Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 2 - Evidence, December 2, 1999
OTTAWA, Thursday, December 2, 1999
The Standing Senate Committee on Banking, Trade and Commerce met this day at 11:00 a.m. to examine the present state of the domestic and international financial system (Export Development Corporation).
Senator E. Leo Kolber (Chairman) in the Chair.
[English]
The Chairman: Pursuant to the Order of Reference adopted by the Senate on Tuesday, November 23, 1999, the committee is resuming its examination of the state of the domestic and international financial system and, more specifically, its study of the Export Development Act.
Our witnesses today are from the Export Development Corporation: Mr. A. Ian Gillespie, President and Chief Executive officer; Mr. Eric Siegel, Executive Vice-President, Medium and Long-Term Financial Services; Mr. Gilles Ross, Senior Vice-President, Legal Services and Secretary; and Ms Louise Landry, Vice-President, Corporate Performance and Communications.
It is the committee's intention that this be the first of several meetings on this matter. We will be hearing from others witnesses and then, possibly, at the end of the next few hearings we will invite this same group back to sum up.
Mr. Ian Gillespie, President and Chief Executive Officer, Export Development Corporation: I should like to present a short prepared text, if I may. Then we will be prepared to answer all your questions.
Thank you for the opportunity to appear before you. We have provided a written submission that covers the issues raised during the review, as well as our response to the areas where EDC has taken a different view from the Gowlings report.
I should like to give you some information about EDC and the role we play in supporting Canadian exporters and investors in the global economy.
EDC is the only financial institution in Canada exclusively dedicated to providing trade finance services to Canadian companies. During the last five years, EDC has helped thousands of Canadian businesses generate more than $114 billion in foreign sales and investments. We expect to support more than $38 billion in 1999 and close to $40 billion next year. We do this by offering risk management and financial solutions to companies of all sizes so that they can take advantage of international opportunities.
I know this committee is familiar with EDC so I will not dwell on the mechanics of our operations, but I will happily address any questions you might have at the conclusion of my prepared remarks.
I will not repeat the content of the written submissions we have provided to the senate committee, but will instead speak briefly to what I believe to be the three fundamental issues.
First, EDC exists because there is a real need. Second, EDC meets this need by balancing commercial and public policy sensibilities. In that sense, we are trying to achieve the best of public policy with the best of private sector methods. Third, Canada needs exporters. Exporters are clearly critical to our economic future.
Why is there a need for EDC and why are exporters critical to our economic future? Because almost three million Canadian jobs rely on exports; because one in three jobs are export jobs; because trade and investment are the keys to Canada's future prosperity, and because there are regrettably few other options for Canadian exporters and investors. EDC provides Canadian companies with virtually all the financial tools they need to remain competitive on the world stage. In that sense, globalization, as you well know, is all about remaining competitive. That is why Canada created EDC; it was because Canadian businesses needed EDC.
During the recent SCFAIT hearings, this need was sometimes misplaced as a secondary issue by some of the witnesses, but this need must be the primary focus of the review -- to examine EDC's performance in meeting the needs of Canadian exporters and investors and to assess our ability to respond to a rapidly changing and increasingly competitive international marketplace.
It is important to recognize that we are talking about a conventional business model here. We are a business. We are a financial institution. EDC does not rely on tax revenues or taxpayers' dollars to operate. We do not receive any appropriations. We rely on the interest and fees we charge borrowers, the premiums we charge on our insurance policies, and the interest that we earn on our investments to cover our operating costs and to grow our financial capacity.
The nearly $1 billion invested into EDC by the Government of Canada is not money that has been allocated or spent by EDC in the way that money is allocated to government departments on an annual basis. The money that the government has invested is still on our balance sheet, available to support future business.
In simplistic terms, for an investment of nearly $1 billion, the Canadian taxpayer has made approximately $800 million in the form of retained earnings, plus building prudential reserves of more than $2.5 billion. The taxpayer has thus earned a significant return on its investment in EDC, to say nothing of the some $300 billion in taxable exporter revenue that has been supported by EDC's financial products and services.
[Translation]
EDC is a unique business model that does meet this mandate, serving the trade finance needs of Canadians. EDC does this by getting the balance right. By this, I mean the critical balance that EDC strives for between its commercial disciplines and its public policy mandate.
[English]
There are, however, a few key areas where I believe the review did not get the right balance. The first is with respect to disclosure. Although EDC has met all of its existing mandatory disclosure requirements -- indeed, EDC has been cited by the Auditor General of Canada in three out of the last five years for its excellence in annual reporting -- we agree with the review that we need to continue to enhance our disclosure if we are to maintain the high level of confidence that Parliament, the government and Canadians have in EDC.
Disclosure is a necessary requirement of a Crown corporation, indeed of all businesses. However, it must also be carefully balanced with the customers' need to protect their commercial interests and with the commercial practices of the corporation.
Thus we agree with the diagnosis emerging from the review, but not necessarily the prescription, which does not reflect a balance that sufficiently protects the commercial interests of Canadian businesses. The Alliance of Manufacturers and Exporters of Canada eloquently articulated this in their brief to the Standing Committee of Foreign Affairs and International Trade. As an alternative, we are working on a more comprehensive disclosure framework against which our disclosure performance can be measured -- and, indeed, enhanced performance measures are the key. We expect to be in a position to report on this work in the early part of next year.
I turn next to the environmental assessment issue. What should be the fundamental goal here? The goal is to have a positive and long-term impact on the global environment. To reach this goal, all expert credit agencies, not just EDC, must continue to strengthen their environmental assessment and mitigation practices. Therefore, EDC is leading the way towards the goal of a multilateral consensus based on our own environmental review framework. We would be pleased to talk to you further about that. In that sense, we are also helping to export Canadian values, as Jacques Lamarre at SNC also put it so eloquently recently when he was in front of the Standing Committee on Foreign Affairs and International Trade.
This framework is intended to provide a clear, transparent, common-sense approach to evaluating the environmental impact of projects. EDC used extensive public consultations, including a number of NGOs, in establishing its environmental review framework.
Other export credit agencies welcome our practices, which we intend to use as a foundation for OECD negotiations on common environmental guidelines, as mandated by the most recent G-8 and OECD ministerial meetings.
By comparison, the review recommendations, while well intentioned, provide an approach that does not reflect commercial practices and competitive circumstances and, thus, does not strike the right balance.
[Translation]
The insured market for credit insurance in Canada has grown by over 400 per cent in the last five years and private sector insurer's share of this market has increased in both volume and premium. This proven growth capacity is in direct contrast with comments by some witnesses that EDC is "crowding out" the private sector insurers.
[English]
With respect to the specific review recommendations, EDC is already developing a partnership with a Canadian company to offer a single credit insurance policy. We hope to be able to make an announcement about that early next year. I should also note, however, that we cannot support the recommendation to move towards a sliding scale for eligibility for domestic cover. That recommendation would decrease service to exporters and would even force EDC to withdraw coverage from existing customers. The problem is that there are few alternatives for Canadian companies, as the largest independent credit insurance broker indicated in front of the standing committee in the last few weeks.
While the report touches positively on EDC bank relations in a number of areas, I will comment on one specific recommendation, No. 14. However, first I will remind the committee of what I said when I last had the opportunity of appearing before you in relation to the work of the MacKay Task Force.
Trade finance is a niche offering for most Canadian banks, and only EDC is exclusively dedicated to providing Canadian exporters and investors with the financial solutions that they need to remain competitive on the global stage. Thus, we strongly disagree with the recommendation on bank guarantees. Exporters and we believe it would be counterproductive to offer largely risk-free returns to the banks for medium-term financing. The answer is not risk-free returns to the banks; the answer is drawing out bank and other private-sector capacity to leverage our own balance sheet. We need committed partners who will make the investments necessary to support companies of all sizes going global. We cannot do it all. We do not have a large enough balance sheet, nor will we ever.
[Translation]
Let me now turn to possible changes to legislation. We believe the committee should endorse the open and transparent process and the broad thrust of the review. We do not see the need for any substantive changes in the act.
[English]
As I have already made clear, we are concerned that certain recommendations may impede EDC's flexibility in delivering programs valued by the exporting community, particularly small businesses.
We do not support recommendation number 2, nor other recommendations, such as 6 and 8, that would reduce the operating flexibility of the corporation and could ultimately hurt our capacity to adapt quickly to meeting the needs of our customers.
We also do not support the proposed changes to regulations 9 and 11, which would limit our operating capacity and flexibility. At this stage, we ask that the committee recommend fine-tuning the Export Development Act to more effectively meet the needs of Canadian companies. In particular it should do the following:
1. Address the methodology for establishing the contingent liability ceiling in order to preserve EDC's operating capacity over an extended period.
2. Allow EDC to reach and serve more customers by endorsing our proposed enhancements to the corporation's image and identity --
As one of the witnesses in front of the standing committee said earlier this week, EDC is the best-kept secret in Canada.
3. Help EDC serve its customers more effectively through increased representation in foreign markets.
4. Reschedule EDC under the Financial Administration Act.
5. Consider possible amendments that would streamline the management of Canada Account.
6. Endorse EDC's efforts to modernize and strengthen our corporate governance model.
[Translation]
Let me conclude by reminding you that exports energize our economy. Over 40 per cent of everything Canadians create is exported. That is a lot of jobs.
[English]
Behind each larger exporter that EDC supports are many thriving smaller businesses. Behind each small business that EDC directly supports are many new Canadian jobs. Canada's economic health is clearly intrinsically linked to its capacity to export, and Canada's export capacity depends on EDC's ability to innovate and manage risk.
Finally, Mr. Chairman, let me summarize what our customers have told both Gowlings and the Standing Committee on Foreign Affairs and International Trade. EDC provides a competitive advantage for exporters. From the smallest to the largest, exporters need the insurance and financing solutions that EDC offers. EDC is more relevant and critical than ever before. EDC is an integral part of the solution for a winning Canadian global trade strategy. Exporters are vulnerable without a strong, flexible and skilled EDC. They have few other options.
Gowlings said in their report that EDC is the recognized centre of excellence for trade finance in Canada. Its staff are highly skilled and innovative and they provide prompt, knowledgeable service. EDC is the role model against which other export credit agencies in the world are judged. It is our hope that the senate committee will put the needs of Canadian exporters and investors at the forefront and act in their best interests when considering the review recommendations.
As you know, at the end of the day, the interests of Canadian exporters and investors are paramount.
Senator Meighen: Welcome, gentlemen and Madam Landry. I heard the chairman say earlier that once we had had a full discussion with you and other interested parties, you might be prepared to come back and talk to us again.
Mr. Gillespie: We would be delighted to come back. We have such a good story, senator, to tell you.
Senator Meighen: I hope you feel the same way at the end of this morning's session, and I am sure you will, because we are all very nice people here. We just want to know the facts and nothing but the facts, as they say.
Let me just throw a general question to you and perhaps you could amplify on it. I am informed that most export credit corporations or organizations similar to yours in other countries operate on government appropriations. In other words, my understanding is that they do not have to be self-sustaining.
Mr. Gillespie: Correct.
Senator Meighen: Your new mandate is to be self-sustaining. The obvious comment on that is: does that not lead you to be averse to risk, because you have to make more money than you lose on your transactions and, therefore, does that not inhibit your ability to serve the needs that we are all seeking to serve of Canadian exporters and investors?
Mr. Gillespie: An excellent question. You are absolutely right; other export credit agencies do not have a self-sustaining mandate. The U.S. Ex-Im Bank is perhaps one of the best examples. They support approximately $17 billion a year in U.S. exports. EDC supported $35 billion last year and $38 billion this year. In U.S. dollar terms, that is $27 billion, or something like that. So we are supporting significantly more than the U.S. Ex-Im Bank, which last year received an appropriation in the order of U.S. $750 million. In other words, they get an annual appropriation that is more than the entire capital invested in EDC. They are a lender of last resort. We are not. That is one of the big differences. If you look at our track record in the last five years, we have grown from about $8 billion dollars in support to the $35 billion last year and the $38 billion this year.
Senator Meighen: I am being the devil's advocate, but is that not simply because you make non-risky loans more than risky loans, which perhaps are more necessary?
Mr. Gillespie: I do not think so. We have been aggressive on the risk; we have been conservative on the accounting. That is by design. We think our best asset is to help Canadian companies by offering solutions, but pricing to the risk of the market.
The EDC of five or ten years ago had companies coming to it with markets such as Algeria. They would say, for instance, "EDC, what is your price for Algeria?" We would have some ridiculously low price, and then they would say, "That is great. We would like to do $1 million." We would say, "We cannot do $1 million. We will do $100,000," and they would say, "What good are you if that is the case?" So we began pricing to the risk of the market and we have been able to support their entire activity.
Over $9 billion of our activity was in very high-risk emerging markets last year. More than half of our activities this year, and indeed last year, were with credits that were below investment grade. That is very high-risk lending.
We certainly believe that the growth that we have supported is of a nature that Canadian banks and other financial institutions would shy away from. That is why we are one of the few games in town; certainly in Canada we are the only game in town.
Senator Meighen: Why do you think that is so? Why is it in your view that Canadian banks, according to what you have said, seemingly shy away from the more risky loans? Is it because they are reluctant to charge, shall we say, an aggressive rate of interest priced to risk, in other words?
Mr. Gillespie: I will ask Mr. Siegel to comment more fully, but I will say a couple of things.
Senator Meighen: And do you price to risk?
Mr. Gillespie: We do price to the risk of the market; absolutely. That is something that we had to establish very clearly in front of the WTO panel in light of the Bombardier-Embraer, Canada-Brazil challenge. We were clearly shown to be operating as a commercial financial institution, which we had fully expected.
To answer your question more directly, the issue is that it requires an investment in people and skills. EDC has the largest pool of trade finance talent under one roof in this country. That is very much a niche market. It is labour intensive. The returns are volatile. These are not risks that you can easily hedge. That is why, when you saw what happened in Southeast Asia, people just left in a hurry because they had to get out; but EDC has a habit of staying in those markets longer; in fact our business grew in many of those markets.
Canadian banks have not historically looked at trade finance as a major focus of their activities. It is very much a niche business for them. But the returns have become more volatile and, as you know, the Canadian banks, for the most part, are looking at things like value-based management, ensuring they maximize shareholder return. However, we are not a profit maximizer; we are an export maximizer. That is one of the major distinctions that you will see with EDC and the banks. We are operating in 160 markets. They are not. Those are all high-risk activities.
There are also some institutional things happening with regard to some of the BIS rules that require more and more capital to be dedicated to this kind of activity. The banks are discovering that it is just not worth their while to put out that capital for the kinds of returns that are available and the volatility of those returns.
Mr. Siegel, would you like to add anything?
Mr. Eric Siegel, Executive Vice-President, Medium and Long-Term Financial Services, Export Development Corporation: Definitely the capital issue is a very key issue. Just to underpin some of the things you said, there has been an enormous shift in the trend that we have seen in terms of the nature of the risk. Ten years ago it was basically export credit agencies lending to sovereign entities, and the system supported that. Today it is export credit agencies lending to commercial entities. Governments have gotten out of the business largely of undertaking project development. Governments are trying to get out of the business of being the buyer. Therefore, all of the export credit agencies have been forced to look at a very different risk profile.
The growth that you see in EDC is our ability to make that transition, in large part because of the way we have been structured, because of our ability to have a variety of services under one roof, a lot of flexibility, et cetera. Other export credit agencies have struggled greatly with that.
The second issue is the rates; there is a movement afoot and it is well underway amongst the European ECAs to actually raise their rates. They have been vitally concerned with the draw on the treasury and, indeed, there is something referred to in the OECD as premier harmonization. It is effectively a concerted effort to get the rates up.
EDC has not had to struggle with that because we have largely tried to structure our financing on a market-based approach. More often than not, we are the ones who are going in alongside banks as a joint participant with the banks as opposed to a separate or parallel lender, because we are able to structure our financing on an entirely compatible basis: Common security, common rates, common terms, et cetera. The other export credit agencies struggle because they are really off in a corner, a parallel lender, and often are unable to directly provide the finance; they have to work through other entities, and that only adds to the cost of it and makes it even less competitive in fact.
A third thing is that in this shift to privatization there has been the emergence of project finance. Everybody is quite aware of the tremendous importance at now being able to have structured finance and off-balance-sheet finance and limited-recourse finance as represented in terms of business development around the world.
When you talk about the risk of lending, the risk today is as much, if not more, a question of your ability to absorb market-risk and project-risk types of structures as opposed to your ability to accept the old sovereign commercial political risk. In that regard, EDC was well positioned to be able to do that. We have that capability in house. If you compare that with, say, U.S. Ex-Im Bank, they have a project finance group as well. Last year, we concluded some 15 limited-recourse deals. They did none. This year, they have six on their pipeline, but they have yet to conclude any. We have done 26 so far this year. For our financing program, that represents about 25 per cent of our total financing.
We are viewed as experts, not just in Canada, but worldwide, and we are sought out by banks to participate. We have become a competitive advantage, if you will, to Canadian exporters because we can deliver something that they vitally have to deliver.
It is not a criticism of the banks, but the Canadian banks have recognized that maintaining project finance across a variety of sectors is tremendously intensive in terms of personnel and capital, as Mr. Gillespie said. There are huge overheads and it is necessary to maintain an international presence, and the return on equity is just not there for them. We have seen them either reduce the number of sectors that they are prepared to concentrate on or, alternatively, to just plain shut down their capability. Some of the banks have shut down their London teams or their New York teams because the return on equity in their view is not there. There has been global concentration of banks. There are bigger players out there who can put out bigger teams. The net effect is that Canada is left vulnerable. We have been able to step up and fill a void. That is why you have seen a lot of our growth on the medium- and long-term side; it is because we are doing something that others cannot do.
Senator Meighen: Did I hear you say that the Canadian banks are increasingly piggybacking or joining with you in export financing?
Mr. Siegel: Yes. Today it is interesting that we probably do much more with the banks from a financing perspective than we ever have done historically. But we are collaborating on a different side. We are collaborating on the corporate finance side because they need capacity to get out there and bid and obtain mandates. More and more they need EDC with them, not EDC guaranteeing them. They need EDC to step up to the plate and take some of the risk and work alongside them so that they have a critical mass to obtain mandates to underwrite, to obtain mandates to syndicate, et cetera. We help make the market for them in a sense.
Senator Meighen: It is to be hoped that the banks will tell us the same thing and we will see an avenue that is going forward with great promise.
Mr. Gillespie, please do not take this the wrong way in terms of your colleagues, because I am very impressed with the team you have here, but are you able to offer remuneration competitive with the totally private sector or do you have a difficulty in that regard?
Mr. Gillespie: It is a constant challenge, senator.
Senator Meighen: I am sure it is, but is there any restriction in law as to the salaries you can pay or the way in which you can pay them?
Mr. Gillespie: As you know, maybe I am the exception. I am under a different regime. We can go into that, if you want.
Senator Meighen: You can keep it in general terms.
Mr. Gillespie: We have been successful in ensuring that we have a strong nucleus of people. That is a constant challenge for a number of reasons.
EDC has grown very dramatically. We have acquired those skills that Mr. Siegel just talked about. We have a huge investment of those people. Our success is only a reflection of the success of the Nortels, the Bombardiers and the 90 per cent of our customers who are small and medium-sized businesses out there. They need more people, with exactly the same skills as EDC has, to help them from an internal point of view -- and guess what the only game in town is? "We love our customers, our customers love our people." So we are vulnerable from that point of view.
The market is getting more competitive in different areas: risk management, project finance, the knowledge of economics in the whole IT infrastructure. I would not say we are where we need to be to have the confidence to ensure that we have all the right people and to ensure that we are able to get the skills. It is not only a matter of retaining them; we have to draw them in, because as we get bigger we need more and more infrastructure. We are constantly working on that with the board to get them to realize that we have a very important asset here that we do not want to lose.
Senator Meighen: But OSFI, for example, has guidelines that restrict it from paying above certain levels. Do you have that?
Mr. Gillespie: We are not restricted other than in the sense that EDC cannot be seen to be on a completely different page from the rest of the government. We are a Crown corporation. The shareholder is the Government of Canada. The board is very cognizant of that. They are also cognizant of what we are doing and where we are trying to go and of the importance of EDC as an institution.
As John Ross said at the standing committee a couple of days ago, EDC is one asset that the Canadian government has that works extremely well.
Senator Meighen: Those tend to stand out then, I guess.
Mr. Gillespie: That is right. With regard to the banks, we estimate that we are doing in excess of $70 billion a year with Canadian financial institutions. That is covering not only our support to our customers, which is driven through their support, indeed through the provision of working capital and other risk management products to the ultimate end customer, but it is also covering the fact that for every loan we make we have to borrow it. We have foreign exchange; we have derivatives; we have commercial paper; we have the whole investment dealer borrowing program. When you add all of those things up, we are doing something around $70 billion to $75 billion. We are in the top ten, if not the top five, if not higher than that, as the best customers of some of the Canadian financial institutions.
In that sense, the relationship with the Canadian banks today is far better than it has ever been, even though we are supporting 10 to 15 times the business that we were supporting 15 years ago. That is a major change. Part of that is that people have got themselves out of looking at this business as simply trade finance. It is the whole treasury side; it is the investment banking side; it is trade finance; it is project finance; it is commercial banking; it is corporate banking. That is quite a different angle.
You may not hear that from the CBA, but I would encourage you to talk to the banks individually, because I think at the senior leadership levels there they have an entirely different view of EDC and what we are doing and the nature of that relationship.
Senator Oliver: Since you are all of these things, what is the advantage of your being a Crown corporation? Why are you not just privatized now so that you could deal even more directly with banks and other financial institutions around the world? What is the advantage to you now of being a Crown corporation?
Mr. Gillespie: Senator, one obvious advantage to being privatized would be that, probably from the CEO on down, we would all be paid more.
Senator Oliver: That is what Senator Meighen was getting at.
Mr. Gillespie: That would be very good news. However, this goes back to the risk question. Are there other Canadian financial institutions or other shareholders that would be prepared to take risks in 160 markets in the world, that would do that $38 billion that we are going to do this year without any government support, that would provide better service to our customers at lower cost? Our efficiency ratio is one of the key ratios that the banks use in their annual report. Their efficiency ratios are about either side of 70 per cent. This is really a reflection of administrative expense to net operating income. We are at 14 per cent. The lower number is better.
I do not think anybody would do it more cheaply. Based on our customer satisfaction scores, I do not think anybody would do it better.
The privatization model would have to be such that you have the confidence that the other shareholders would support more business to more companies at less cost without any government support, and I have not seen anybody step up to say that they are prepared to do that. It would be great if they were.
Senator Oliver: You said that the $1 billion that you got from the Government of Canada is still there. So there is no reason why you could not pay that back, go to the markets, raise another $1 billion and go on with your business and be private and not have the constraints of the Crown.
Mr. Gillespie: You are right in one sense, senator, but again, if we go back to the banks, right now they are looking for a 30 per cent return on equity pre-tax, and 20 per cent after tax. Our return on equity this year is going to be, say, 7 per cent. That is not exactly a compelling return for private shareholders to get into, given the risk and the volatility that we just spoke about. That is the problem.
While we are a commercial financial institution, we want to be the best of private sector methods. We have to be from a risk management point of view. It is highly dangerous stuff, but we also have to be the best of public policy and find that balancing act that is so critical.
Senator Kenny: Mr. Gillespie, my interest is along the same lines as Senator Meighen's questions. I understand why you are not keen on guarantees for bank loans, but you did say in your remarks that export financing is a niche market and there is a need for committed partners to leverage your efforts. How big is the problem and what are you doing about it?
Mr. Gillespie: Again I will ask Mr. Siegel to make some further comments on this, but first let me say that right now there is not a major problem. We are not constrained in terms of supporting Canadian companies. That needs to be fully understood.
However, as we go forward and build and support more and more Canadian companies going global, and as our activity goes up, then there is the potential to run into risk concentrations, with which we will have to deal one way or the other. We would like to find some partners to assist us not only in supporting small and medium-sized customers and doing that more effectively, but also on the public-private infrastructure side internationally, where obviously EDC's interest is in the benefits to Canada. Yet, these projects are very large. They often entail substantial amounts of third-country supply, which is not a terribly good use of EDC's balance sheet, as you might well imagine, but, at the same time, without the full financing package being put together on the table, the deal is not likely to come to fruition.
Mr. Siegel: As you say, it is really looking forward. As we look out globally at what other countries can bring to the table, the problem is becoming more pronounced in the sense that we do not have the large transnational corporations that have captive financial institutions with them that you see in Europe. We do not have the preponderance of policy banks that you see in Europe, such as the European Investment Bank, Nordic Investment Bank. I could go on and on.
You are seeing a diminishment of the role in financing that the multilateral development banks are prepared to play. Indeed, one need only look at Seattle and at the type of pressure they are under, which makes it that much more difficult for them to engage in particular projects. However, it will become more of an issue. It stems from the use of our programs. Very often what we are trying to do when we lend is to bring other players alongside.
For instance, we lend and we have a political risk insurance program that historically used to be given to equity investors. It protected them and their equity investment abroad. Today 50 per cent of that coverage goes to banks to give them protection against political risk, if they are prepared to take the underlying commercial risk in a project. We are trying to leverage more capacity in there. We will take maybe a third of the financing requirement and try to leverage out two-thirds by using our political risk insurance. That is more a project-specific and transaction-specific example.
With respect to building capacity in a longer-term range, we have talked with virtually every one of the Canadian banks to see, given the fact that they cannot necessarily maintain the kind of presence in limited and project finance, whether it makes sense to collaborate in some way and bring that capacity together so that they can maintain a certain core capacity and piggyback off the capacity that EDC has, and in a sense, in terms of Canadian exporters, present a larger more critical mass, if you will, of advising and arranging capability out there.
That is another example. We are in earnest in pursuing that kind of structure.
A third area that I have mentioned -- and it has been publicly announced -- is that there has been a suggestion from the Department of Finance of a regulation change that would permit Canadian pension funds to potentially participate in EDC-originated financing and not be subject to the foreign property definition in respect of their overall portfolio holdings.
We have been in discussion with some specific players who have been championing this and have been discussing how they can, in effect, participate in EDC financing and bring more capacity into the game, but through EDC. So they benefit and they bring more dollars to the table. Those are three areas that I would emphasize.
Senator Kenny: On the second area you spoke of, Mr. Siegel, what sort of response have you had from the banks about creating further capacity?
Mr. Siegel: Lukewarm, senator. One or two have indicated that they would look at it more seriously. One or two have really tried to look at it more from the traditional trade finance perspective, almost assuming that EDC would be a guarantor, and that is not what we are talking about. We are not talking about substitution of risk. We are talking about collaboration. I would say one or two have just basically rejected it out of hand. It is not in their plan to do that kind of lending so they do not see the merits of doing it.
Senator Kenny: It is not in their plan because they cannot make money at it?
Mr. Siegel: Yes, that type of activity is very capital intensive and labour intensive and it is just not, in their view, a growth area.
Senator Kenny: Maybe I could ask to you say that again. The view of the banks is that export financing is not a growth area?
Mr. Siegel: The view of some of the banks is that the area of project finance, limited recourse, is not a growth area relative to some of their other businesses and options, given the overall capital and labour intensity of that particular business.
In terms of specific trade financing -- and here you have to separate the short term from the medium and long term -- I do not profess to know the internal strategy of the banks, but you might judge it by the dedication of the personnel: virtually all the banks have cut back dramatically their medium- and long-term trade finance staff and, in some cases, have merged that with their corporate banking operations as well. That part has been diminishing, and in some cases even imploding. That is some indication of what their investment is on that side of the business.
The Chairman: Could you explain why Bombardier would do business with you rather than with their major banker? Obviously, their credit must be impeccable.
Mr. Siegel: It is not necessarily a question of Bombardier, although we do support Bombardier through bonding programs and basically backstopping their performance and their ability to perform; it is really a question of their customers. It is Bombardier reaching out to regional airlines in the United States in respect to their RJ program, the regional airlines. These are not the majors. These are second-tier airlines that present different risk profiles. Yet they still require the same type of financing support, long-term, large amounts of financing to overhaul their fleets and to move quickly into the jet fleet.
It is a matter of Bombardier coming to us because there is a risk profile out there that the banks have a limited appetite for. That does not mean they have no appetite, but they have a limited appetite for what they can take on.
The same would apply on the ground transportation side. Bombardier and its ground transportation group is looking at major transit projects around the world. Many of these are back to the limited or project finance types of structures to which my earlier comments would pertain. That is what their financing requirement is and that is what the competitor is putting up in those, because the buyers ars not prepared to arrange the financing themselves. They want it arranged for them and brought to the table.
The Chairman: You are saying that Bombardier can sell planes to some little feeder airline in Costa Rica, if Bombardier can help them arrange financing in order to pay Bombardier?
Mr. Siegel: I am saying that Bombardier comes to us, as they go to any bank, looking for preparedness to lend to airlines around the world. They may be in Third World countries, they may be right next door in the United States. A large part of their program has been right next door in the United States. These are the regional feeders whom you may not know by name but who are operating under a code share arrangement with United or with Delta or with American Airlines; but the risk is not the same as for American Airlines or United. The risk is for a second-tier operator who does not present the same kind of financial strength or root network as these majors do. That extends as you go, then, into emerging markets with airlines that do not have the same strength. They need somebody who is prepared to lend to those parties.
The Chairman: Are you saying you make the money arrangements for the buyer?
Mr. Siegel: Yes, we lend to those buyers, Mr. Chairman, secured in many cases by the aircraft itself.
The Chairman: Which is probably something Canadian banks will not do?
Mr. Siegel: I will not say that they are not prepared to do it. They obviously have a risk threshold. Some risks they cannot undertake. In other cases, the issue is how much they are prepared to lend -- that is, how much concentration they can accept in one buyer or in one sector.
They are also doing other types of financing, for wide-bodied aircraft and what have you. So they have limits on how much they can bring to the table. But Bombardier has a huge appetite and requirement. They are now delivering close to 100 aircraft a year in their regional jet program. That is a huge requirement in terms of financing.
Senator Tkachuk: I would like to know whether you have a breakdown of the amount of business you write in Western Canada and whether you could break it down by provinces in Western Canada or if it just done as a region?
Mr. Gillespie: Senator, we can. I would ask Louise Landry to speak directly to that.
Ms Louise Landry, Vice-President, Corporate Performance and Communications, Export Development Corporation: Yes, in fact we have a breakdown. It is in the annual report. Every year we show our support by number of cuts, regional destination and also province of origin. It is interesting to note that we are very closely married to the actual destination of Canadian exports, particularly in Western Canada. We do have this information. We can provide it to you.
Senator Tkachuk: What percentage of business would you say is done in, let us say, the Prairies?
Ms Landry: I will do some quick math here, because we have it by province.
Senator Tkachuk: Why don't you put it on the record for Western Canada?
Ms Landry: I will start with Manitoba and go West. Manitoban exports, as a percentage of Canadian exports, equals 3 per cent, and 2 per cent of our support goes to Manitoban exports. So we are closely linked to the Canadian profile, if you like, in that province. For Saskatchewan, 3 per cent of Canadian exports are from Saskatchewan; 4 per cent of our support is for Saskatchewan exports. With respect to Alberta, they have 9 per cent for the Canadian percentage and 8 per cent for EDC's percentage. Finally, looking at British Columbia, 9 per cent of Canadian exports are from B.C. and 12 per cent of EDC support is on behalf of B.C. exports. We are very closely matched to the Canadian destination.
Senator Oliver: Our report says that 72 per cent of what you do is in Ontario and Quebec. What about Atlantic Canada?
Ms Landry: Let me mention that 72 per cent of Canadian exports are from Ontario and Quebec. Therefore, our support matches again the Canadian profile.
There are very small percentages from the Atlantic, as you may appreciate. In total, 4 per cent of Canadian exports come from the Atlantic provinces. I am not going to name it by province, because some of them are decimal points; they are very small. EDC support is 3 per cent, again very closely matching the Canadian export profile.
Senator Tkachuk: It is like the chicken and the egg. Western Canadian jobs are highly dependent on exports. Our agriculture sector is almost totally dependent on exports. We are a trade region of the country.
When you see numbers that are low, does that get you more interested in that particular region? In other words, do you have a mandate, or is it part of your mandate, to actually stimulate further exports from a particular region that may be low?
Mr. Gillespie: We have ten offices across the country. We have business development efforts that go right from B.C. to Newfoundland and Labrador, trying to increase the number of customers and increase our volume of activity.
The numbers that Louise was talking about in Western Canada show that our export support there is actually higher than the Canadian export profile. The support is less than that in Ontario simply because there is a lot of trade that is automotive related in Ontario that we would not touch. In Quebec and the Atlantic provinces, the amount of support is actually higher than the Canadian export profile for those regions.
Having said that, one also has to be a little careful in the sense that our numbers are based on the exporters served, wherever their head office is. So what you would have, for example, in the case of Nortel, which is a major customer of ours, if their plant was in Alberta, then the statistics we have would be against Nortel's showing up in Ontario. Similarly, you could have activity in the Atlantic provinces that might be potash, or paper, or fish, or it might be all sorts of different things related to showing up against a Quebec-based head office or an Ontario-based head office or a head office somewhere else in addition to the Maritimes. So one has to be a little careful with some of the numbers in getting overly precise.
The other interesting thing is that in our annual customer satisfaction survey, which we just concluded for this year, the perception of EDC regional support is actually highest in B.C. and the West, and in the Atlantic provinces it is higher than it is in Quebec and Ontario.
Senator Tkachuk: Gowlings have said that they want to see more decentralization of business decision-making by EDC, and that is something that you disagreed with in your paper. I am wondering why that is.
Mr. Gillespie: There are a couple of reasons. Technology has -- I think it has been referred to this way -- created the death of distance. Decisions can be taken virtually anywhere in the world. So, in a sense, the issue is not where the decision is taken. That can be at a computer sitting in Ottawa; it could be sitting in Moncton; it could be sitting somewhere else in the world, conceivably. That can be seamless to the customer. We are trying to ensure that we have the right goods and services delivered for the customers as they need them in their particular segment of the market.
We are beefing up, and have been beefing up, our business development efforts. That is what we think is most critical in the region, because we are not sufficiently well known. That is one of our biggest challenges. Our efforts in the region are around building our awareness and reaching more and more customers, performing the appropriate diagnoses, and then bringing those decisions to wherever.
As an example, we have effectively a call centre for what we describe as the emerging exporters segment, which are all the exporters that have less than $1 million in export sales. That is effectively a call centre. That is what the exporters want -- very fast response times. That needs to be very consistent and deliver the right answers time and time again. That is set up in Ottawa. However, obviously from an exporter's point of view it could, with technology, be sitting down the street. The exporters are not looking for a real, live, human being; they just want to get the right answer.
With regard to our short-term insurance activities, one of the big interests of our customer base is fast response time. If you go back about ten years, EDC's response time on credit approvals was something like nine to ten days. We have spent a lot of time and effort putting together some interesting technology with the D&B in the States. A couple of years ago we got that down to two days. In fact, we got a Canadian productivity award for that.
Because of the Internet we are just starting to pilot, and roll out to our customers, some technology that allows the customers to access the credit decision themselves right on line. We believe we can deliver that service in two minutes. They type in the buyer they want to deal with in the world, whether it is in the United States or in Europe, or in some emerging market, because the data bases are not linked completely around the world, and after they put in their customer they indicate the credit limit requested and the terms and conditions that they will sell on. If we do not have the information in our data base when they hit "submit request", that information request goes down into the United States and draws out certain packets of data, or it goes elsewhere in the world where we have this linked this up, populating a decision support module within EDC that runs through various credit modules and issuing a credit approval right back to the customer. Within two minutes, it would say, "There is mail waiting for you." That is fairly interesting. It is still in its early days, but that is where it is going.
That is why, in a sense, the decision making does not have to be in Vancouver. The decision making is on the screen. That is what the customers are telling us they want. They want instant access to decision making. That is where we are going. They also need business development people who can help them do some hand holding, particularly for the small and medium-sized businesses that form 90 per cent of our customer base. They need the right tools, the diagnostics to make sure they are put in the right slot.
Senator Kroft: When you are making these comments about this kind of service, are you talking generally across your credit and your insurance side?
Mr. Gillespie: The comments with regard to this two-minute response time is around the short-term insurance product, which is where we are taking the risk on foreign receivables against commercial and political risks. Short-term insurance constitutes 70 per cent of our total activity. That is what I am speaking to, where we are actually doing more than 40,000 credit approvals a year. Now about 60 per cent of those are same-day approvals. Where it gets a little tricky is in some of those emerging markets, where we just do not have information and it takes some time to get in.
Senator Tkachuk: Is agriculture a large part of your business? I am specifically speaking of the commodity market -- wheat, oats, barley, canola.
Mr. Gillespie: Yes, it is a significant part and a growing part. For that reason, actually, we recently announced the creation of an agri-food team, whereas before that service was provided within a couple of other industry sector teams. We have decided that the size is now sufficiently big and the skills sufficiently specialized that we need to dedicate staff to that area.
This is another area where we are working extensively with the banks. Often in agricultural products, the terms of payment are a letter of credit. EDC does not issue letters of credit, but we can insure them. This is where the Canadian banks may not want the risk on that letter of credit but obviously want to advise and confirm those letters of credit to their customers.
So the bank is the intermediary, but the bank does not want the risk. The banks lay that risk off on EDC for a fee. We are quite active in markets like Mexico, which is a very big market for Canadian canola and some wheat products. Obviously we do not, for the most part, do the Wheat Board activities. They have their own programs, which they can access, although we have done some Wheat Board activity in some markets in the world where they ran out of capacity elsewhere. We are working extensively with the banks. We are trying to grow our business in that regard, and we have been quite successful.
Senator Tkachuk: And will this team be here in Ottawa or will it be out in the Prairies?
Mr. Gillespie: It will be here in Ottawa, again because it is some financial risk that we have to manage very carefully.
Senator Oliver: Senator Tkachuk's questions were in an area that I want to pursue a bit more.
One of the things that this committee has studied in the past, and might study again, is small businesses and small business equity and small business financing, and so on. I heard what you said about your call centre for small business and quick response and so on. As I understand what you do, you largely deal with companies the size of Nortel, SNC, Lavalin, Bombardier, Siemens, Boeing, et cetera. What percentage of your business is within those top six people and how much is left for what I call small business?
Mr. Gillespie: Thank you, senator, for that question. I have to take issue with your expression "we largely do business with." If you are looking at the total number of customers, and we think that is the best measure of our support in the marketplace, that is where I come back to saying that 90 per cent are small and medium-sized businesses. What we define as small businesses are those businesses with sales of less than $5 million, and a medium company is one with sales of less than $25 million.
Senator Oliver: Those are the same numbers as we use.
Mr. Gillespie: Ninety per cent of our customers are of that nature. Half of our customers are emerging exporters with export sales of less than $1 million. Our support last year for the small business and medium-sized business activity was $5.8 billion. That makes us the largest by quite a margin against other federal providers of small business services. The Business Development Bank, I believe, does $1.4 billion in activity to small business. EDC has $5.8 billion of small business activity. That is $5.8 billion out of the $35 billion that I talked about. In other words, 90 per cent of the customers are doing 15 per cent to 20 per cent of our volume, and that is 50 to 100 customers overall, where we have doubled the number in the last couple of years. We have major initiatives underway to try to make that grow across the country.
There is an interesting thing about the small business activity. I would bring your attention to a couple of statistics in the Gowlings report. They talk about EDC's customer satisfaction. We have our own annual survey and those reports were just released and shared with the board yesterday. We had a result of 80.4 per cent on customer satisfaction, which was actually the highest that we have ever had.
Senator Oliver: Who did that study for you?
Mr. Gillespie: We did that study.
Senator Oliver: Was it self-serving?
Mr. Gillespie: No. Phase 5, I believe, is the consulting company that was used to conduct the interviews. So it was an independent third party that did that.
The small business results are actually highest overall. We are slightly below that number that I just gave you for the largest customers, simply because, as you might imagine, their expectations are measured against the best service providers in the world. They are trying to move a very large volume of activity in pretty difficult places of the world and we cannot always find financial solutions for them, but, overall, 80.4 per cent is pretty good.
Gowlings actually had Environics do a study as part of their review. I would recommend that you read the Environics study, because there are a number of very telling statistics in it, one of which was that 74 per cent of small and medium-sized exporters could not think of one thing that EDC should do differently or better to meet their needs, which I thought was a pretty interesting number relative to the difficulty of managing this constituency.
Senator Oliver: In relation to one of the responses you gave to Senator Tkachuk, you were talking about your quick response to a credit request. You said that what people want is on a screen and so the interaction is between one screen and another screen. However, once the credit is approved for what the client wants, there has to be an individual there to do some negotiating on the rate and on the terms and so on. Is there a long delay in getting a person to finally deal with the customer to talk about the terms of the approval once the credit has been approved?
Mr. Gillespie: Once the credit has taken on the decision, the customer knows what the rate is. I am talking about short-term insurance here. I am not talking about medium-term activity related to selling Bombardier aircraft or something. I am talking about the short-term credit insurance program.
Senator Oliver: So there is no negotiation?
Mr. Gillespie: There is no negotiation. The customers understand, when they sign up the policy with us, what the various rates are for the various risks in the world based on the terms of payment. Obviously, a letter of credit is one of the most secure risks and would have the lowest rates, again differentiated by bank in the world, depending where that is. Open account, 180 days -- that gets riskier. That is where you are starting to simply underwrite on the strength of the commercial risk.
Those rates are established in the policy. Once the credit approval is issued, the exporter has what he or she needs to do the business.
Senator Angus: Ms Landry, gentlemen, thank you for coming. We have had not perhaps as long a time as we would have liked to prepare for this morning. We could spend hours questioning you. I know my colleague, Senator Meighen, indicated he would like to go on and on. However, I understand that there may be a possibility of having you folks back again for further questioning.
The Chairman: Our plan is to have other witnesses in, such as some representation from banks, whether it is CBA or the banks themselves. The committee will have to come to that conclusion. Gowlings will have to come in ot tell us something about their report. The plan presently, depending on your wishes, is to bring these people back for a wrap up.
Senator Angus: Mr. Gillespie, some two or three years ago the Banking Committee did a study of the government-owned credit granting institutions, reviewing the gaps that existed and, therefore, justified having publicly-owned enterprises in this field.
One of the recommendations the committee made was that the Canadian Commercial Corporation be integrated with the EDC. That has not happened in the interim. At the time, when the EDC reps came before us, they were not in favour of that kind of a merger, but we recommended it in any event and we listed our reasoning in the report.
As I understand it, the Canadian Commercial Corporation does a lot of the same things in terms of facilitating the export of Canadian goods, arranging risk management programs, finding financing and even standing in the shoes of the exporter to give it a face, to give it a visible entity for the foreign buyer.
I am of the view that there is duplication, and that it would be good to have CCC in with you folks. Could you comment on that first of all, please?
Mr. Gillespie: Senator, with respect, I do not think I will personally comment on that, simply because the government took a decision earlier this year to maintain the present structure of CCC and to appoint a full-time CEO of that corporation. The question is best put to perhaps the minister or other government officials.
Senator Angus: There are many things that result from decisions by government. Most of those things are on my list of questions, so we will see how we get along.
Obviously, you are a Crown corporation and you are a government-owned entity. I guess at the end of the day everything that happens respecting your corporation is a result of one government decision or another. Let us try one area for fun: corporate governance.
In the private sector, corporate governance has been very much in focus in the last five or ten years. Since the Day report of the Toronto Stock Exchange and the public companies in the private sector made great strides in answering the question: "Where are the directors?", Boards of directors have undergone radical change and substantial improvement in terms of getting more involved and being accountable for the things they do. Indeed, there are processes for ensuring that on an ongoing basis the boards are appropriate for the enterprises.
I notice that in the Gowlings report there are some recommendations that, while they do not directly mirror the TSE guidelines, certainly go a long way. Could you tell us where you are in terms of implementing these kinds of governance processes at EDC?
Mr. Gillespie: That is an extremely important question and I will ask Gilles Ross to speak more fully on that, but first I would like to make a couple of very brief comments. One of the recommendations of Gowlings, which we fully support, is to move EDC from Part 1 to Part 2 of the Financial Administration Act. In my view, it is increasingly important to put more and more accountability on the corporation and the Board of Directors of EDC. That is going to be the best long-term model to ensure success. EDC has grown dramatically. It is now a big, sophisticated, financial institution doing the kinds of volumes that I talked about and taking risks in all of those countries. Therefore, the governance of EDC is a most important matter.
We fully support having the Auditor General remain as EDC's auditor. In that regard, we disagree with Gowlings, who believes that we should have a private-sector auditor. In our view, that skill can be retained by the Auditor General, if he has private-sector expertise brought to the table.
With respect to accountability, I do not think the answer is, "The more hands the merrier." We have an extremely rigorous accountability regime right now, even more so than the private sector in some regards. We have the board, which in the majority is private sector, as you know. We have to file a corporate plan. We have to file a corporate plan summary. The minister has to approve it. The Minister of Finance has to approve our borrowing plan. The Treasury Board has to as well. So the accountability is there more and more.
The real assurance that you and others should be looking for is to make sure that the Board of Directors of EDC has the right skills to be able to manage this organization going forward.
With regard to your specific recommendations or your specific comments on the governance structure vis-à-vis the private sector, let me turn to Mr. Ross.
Mr. Gilles Ross, Senior Vice-President, Legal Services and Secretary, Export Development Corporation: Indeed, we have a very strong corporate governance structure at EDC. Our Board of Directors is very familiar with the Crown corporation guidelines on corporate governance that were adopted a few years ago. Our chairman and president are separate officers. In other words, the two offices are not held by the same person, which is a strong concept in the private sector. We have a very strong committee structure of the board. We have at this stage six committees of the board that focus on different areas of the corporation.
Our directors invest the majority of their time in EDC on strategic direction. They meet once a year, and that meeting is totally dedicated to setting the corporation's direction for the year ahead. Of course they have to approve the corporate plan.
Even yesterday, by way of example, our board considered a director profile, with which it agreed, that described the attributes that directors of EDC should have and described the mix of skills that should be found on our board. We have an important training program for our new directors when they are appointed. This year in particular we have focussed very much on risk management and on modern principles of risk management. Altogether our board is doing a good and strong job of corporate governance.
Senator Angus: I appreciate those comments. Some cynic told me that the majority of your directors are Governor in Council appointments, hacks, party bagmen and partisan appointees. I would not know whether that is true or not, but the recommendation in this report that we are talking about is that there would be a committee that would recommend to the Governor in Council who should be appointed to the board, rather than suddenly one day you wake up, Mr. Gillespie, and you see in The Globe and Mail that you have a new director, which is, I understand, how it has been happening for quite a few years.
Under these new corporate governance initiatives, in both the public and private sectors, the concept, I believe, is to have a little more discipline in how directors are selected.
With respect to the recommendation that is found just towards the end of the Gowlings report, I was hoping you would specifically tell us how you are doing with the implementation of that recommendation -- in other words, having you folks suggest who would be good directors.
Mr. Gillespie: That is exactly the direction we are going and why the board spent time at the Governance Committee yesterday in examining the appropriate role profile for an EDC director. It is extremely important to have that balance, whether it is people who have small-business knowledge, whether it is people who are lawyers, whether it is people who have international experience, or whether it is people who have experience in financial institutions. It is critical that we have such a good mix on the board that ultimately we can develop those lists of individuals who would be appropriate and present those to the government and the minister in order that they would, one would hope, give consideration to exactly those names.
Senator Angus: That is very reassuring.
Mr. Gillespie: Ultimately the decision will be theirs. We understand that. But we can assist the process to ensure that they have a good sense for what would be an appropriate decision, given the growing nature of EDC.
Senator Angus: The recommendation appears on its face to be a good one and I certainly hope it will be implemented. I do appreciate that it is the government who will ultimately decide.
Another area of government involvement, of course, is the background to this report that we are examining. In the 1993 revisions to your act, there was provision for a review, but "review" was not defined. It does not talk about the type of review in any detail. Without casting any aspersions on the people who were hired to do the review, in the wisdom of the government, I was curious to notice that it was a law firm that was selected to do this job. I am a lawyer myself, and it provokes me to at least ask you if you participated or if the agency participated in the selection of the reviewers?
Mr. Gillespie: We had no involvement in it. The government went out with a competitive bid, which my recollection was that Public Works established certain criteria around which the selection would be ultimately made. In the case of Gowlings, they supplemented their internal skill sets with some external people. Gerry Shannon, for example, was retained by Gowlings, given his history and knowledge of many of the issues that we are talking about. There were some other people, as well. That was ultimately the decision of the government through a very public and open process.
Senator Angus: I feel that this question is an appropriate question. It is not designed to cast any aspersions anywhere. It is designed to determine the objectivity of the report.
I know that at one time Gowlings were the regular lawyers for the EDC and then there was a period when other lawyers were involved. At any time during this study did Gowlings have any open mandates from the EDC?
Mr. Ross: No, Gowlings do not act as EDC's counsel. They had acted as EDC's counsel up until 1982 or so, but they have had no mandates from EDC since then.
Senator Angus: We have been talking about the amount of money from a province and so forth. I have always been curious to understand the quota system, if it is a quota system, for countries. Is there an amount, for example, that you are allowed to finance for Russia, or for the former Soviet Union, whatever it is called now? Do you have an amount for each area that is a limit beyond which you cannot go?
Mr. Gillespie: We have a risk management methodology that we have created that helps us establish what would be appropriate exposure in the various markets in the world that we operate in. This is something that has been part of the whole risk management process that we have discussed with the board. There are amounts that we look at from a country point of view and political point of view. We also have industry concentration limits and single-name limits, based on the various risks of the counter parties, similar to what you would find in any other commercial financial institution.
Senator Angus: I have never really delved into it, because I have not had any reason to, but I have heard it said that, on occasion, somebody with a project, or a potential deal, say, in Russia, to use that example, has been advised by EDC that, "Unfortunately, we have reached our quota and we are not lending any more money to Russia right now." Does that happen, first of all, and, if so, who sets those quotas? Does the government?
Mr. Gillespie: No, no, the government has no involvement in that. Absolutely, we have limits. To take the case in point, in Russia, our short-term claims experience this year is substantially higher than ever before. In part, $27 million has been paid out to Russia on Russian commercial banks.
Do we have an open appetite to take Russia today or tomorrow? They have some serious problems, as you might imagine. There is still a serious hiccup there. Yes, if a Canadian company were approaching us today on a bank risk in Russia or a project financing in Russia, I would expect that the answer would be no, unless they could demonstrate some pretty unusual risk mitigation strategies -- for example, offshore escrow accounts or some other mechanism that we could look right through to where that money and that source of funds was coming from.
That is part of the way we operate as a best-practice commercial financial institution. We have to manage those risks. If Russia goes into difficulty, we are potentially going to go off cover in some of those markets where we are going to get a lot more cautious.
Senator Angus: It is probably obvious why I am pursuing this. It is along my theme that at the end of the day, the government's oversight of what you folks are doing that counts, notwithstanding the provisions of the act. It is the government that gets the pressure, for example, not you directly, at one of these trade meetings, where Captain Canada is out there with his boys and someone says, "Well, you should be doing more for XYZ country." So they say, "Yes, we will do that. Canada is going to do more."
Do they then come to you and say, "Okay, EDC." It is not clear to me how that works, because I have heard it said that going on a trade mission -- and I will use Russia again, because it is true that they are continuously defaulting on their loans, so that it is a risk management issue, and I suppose it is a problem between the government and --
Mr. Gillespie: Excuse me. I may be completely wrong here, but one of the reasons that perhaps "Team Canada to Russia" did not happen earlier this year was simply that, given the extreme economic hiccup there, taking a plane full of potential Canadian exporters and telling them to do business there was not really viable; they would then simply turn to you us and say, "EDC, I guess you are going to do it for us." That is rather difficult, when you are paying claims and trying to recover that.
Senator Angus: Let us forget about the example of one that is defaulting all the time. Instead of Russia, take Algeria, Morocco or one of those sorts of countries. I understand there still is a quota system. If a project is presented, they would say, "If we have reached the quota on EDC's normal lending portfolio, you might get money out of Canada Account" -- whatever that is. I have seen articles that talk about this, saying that perhaps it violates WTO rules. I always thought it was an extra slush fund of government money that could supplement what you do. Could you clarify that?
Mr. Gillespie: I would be happy to. I think we need a conversation at some point. You are hearing from all these people about things like quotas. We have a risk management framework. We set that risk management framework and the economists figure out what kind of exposure we should take in countries, based on things like their foreign exchange earnings, their level of indebtedness to start with, and so on and so forth.
So, yes, we come up with a framework for the various countries in the world that exporters want to do business in, and, as we talked about, every so often things do not go the right way or, indeed, they go exceedingly well and all of a sudden we are reaching the point that we do not want to put any more money into a given country simply because our risk concentration is becoming more than we want.
What are the options? The options are Canada Account, and we can talk about that further. It is the account where, for reasons of risk in excess of that which EDC would normally undertake for its own books, the ministers can make decisions in that regard based on the benefits to Canada as they understand them; or EDC can stop lending and nothing further happens in that market, or we look for opportunities to transfer the risk out of our own books onto somebody else's plate to free up some capacity. There are a number of different ways in which we are trying to make sure that we have sufficient capacity to meet the needs of our customers.
Mr. Siegel: In respect of the Canada Account, the government does look to us, however, ultimately to give them a recommendation, based on our assessment of the risk, as to how they should provision for that. In some respects, that underscores the governance that you were talking about. They, themselves, if they want to proceed because they believe that the benefits would warrant that, still have to look at the financial implications and they look to us to advise them as to how we see it.
To underscore what Mr. Gillespie has said, it is rare that we have a market for which we are just closed. You used the word "quota." The issue is what sort of risk you can take in that market, and we come back to the fact that there are ways to structure around those risks. For instance, we are associated with a mining project in Russia that has been structured in such a way that we believe it is a fair way to balance the risks in that market. It is very difficult but we hope it will proceed.
You can go into some very difficult countries, and it is not just the simple question of whether we are up to a certain dollar amount. Our exposure may be undertaken in a variety of ways. The issue may be that we can take short-term exposure, but if you want five-year exposure or ten-year exposure that market is just too risky for it. We can support you with equity coverage. We can take some of the political risk coverage against expropriation, against political violence, against long-term transfer, but we are not going to be able to lend directly and take that exposure.
It obviously takes on a number of dimensions. I would say it is pretty rare that we face a situation where the country is just plain unable to go into that market; but obviously the structures can be very complex -- I do not want to use the word "onerous", but they can be complex, and then obviously in respect to some transactions the cost benefit does not warrant doing that.
Senator Angus: If I understand well, you actually are very actively involved in the administration of and the setting up of the structure of loans that come from the Canada Account source; but those are generally higher risk loans, loans that do not meet the parameters of your risk management system, and the decisions on that money are made in the other place. Is that fair?
Mr. Siegel: Exactly. It may be a good risk, but when you look at the overall magnitude of risk that we would have to take, it would be just too much for EDC to take at one particular time. More rightly, it may be that the risk profile is too high, but the government will look to us to structure it in the same way, and in all other ways to go about it as an EDC loan.
The use of the Canada Account, either in respect of insurance or in financing, has dropped dramatically and is virtually non-existent in respect of short-term exposure and is in the order of less than 5 per cent of our total activity. Basically, it is all done on EDC's corporate balance sheet.
Senator Angus: One of the objects, as I had understood it, of the EDC was to give Canadian exporters a level playing field so they could get out there. It stimulates Canadian industry and Canadian exports, but there are other countries out there -- and I have asked these questions in the past -- that only pay lip service to the rules of the game, and there is soft money and other deals in some of those countries. But EDC plays fair, plays by the rules.
Mr. Chairman, I would like to explore that, when these people come back the next time, and the whole issue of Canada Account versus the regular money, and the question whether the game is changing now because of the WTO.
Mr. Gillespie: We would be pleased to come back and talk about those things. It is important to note, however, that EDC is the role model against which other export credit agencies are judged; indeed, those other export credit agencies are becoming extremely envious of EDC's ability to have capacity and flexibility to meet the needs of Canadian companies.
Senator Kelleher: Perhaps I should get rid of a couple of conflicts, before I get started.
First, I am counsel to Gowlings. I played no role whatsoever in that report. I was never a party to it and never discussed it with anybody. I never even saw the report until it arrived.
My second conflict arises from the fact that I was the former minister and, theoretically, EDC reported through me. I will disclose a bias in that, certainly during my tenure -- and I go on the record for this -- I think EDC did a pretty good job. I have very few complaints.
Mr. Gillespie: Thank you for that, senator.
Senator Kelleher: Having said the nice things, I have one or two concerns. Recommendation 19 has to do with the establishment of places of business abroad. I must say I have concerns there. You disagree that there should be obtained the approval of the minister of trade for the establishment of offices abroad. Quite frankly, I disagree with you on that. I disagree with you for several reasons. To establish an office abroad, even a one- or two-man office, as I know from my trade days, you are looking at $1 million a year. It is very expensive to set up an office abroad. I do not know what you have in mind here, but I would not have a problem if you were going to send a person into one of our embassies or consulates abroad. That is a sensible solution; we have that with the RCMP and Immigration; but to set up separate, independent offices concerns me.
The other concern I have arising with that is that every ministry in government wants to set up its own trade office abroad. Certainly, Agriculture is always trying to do it; Fisheries is always trying to do it. We find that this tends to lend to a splitting of trade activities abroad and it is not conducive to good trade.
What are your plans in this area?
Mr. Gillespie: Our disagreement with Gowlings goes back to the issue of governance. Given the construction of the present board, where you have the Deputy Minister of Foreign Affairs and International Trade on our board as well as a representative from the Department of Finance, to name but two, the views of the department can be well articulated at that particular juncture.
We are operating as a commercial financial institution; so we need to have a business case for each and every office that we would open in order to be able to demonstrate pretty clearly to the board that there is a value added through this activity. We are not looking to duplicate the trade commission or its service around the world. It is a great service and our role is quite different from that.
The issue is that we do not right now have the power in the act to open offices per se. We have a representative in Beijing now. We are looking to put a representative into the Canadian Embassy in Mexico City, as well as in San Paulo, Brazil. However, as you build that business model out, people are going to ask, "Have you got the power to open offices?" The answer is, "Well, we do not exactly have the power, but we can put a representative there." Let us get the thing fixed.
In some jurisdictions it makes sense not to co-locate in the embassy, for good and valid reasons that are unique to that market, cultural or otherwise. We just want the flexibility to be able to respond. We are talking about a long-term time horizon here in the most appropriate way possible. Our simple view is that, if that business case is appropriately put together, brought to the board, and they accept it with the input that they can hear from the various public-sector directors that sit there, that should suffice.
Senator Kelleher: Well, you have my thoughts. We have yours.
The next area is a sensitive area. It has to do with recommendations 31, 32, 33 and branches off in 34, where we are dealing with the environment and environmental guidelines and we get into the human rights guidelines. I know that under NAFTA we have brought in sidebars, if you will, for environment and labour. We all know from watching TV at night that environmental concerns are certainly being expressed in Seattle.
I know and you well know that our competitors out there in the world do not always follow the rules. We all know this with respect to trade financing, rates being charged and the soft money financing that goes on. I see nothing wrong with Canada's being in the forefront of trying to establish proper guidelines. That is great. The goal is worth it. However, I get a bit concerned, if we are going to be going out into that area, that we then, in order to make ourselves look like Caesar's wife, voluntarily accept these guidelines ourselves before they have been accepted by our competitors out there. If we start doing that, you know and I know that we are not going to be able to get very much done out there. I see you nodding your head.
Mr. Gillespie: We are on the same page on this one.
Senator Kelleher: I would like to have your thoughts to see if you can allay my concerns in that area.
Mr. Gillespie: I will turn it over to Mr. Siegel to speak more directly to that, but we fully agree that it is critical that the right balance is struck here. That is why we have disagreed with Gowlings on the prescription that they are suggesting.
Senator Kelleher: I noticed that and I agree with you on it.
Mr. Gillespie: If we set the Canadian bar so high that everybody else then enjoys the fact that we have now taken the Canadians out of play, that does not help us export our values to the world but only makes Canadian companies more uncompetitive. At the same time, we realize that it is important for us to be seen to take a leadership position and role in this internationally.
Mr. Siegel can amplify what we have been doing in that regard.
Mr. Siegel: There are a number of areas where we disagree with the recommendations, starting with the fact that environmental review should be built into the act.
EDC has already recognized that you cannot do business in the world without being able to address environmental risks, and by that I mean not just emissions; we are talking about looking at social issues as well. That is part of the environmental review. We have to be focussed on it. It is good risk management and it is also good corporate citizenship.
We have already stepped forward and developed our own environmental review framework. It is not something we have all of a sudden started to do. We have been doing it historically, but we felt there was a need to be far more articulate with the public as to what EDC's approach is to environmental review in respect of projects that it is engaging its support on. We put together a framework that clearly sets out how we go about assessing environmental review, the scope of the environmental review, whose responsibility it is to submit information, and what EDC's ultimate philosophy is. It makes it very clear that EDC reserves the right to turn down support for projects if the environmental impact is too high. If, ultimately, after reviewing the environmental risks and any appropriate mitigants that can be brought to bear, the environmental impact outweighs the benefits of the project, then we will turn down the project. We have made that very clear. I do not think we have to go further.
EDC is ahead of the market in that regard. The bulk of export credit agencies do not have a framework of that nature. To formalize that even more will put EDC more at an advantage; but EDC is taking a leadership role. We are developing a framework that is fairly balanced, that protects the information that is submitted to us, but commits us and obligates us to look at the environmental review, and we now have a philosophy that we can take out and aggressively promote amongst other export credit agencies. That is what we have been doing.
In the OECD consensus, we have been a driving force in getting those same principles agreed to by the other export credit agencies and ultimately encouraging them to adopt a similar framework to that as a responsible way to move forward. Effectively, we all raise the playing field as opposed to putting ourselves at a disadvantage relative to others.
I will not go into all the details, but we have taken similar steps with the United Nations Environmental Program, and we are the only export credit agency that has become a participant in that. That being said, we need to maintain a balance.
Again we disagree with Gowlings when they suggest that what we should do is adopt World Bank guidelines or standards and embody those as the minimum which EDC would have to adhere to. There is an "apples and oranges" comparison here. We are using a development institution and operating in an entirely different environment. They are not operating in a competitive environment. They are coming in and advising a board in the bottom-up development of their project as to how to go about incorporating environmental standards and issues. They are not operating in a competitive environment, where the buyer has already made a decision to go ahead and pursue a project and is now inviting competitors. To use World Bank guidelines and suggest that that is applicable to NECA is, in our view, flawed.
That said, we follow very closely World Bank guidelines and any other appropriate guidelines and the bulk of EDC's support for projects in sensitive industries would meet or exceed World Bank guidelines.
The last area where we would take umbridge is the area of access to information. Many NGOs would put forward the argument that the only way we can determine that EDC is meeting its environmental responsibilities is to have free and open access to information on projects that they are looking at. I go back to the earlier comment that the majority of the projects that we are dealing with are in the commercial realm. The information that is submitted to us is submitted to us as commercially confidential. The environmental assessments are not always the property of EDC. So it would be very difficult, if not impossible, for EDC to comply with that kind of formula.
Senator Tkachuk: You may not be able to answer this, but I would like the answer before we meet with the Gowlings group, if possible. According to your report you had 3,200 customers in 1997. Could you get me the requests by region as well? That would be interesting to me. In other words, how many applications do you get from British Columbia, Alberta, Saskatchewan and across the country to Atlantic Canada? I would like to know the total number of requests so that I can compare them to the number in your customer base.
You mentioned that Bombardier, for example, is a customer. Who would be your ten largest clients in Canada?
Mr. Gillespie: I would be guessing after the first few, senator. That is information we should bring back to the committee.
Senator Tkachuk: Who would be one, two, and three, then?
Mr. Gillespie: Clearly, you have companies like Nortel and Bombardier in the medium-term capital-goods size, but there are a lot of very large Canadian companies that rely on our short-term insurance products, whether they are exporting, for example, agri-food, potash, or forest products, where you are getting very significant margins. We are taking the risk on their foreign activity.
Senator Tkachuk: Could you actually break those down for me by insurance and by extension of credit to their clients, if that is possible? Again, it does not have to be done today. I do not know exactly how you do business with each one.
Mr. Gillespie: For some of that activity, particularly short-term activity, we have to be a little careful about the issue of confidentiality. I will have to talk to my counsel here about what we can give you in that regard. Some are clearly public. Others who take our short-term insurance do not necessarily want it known in the world that they are using EDC services; it could be a competitive disadvantage.
Senator Tkachuk: I understand. I am asking you this because of the Gowlings recommendation on decentralization; I am trying to get to the reasons, because I will be asking them the same questions.
Mr. Gillespie: We will give you the profile across the country of where the customers are.
The Chairman: I want to thank the witnesses. This has been very interesting, and we look forward to seeing them again probably some time next year.
Mr. Gillespie: Thank you for the opportunity to appear before you.
The committee adjourned.