Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 4 - Evidence, December 15, 1999
OTTAWA, Wednesday, December 15, 1999
The Standing Senate Committee on Banking, Trade and Commerce met this day at 3:35 p.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: Honourable senators, our witnesses today are from the firm of Gowling, Strathy & Henderson. Mr. Guy David is the project leader of the Review Team. With him are Mr. Gerald Shannon, Mr. Stan McRoberts, and Mr. Maxime Faille.
Senator Kelleher: Mr. Chairman, before you introduce the witnesses, I should like to have it on the record that I am counsel to Gowling, Strathy & Henderson; consequently, there would be a conflict of interest in my serving on the committee, although I did not take part in the project and never saw the report of the project until it was made public. Having declared that conflict, I wish to say that I will not take part in the proceedings, but shall be here as an observer only.
The Chairman: Senator, I am sure the fact that you are their counsel would not colour your views.
Senator Kroft: Mr. Chairman, although Senator Kelleher has declared a conflict of interest, I would still welcome his participation at this hearing.
The Chairman: Mr. David, would you please proceed.
Mr. Guy David, Partner, Project Leader, Review Team, Gowling, Strathy & Henderson: Thank you for having invited us to speak with you today on the EDC review. The members of the Review Team have already been introduced by the Chairman.
The primary objective of the review was to assess EDC's operations and success in discharging its mandate in light of the 1993 revisions to the act. With those revisions, there was a legislated requirement for a review after five years. EDC was given a number of new powers to discharge this expanded mandate, including the power to make equity investments, to engage in leasing, to provide domestic financing and domestic credit insurance. In light of the growing importance of investment in relation to trade, FDI, both FDI in and FDI out, EDC has also interpreted its broadened mandate as including support of trade related investments.
EDC's capabilities in international trade and project financing are widely recognized and respected in the Canadian financial community as well as internationally. Institutions such as the World Bank, IFC, and the regional development banks, such as EBRD and IADB, all recognize EDC's capabilities, especially in the areas of risk management and general financial talents and skills.
EDC has developed a unique blend of commercial culture and entrepreneurial enthusiasm while maintaining a sense of public service responsibility as a Crown corporation. However, in the review we found that EDC's commercial orientation is creating tension with those who believe it should observe the same standards of accountability as do other government agencies. On the other hand, we also found that EDC's strong competitive ethic leads to tension with private sector players who believe that, as a Crown corporation, EDC enjoys unfair advantages and should not be competing with them. Both the banks and the insurance companies make that point.
EDC's own enthusiasm for rapid evolution into new lines of business is also beginning to grind a little against the natural limitations of a Crown corporation. That has created tensions with government departments, which in some respects would prefer a less aggressive interpretation of the corporation's mandate. We found EDC to be fundamentally different, though, from the private sector financial institutions with which it competes -- and also cooperates, it must be said. EDC is ultimately driven by its public mandate to support trade and to develop trade and increasingly to develop capacity for engaging in trade.
By contrast, it is clear that the private sector financial institutions continue to be driven by their need to make a return for shareholders, providing whatever financial products will achieve that.
In short, EDC is a highly successful niche player in the Canadian financial services industry. It is unique and it enjoys strong support and loyalty from its customers, the Canadian exporters.
[Translation]
In view of the strong support enjoyed by EDC from the exporting community and the lack of compelling arguments to constrain its activities, we are not recommending that any of EDC's new powers be withdrawn.
However, in recognition of the accelerated pace of EDC's evolution towards a greater commercial orientation since 1993, we do recommend that certain of EDC's operations be placed on a purely commercial footing. In particular, except for project equity investment, we recommend that EDC's equity investment power be undertaken solely through a taxable subsidiary that operates on commercial principles.
We have made a similar recommendation with respect to EDC's leasing powers. We believe this will result in EDC taking a more strategic approach aimed at developing capacity, rather than a transactional approach in the deployment of these powers. While we are impressed by EDC's performance and the vocal support of its clients, we are quite concerned about the slow pace of development of Canada's trade finance capacity beyond the walls of the Corporation.
Canada is far too dependent on trade for its economic well-being to place excessive reliance on a single financial institution. Thus, a primary objective of the review has been to recommend changes that will augment and diversify Canada's trade finance capacity. Some of these recommendations are directed at inducing greater participation by other financial institutions, while others support proposals for new initiatives by EDC.
[English]
We are particularly concerned about the limited participation of the Canadian banks in medium- and long-term trade finance, and in financing Canadian-led projects. Therefore, we have recommended that the government create a guarantee facility to support greater participation by the banks in officially supported transactions. It should be housed in a small agency separate from EDC so as not to compromise the current role and future evolution of the corporation.
In 1993, the Export Development Act was amended to permit EDC to provide domestic credit insurance as well as insurance on foreign receivables. That was done on the ground that the domestic market was not being fully served. Exporters, particularly SMEs, found it very inconvenient to manage more than one insurance company relationship. The result has been that EDC's domestic business has flourished, but domestic service providers, both foreign-owned credit insurers and domestically owned factors, have objected to unfair competition. We deal extensively with that issue in the report.
Of particular concern is the maintenance of adequate competition and capacity in the supply of domestic credit insurance. If EDC were removed from the domestic market, we are not satisfied that this would be the case. Therefore, after careful consideration, we did not recommend that EDC withdraw, but we recommended that EDC encourage further development of domestic institutional capacity. Once adequate capacity has been created, then the corporation should withdraw on terms that do not undermine the convenience of current arrangements to small and medium enterprises.
Based on our consultations, there appears to be a consensus that EDC should provide additional disclosure in some areas. It is acknowledged that the release of information cannot override the rights of exporters to protect commercially confidential information and that disclosure should not adversely affect exporters' competitiveness.
We have recommended that EDC adopt a policy of releasing certain specific information on a regular basis, such as the name of the borrower, the country, the name of the exporter and the amount and type of transaction involved.
Our recommendations are listed in their entirety in the last chapter of our report. I should like to provide a brief summary, if I may, of the main thrust of our recommendations, or in some cases the findings on which they are premised:
First, EDC's mandate should be restated to more accurately reflect its current operations and strategic direction.
EDC should not be constrained in its evolution towards a more commercial orientation.
EDC's commercial orientation should be recognized in the administrative structure of its relationship with the Government of Canada. By that I mean that EDC should be moved from Part I of Schedule III to the Financial Administration Act to Part II of that Schedule. In conjunction with that change, EDC should shift to a private sector auditor in lieu of the Auditor General of Canada.
In keeping with EDC's commercial evolution, non-traditional powers such as non-project equity investment and leasing should be undertaken in subsidiaries that operate solely on a commercial basis.
EDC's important market development initiative in the field of domestic credit insurance should not be discontinued until the domestic private sector is sufficiently developed. EDC should intensify its efforts to achieve that objective.
We recommend that a number of initiatives be undertaken by EDC to further develop Canadian capacity to finance international trade and investment. These would include: fine-tuning cooperative programs with the banks that are currently underutilized to make them more attractive; sharing country risk assessments; greater use of asset management and securitization to leverage EDC's own balance sheet as well as diversify risk; distributing products and services through the banks' branch networks; and, in agreement with EDC's request, having direct representation in foreign markets where the business volumes warrant.
Recognizing that EDC competes with domestic financial institutions, a guarantee framework for bank medium- and long-term finance could not be provided effectively by EDC unless EDC itself were to withdraw from direct lending, which we do not recommend. Nevertheless, we agree with those who suggest that significant benefits might be achieved from such an arrangement. Accordingly, we have recommended that a bank guarantee arrangement be provided by government on a cost-recovery basis.
Recognizing that, despite its commercial orientation, EDC is nonetheless a government institution, Canadians expect, and told us, that EDC should meet higher standards of public accountability and transparency, as well as environmental and human rights standards, than currently apply. Standards that we believe would be appropriate are included in our recommendations.
[Translation]
In closing, I would like to say that EDC's growth since its mandate and powers were expanded in 1993 clearly demonstrates that the EDC is responding to the needs of its clients.
Customer satisfaction ratings presented by EDC -- the results of focus group research and the survey conducted by this review, as well as anecdotal evidence presented during consultations conducted across Canada by our review team -- generally convey a strong sense of satisfaction with EDC's performance on the part of those who are knowledgeable about the EDC.
The members of our review team and I would be happy to answer any questions you might have.
[English]
The Chairman: Before we go to questions, I should point out that this is an anomalous hearing in the sense that, while you have many recommendations, we will only know if they have been used or implemented when we see the forthcoming legislation. Obviously, we will have to revisit this matter in four or five months, or whenever the legislation is enacted. Of course, this is a review and we want to receive whatever information we can, but the real hearing will have to be held after the legislation comes out.
With that in mind, I call on Senator Tkachuk first and then Senator Angus.
Senator Tkachuk: Why was the recommendation made that the Auditor General not be the auditor of EDC but be replaced by someone from the private sector, and who would make the appointment of the auditor?
Mr. David: To answer the second part of your question first, the appointment of the auditor would be made by the board of directors of EDC and approved by the shareholder, which would be the Minister of International Trade.
As to the reason the recommendation was made, we noted that EDC had won the Auditor General's award three out of the last five years. In the last few years, or perhaps even this year, they have had the five-year review by the Auditor General under the Financial Administration Act. It occurred to us that if EDC were to be moved to this lighter regulatory schedule, which is Schedule II of the Financial Administration Act, it would then be allowed to have a private-sector auditor. We thought some benefits might accrue to EDC by being subject to the rigors of a private-sector financial-institution audit as opposed to a government-institution audit.
Senator Tkachuk: So the recommendation would be made by the board of directors. That is a trend in the government right now. We had that argument with the Canada Pension Plan, where the board of directors appointed the auditor and obviously had influence. In your particular case you recommend they have influence on who the auditor is, but yet, theoretically, the auditor should be reporting to the shareholder, which is the Government of Canada, or to the minister or to the members of Parliament, as to what the financial performance of the corporation is. It always seems like a conflict of interest when the board has anything to do whatsoever with appointing their own auditor to report to them.
Mr. David: That is the inherent conflict of audit firms. I am not an auditor myself, but you certainly do have a relationship with the management of the company. You have legal responsibilities and professional responsibilities to the shareholders. That situation would not be different in the case of EDC. The main reason why I would recommend that the appointment be made by the corporation's board of directors is that I would expect they would run a selection process, a beauty-contest type of selection process that would evaluate submissions from several firms and make the decision on that basis, as opposed to the types of considerations that would arise in the case of a strictly governmental appointment.
Senator Tkachuk: I do not agree with you on that recommendation, but it is something that we can have further discussions on.
You make a recommendation regarding section 10, amend the act to remove "directly or indirectly" and add "investment". Why did you make that recommendation?
Mr. David: I will deal with "investment" first. Support of investment is not dealt with specifically in EDC's mandate as presently stated, but it does form a very important element of EDC's strategic direction, as well as its own internal interpretation of the mandate. Given that fact, we believe it should be stated expressly as part of the mandate. If this is done in legislation, there can be a debate at that point as to what extent should EDC support investment and where would be the limits on this.
In terms of the "directly and indirectly," it is a bit of a related issue as well. We note that EDC has very specific powers to do a number of things. It occurred to us that it was very hard to imagine going any further upstream in terms of discharging your powers because of the indirect benefits that would be derived as opposed to simply deploying one of the stated powers which would be doing something directly. In other words, we felt that the word "indirectly" broadened to an extent that was almost incomprehensible the scope of these powers and felt that if there was anything missing from the enumerated powers, then it could be added specifically, but it should not be justified under the rubric of indirectly achieving benefits. It was primarily a concern with the extent to which EDC could intervene in the domestic financial sector.
Senator Tkachuk: Did the Alliance of Manufacturers and Exporters in Canada not oppose that particular recommendation?
Mr. David: AMEC did oppose that, and certainly EDC opposes that. They have strong reasons why they oppose it. This is something that they wanted to obtain in 1993 and they did.
Senator Tkachuk: The alliance is their biggest client base, I would say; the people representing the alliance would be the people doing business with EDC on a regular basis; right?
Mr. David: That is correct. We looked for evidence of transactions that were indirect that could not have been done but for the fact that they would be justified as indirectly creating benefits or as an indirect use of powers. We did not find any evidence of that type of transaction. In other words, it appears that everything that EDC has done in the last five years has been done directly.
Senator Tkachuk: Just because it has not been done, we should therefore remove it; right?
Mr. David: Yes, remove it, because in our view it broadened the mandate to an extent which we had trouble delimiting or scoping out.
Senator Kroft: This committee has been and continues to be preoccupied with financing and opportunities for development for small and medium-sized businesses. Could you comment on what you feel the contribution of the EDC has been? I would ask you to particularly focus on this area and whether you think it has accomplished something that might not otherwise have been done had it been left to the banks? In our work we continually raise the question whether or not in other financial service areas the support for small and medium-sized business is adequate. perhaps we can explore this area a little bit.
Mr. David: We devote a whole chapter of this report to small and medium-sized enterprises. EDC has done a very good job in expanding its services to SMEs; they have done that, and made great progress in doing it, over the last five years. If you read the EDC annual reports, as we did over the last five years, you will see that the progress is graphic in terms of number of transactions supported, the number of businesses served and that type of thing, and the number of co-operative programs that can be offered or availed of through the banks.
That having been said, we also concluded -- and this is a little paradoxical --that the SME market is woefully underserved in the trade finance area. EDC cannot do it all. There is a great lack of awareness of the financial support that is available either through EDC or its co-operative initiatives such as North Star Finance, which was largely developed by EDC or with EDC's help. There was a survey and perhaps Mr. Faille could go into that.
Mr. Maxime Faille, Lawyer, Project Assistant, Review Team, Gowling, Strathy & Henderson: Those SMEs who have had the pleasure of doing business with EDC have been quite satisfied in recent years. The survey we commissioned indicated close to an 80 per cent approval rating amongst those SMEs who are EDC customers. It remains a small group unfortunately. By our calculation, only about 5 per cent of SME exporters are receiving EDC support. It is correct to say that the reason for that is the lack of visibility of EDC.
The Canadian Federation of Independent Business did a study in 1996 that provided some startling figures. For instance, 27 per cent of companies with fewer than 100 employees that did some exporting to the United States had never heard of EDC. The figures go on, and they are quoted at page 95 of our report.
EDC has made tremendous strides to make its services available and amenable to SMEs, but it has not penetrated the market to the extent that it should.
Senator Kroft: Would that not be attractive business for EDC? It strikes me as almost a made-in-heaven arrangement, since we look to small and medium-sized businesses so much in our economy. Export opportunities are something that we are searching for, and companies are searching for. EDC is providing a highly valued service, and yet it has a penetration level of only 5 per cent for companies that can least afford either the capital or, on the insurance side, some of the inherent risks. There is an incredible gap there. I have trouble understanding that.
On page 86 of your report it appears that there are a few programs, smaller export or medium-term export financing guarantee framework and working capital-risk-sharing guarantees that are joint programs. You mentioned North Star. This is in that same area. They are working jointly with banks in the private sector. The suggestion is that those are not working out very well. There appears to be a huge opportunity in need in the small and medium-sized business area that is not being met by either EDC or by the combined EDC commercial bank area.
Mr. David: That is not an unfair statement. To the extent that EDC can develop a greater number of off-the-shelf products, and products that can be marketed through the banks, then it will be able to increase the level of service to SMEs. EDC is handling a fairly large volume and it continues to streamline its operation. We are talking here about an extremely large increase in business which leads us to think that the way that ultimately will be done is through the branch network, either on a marketing basis or on risk-sharing, on shared programs. To date, the uptake on these offerings has not been what it could be, either because they are not being pushed by the banks or because each branch has so many financial products that it can offer and manage that it does not take up the EDC product offerings. There are a number of reasons for this.
Senator Kroft: A lot of the companies that we would like to be seeing developing are technology companies. You might broadly categorize them as the information type of industry. EDC is traditionally focused on harder products or physical exports. Do you have any comment on how it does in the knowledge-based industries generally and then bring it back specifically to small technology companies in this area?
Mr. David: This is not an area that we obtained specific information on in terms of knowledge-based industries. We did focus a little bit on services and had a preconception that EDC was less likely to finance services than it was to finance the exports of goods. That was born out in the review.
In terms of knowledge-based industries, while we did not focus on it specifically, none of the big exporters that came to us in the consultations you could say were KBIs. That having been said, you probably know the BDC does have a specific focus on KBIs, as does Industry Canada, and the BDC is working to develop co-operative programs with EDC where it would bring its client to EDC and assist in mobilizing EDC support for the KBI sector.
Senator Kroft: Would you draw any parallels to the way in which financial institutions see BDC and EDC in the marketplace in terms of fairness in competition or otherwise?
Mr. David: We did not make any inquiries concerning BDC. None of our scientific research dealt with BDC. In fact BDC did not come up in our consultations other than the specific consultations with BDC itself and other government agencies and departments. So we would not wish to comment on that.
Senator Kroft: You would not have had the impression that amongst the banks there was a linkage in their minds between the two institutions and an interventionist type of role? I am not looking for trouble; I was just curious to see whether it came up.
Mr. David: I do not recall. Perhaps one of the other members might recall.
Mr. Stan McRoberts, Research Economist, Review Team, Gowling, Strathy & Henderson: Not BDC, no.
Senator Kroft: It strikes me as strange, because a lot of the small business companies that are the clientele of BDC would, particularly on their export activities now that EDC is on the domestic side, be the logical users of the services of EDC as well, but if it is not an issue in your minds or in the report, I do not want to create something that is not there.
Mr. David: Clearly, BDC takes domestic risk primarily whereas EDC takes foreign risk primarily. That is the big difference between the two. EDC is maybe starting to take more domestic risk than it did in the past. Maybe there is a bit of an overlap now between BDC and EDC. The ideal situation would be for them to work cooperatively and seamlessly, but not to have overlapping in their service offerings.
The Chairman: I want to make sure I have the basic given premises. First of all, is it a fact that EDC is able to borrow in the market, not at commercial rates, but at sovereign rates?
Mr. David: Yes.
The Chairman: They do not pay income tax?
Mr. McRoberts: Correct.
The Chairman:: As far as we know, there is little or no prudential or conduct-of-business regulation, and you say yourself there is a lack of transparency. There does not seem to be an obligation to provide the shareholder with a positive rate of return. If these givens are acceptable to you, why would any bank want to go into competition with them?
Mr. McRoberts: You have to look at EDC as a combination of two banks, one of which is a commercial bank. It is really two banks in one. Its commercial operations are what support the less than fully commercial activities of the entity.
One asks whether the commercial banks would want to become involved. It is a very interesting question. Among all the G-7 countries, Canada is the most dependent on trade, and yet its commercial banking sector is the least involved.
The Chairman: Because they have government competition.
Mr. McRoberts: Yes, that is the basic premise. Other countries support their financial sectors, their banking institutions, through what are in essence credit guarantee programs. Their export credit agencies are guarantee agencies; they are not direct lenders.
The Chairman:: Why do we not do the same in Canada and, let us say, privatize EDC?
Mr. McRoberts: We have not gone that far and I do not think we would recommend that, because our financial institutions are not that well developed. EDC is by far and away the best trade-finance operation in the country. It would be a mistake to undermine that. Having said that, we think it is a serious problem that the commercial banks are not more actively involved.
The Chairman: Why are they not more actively involved?
Mr. McRoberts: The banks claim that the reason for that is that Canada supports commercial lenders in a way that is different from what is done in other countries. In other words, while EDC does in fact have a program in support of commercial banks -- we are not talking about medium-term trade finance, we are not talking short term, and to some extent project finance -- we do not support commercial banks the way other countries do.
To take the U.S. as an example, the Ex-Im Bank, the credit guarantee agency in the United States, supports commercial lenders on a residual lending basis. In other words, to the extent that the risk is unacceptable from the standpoint of a commercial lender, but is nevertheless deemed to be in the national interest, Ex-Im Bank will provide a guarantee to support the activity.
In Canada, we do not operate quite the same way. EDC is a direct lender, in some sense in direct competition with commercial lenders. It does in fact have a program that is theoretically available to commercial lenders who wish to have a guarantee support where it is appropriate, but it is less generous than what is available in other countries. If we established a level playing field between the way Canada supports commercial lending in the trade finance area and the way other countries do it, it is an open question whether the banks would take it up. That is what the banks have told us. They have said that the reason for their lack of participation is the lack of activity. That is widely accepted by the clients of EDC, and the banks themselves admit that commercial lenders are not sufficiently active in this area. The banks acknowledge it. They say that the way to fix this is to establish a program that would provide the same kind of support for them in Canada as is available to them in other countries.
It is worth noting, and we have a table in the report that shows it, that the Canadian banks are active in the area, but it just so happens that they are active in the United States, which strikes us as a bit of an anomaly. One can explain that in part by the fact that, obviously, the most important money centre is New York, so there are locational advantages to being a participant down there. The banks note, however, that in the U.S. they also have access to Ex-Im's support.
All of this must be taken with a grain of salt, because EDC itself points out that the amount of credit activity that is officially supported has fallen from about 70 per cent to about 20 per cent. So this form of activity is much less important now than it was even five or 10 years ago. One may question whether or not the banks are really serious when they say that in fact they would become involved. Our response is to say: Well, why not put up the program, make it conditional on their demonstrating some genuine enthusiasm for becoming involved in the business, and see what they do?
The Chairman: Well, we will be having the banks in, and we can put that to them.
Senator Meighen: I wonder if you could you amplify the reasoning in a paragraph on page 4 of your opening statement. You are talking about the domestic credit insurance situation, which is covered in your twelfth recommendation. I have difficulty understanding how it will play out. As I read your suggestion in the third paragraph on page 4, there is now adequate competition and capacity in the supply of domestic credit insurance. The paragraph begins, "Of particular concern is the maintenance of adequate competition and capacity..." I assume that your finding was that there is adequate competition right now.
This is the area that the banks really see as their playing field, rightly or wrongly, and they feel that the EDC should not be there. However, you have recommended that EDC not be removed, because you do not think adequate competition would be maintained, if they no longer played there, at least under present circumstances; therefore, you say that EDC should take it upon itself to develop further domestic institutional capacity, as I read what you are saying. Is that what you are recommending, that EDC take on the job of le père de famille and encourage its competitors, and then when its competitors become strong enough it should act in an altruistic way and pull out?
To me, that just does not seem to hold water, but maybe I am not reading it in the right way.
Mr. Faille: I think EDC has reacted favourably to this recommendation. This was a new power provided in 1993 to get into the domestic credit insurance business, which some would argue is somewhat tangential to its primary function of supporting exporters, since we are talking about insuring, not foreign credit, but domestic credit. Nevertheless, a case was made and a number of exporters made a number of arguments as to why it would be a lot easier for them if they could go to a single organization; given that they were insuring their foreign receivables with EDC, it would certainly be a lot easier if they could also insure their domestic receivables with that same agency and not have to deal with two policies, and so on.
There was a real concern, primarily among SMEs, that the service was just not available for the volume of business that SMEs were into. That was the justification for EDC's involvement in 1993.
Since 1993, we have seen a development of the market for domestic credit insurance, which is not a product that has been taken up with great relish in this country for historical reasons. However, since EDC's involvement in this area, we have seen a significant growth in the area, which suggests to us that, ultimately, EDC ought to be able to exit this market as there are more suppliers in the market. We are concerned that we are not there yet. In other words, we do not feel that this is necessarily an area that EDC should be involved in, given its mandate of supporting Canadian exports from Canadian exporters, since we are dealing with domestic receivables.
That being said, the arguments that were put forth in 1993 are valid at this time, but, over time, it is our belief and hope that the strength of those arguments will likely wane and that this is something that can probably be taken up by the private sector. That is where we enter into the whole balancing act of having a Crown corporation provide certain services, particularly to small and medium enterprises where there is a void and the question of whether or not that creates undue competition with the private sector. Obviously, ideally, the private sector will take this up. The problem is that at this time the private sector has not demonstrated the capacity to do so.
I guess our solution is to have EDC stay in the market at this time and help develop that domestic capacity; and just to close on that, when we say "domestic capacity," the players involved in credit insurance in Canada right now are foreign-owned and there is not a true domestic capacity at this stage. So that is where we see EDC playing a role, and EDC has responded positively to that idea.
Senator Meighen: Presumably, in terms of EDC's withdrawing, if the scenario unfolds as you hope it will unfold, either EDC will have to fall on its sword or someone will have to push it onto a sword.
Mr. Faille: You may be quite right.
Senator Meighen: The legislation that will come down and we will have to is see if there is some provision for some review of this situation.
Mr. David: We are trying to signal, too, to the domestic market that what we are talking about is a serious Canadian domestic player in that market. We are not saying that from a nationalistic perspective. The risk assessment and the credit decisions on this insurance should be made in Canada by an institution that is taking on Canadian risk, whereas now the number of foreign companies that are serving the Canadian market have a certain window for Canadian and other risks. They also have risks in their own countries. The amount of business that they will write in Canada is largely made by risk managers who are based elsewhere than in Canada.
The report signals to the domestic market, be it the banks through subsidiaries, be it the existing insurance companies through a broadening of their operations or be it through others who form a domestic company, we are trying to signal that in the long term, if a domestic player steps up to the plate, then there would be a good policy argument to move EDC out of that market.
Senator Meighen: Presuming there will always be some non-domestic players?
Mr. David: Absolutely. It is beneficial and useful for them to be there, but there should be some domestic players as well.
Senator Meighen: May I ask where EDC itself re-insures its primary credit insurance cover?
Mr. David: I do not think that they re-insure.
Mr. McRoberts: I do not think so either. They do not re-insure; they take on the risk.
Senator Meighen: If they did, I would assume it would be abroad.
Mr. David: Yes.
Senator Meighen: It would have to be, wouldn't it?
Mr. David: Yes.
Senator Meighen: I have one final question, if I may, on Recommendation 32. You suggest that environmental impact assessments be required concurrent with EDC board decisions. EDC was not in favour of that because they claim they do not play the role of project sponsor.
What is your response to that? If EDC is permitted to take a 25 per cent stake in projects, as we were discussing, could you not argue that that is control, that 25 per cent may in certain circumstances be control of a project, an amount to project sponsorship?
Mr. David: I will ask Mr. Shannon to respond to that question. Mr. Shannon has just spent the last couple of weeks in Seattle, so he is familiar with the issue.
Mr. Gerald E. Shannon, Chair of Stakeholder Consultations, Review Team, Gowling, Strathy & Henderson: I am not aware of the concerns that EDC may have expressed when they met with you recently. However, where corporations are involved in areas where government policies are appropriate, such as environment and human rights, obviously a balancing act must be achieved.
We met on a number of occasions with both exporters, AMEC in particular, with EDC, and with various non-governmental organizations who had a stake and who had expressed some environmental concerns. We were trying to help find some way to ensure that the corporation gave more disclosure on projects that it was undertaking without going so far as to require it to be covered by the Access to Information Act, which we thought would not necessarily be a step forward.
Our objective was to try to meet some of the legitimate points. For example, some of the non-governmental organizations expressed concerns about the environmental dimensions of some projects with which the corporation might be involved. The recommendations you see reflect our attempt to find a balance between the conflicting interests of the corporation, the exporters, and the non-governmental organizations.
Senator Oliver: My biggest concern with respect to your report and the EDC is the relationship with our banks. I have heard your response to the questions that were put to you by our Chairman and Senator Meighen. It seems to me that the biggest problem with the EDC and exporters in Canadian business is that our Canadian banks are not afforded a fair opportunity to compete with the EDC, because, as our chairman said, the EDC does not pay taxes, it is a Crown corporation, it is protected, and so on. That is a major concern for our Canadian chartered banks. I think you had a golden opportunity to lay that problem to rest in your report.
How can the EDC, or the financial sector, be modified in order to increase Canadian banks' participation in export financing?
Mr. Shannon: We went out of our way to engage the banks in this review. We had hoped to meet collectively with all the banks to determine the issues from their perspective, but in the end we met individually with the banks. We are familiar with the arguments made about non-taxes and being able to borrow at the government rate. Those issues have been aired by banks and insurance companies and others. It is a fact of life that these conditions do exist.
This time around we had hoped to find some way of ensuring that the banks and the corporation would find common ground -- the EDC being a Crown corporation, the banks having a big stake in this economy -- in order to be of maximum assistance to exporters. That is what ties them together in the context of this review. The debate involving the banks and the corporations has gone on now for 15 years. We tried very hard, and we did eventually meet with the banks.
Senator Oliver: What did they say? Did they not express the concerns that we have all heard so many times?
Mr. Shannon: We did discuss those concerns. The guarantee facility we put forward was really an effort on our part to find a way that the banks could be more appropriately engaged in the financing of Canadian exports.
Senator Oliver: You said earlier that a serious risk is not handled by the regular banks, but goes to the Ex-Im Bank. Does Ex-Im price to risk? If so, what are the ranges? Do they charge 5 per cent, 6 per cent or 7 per cent for severe risk?
Mr. McRoberts: The pricing for official credits is determined by the OECD consensus; the group of export credit agencies from developed countries agree on a set of rates -- adjusted per country -- that are intended to establish a level playing field. Does that respond to your question?
Senator Oliver: No.
Mr. David: They were priced then on the basis of the OECD consensus rate for loans to borrowers in this particular country.
Senator Oliver: Would chartered banks be able and permitted to charge the same rates?
Mr. David: Sometimes those rates are intended to reflect a commercial rate. The whole intention of the consensus is to get all the official credit agencies charging commercial rates so that as a group they are not undercutting the private sector. In fact, sometimes those rates are more expensive than private-sector rates, while sometimes they are less expensive. The OECD consensus is not an organization that is very lithe in its price setting. It is very slow and takes quite a bit of time to make adjustments.
Mr. McRoberts: In order to receive support, a bank must charge the rates that are set out in the consensus.
Senator Oliver: I understand that. What must be done in order for our Canadian banks to participate more fully in export financing?
Mr. McRoberts: According to the banks, they require a program of guarantees comparable, for example, to that which was provided in the United States through Ex-Im Bank and other export credit agencies. We cannot verify that in fact the banks would respond with vigour if such a program were created. That is just what the banks have told us is necessary.
Senator Oliver: Did the banks also tell you that we do not feel that we need a Crown corporation in this sector any longer, that we have Canadian banks that are sophisticated internationally and in trade finance and that have done quite well on their own without having to compete unfairly with the Crown?
Mr. McRoberts: The banks did not go that far.
Mr. David: I think they told us the opposite. I must underscore Mr. Shannon's point. It took a great deal of effort on our part to get the banks to participate in this review: they had other things on their agenda at that time.
The Chairman: They are quite eager to come and talk to us.
Mr. David: They have developed more eagerness with the passage of time.
Senator Oliver: Were the mergers on the table at the time?
Mr. David: Yes. The Canadian Bankers Association did not have a position. Between the Schedule I and Schedule II banks there was a divergence at the CBA level, so we could not receive a unique CBA position. We finally had the banks out individually after the formal consultations were closed. We had meetings with them in early February or late January of last year.
Senator Oliver: I am sorry you did not have that co-operation, because I feel your report has missed a golden opportunity to try to bring to rest a major problem, which Mr. Shannon has said has been going on for over 10 years.
Mr. David: We have addressed this. The major issue over the last 10 years or 15 years has been the lack of a guarantee facility. We have acknowledged that the EDC and a competitor cannot both offer that facility at the same time. On behalf of a customer, a bank brings a loan to the front door for the guarantee, EDC turns it down, so the customer walks around to the back door and EDC does the loan directly. That cannot work.
Senator Oliver: The banks say that is occurring now.
Mr. David: There is a lot of anecdotal evidence about that type of thing, but it is hard to document. We have said it should be a separate agency, but we have said a few other things in this report that are lost in the fine print. There are structural differences in the Canadian financial sector, as compared to other countries. Those differences have been good for domestic competition and good for the development of the financial sector, but have weakened Canada's position under trade finance. I am referring to the absence of the linkages between commercial companies and financial companies in Canada.
Senator Oliver: Like they have in Europe and in Japan?
Mr. David: Yes.
Senator Oliver: Did you recommend that that should be changed to reflect the current situations in Europe and Japan?
Mr. David: After two years of study, the MacKay Task Force produced approximately 12 volumes of recommendations. Given that context, we were not so bold as to make a recommendation that would affect the structure of the financial system, but we did suggest that the task force of the Department of Finance could look at this issue from the point of view of trade.
It is clear that in Europe and in Japan, and to a certain extent in the U.S., either the industrial company will lead the bank into that foreign market or the bank will lead one of its commercial partners into the foreign market, but the two of them have a symbiotic relationship.
Senator Oliver: Do you think that is a good thing?
Mr. David: Yes, I think it is a very good thing, and it does not exist in Canada.
Mr. Shannon: The bottom line is the Canadian exporter. That is what the corporation is there for. We all want the Canadian exporter -- particularly the SMEs, but also the larger corporations -- to have an opportunity to compete abroad and sell their goods and services. That is what we are all about. You are quite right, senator, that there is still a debate to be had looking at banks versus EDC. However, in that debate, do not lose sight of the fact that the exporter is the one who avails himself of all those services. When you re-juggle the building blocks, bear in mind that the end-user is the raison d'être of the organization.
The Chairman: Could you for the record give us a brief understanding of the Canada Account and some assessment of the decision-making processes that go into it?
Mr. McRoberts: The Canada Account is a financing mechanism covered by the Export Development Act. It comes into play when EDC concludes that a particular transaction entails too much risk for it to handle. Such loans can be concessional or non-concessional. Concessional loans are at quite low interest rates, while non-concessional loans are essentially commercial.
Such transactions are processed as regular transactions right up to the board of directors, where they are rejected for the corporate account. After that, transactions below $50 million go to the Minister of Finance and the Minister of International Trade. Transactions above $50 million must go to full cabinet. I would point out that such activity is less frequent than it was five or 10 years ago.
The Chairman: Is the Canada Account the government's way of doing business when it does not seem to be good business?
Mr. McRoberts: When it is not good business for EDC, yes. For example, EDC must maintain a reasonably balanced portfolio in terms of concentrations in particular countries. It can become fully extended in a particular country, and therefore it shuts the window. There may nevertheless be transactions that the government considers appropriate, desirable and in the national interest, and the government may wish therefore to avail itself of the Canada Account to finance them.
The Chairman: Is the Canada Account used basically for political considerations rather than for commercial considerations?
Mr. Shannon: The government may have concerns that go beyond what EDC must normally consider in making a transaction. It is a matter for government to conclude whether, for example, the sale of a reactor system to country X is a desirable thing or not. Likely EDC would not want to see that on its own books. The government must decide whether that project is worthy of government support for a variety of reasons, be it industrial policy or foreign policy or whatever.
The Chairman: Thank you very much for coming. It was very interesting. I am sure we will call you again after the legislation comes out to see how many of your recommendations have been incorporated.
Senators, our budget was considered by the steering committee last night and submitted as a draft to the Internal Economy Committee this morning, which I attended. We should adopt that budget before it goes to the Internal Economy Committee tomorrow. The clerk has distributed the budget.
Our committee is in an anomalous position, because our fiscal year-end is the end of March and we need money to operate until then. Internal Economy said, "Show us your budget. We will give you half of what you need now to last you until the middle of February, and then we will reconsider it."
The clerk and I went over this with Senator Tkachuk and Senator Kroft, who is also on the Internal Economy Committee.
Does anyone have any questions, because some of the items in the budget are guestimates. We will stay another five minutes to talk about some potential travel, but I thought we should have something in the budget just in case. I have no idea what our communications bill will be.
Will someone move the motion?
Senator Oliver: I move that the proposed budget be adopted.
The Chairman: As we do not need a seconder, is it agreed, honourable senators?
Hon. Senators: Agreed.
The Chairman: Carried.
The committee continued in camera.