) in otherdebtors and prepayments 0.1 0.1 — — 0.1 0.1

Outflows:

Premiums paid to reinsurers (net of commissions) (5.1) (12.5) (1.0) (0.9) (6.1) (13.4)

Credit insurance claims and associated costs (1.3) (5.7) — — (1.3) (5.7)

Payment to creditors and employees(grossed up for goods and services tax) (21.1) (25.1) — — (21.1) (25.1)

Interest and other costs of finance paid (32.3) (49.2) (95.7) (163.4) (128.0) (212.6)

Payments for bonds and guarantees — (0.2) — (0.3) — (0.5)

Net cash provided by/(used in) operating activities (Note 30) 13.0 4.1 (46.1) (116.1) (33.1) (112.0)

Cash flows from investing activities

Inflows:

Proceeds from sale of investments 196.6 1,212.5 — — 196.6 1,212.5

Net repayments of loan balances 19.1 11.5 165.6 161.4 184.7 172.9

Rescheduled debt repayments 2.4 2.2 30.1 27.7 32.5 29.9

Proceeds from sale of credit insurancebusiness 2.5 — — — 2.5 —

Proceeds from sale of property, plant and equipment 0.6 0.3 — — 0.6 0.3

Outflows:

Payments for investments (196.8) (1,232.9) — — (196.8) (1,232.9)

Payments for property, plantand equipment (0.3) (0.4) — — (0.3) (0.4)

Net cash provided by/(used in) investing activities 24.1 (6.8) 195.7 189.1 219.8 182.3


STATEMENT OF CASH FLOWSfor the year ended 30 June 2004

51

52



$m $m $m $m $m $m

Cash flows from financing activities

Inflows:

Receipts from the Commonwealth 4.0 4.4 9.9 21.3 13.9 25.7

Outflows:

Net proceeds from /(repayments of)borrowings 300.4 (45.7) (136.8) (71.2) 163.6 (116.9)

Payments to the Commonwealth (1 .4) — (22.7) (23.1) (24.1) (23.1)

Dividend payments to theCommonwealth (15.2) (9.7) — — (15.2) (9.7)

Net case provided by/(used in)financing activities 287.8 (51.0) (149.6) (73.0) 138.2 (124.0)

Net increase/(decrease) in cash held 324.9 (53.7) — — 324.9 (53.7)

Cash at beginning of financial year 276.0 338.6 — — 276.0 338.6

Net effects of exchange rate changeson cash balances held in foreign currencies (1.8) (8.9) — — (1.8) (8.9)

Cash at end of financial year (Note 30) 599.1 276.0 — — 599.1 276.0


STATEMENT OF CASH FLOWS (CONTINUED)

53

SCHEDULE OF COMMITMENTS30 June 2004



$m $m $m $m $m $m

Other commitments

Operating leases — 0.2 — — — 0.2

Total commitments — 0.2 — — 0.2

Maturity analysis of commitments

One year or less — 0.1 — — — 0.1

From one to two years — 0.1 — — — 0.1

Total commitments — 0.2 — — — 0.2

The commitments to provide financial facilities to clients are set out in Note 21.

SCHEDULE OF CONTINGENCIES30 June 2004

The contingent liabilities of the Corporation arising from normal business operations conducted in the following areas are recorded asexposures within Note 21:

> Short-term export credit insurance> Guarantees> Bonds> Residual value insurance> Political risk insurance> Medium-term insurance> Reinsurers

54

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTSfor the year ended 30 June 2004

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Export Finance and Insurance Corporation(“EFIC”) was established as an independent entitywholly owned by the Commonwealth of Australia (“the Commonwealth”) on 1 November 1991 by theExport Finance and Insurance Corporation Act 1991(the “EFIC Act”).

The following accounting policies have been adoptedin the financial statements.

(a) Statutory requirementsEFIC adopts accounting principles and policiesgenerally applied in commercial practice. Thefinancial statements are required by clause 1(b) of Schedule 1 to the Commonwealth Authoritiesand Companies Act 1997 and are a generalpurpose financial report.

The statements have been prepared inaccordance with:

> Australian Accounting Standards;> other authoritative pronouncements of the

Australian Accounting Standards Board;

> the Consensus Views of the Urgent IssuesGroup; and

> Schedule 1 of the Commonwealth Authoritiesand Companies (Financial Statements 2003-2004) Orders.

The statements have been prepared havingregard to:

> Statements of Accounting Concepts; and

> the Explanatory Notes to Schedule 1 issued bythe Department of Finance and Administration.

(b) Basis of accountingUnless otherwise indicated, all amounts areexpressed in Australian dollars.

The financial statements have been prepared on the basis of historical costs on an accrualbasis and except where stated do not take intoaccount current valuations of non-current assets.Costs are based on the fair values of theconsideration given in exchange for assets.

The carrying amounts of assets are reviewed to determine whether they are in excess of theirrecoverable amounts at balance date. If the carryingamounts of assets exceed the recoverable amounts,the assets are written down to the lower amount.In this assessment, the relevant cash flows are notdiscounted to present values unless otherwisestated.

The financial statements identify separately theactivities undertaken on EFIC’s own account andthose entered into on the National InterestAccount.

(i) Business undertaken on EFIC’s own account(“Commercial Account” transactions) For activities undertaken under Part 4 of the EFIC Act, all risks are borne by EFIC andthe net profit or loss generated from theseactivities is attributable to EFIC.

(ii) Business undertaken on the National Interest AccountPart 5 of the EFIC Act provides for the Ministerfor Trade to give an approval or direction toEFIC to undertake any transaction which theMinister considers is in the National Interest.Such transactions may relate to a class ofbusiness which EFIC is not authorised toundertake, or involve terms and conditionsEFIC would not accept in the normal course of business.

Where the Minister gives EFIC an approval or direction to undertake a transaction underPart 5 of the Act, the risk is borne by theCommonwealth. Premium or other income fromthe transaction is paid by EFIC to theCommonwealth. EFIC recovers from theCommonwealth the costs of administeringbusiness undertaken under Part 5 and recoversfrom the Commonwealth any losses incurred inrespect of such business. The National InterestAccount profit or loss is therefore directlyattributable to the Commonwealth.

There is a provision in the EFIC Act whichallows EFIC to share part of a National Interesttransaction. In such cases income, expensesand therefore any profits or losses areapportioned between the two accounts in accordance with the risk participation.

(c) Premium fees and other revenueInsurance premiums are treated as earned from the date of attachment of risk. For the short-term credit insurance business the pattern ofrecognition over the policy or indemnity period isbased on time and unearned premium iscalculated using the pro-rata method. Premiumsand fees on export finance facilities which aretime-related are taken into revenue on a reducingbalance method, generally reflecting the diminishingexposure over the term of the transactions.

(d) Unamortised grantsUnamortised grant income is comprised of fundspreviously provided from the CommonwealthGovernment’s overseas aid appropriations. TheGovernment provided overseas aid funds under amixed credit scheme to assist developingcountries to undertake high priority public sectorprojects. The mixed credit grant, which isadministered by EFIC on the National InterestAccount, was blended with funding at commercialrates under EFIC’s export finance facility toprovide a ’soft loan’ package to finance theproject in the developing country.

The mixed credit grant is amortised over the life of the loan to cover the difference between EFIC’scommercial borrowing costs and the concessionalinterest income earned on the loan. The unamortisedgrant is included in the balance sheet as an offsetto loan assets.

The Government has discontinued the mixedcredit scheme. Commitments to provide facilitiesset out in note 21 include all remaining commitmentsunder mixed credit facilities already approved.

(e) Foreign currencyTransactions denominated in a foreign currencyare converted at the exchange rate at the date ofthe transaction. Foreign currency receivables andpayables at balance date are translated atexchange rates prevailing at balance date.

All exchange gains and losses relating to hedgetransactions are brought to account in thestatement of financial performance in the sameperiod as the exchange differences on the itemscovered by the hedge transactions. Costs onsuch contracts are amortised over the life of thehedge contract. Exchange gains and losses arebrought to account in determining the profit orloss for the year.

The principal exchange rates affecting thestatement of financial position are the US dollar,the Euro and the Japanese Yen. The relevantexchange rates used are:

2004 2003

Average rates during yearUS$ / A$ 0.7127 0.5840Euro / A$ 0.5972 0.5575Yen / A$ 78.82 69.96Rates at 30 JuneUS$ / A$ 0.6894 0.6675Euro / A$ 0.5706 0.5839Yen / A$ 74.91 79.98

(f) Derivative financial instrumentsEFIC uses derivative financial instruments tomanage exposures to interest rate and foreignexchange risk. These include foreign exchangecontracts, interest rate and cross-currencyswaps, financial futures and forward rateagreements. The derivative financial instrumentsare used to hedge certain assets and liabilities.Gains and losses on these hedge contracts areaccounted for on the same basis as theinstrument being hedged.

Unrealised foreign exchange gains and losses on these instruments at balance date are includedin the statement of financial position under otherassets or other liabilities, as appropriate. Forwardforeign exchange contracts are accounted for asoutlined in note 1(e).

Further details on derivative financial instrumentsare set out in note 21.

(g) Export finance interest subsidyInterest rates charged to customers are set inaccordance with OECD Guidelines for OfficiallySupported Export Credits. The subsidy from(refunds of subsidy to) the Commonwealth on the Commercial Account represents the interestshortfall (surplus) on these lending activities aftertaking into account the costs associated withfunding the loans, together with loanadministration management fees paid inconnection with export finance guarantees.

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NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)

(h) TaxationUnder Section 63 of the EFIC Act, EFIC is notsubject to income tax and a number of othertaxes. From 1 July 1998 EFIC has been subjectto a tax equivalent regime on its short-term creditinsurance business on the Commercial Account.Under Section 63A of the EFIC Act, EFIC pays tothe Commonwealth the amounts equivalent to theincome tax on its short-term credit insurancebusiness which it would have paid if it had beensubject to the Income Tax Assessment Act andthe amounts equivalent to the state taxes inrespect of its short-term credit insurance businessfrom which it is currently exempt.

EFIC has adopted the liability method of tax-effectaccounting for its income tax equivalent. Other taxequivalents are expensed in the normal way on anaccrual basis.

(i) Goods and services taxRevenues, expenses and assets are recognisednet of the amount of goods and services tax(GST), except:

> where the amount of GST incurred is not recoverable as an input tax credit from theAustralian Taxation Office, it is recognised aspart of the cost of acquisition of an asset or aspart of an item of expense; and

> the net amount of GST recoverable from, orpayable to, the Australian Taxation Office isincluded as part of the receivables, payables or commitments.

(j) Sundry creditorsCreditors and other liabilities are recognised whenEFIC becomes obliged to make future paymentsresulting from the purchase of goods and services.

(k) Employee entitlementsProvisions for annual leave and long service leavehave been established to provide for amountsexpected to be paid to employees based on theirentitlements. Where applicable, the entitlementstake into account prior government service. The provision for annual leave is based on thevalue of actual entitlements at balance date.

Long service leave and annual leave liabilities aremeasured at the present value of expected futurepayments to be made in respect of servicesprovided by employees up to the reporting date,discounted using the market yields at balance date.

(l) Cash and liquid assetsCash and liquid assets include cash on hand andbank account balances.

(m) Receivables from other financial institutionsReceivables from other financial institutionsinclude deposits with banks and other financialinstitutions, but exclude securities issued by them.

(n) Investment securitiesInvestment securities are those purchased withthe intent of being held to maturity. They areshort- and long-term government, bank and othersecurities and include bonds, bills of exchange,commercial paper and certificates of deposit.They are carried at cost, adjusted for unamortisedpremiums and discounts. Where there has beena permanent diminution in the value of investments,a provision for the diminution is made.

Interest income is recognised on an accruals basis.

(o) Loans and rescheduled debtsExport finance loans and rescheduled creditinsurance debts are carried at the recoverableamount, represented by the gross value of theoutstanding balances, adjusted by provisions forimpairment and unearned income, lessunamortised grants (see Note 1(d) and 1(r)).

Interest income is recognised on an accruals basis.

(p) Impaired assetsImpaired assets include non-accrual loans, with or without specific provisions for impairment, andrestructured loans. Details are given in Note 11.

(q) Property, plant and equipment Land and buildings are revalued periodically using the fair value, as required by the FinanceMinister’s Orders. The valuation is made by an independent registered valuer. Revaluationincrements are credited directly to the assetrevaluation reserve.

Property, plant and equipment, other than freeholdland, are depreciated over their estimated usefuleconomic lives using the straight line method.Depreciation rates used are as follows:

> buildings 6.67%

> computer equipment 33.3%

> other plant and equipment 10 – 22.5%

Profits and losses on disposal of property, plant and equipment are taken into account in determining the result for the year.


(r) Provisions for impairment relating to loansand rescheduled debts

Commercial Account specific provisions:for loans and rescheduled debts on the CommercialAccount, a specific provision is established whenit is likely that a loan or debt will not be recoveredin full. All individual facilities are reviewed regularly.

Commercial Account general provision: a general provision is deducted from the loan and rescheduled debt balance on the CommercialAccount to provide for unidentified probable lossesinherent in the portfolio. The provision is madehaving regard to the risk profile of the portfolio,economic conditions and a range of other dataand criteria.

National Interest Account provisions:for loans and rescheduled debts on the NationalInterest Account, no general provision is made as the Commonwealth has borne the risks andreimburses EFIC for any specific losses. A specificprovision is made when it is likely that a loan or rescheduled debt will not be recovered in full.

(s) Provisions for losses relating to off-balancesheet facilitiesOff-balance sheet facilities provided by EFIC includebonds, guarantees and term insurance, includingpolitical risk insurance and medium-term insurance.

Commercial Account specific provisions:A specific provision is raised for off-balance sheetfacilities on the Commercial Account where it islikely that a payment will be made in respect ofclaims received under them.

Commercial Account general provision:A general provision has been created to providefor unidentified probable losses inherent in theportfolio of bond, guarantee, medium-terminsurance and political risk insurance facilities onthe Commercial Account. The provision is madehaving regard to the risk profile of the portfolio,economic conditions and a range of other criteria.

National Interest Account provisions:For bond, guarantee and political risk insurancefacilities provided on the National Interest Account,no general provision is made as the Commonwealthhas borne the risks and reimburses EFIC for anyspecific losses. A specific provision is made whenit is likely that a payment will be made in respectof claims under these facilities.

(t) Credit insurance claims and recoveriesThe net claims expense for credit insurance is net of estimated recoveries in respect of claimsalready paid and estimated to be payable.

The provision for outstanding credit insuranceclaims at balance date is an estimate bymanagement which has regard to claims awaitingpayment and claims likely to result from paymentdelays notified and expected to be notified, lessrecoveries in respect of these amounts.

Where rescheduling agreements have beenentered into, the claim payments are capitalised(as per the terms set out in the relevant agreement)and included as rescheduled debts in thefinancial statements.

(u) BorrowingsCommercial paper, medium-term notes andbonds are recorded at an amount equal to the net proceeds received, with the premium or discount amortised over the period untilmaturity. Interest expense is recognised on an effective yield basis.

(v) Cash flowsFor the purpose of the statements of cash flows,cash includes cash on hand and at bank, andsecurities, of and deposits with, financial institutions,to maintain liquidity.

(w) RoundingAmounts are rounded to the nearest $0.1 millionunless otherwise indicated.

(x) ComparativesWhere necessary, comparatives have beenreclassified and repositioned for consistency with current year disclosures.

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$m $m $m $m $m $m

NOTE 2 OPERATING PROFIT

(i) Interest income

Investment securities 31.1 30.3 — — 31.1 30.3

Other financial institutions 1.6 2.4 — — 1.6 2.4

Loans 11.5 14.0 39.7 50.0 51.2 64.0

Impaired loans 3.1 3.8 24.8 30.1 27.9 33.9

Amortisation of grants — — 54.6 71.1 54.6 71.1

Total interest income 47.3 50.5 119.1 151.2 166.4 201.7

Allocated to:

Export Finance 47.3 47.8 119.1 151.2 166.4 199.0

Credit Insurance underwriting — 2.7 — — — 2.7

(ii) Interest expense

Other financial institutions (15.2) (16.6) — — (15.2) (16.6)

Other borrowings (14.9) (16.1) (94.7) (128.3) (109.6) (144.4)

Subsidy from the Commonwealth 0.5 0.2 — — 0.5 0.2

Total Interest expense (29.6) (32.5) (94.7) (128.3) (124.3) (160.8)

Allocated to:

Export Finance (29.6) (32.5) (94.7) (128.3) (124.3) (160.8)

(iii) Premiums, fees and other revenueExport finance

Premiums and fees 16.9 17.3 6.1 7.8 23.0 25.1

Profit on sale of fixed assets — 0.1 — — — 0.1

Rental Income 2.6 2.0 — — 2.6 2.0

Sundry income 0.1 0.1 — — 0.1 0.1

Export finance revenue 19.6 19.5 6.1 7.8 25.7 27.3

Credit insurance underwritingpremium and fee revenue 6.0 19.6 — 0.3 6.0 19.9



$m $m $m $m $m $m

(iv) (Charge)/credit to provisions

Export Finance

Specific provisions for losses 8.6 (2.1) 1.5 3.8 10.1 1.7

Loan written off (8.3) (0.2) (1.7) — (10.0) (0.2)

Loan recoveries — — — 2.0 — 2.0

General provisions for losses (3.5) 5.2 — — (3.5) 5.2

Export finance (charge)/credit to provisions (3.2) 2.9 (0.2) 5.8 (3.4) 8.7

Credit Insurance underwritingClaims 0.6 (5.3) — — 0.6 (5.3)Recoveries (0.4) 2.3 — — (0.4) 2.3

Claims expense includingreinsurer’s share 0.2 (3.0) — — 0.2 (3.0)

Most of EFIC’s loans, rescheduled debts and off-balance sheet facilities are denominated in foreign currencies. Movements in foreignexchange rates affect the magnitude in Australian dollars of these exposures and therefore the provisions for losses required. Thecharges to provisions included above (mainly in Export Finance provisions) which resulted from foreign exchange rate movements were:

Credit to provision due toforeign exchange movements 0.5 9.8 — 3.7 0.5 13.5

During the year the method of measuring the general provision for losses was changed from one based on the use of bond spreadsto one using default probabilities and loss statistics. The change of methodology resulted in a $11.5m reduction in the charge togeneral provision for losses earlier in the year.

(v) Operating expenses

Staff costs (8.7) (16.0) — — (8.7) (16.0)

Property costs (0.8) (1.2) — — (0.8) (1.2)

Computer costs (0.7) (0.6) — — (0.7) (0.6)

Professional fees (2.1) (2.8) — — (2.1) (2.8)

Credit information (0.1) (1.1) — — (0.1) (1.1)

Depreciation of property, plant and equipment (1.9) (2.1) — — (1.9) (2.1)

Provisions for employee entitlements (0.1) (3.6) — — (0.1) (3.6)

Travel costs (0.8) (0.7) — — (0.8) (0.7)

Corporate Insurance (0.4) (0.4) — — (0.4) (0.4)

Other expenses (1.5) (1.3) — — (1.5) (1.3)

National Interest Account allocation 4.7 5.6 (4.7) (5.6) — —

Total operating expenses (12.4) (24.2) (4.7) (5.6) (17.1) (29.8)

Allocated to:Export Finance (9.0) (7.2) (4.7) (5.2) (13.7) (12.4)Credit Insurance (3.4) (17.0) — (0.4) (3.4) (17.4)

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NOTE 3 CLAIMS EXPENSECurrent year claims expense 0.6 4.2 — — 0.6 4.2

Adjustment to prior years’ claimsexpense (0.8) (1.2) — — (0.8) (1.2)

Claims expense (0.2) 3.0 — — (0.2) 3.0

NOTE 4 TAXATION 1(h)

The aggregate amount of income tax attributable to the financial year differs from the amount calculated on the operating profit. The differences are reconciled as follows:

Operating profit before income tax 50.3 41.9

Income tax calculated at 30% 15.1 12.6

Tax effect of permanent differences:

National Interest Account profit not taxable (6.8) (4.9)

Export Finance profit not taxable (7.0) (8.5)

Future tax benefit of losses not recognised (0.5) 0.9

Other permanent differences (0.8) (0.1)

Income tax equivalent — —

The future tax benefit of Credit Insurance losses has not been recognised because the business has been divested.

NOTE 5 CASH AND LIQUID ASSETS 1(l)

Cash at bank — Australia 4.1 0.8 — — 4.1 0.8

Cash at bank — overseas 0.1 0.1 — — 0.1 0.1

Total cash and liquid assets 4.2 0.9 — — 4.2 0.9

NOTE 6 RECEIVABLES FROM OTHER FINANCIAL INSTITUTIONS1(m)

At call 11.9 9.4 — — 11.9 9.4

Due in less than 3 months 121.3 19.5 — — 121.3 19.5

Due after 3 months to 1 year 35.3 — — — 35.3 —

Total receivables from otherfinancial institutions 168.5 28.9 — — 168.5 28.9




NOTE 7 OTHER ASSETSAccrued interest receivable 1.9 3.1 15.5 16.8 17.4 19.9

Sundry debtors and prepayments 2.7 4.5 0.1 0.1 2.8 4.6

Derivative financial instrumentsreceivable 1(f) 85.0 38.4 199.8 148.4 284.8 186.8

Total other assets 89.6 46.0 215.4 165.3 305.0 211.3

NOTE 8 INVESTMENT SECURITIES 1(n)

Bank bills and other securities 732.2 552.2 — — 732.2 552.2

Total investment securities 732.2 552.2 — — 732.2 552.2

Maturity analysis

Due in 3 months or less 282.1 187.2 — — 282.1 187.2

Due after 3 months to 1 year 12.1 105.9 — — 12.1 105.9

Due after 1 year to 5 years 438.0 259.1 — — 438.0 259.1

Total investment securities 732.2 552.2 — — 732.2 552.2

Market value

Bank bills and other securities 728.8 551.8 — — 728.8 551.8

Total market value 728.8 551.8 — — 728.8 551.8

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NOTE 9 LOANS AND RESCHEDULED DEBTS1(o)

Export finance loans (gross) 273.4 308.7 1,780.6 1,977.2 2,054.0 2,285.9

Rescheduled credit insurance debts 39.4 40.6 607.2 648.0 646.6 688.6

Loans and rescheduled debts (gross) 312.8 349.3 2,387.8 2,625.2 2,700.6 2,974.5

Less: unearned premiums (4.0) (4.3) (26.5) (32.2) (30.5) (36.5)

Less: provision for impairment 1(r) (31.4) (37.5) (28.7) (30.4) (60.1) (67.9)

Less: unamortised grant 1(d) — — (324.4) (388.6) (324.4) (388.6)

Loans and rescheduled debts (net) 277.4 307.5 2,008.2 2,174.0 2,285.6 2,481.5

Provision for impairment

Specific provision 2.6 11.7 28.7 30.4 31.3 42.1

General provision 28.8 25.8 — — 28.8 25.8

Total provision for impairment 31.4 37.5 28.7 30.4 60.1 67.9

Maturity analysis

Due in 3 months or less 16.7 25.2 57.9 64.5 74.6 89.7

Due after 3 months to 1 year 46.8 49.3 150.4 181.8 197.2 231.1

Due after 1 year to 5 years 145.9 188.4 674.0 727.8 819.9 916.2

Due after 5 years 103.4 86.4 1,505.5 1,651.1 1,608.9 1,737.5

Total loans and rescheduleddebts (gross) 312.8 349.3 2,387.8 2,625.2 2,700.6 2,974.5

Overdue loans are aged as follows:

Overdue by:

less than 30 days 0.6 5.0 — — 0.6 5.0

30 to 60 days — 0.1 — — — 0.1

60 to 90 days — 0.2 — — — 0.2

more than 90 days 2.4 4.4 9.6 9.6 12.0 14.0

Overdue loans 3.0 9.7 9.6 9.6 12.6 19.3

Amounts shown under National Interest Account represent loans made by EFIC under the National Interest provisions of the EFIC Act.




NOTE 10 TOTAL PROVISIONS FOR LOSSES ON CLIENT EXPOSURES(loans, rescheduled debts and off-balance sheet facilities)

Total specific and general provisions 1(r), 1(s) 57.6 62.7 28.9 30.4 86.5 93.1

Specific provisions opening balance 19.4 17.3 30.4 38.7 49.8 56.0

Charge against/(credit to) profit (0.3) 2.1 0.2 (3.8) (0.1) (1.7)

Recoveries — — — (2.0) — (2.0)

Loans written off and claims paid (8.3) — (1.7) (2.5) (10.0) (2.5)

Specific provisions closing balance 10.8 19.4 28.9 30.4 39.7 49.8

Made up of provisions for:

Loans and rescheduled debts 9 2.6 11.7 28.7 30.4 31.3 42.1

Off-balance sheet facilities 15 8.2 7.7 0.2 — 8.4 7.7

Specific provisions closing balance 10.8 19.4 28.9 30.4 39.7 49.8

General provisions opening balance 43.3 48.5 — — 43.3 48.5

Charge/(credit) to profit 3.5 (5.2) — — 3.5 (5.2)

General provisions closing balance 46.8 43.3 — — 46.8 43.3

Made up of provisions for:

Loans and rescheduled debts 9 28.8 25.8 — — 28.8 25.8

Off-balance sheet facilities 15 18.0 17.5 — — 18.0 17.5

General provisions closing balance 46.8 43.3 — — 46.8 43.3

NOTE 11 IMPAIRED LOANSNon-accrual loans with

specific provisions 4.1 16.9 28.7 30.4 32.8 47.3

Less: specific provision for impairment (2.6) (11.7) (28.7) (30.4) (31.3) (42.1)

Carrying value of impaired non-accrual loans 1.5 5.2 — — 1.5 5.2

Carrying value of restructured loansand debts 81.0 86.8 929.5 925.6 1,010.5 1,012.4

Total impaired loans 82.5 92.0 929.5 925.6 1,012.0 1,017.6

Interest foregone on non-accrual loans — 0.2 — — — 0.2

There are no specific provisions for impairment in respect of restructured loans and debts.

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NOTE 12 PROPERTY PLANT AND EQUIPMENTFreehold land and building,

at valuation 1(q) 30.0 30.0 — — 30.0 30.0

Accumulated depreciation (3.0) (1.5) — — (3.0) (1.5)

Net book value land and building 27.0 28.5 — — 27.0 28.5

Plant and equipment, at carrying value 4.2 8.0 — — 4.2 8.0

Accumulated depreciation (3.6) (6.7) — — (3.6) (6.7)

Net book value plant and equipment 0.6 1.3 — — 0.6 1.3

Total property, plant and equipment 27.6 29.8 — — 27.6 29.8

Land and Plant and Totalbuilding equipment

$m $m $m

Gross value

Balance as at 30 June 2003 30.0 8.0 38.0

Additions — 0.5 0.5

Disposals — (4.3) (4.3)


Accumulated depreciation


Depreciation charge for assets heldat 1 July 2003 1.5 0.4 1.9

Depreciation recovered on disposals — (3.5) (3.5)


Net book value as at 1 July 2003 28.5 1.3 29.8

Net book value as at 30 June 2004 27.0 0.6 27.6

An independent valuation of land and buildings was carried out in June 2002 by Roger Price B.Bus (L.Econ) AAPI, Registered ValuerNo. 4096 of CB Richard Ellis Pty Ltd. On a deprival value basis, the land and buildings were valued at $30,000,000.

Leased accommodationFreehold land and buildings includes accommodation which has been leased to third parties. The valuation, accumulated depreciationand depreciation charge attributed to the leased space has been derived based on the floor area of the leased space.

The allocated valuation, accumulated depreciation, written-down value and depreciation expense of the leased space are as follows:30 June 30 June

2004 2003$m $m

Freehold land and buildings at valuation 21.5 13.0

Accumulated depreciation (2.1) (0.6)

Writtten-down value 19.4 12.4

Depreciation expense 1.1 0.6




NOTE 13 PAYABLES TO OTHER FINANCIAL INSTITUTIONS

Borrowings — unsecured 360.7 343.3 — — 360.7 343.3

Maturity analysis

Due in 3 months or less 255.3 6.1 — — 255.3 6.1

Due after 3 months to 1 year — 8.8 — — — 8.8

Due after 1 year to 5 years 66.7 287.6 — — 66.7 287.6

Due after 5 years 38.7 40.8 — — 38.7 40.8

Total payables to otherfinancial institutions 360.7 343.3 — — 360.7 343.3

All of EFIC’s liabilities, including those referred in Notes 13 to 16, are guaranteed by the Commonwealth pursuant to Section 62 of the EFIC Act.

NOTE 14 OTHER LIABILITIESUnearned credit insurance premiums 1(c) — 1.7 — — — 1.7

Less reinsurer’s share — (1.7) — — — (1.7)

Unearned off-balance sheetexport finance premiums 1(c) 16.4 18.2 0.4 0.1 16.8 18.3

Derivative financial instrumentpayables 1(f) 44.8 49.0 105.2 189.2 150.0 238.2

Sundry creditors 1(j) 6.1 10.6 — — 6.1 10.6

Interest payable 40.8 42.1 5.6 5.7 46.4 47.8

Total other liabilities 108.1 119.9 111.2 195.0 219.3 314.9

NOTE 15 PROVISIONSEmployee entitlements 1(k) 2.2 7.0 — — 2.2 7.0

Credit insurance claims 1(t) 3.1 6.0 — — 3.1 6.0

Less reinsurer’s share of claims (1.2) (3.1) — — (1.2) (3.1)

Off-balance sheet exportfinance facilities* 26.2 25.2 0.2 — 26.4 25.2

Total provisions 30.3 35.1 0.2 — 30.5 35.1

Specific provisions 8.2 7.7 0.2 — 8.4 7.7

General provision 18.0 17.5 — — 18.0 17.5

Total provision for off-balancesheet export finance losses* 26.2 25.2 0.2 — 26.4 25.2

* See Note 9 for provisions relating to loan and rescheduled debt facilities and Note 10 for a summary of the combined provisions for allclient exposures (loans, rescheduled debts and off-balance sheet facilities).

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NOTE 16 BORROWINGS 1(u)

Other borrowings — unsecured 2,636.7 2,361.4 — — 2,636.7 2,361.4

Borrowings in respect ofNational Interest (2,102.5) (2,148.1) 2,102.5 2,148.1 — —

Total borrowings 534.2 213.3 2,102.5 2,148.1 2,636.7 2,361.4

Amounts shown under National Interest represent borrowings and other liabilities incurred by EFIC for the purpose of funding loans madeunder the National Interest provisions of the EFIC Act.

Borrowing profile

Medium-term notes

Australian dollar 147.8 233.5

Japanese yen 1,026.7 1,114.5

US dollar 123.5 135.3

Total medium-term notes 1,298.0 1,483.3

Bonds

Australian dollar 799.4 568.6

Euro 104.7 125.9

New Zealand dollar 108.9 —

Total bonds 1,013.0 694.5

Euro-commercial paper

Euro — 34.1

US dollar 325.7 149.5

Total euro-commercial paper 325.7 183.6

Total other borrowings — unsecured 2,636.7 2,361.4

Maturity analysis of borrowings

Due in 3 months or less 428.5 279.5

Due after 3 months to 1 year 956.2 401.0

Due after 1 year to 5 years 769.9 1,180.4

Due after 5 years 482.1 500.5

Total other borrowings — unsecured 2,636.7 2,361.4

Borrowings from financial institutions are set out separately in Note 13. Where borrowings are in a different currency from the assets beingfinanced, cross-currency swap or currency hedging arrangements are entered into (see Note 21).



$m $m $m $m $m $m

NOTE 17 CONTRIBUTED EQUITYCapital paid to EFIC out of the assets of the

Australian Trade Commission pursuantto Section 19 of the Export Finance and Insurance Corporation (Transitional Provisions and Consequential Amendments) Act 1991 6.0 6.0 — — 6.0 6.0

The contributed equity carries the right to dividends. In addition to the contributed equity, Section 54 of the EFIC Act provides for $200million of callable capital from the Commonwealth, none of which has been called.

NOTE 18 RESERVES AND RETAINED PROFITSGeneral reserves representing

other net assets transferred fromthe Australian Trade Commissionon 1 November 1991 66.2 66.2 — — 66.2 66.2

Asset revaluation reserve 11.2 11.2 — — 11.2 11.2

Total reserves 77.4 77.4 — — 77.4 77.4

Movement in retained profits

Balance 1 July 2003 170.3 154.5 — — 170.3 154.5

Dividends paid (15.2) (9.7) — — (15.2) (9.7)

Profit for the year after tax 27.7 25.5 — — 27.7 25.5

Closing balance at 30 June 2004 182.8 170.3 — — 182.8 170.3

NOTE 19 EQUITYTotal equity at 1 July 2003 253.7 237.9 — — 253.7 237.9

Changes in equity recognised in thestatement of financial performance 27.7 25.5 — — 27.7 25.5

Dividend paid (15.2) (9.7) — — (15.2) (9.7)

Total equity at 30 June 2004 266.2 253.7 — — 266.2 253.7

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NOTE 20 AVERAGE BALANCE SHEET AND RELATED INTERESTThe following table sets out the major categories of assets and liabilities of EFIC together with the respective interest earned and paidand the average interest rates for the year ended 30 June 2004:

AVERAGE BALANCE INTEREST AVERAGE RATE


$m $m $m $m % p.a. % p.a.

Assets

Receivables from other financial institutions 120.8 105.4 1.6 2.4 1.3% 2.3%

Investment securities 594.2 564.1 31.1 30.3 5.2% 5.4%

Loans and rescheduled debts 2,276.9 2,806.0 133.7 169.0 5.9% 6.0%

Other assets 172.3 57.0 — — — —

Total assets 3,164.2 3,532.5 166.4 201.7 5.3% 5.7%

Liabilities

Payables to other financial institutions 350.0 408.9 15.2 16.6 4.3% 4.1%

Borrowings 2,442.2 2,652.8 109.6 144.4 4.5% 5.4%

Provisions 20.8 36.2 — — — —

Other liabilities 77.2 190.0 — — — —

Total liabilities 2,890.2 3,287.9 124.8 161.0 4.3% 4.9%

NOTE 21 FINANCIAL INSTRUMENTS AND CLIENT EXPOSURES(i) General

As part of its normal operations, EFIC enters into a variety of transactions (which include medium-term loans, guarantees, bonds,political risk insurance and export credit insurance), which give rise to balance sheet and "off-balance sheet" financial instruments.These instruments are in various currencies.

EFIC enters into a number of financial derivative transactions to hedge its exposures to interest rate, foreign exchangeand funding risks: > interest rate swaps, forward rate agreements and futures contracts to hedge the interest rate risks of loans and borrowings

> cross-currency swaps to hedge interest rate and exchange movements where the currency of borrowing is different from that of the required liability to fund assets

> forward foreign exchange contracts to hedge against foreign exchange movements in loans and borrowings.

EFIC does not enter into or trade derivative instruments for speculative purposes.

(ii) Credit risk and exposures

Credit risk arises from the possibility of defaults on contractual obligations, resulting in financial loss.

Exposure to treasury counter-parties

The tables below on exposures do not include exposure to treasury counter-parties. Credit risk arising from EFIC’s treasury activitiesin investment, interest rate management and foreign exchange management is considered low as the counter-parties for newtransactions are limited to the Commonwealth, state governments and Australian banks and to entities with high credit ratings (the equivalent of AA-/Aa3 or better). In addition, there are individual limits for each counter-party and sub limits by product type.

Client exposures

EFIC’s principal exposures arise from the financing and credit insurance facilities extended to clients. The credit risk on NationalInterest Account exposures is borne by the Commonwealth as set out in note 1(b)(ii). The following table shows the exposures arisingfrom client facilities:



$m $m $m $m $m $m

Balance sheet exposures

Loans 273.4 308.7 1,780.6 1,977.2 2,054.0 2,285.9

Rescheduled credit insurance debts 39.4 40.6 607.2 648.0 646.6 688.6

Total on balance sheet exposures 312.8 349.3 2,387.8 2,625.2 2,700.6 2,974.5

Off-balance sheet exposures

Short-term export credit insurance — 1,192.2 — — — 1,192.2

Guarantees 549.1 482.4 0.2 0.8 549.3 483.2

Bonds 12.3 5.4 5.6 34.1 17.9 39.5

Residual value insurance — 46.2 — — — 46.2

Political risk insurance 3.5 70.0 — 31.0 3.5 101.0

Medium-term insurance 46.0 55.0 — — 46.0 55.0

Total off-balance sheet exposures 610.9 1,851.2 5.8 65.9 616.7 1,917.1

Total exposures 923.7 2,200.5 2,393.6 2,691.1 3,317.3 4,891.6

Reinsured exposures included above

Short-term export credit insurance exposures reinsured — 1,176.2 — — — 1,176.2

Medium-term facility exposures reinsured 81.8 47.8 66.3 31.0 148.1 78.8

Total exposures reinsured 81.8 1,224.0 66.3 31.0 148.1 1,255.0

Commitments to provide financialfacilities not included aboveLoans 28.9 80.2 4.8 10.7 33.7 90.9

Guarantees 122.2 236.6 — 0.2 122.2 236.8

Political risk insurance 30.9 20.6 — 21.5 30.9 42.1

Bonds 86.4 60.5 — — 86.4 60.5

Medium-term insurance — 10.5 — — — 10.5

Total commitments 268.4 408.4 4.8 32.4 273.2 440.8

69


70

NOTE 21 FINANCIAL INSTRUMENTS AND CLIENT EXPOSURES(CONTINUED)

(ii) Credit risk and exposure (continued)

EFIC employs risk grading systems to rank its risks according to counter-party risk and to the level of country risk inherent in theexposure. EFIC also measures and monitors country, industry and counter-party risk concentration in the Commercial Account andthe National Interest Account. Any significant risk concentration in the Commercial Account is taken into account in assessing theamount of capital which EFIC requires to conduct its Commercial Account activities.

EFIC uses seven categories of country risk, with category 1 representing the lowest risk. The exposure under each of the sevencategories is as follows:



$m $m $m $m $m $m

Country risk

Country risk category 1 292.8 295.4 0.6 32.3 293.4 327.7




Country risk category 5 267.4 194.7 138.5 1,903.1 405.9 2,097.8

Country risk category 6 89.3 — 1,347.4 30.4 1,436.7 30.4

Country risk category 7 2.1 — 33.1 — 35.2 —

Retained exposures 841.9 976.5 2,327.3 2,660.1 3,169.2 3,636.6

Reinsured exposures (category 1) 81.8 1,224.0 66.3 31.0 148.1 1,255.0

Total exposures 923.7 2,200.5 2,393.6 2,691.1 3,317.3 4,891.6

The above table has not taken into account the value of any collateral or security held.

EFIC segments the risks further by nature of the exposure, customer and term of the facility.

Commercial Account exposures

Countries with which EFIC has retained significant exposures on its Commercial Account and which are in higher risk categoriesinclude the Philippines $147.5 million (2003: $131.4 million), Sri Lanka $78.8 million (2003: $66.6 million), Indonesia $52.4 million(2003: $48.9 million), Turkey $38.2 million (2003: $58.9 million) and Bangladesh $29.5 million (2003: $32.1 million).

Retained industry exposure

The only industry which represents more than 15% of EFIC’s Commercial Account retained exposure is the ship sector.At 30 June 2004, the exposure to the ship sector accounted for $270.1 million representing 32% of EFIC’s total retained exposure(2003: $379.6 million, being 38% of the total).

In these calculations the ship sector mainly represents exposures to ferry operators in a variety of countries and excludes exposuresto banks and public sector organisations in respect of ship finance.

National Interest Account exposures

Under the National Interest Account, the exposures are nearly all to overseas governments or entities owned or guaranteed by overseas governments, or are political risk insurances in respect of overseas countries. The portfolio of exposure is:

30 June 30 June 30 June 30 June2004 2004 2003 2003

$m % of total $m % of total

Indonesia 1,343.6 56 1,386.7 52

Russia 466.4 19 504.0 19

China 194.2 8 279.0 10

Egypt 140.8 6 144.0 6

Philippines 118.5 5 197.9 7

India — — 31.6 1

Papua New Guinea 18.1 1 24.5 1

Other* 45.7 2 92.4 3

Retained exposures 2,327.3 97 2,660.1 99

Reinsured exposures 66.3 3 31.0 1

Total exposures 2,393.6 100 2,691.1 100

* Includes performance bonds issued on behalf of Australian companies

Rescheduled debt exposures

Indonesia: Scheduled payments from Indonesia from December 1998 to December 2003 were reschedueld on three occasionsin the Paris Club. The payments rescheduled totalled US$21 million on EFIC’s Commercial Account and US$93 million and Euro 108million on the National Interest Account.

Russia: EFIC is owed US$8 million by Russia on the Commercial Account and US$321 million on the National Interest Account.The debts arose from credit insurance claims paid in respect of export sales to the former USSR, which were subject to reschedulingat Paris Club meetings of Russia’s government creditors, most recently in 1999.

Egypt: EFIC is owed A$28 million by Egypt on the Commercial Account and US$39 million and A$85 million on the National InterestAccount. These debts arose from credit insurance claims in respect of wheat exports in the mid - 1980s. These debts were subjectto recheduling (with partial forgiveness) at the Paris Club meetings of Egypt’s government creditors in 1987 and 1991.

71


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(iii) Interest rate risk

As EFIC is involved in loans and borrowings, interest rate risks arise. EFIC uses interest rate swaps, forward rate agreements, cross-currency swaps and futures as the primary methods of reducing exposure to interest rate movements.

EFIC’s policy is to minimise interest rate risk. If loans are not at floating rates, a floating rate hedge is generally entered into from the time the terms and conditions are agreed. Similarly, if the borrowings are not at floating rates, floating rate hedges are entered into.

As exposures to interest rate risks are hedged as far as practicable, movements in market interest rates do not have a materialimpact on EFIC’s financial situation.

EFIC’s exposure to interest rate risk (including both the Commercial and National Interest accounts) was:

30 June 2004 FIXED INTEREST RATE MATURITY

Floating Less than 1 to 5 More than Non-interest Totalinterest rate 1 year years 5 years bearing

$m $m $m $m $m $m

Financial assets

Receivables 995.4 114.4 445.7 730.1 — 2,285.6

Investments 342.0 459.5 99.2 — — 900.7

Other monetary assets — — — — 24.4 24.4

Total financial assets 1,337.4 573.9 544.9 730.1 24.4 3,210.7

Financial liabilities

Borrowings 591.4 1,490.5 566.6 348.9 — 2,997.4

Other monetary liabilities — — — — 77.7 77.7

Cross-currency swaps 1,678.4 (1,056.9) (497.4) (227.1) — (103.0)

Interest rate swaps* (955.0) 19.1 346.6 589.3 — —

Interest rate futures* 9.7 — (9.7) — — —

Total financial liabilities 1,324.5 452.7 406.1 711.1 77.7 2,972.1

* Notional principal amounts

30 June 2003 FIXED INTEREST RATE MATURITY

Floating Less than 1 to 5 More than Non-interest Totalinterest rate 1 year years 5 years bearing

$m $m $m $m $m $m

Financial assets

Receivables 991.4 176.4 469.4 844.3 — 2,481.5

Investments 146.7 323.6 110.8 — — 581.1

Other monetary assets — — — — 29.2 29.2

Total financial assets 1,138.1 500.0 580.2 844.3 29.2 3,091.8


Borrowings 600.1 501.4 1,233.5 369.7 — 2,704.7

Other monetary liabilities — — — — 115.9 115.9

Cross-currency swaps 1,464.7 (214.0) (1,095.8) (107.6) — 47.3

Interest rate swaps* (1,136.3) 78.6 364.8 692.9 — —

Interest rate futures* (12.1) — 12.1 — — —

Total financial liabilities 916.4 366.0 514.6 955.0 115.9 2,867.9

* Notional principal amounts

(iv) Foreign exchange risk

EFIC extends facilities in various currencies, principally US dollars and Euros. Where the currency of a borrowing is different from the currency of the assets being funded, cross-currency swaps or foreign exchange contracts are used to offset the exposure(before provisions). For cross-currency swaps the final exchange amounts to be received are as follows:

30 June 30 June2004 2003

$m $m

Not later than one year 1,365.1 803.9

Later than 1, not later than 2 years 694.3 625.8




Total financial liabilities 2,942.3 2,393.3

The net amount payable, representing

the carrying value of these cross-currency

swaps at balance date is: (103.0) 47.3

The principal amounts and remaining term of the foreign exchange contracts entered into by EFIC as at 30 June 2004 were:

Buy US$ Buy AU$ Averageand sell AU$ and sell US$ exchange rates

$m $m

Not later than one year 242.6 0.9 0.73 ; 0.71

Later than 1, not later than 2 years — 0.9 0.71




242.6 12.9

The principal amounts and remaining term of the foreign exchange contracts entered into by EFIC as at 30 June 2003 were:

Buy US$ Buy AU$ Averageand sell AU$ and sell US$ exchange rates

$m $m

Not later than one year 219.9 0.8 0.62; 0.71





219.9 13.6

73


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(v) Fair value

Except as detailed in the following table, the carrying value of financial assets and financial liabilities recorded in the financial statementsrepresents their respective net fair values, determined in accordance with the accounting policies disclosed in note 1.

The net fair values of financial assets and financial liabilities detailed in the following table have been determined as follows:

• the net fair values of financial assets and financial liabilities with standard terms and conditions and traded on active liquid marketsare determined with reference to quoted market prices; and

• the net fair values of other financial assets and financial liabilities are determined in accordance with generally accepted pricingmodels based on discounted cash flow principles.

Carrying Net fair Carrying Net fair amount value amount value30 June 30 June 30 June 30 June

2004 2004 2003 2003$m $m $m $m

Financial assets

Receivables (net of unamortised grant) 2,303.0 2,435.6 2,501.4 2,638.0

Investments 900.7 902.4 581.1 598.0


Creditors and borrowings 3,043.8 2,911.0 2,752.5 2,907.5

Cross-currency swaps (103.0) 6.9 47.3 (145.7)

Interest rate swaps – 172.2 – 265.4

NOTE 22 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)A project team has been set up to manage the transition to IFRS. The team has completed identifying the key differences betweenthe existing accounting policies and the changes required under IFRS.

Our conclusion is that the implementation of AASB 139 ‘Financial Instruments: Recognition and Measurement’ will have a significantimpact on the financial statements. The major areas of difference will be the change in the basis of measurement of certain financialinstruments (most notably derivatives) from cost to fair values, and the measurement of the impairment of receivables.

Under AASB 139, impairment of receivables should take into account only those losses that have already been incurred, and notthose which might happen in future. EFIC’s current policy on impairment is to provision for losses which are expected over the termof the receivables.

NOTE 23 SEGMENT INFORMATIONPrior to the divestment of the Credit Insurance business (note 24) EFIC operated its export facilitation activities in Australia through two business segments, Credit Insurance and Export Finance.

Credit Insurance business provided insurance to Australian exporters and banks against non-payment by the overseas buyers,or overseas banks in respect of Australian exports. The payment terms can be up to two years, but are usually 180 days or less.

Export Finance business involves the provision of medium to long-term facilities (generally over two years) to the buyers of Australianexports, or to their financiers, to assist with the purchase of exports. The exports financed this way are usually capital goods andservices rather than commodities or other consumables. The finance is normally provided as a loan to an overseas buyer or as aguarantee to a bank funding an overseas buyer. This business also provides: performance and other types of bonds; medium-termpolitical risk insurance in respect of overseas investment and associated debt; export working capital guarantees; and other medium-term insurances.

The Export Finance business now includes Credit Insurance rescheduled debts of the Russian and Egyptian governments.Previously these debts were part of the Credit Insurance business.

The segment results in respect of each of these businesses are shown in the Statement of Financial Performance. In addition, the following tables show the segment assets, liabilities and other segment information in respect of each of the businesses:

DISCONTINUEDOPERATIONS

EXPORT FINANCE CREDIT INSURANCE TOTAL


$m $m $m $m $m $m

Commercial Account

Segment assets 993.3 656.6 — 2.3 993.3 658.9

Allocated investments 306.2 268.7 — 36.5 306.2 305.2

Unallocated assets — 1.2

Total assets 1,299.5 925.3 — 38.8 1,299.5 965.3

Segment liabilities 1,031.4 691.1 1.9 8.5 1,033.3 699.6

Unallocated liabilities — 12.0

Total liabilities 1,031.4 691.1 1.9 8.5 1,033.3 711.6


Segment assets 2,223.6 2,343.1 — — 2,223.6 2,343.1

Segment liabilities 2,223.6 2,343.1 — — 2,223.6 2,343.1

75


76

NOTE 24 DIVESTMENT OF THE CREDIT INSURANCE BUSINESSOn 30 September 2003, the Commercial Account Credit Insurance business was sold to a private sector credit insurer, Atradius CreditInsurance NV, incorporated in the Netherlands (formerly Gerling NCM). The sale was made after a twenty-month alliance period underwhich most of the short-term credit insurance business was reinsured by Atradius Credit Insurance NV.

At the date of divestment Atradius acquired the accounts receivables and fixed assets of the Credit Insurance business.

The Credit Insurance portfolio of retained and reinsured risks and outstanding claims, relating to shipments made prior to divestment,were not included in the business sold. These are, however managed by Atradius on behalf of EFIC.

The business subject to the sale also did not include the Credit Insurance rescheduled debts owed by the Russian and Egyptian governments.

The financial information of the divested Credit Insurance business is as follows:

Statement of financial performance

The revenue and expenditure items of the divested Commercial Account Credit Insurance business for the three months prior to divestment are disclosed as a separate segment in the statement of financial performance.

Statement of financial position

The assets and liabilities of the divested Commercial Account Credit Insurance business are disclosed in Note 23 ‘Segment Information’.

Contingent liabilities

At 30 June 2004, the remaining exposures of the divested business amounted to nil (2003 $1,192m) of which nil (2003 $1,176m)was reinsured.

77

NOTE 25 REMUNERATION OF AUDITORS 30 June 30 June

2004 2003$ $

Audit fees 168,728 176,609

Other services 33,770 —

NOTE 26 NUMBER OF EMPLOYEES30 June 30 June

2004 2003

Full-time equivalents at year end 57 110

78

NOTE 27 REMUNERATION OF EXECUTIVES

Total remuneration received and receivable by executives whose remuneration for the year is at least $100,000. Remuneration includes all cash remuneration, superannuation and any non-cash benefits (including applicable FBT). For this note, "executives" includes persons who are in the senior management team of EFIC.

30 June 30 June2004 2003

$ $

5,392,696 5,358,782

Termination payments to executives included above 1,686,169 87,522

The numbers of executives whose remunerationfor the year fell within the following bands are:(Terminated positions in respect of the discontinuedCredit Insurance business are shown in a separate column)

30 June 30 June 30 June2004 2004 2003

Ongoing business Discontinued business*

$110,000 — $119,999 — 1 2

$120,000 — $129,999 — — 2

$130,000 — $139,999 — 1 1

$140,000 — $149,999 — — 2

$150,000 — $159,999 1 1 1

$170,000 — $179,999 1 1 2

$180,000 — $189,999 — — 1

$190,000 — $199,999 — 1 1

$200,000 — $209,999 1 1 3

$210,000 — $219,999 1 2 1

$220,000 — $229,999 3 — 1

$230,000 — $239,999 1 — —$240,000 — $249,999 — 1 —

$250,000 — $259,999 — — 1

$260,000 — $269,999 — 1 —

$270,000 — $279,999 — — 1*

$280,000 — $289,999 1* — —$300,000 — $309,999 — — 1

$310,000 — $319,999 — — 2

$320,000 — $329,999 1 — 1

$330,000 — $339,999 1 — —$350,000 — $359,999 1 — —

$370,000 — $379,999 — — 1

$380,000 — $389,999 — — 1

$500,000 — $509,999 — 1 —

12 11 25

* Includes termination payments made during the year.


79

NOTE 28 REMUNERATION OF BOARD MEMBERS30 June 30 June

2004 2003

Total remuneration received or receivable by Board Members of EFIC $740,822 $570,395

The number of Board Members whose remunerationfrom EFIC for the year fell within the following bands are:

Nil 3 3

$1 — $9,999 — 1

$10,000 — $19,999 1 —

$20,000 — $29,999 2 3

$30,000 — $39,999 2 2

$40,000 — $49,999 1 1

$210,000 — $219,999 1 —

$350,000 — $359,999 1 —

$380,000 — $389,999 — 1

11 11

NOTE 29 RELATED PARTY INFORMATION

Board MembersThe names of each person who held office as a Member of the Board of EFIC during the financial year are: Mr P Young, Mr I Knop, Ms Y Allen, Dr A Calvert, Mr H Davies, Ms S Israel, Mr F Levy, Mr P O’Byrne, Mr M Paterson, Mr E Waterman and Mr A Armour.

Changes in Board membership during the year:

15 August 2003 Ms S Israel Appointment renewed for a period not exceeding three months8 September 2003 Ms S Israel Appointment renewed for three years31 October 2003 Mr E Waterman Appointment as Managing Director ended31 October 2003 Mr A Armour Appointed as Managing Director for three years5 December 2003 Mr F Levy Appointment ended

Details of Board Members’ remuneration are set out in Note 28.

Transactions with Board Members and Board Member-related Entities

Any contract entered into by EFIC with a Board Member, or an entity related to a Board Member, has been entered in the normalcourse of business and on normal terms and conditions applied to EFIC’s facilities of insurance, bonds, guarantees and loans.

Under the EFIC Act, EFIC has a number of transactions with the Commonwealth. The principal transactions are those related to theNational Interest Account, interest subsidy and the payment of tax equivalents under the tax equivalent regime. Material transactionsare detailed in these statements.

The Commonwealth guarantees the payment by EFIC of any money that becomes payable by EFIC to a third party.

80



$m $m $m $m $m $m

NOTE 30 RECONCILIATION OF OPERATING PROFIT TO NET CASH FLOWS FROM OPERATING ACTIVITIES

Operating profit after income tax 27.7 25.5 22.6 16.4 50.3 41.9

Reclassification of non-cash items

Depreciation 1.9 2.1 — — 1.9 2.1

Employee entitlements 0.1 3.6 — — 0.1 3.6

Amortisation of deferred income (1.7) (1.7) (62.7) (80.3) (64.4) (82.0)

Interest capitalised (0.2) (1.0) (8.0) (29.5) (8.2) (30.5)

Loan provision 3.6 (3.2) 0.1 (5.7) 3.7 (8.9)

Insurance provision (2.5) (2.1) — — (2.5) (2.1)

Exchange losses — 0.5 2.3 13.6 2.3 14.1

National Interest fees (4.7) (5.6) 4.7 5.6 — —

Unearned premium (1.3) 1.0 (4.8) (5.9) (6.1) (4.9)

Decrease/(increase) in receivables (1.1) 2.0 1.4 4.8 0.3 6.8

Decrease in payables (5.8) (19.4) (0.1) (34.0) (5.9) (53.4)

Other (3.0) (2.4) (1.6) (1.1) (4.6) 1.3

Net cash inflows/(outflows)from operating activities 13.0 4.1 (46.1) (116.1) (33.1) (112.0)

Reconciliation of cash

Cash at end of financial year isreconciled to the related itemsin the Statement of Financial Positionas follows:

Cash 4.2 0.9 — — 4.2 0.9

Receivable from other financial institutions 162.2 27.2 — — 162.2 27.2

Investment securities 432.7 247.9 — — 432.7 247.9

Cash (including liquid funds)at end of financial year 599.1 276.0 — — 599.1 276.0

Financing facilities

Borrowing facilities available toEFIC at end of financial year

Overdraft facilities 65.3 67.4 — — 65.3 67.4

Amount of facilities used — — — — — —

65.3 67.4 — — 65.3 67.4


MissionProfilePerformance Against Principal ObjectivesYear in ReviewExport Finance Business OverviewReport of Operations

Summary and Statement by the BoardAn Overview of EFIC’s RoleExport Finance BusinessCredit Insurance BusinessCorporate Matters

Appendices1. Corporate Governance 2. Board Membership 3. Organisational Structure 4. EFIC’s Exposures 5. Export Finance Facilities Signed in the Year Ended 30 June 2004 6. Environment Report 7. New Borrowings 8. Other Miscellaneous Information 9. EFIC: A Ten Year Summary

Financial Statements for the year ended 30 June 2004Results at a Glance

12468

141415162122242427313234353839424481

contents

Results at a Glance

Commercial and National Interest Accounts 2003/04 2002/03$ million $ million

Exports and overseas contracts supported

Credit insurance 1,835 6,741

Export finance 411 453

Total 2,246 7,194

Exposures at year end

Export finance loans 2,054 2,286

Credit insurance rescheduled debts 647 689

Export finance guarantees, bonds, insurances 617 725

Credit insurance - 1,192

Less reinsured (mainly credit insurance) (148) (1,255)

Total retained risks 3,170 3,637

Revenue

Interest income 166 202

Interest expense (124) (161)

Premiums and fees 32 47

Less premiums and fees ceded to reinsurers (8) (22)

Net revenue 66 66

Profit

Commercial Account 28 26

National Interest Account 22 16

Total 50 42

Dividends paid during year (Commercial Account only) 15 10

Equity at end of year (Commercial Account only) 266 254

Return on average equity

(Commercial Account only) 11% pa 10% pa

Number of staff at year end 57 110

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Annual Report

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2004Level 10 Export House, 22 Pitt Street, Sydney NSW 2000

Tel +61 2 9201 2111 or tollfree 1800 887 588 Fax +61 2 9251 3851 Email [email protected]

For further information, please contact EFIC or visit

www.efic.gov.au Australia's Export Credit Agency

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