Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 2 - Evidence, March 3, 2009
OTTAWA, Tuesday, March 3, 2009
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 5:20 p.m. to review and report on the 2008 Legislative Review of Export Development Canada, tabled in the Senate on Tuesday, February 10, 2009.
Senator Consiglio Di Nino (Chair) in the chair.
[English]
The Chair: Welcome to the meeting of the Standing Senate Committee on Foreign Affairs and International Trade.
Welcome to the meeting of the Standing Senate Committee on Foreign Affairs and International Trade. The committee is currently examining the document entitled The Legislative Review of Export Development Canada — December 2008.
The objective of the legislative review is to assess how Export Development Canada is evolving and should continue to evolve in the future to address the competitive dynamics and demands of international trade on behalf of its stakeholders, and to make recommendations where appropriate, including possible changes to the Export Development Act.
Appearing before the committee today is Ms. Diana Smallridge, who is President of International Financial Consulting Ltd., a position she has held since June 2000. Ms. Smallridge is a well-known expert in the area of oexport- import banks, export credit agencies and development banks, and has 20 years of experience in the field. Ms. Smallridge was project co-leader with Malcolm Stephens.
Welcome to the Senate. We will begin with opening remarks by Ms. Smallridge, and then we will move to questions from our committee members.
Diana Smallridge, President, International Financial Consulting Ltd.: Thank you very much, Mr. Chair. I may be a well-known expert in the field, but I am not very well known to this committee. I am very pleased and honoured to be here.
I want to underscore the importance of this review. From a public policy perspective, in terms of accountability, it is important for Crown corporations like EDC to undergo these periodic reviews; but Export Development Canada is also important as a Canadian government-owned institution supporting Canadian firms.
As you noted in your kind introduction, there are such things as export credit agencies and export-import banks around the world. Just about every country has an EDC-like organization, which is how I make my living. In this international sphere, EDC is really in a category by itself; it is the envy of many others, and well respected for not just its flexibility, but also its expertise.
This review has been retrospective for the past 10 years, looking back since the last review and looking forward to see whether the legislation, as it stands, is sufficiently flexible and properly worded for EDC to meet the needs of Canadian companies.
In a rapidly changing global environment and international trading world, it is critical that EDC have the powers, along with the proper accountability, to help Canadian companies meet head on the international competition, and that EDC has access to internationally competitive financial facilities.
As you noted in your opening remarks, our approach in undertaking the review that took place starting last February was about stakeholders. The key stakeholder is obviously the Canadian business community, but taxpayers also are important. EDC's private sector competitors are clearly important, along with civil society. We undertook meetings across the country — held public town hall meetings. We had a dedicated website, as well as one-on-one interviews at the request of stakeholders, and we got a lot of feedback and detailed input.
Our focus was on understanding precisely what Canadian companies need to be internationally competitive. Our recommendations are lengthy, but many of them do not necessitate changes to existing legislation; there were only a few minor points. In summary, we concluded that Export Development Canada's legislation, as it is, has stood the test of time remarkably well over the previous 10 years. Looking forward to the next 10 years, there is very little change required.
Since submitting our report, the world has been facing certain challenges in what I refuse to call a ``crisis,'' because I think that perpetuates the issues. The Economic Development Corporation was given additional powers in Budget 2009, but that was outside our review. Our recommendations will also stand the test of time during these challenging financial and economic times. I am happy to answer any questions senators might have.
Senator Downe: I am interested in the consultations you did across Canada. In Atlantic Canada, it appears that you had only one town hall meeting, which was held in Halifax. Looking at the list of the people in attendance, I find that one third of them were from federal government departments or agencies. Many of them were repeat attendees, such as from the Business Development Bank and Agriculture and Agri-Food Canada. They participated in more than one town hall meeting and, in many cases, in all of them. Your consultation in Atlantic Canada concerns me because, as you know, 95 per cent of our businesses in Atlantic Canada are small- and medium-sized businesses, which are defined as fewer than 500 employees and under $50 million per year in revenue. Could you explain why you did not do more consultations in the region where exports are so important?
Ms. Smallridge: Thank you for that question. Our approach in these consultations was to make ourselves available. We informed the exporting and business communities of our review. We published the information and placed newspaper advertisements of the town hall meetings.
In Atlantic Canada, we held the session in Halifax, but we also made ourselves available for one-on-one interviews with individuals. We made a decision to put video conferences online to allow people to participate in that way. Our job was primarily to get the word out and to let people have their say. Whether they chose to participate, was not in our control. We had tremendous help from the EDC and the BDC people in the region to get the word out.
Senator Downe: I cannot understand why you would have one town hall meeting in Kanata and another one in Ottawa when, for all of Atlantic Canada, you have one town hall meeting. I cannot understand why you would have one town hall meeting in one province with one third of the people in attendance from federal departments and agencies. At that meeting, you did not have any participants from the other three Atlantic provinces. I consider that an oversight of your report.
Senator De Bané: I fully support what my colleague has just said. One of the fundamental characteristics of this country is its federal nature. To have just one meeting for Atlantic Canada does not seem sufficient.
My question concerns a comment at the beginning of your extensive report. Are you able to tell us about the statement that exporting is now less predictable and more complex? Is this because of new emerging competitors or does it involve more than that?
Ms. Smallridge: Thank you for that question. The key issue we were trying to underscore is that firms are operating within a global supply chain. It is no longer simply a case of exporting a good to a country in a single cross-border transaction. Typically, that good is being exported to another country where there is additional value added after which it might be exported to a third country. The complexity occurs when there are many more pieces of the value chain happening. Therefore, companies that participate in the global supply chain are better placed to be an importer of someone else's goods that they repackage with their own piece and export on, with the final end user being quite far away from their piece of the action.
The message we were trying to underscore is that in the global supply chain, the granularity of that activity is much more intense than it was in the past.
As you say quite rightly, competition has increased tremendously. The emerging markets of India, China, Brazil and Russia mean that many other players that are providing quality and price are in competition.
Senator De Bané: Ms. Smallridge, please explain the dynamics of fragmentation and what that means to exporters and their needs. Could you explain the phenomenon that you discuss on page 12?
Ms. Smallridge: It used to be that the support of agencies such as EDC around the world was tied closely to national content. The exporter was required to fill out a form and declare that 80 per cent of the goods had been assembled from Canadian supply and, therefore, eligible for EDC support. That philosophy is changing worldwide and it is no longer a case of ``made in'' or even ``made by'' but rather it is ``conceived by'' or ``designed by.'' In other words, the intellectual property of companies and the value creation is about the designing. The manufacturing is happening in the local country but also as part of this global supply chain.
That has been a bit of the difference in how these export credit agencies like EDC globally are operating, and they recognize that change.
Senator De Bané: I listened recently to an interview with World Trade Organisation Director General Pascal Lamy, who said that some importing firms send letters of credit from banks of the AAA to some exporters, such as in China, but those exporters say, no, thank you very much. Even if the letter of credit is issued by a bank of the highest order, they will not take it. Is it true that such sentiment exists?
Ms. Smallridge: We are doing a study on that very issue. It is unrelated to the EDC but I am happy to answer that question. What makes this crisis unusual, as compared to the Asia or Latin America or Russia crises in previous years is that it involves the developed country banks. The OECD country banks are now in question. Previously, an importer in China, for example, would have been quite happy with the quality of that commitment. That is no longer the case. I am not saying that as a broad statement. There are cases where there is some concern and the WTO is looking at that issue.
Senator Andreychuk: You prefaced your remarks by saying that EDC is a model that others look to. You pointed that out in your report. You also noted some changes, which are more incremental as the world is changing. There seems to be a comment and a recommendation about more transparency.
In my travels, I have met company executives who say it is not quick enough. Sometimes if the company is small, it does not know what levers it might utilize. It takes them too long to find out and when they do, the competition has already come and gone, taking the profit with them.
I am interested in how transparency will improve our ability for take-up overseas. There seemed to be a thread that the government's priorities are not always in sync with what EDC is doing and they need to work more closely. I wonder where the fine-tuning is to come from to make it work. Is it to come from the government side or from the EDC side? I did not understand what you were getting at other than your recommendations, which speak for themselves.
Ms. Smallridge: If I could take your second question first, it is important in the context of EDC as a Crown corporation under the Federal Administration Act at arm's length. The challenge is a delicate balance for the government to be imposing how one needs to do things, yet EDC needs commercial flexibility to be able to respond quickly.
We had comments about both sides of that relationship with respect to what needs to be done, recognizing that balance is difficult to achieve. You do not want an organization in which every transaction it undertakes needs government approval. That would kill the ability for them to do it. However, the government needs to be clearer about its priorities. In terms of the corporate planning process, there needs to be some prior initiative on the part of government to get out the priorities of government under the ministerial responsibility.
In terms of transparency, I think that covers two points. One is transparency as a Crown corporation, but if I understood your question, it was really around awareness in the market amongst Canadian companies. We certainly heard across the country that small companies were somewhat confused between EDC and BDC and there is a need for greater coordination. It is a complex world out there. There should be one person who could direct traffic and tell me where to go. There is an understanding, and I have to say that across the country it was not necessarily consistent, about the various roles people were playing. We had a fantastic person in Calgary who was with the Department of Foreign Affairs and International Trade. She was very much directing traffic and knew precisely who to send people to. That is a model that could be replicated across the country.
Senator Andreychuk: Is the provincial end of that another area that needs coordination?
Ms. Smallridge: Yes.
Senator Andreychuk: Is that working well?
Ms. Smallridge: Again, it is spotty. In some cases there is very good collaboration and in some cases not so much. There is an effort through the federal-provincial-territorial task force to bring coordination, and I was seeing that, but it is not consistent. That has less to do with organization and more to do with individuals.
Senator Grafstein: I want to ask you some cosmic questions and then some micro-questions. How much money do you spend a year?
Ms. Smallridge: How much do I personally spend?
Senator Grafstein: I am talking about Export Development Corporation. What is your budget?
The Chair: EDC is the corporation that retained the services of the company of which our witness is the president.
Senator Grafstein: I just want to know how much the Export Development Corporation spends.
Ms. Smallridge: I will let EDC answer that specifically when they see you next week, but I can say precisely that EDC is not a drain on the taxpayer. They do run a self-sustaining entity and have paid dividends back over the past two years. I do not know where they are this year.
Senator Grafstein: These are questions I will ask them as well, but I am curious about that because the question is how much money is spent. What is the size of the problem? Are we spending enough money and are we properly coordinated?
I speak from my late sister's experience. She started a little export company from her kitchen and she grew it into a worldwide business. She spent most of her time trying to get to the right agency to help her, either from the funding side of it or from the export side.
The whole issue is how much is spent between the EDC and the BDC. Is there one-stop shopping so the small business exporter can punch a button and say, ``I have this problem. I need this type of credit and guarantee. How do I get it done?'' Again, time is money. I would like to be producing my product and selling it, but meanwhile I need this help.
It strikes me, based on all the anecdotal stories I have heard from people who have done the same thing, that there is a deep frustration because they tend to spend more time and energy chasing support than getting support. You are an outside person. What is your view of that?
Ms. Smallridge: Not only am I an outside person, I am a small business person as well. We run a consulting firm. I am an SME services exporter and I happen to be a knowledgeable one. I would say yes, that is a challenge. I can also say — and you know this — that small business people barely have time to sign the cheques, much less track down who they are suppose to be calling. It is an issue. We certainly heard this.
EDC is doing a good job. Maybe it could be better, but certainly it is well known within the exporting community. We had very strong submissions from the Canadian Manufacturers and Exporters association and other associations. There was very little that we could dream up to criticize them on this; we did not hear many criticisms. It may be because SME business owners are just so busy.
Senator Grafstein: You have looked at other models. The one with which I am most familiar is the Export-Import Bank of the United States, Ex-Im, and their Overseas Private Investment Corporation.
Ms. Smallridge: It is the OPIC, or Overseas Private Investment Corporation, yes.
Senator Grafstein: Again, they had the same problem with coordination between the small business exporters, someone who wants to get into the market, who know they have a customer over there. The question is how to facilitate the money they need to cover off the receivables, plus the guarantees and so on.
Based on your experience, which country does this the best and which should be a model for us?
Ms. Smallridge: Would you believe I am sitting in the country that does it the best? I know I am a Canadian, so that may not have any credibility, but I have spoken to probably most export credit agencies in the world and they wish they could be an EDC.
Senator Grafstein: Are we the best in the world?
Ms. Smallridge: Yes. I think that is universally felt.
Senator Grafstein: Really?
The Chair: Ms. Smallridge, I can assure you that your opinion carries weight.
Senator Grafstein: That information comes as a shock.
The Chair: I am glad that, for once, we were able to surprise Senator Grafstein with a response.
Senator Grafstein: Absolutely. It is shocking.
The Chair: I read your report, and you were clear that the world thinks we are just about as good as you can get on this issue.
Senator Segal: I want to ask the witness the question, in a sense, that she is not allowed to answer in her report.
By definition, when you deal with an instrument like EDC, you would analyze it based on the normative criteria for how export support organizations operate worldwide. It is not your mandate to analyze whether, if EDC disappeared, there would be a more efficient or appropriate way to accomplish this work.
For example, if government merely said that when a Canadian bank lends funds to an exporter in an area that is justifiably supportable on a credit-worthy basis, the federal government will indemnify the bank for one third of the risk; end of story. That is, the federal government dismantles the whole process by which risk is assessed, country managers are reporting and instruments are self-supporting, in a sense, and lets the financial marketplace do its job, providing an indemnification, so that you assist our exporters on that critical question of risk, for example.
In the same way as our friends on the far right used to say, if government is doing it, it is wrong, it is better done in the marketplace all the time — and history has proven them remarkably wrong — I worry that if we are not careful, the pendulum will swing in the other direction, which is that only government can do certain things. Because some private sector organizations — largely not in Canada, I hasten to add, but elsewhere — have collapsed in terms of their management of credit, therefore, government is the only answer.
What I am asking is — and if this strikes you as an unreasonable question, feel free to say so — in terms of your broad experience in the area, which is larger than your evaluation of EDC for the legislative review, do you think there is any mix down the road where the private sector, with the right kind of support and indemnification, could be as positive a force as EDC? Alternatively, is the only answer for a country this size that kind of instrument over time?
Ms. Smallridge: That question is difficult, but I will attempt to answer it, I hope, to your satisfaction.
Several years ago, we were invited to New Zealand to look at their export credit system, which they had privatized fully in the early 1980s, along with almost everything government was doing.
We took the approach to analyze whether there were gaps. In other words, were there market gaps so that New Zealand companies were not able to compete internationally because other people had an export credit agency?
Our recommendation was that New Zealand companies needed facilities, but did the government need to set up a brand new institution, bricks and mortar, and hire people? We ended up as a virtual export credit agency where we outsourced all the underwriting and risk assessment to a Danish company, and we basically put a shop window through Trade NZ, that companies could go in and get their export credit facilities. The back office stuff was all done overseas. That model has been an interesting one.
The question of whether, in a competitive world, EDC did not exist, and Canada was to start from scratch with an export credit agency, because there are the U.S. export-import banks of this world and every other country has one — that is a slightly different question than if nobody had one — would there be a need for one. That is a question I could not even begin to answer on the spot. I would have to think about that question.
Senator Segal: By definition, EDC faces the challenging task — which, by the way, I think it performs in an exemplary way — of advancing the public interest of greater Canadian exports around the world, while dealing with a series of competing, on occasion, private interests, which are different companies that may be competing to do the same thing in different parts of the world in various ways.
Based on your own assessment, in terms of the work you have been asked to do specifically for the legislative review, what is your sense of how that potential conflict is managed and how that balance is achieved? Are you comfortable as an entrepreneur who works in other sectors that the balance is well managed? Do you think there might be practices that might improve that process in some way? I am sure the people who work at EDC ask themselves that question all the time.
Ms. Smallridge: Yes, indeed: It is a technical area in the report, but it is under the issue of credit insurance, EDC's most active product line, where there is truly competition with the private sector. There are strong recommendations about greater cooperation and transparency in their accounting.
We received a couple of testimonials concerning predatory competition. Therefore, we have made recommendations, and I know for a fact that EDC has been working on greater cooperation with the private sector. That is of no help to anyone. Canadian exporters do not necessarily benefit from that kind of behaviour; they maybe benefit specifically for that transaction.
As you note, it is a delicate balance to achieve between being competitive and providing world-class services on the one hand, and not being unfair, on the other hand.
The Chair: I thought Senator Segal would lead us to partnering, co-insuring, joint ventures and that sort of thing. There are times when, driven by risk or other factors, that may be a way of achieving certain objectives that may be difficult, or it may be easier for EDC alone.
Does EDC do any of that? What is the experience around the world in that area?
Ms. Smallridge: Yes, EDC seeks to co-insure and re-insure. Internationally, it is an active market of co-insuring and re-insuring large accounts.
EDC is unusual, not only in being the sort of recognized leader in the industry, but along with its Japanese counterpart, it is active in the credit insurance market.
In Europe, that activity was curtailed by the European Commission. As we are not members of Europe, that issue would not have applied to Canada. The issue was a legislative one, where Europe had to get out. Of course, under the current conditions, European countries are looking for new solutions for state-backed credit insurance.
There is no precise answer to your question, except to say EDC seems to be active in wanting to do more in terms of cooperation as we see it.
The Chair: Does EDC do this with other state or public entities instead of private entities, or do they have a mix of private-public ventures? The other question is: Do they do it with Canadian private companies or other insurers in Canada?
Ms. Smallridge: It is a specialized insurance field. The global big players are in Canada, and I know we have one in the audience behind me.
The Chair: That is what I was getting at for tomorrow night, or sometime in the future.
Ms. Smallridge: Yes, EDC is cooperating. We are seeing that. It would be unfair to say that the testimonies we heard from both sides said the same thing. We have heard that it is not a great relationship. There are some challenges there. We have addressed those challenges in the report.
Senator Stollery: Export Development Canada is essentially, as I understand it, an insurance operation for exporters so that exporters are paid. That, of course, is important. This question is really for the EDC: In the current atmosphere, how many claims are being made against the EDC? However, I understand that you are not here for that purpose.
I always think of Export Development Corporation as essentially, exports, but I gather they are now either entering into, or are into, the domestic market as well. This entry is a rather contentious issue with people who are in the private insurance business, who, after all, are their competitors.
I know that the issue has been reviewed in the House of Commons, but I want to know a little more about the justification for the Export Development Corporation becoming partly domestic, the export and domestic development corporation. What is the story there? That change seems a little odd to me. Can you give me a heads- up, please?
Ms. Smallridge: Thank you, senator. Our first recommendation is that EDC not re-enter the domestic credit insurance market unless there are significant changes in the market leading to large-scale gaps in the availability of domestic credit insurance.
We submitted this report. Since that time, there has been a budget and analysis completed on that, which is outside our remit. We did not feel it was necessary at the time of our analysis. However, other minds in Ottawa made a decision through the budget to do so.
Senator Stollery: As you know, we are dealing with Bill C-10 at the moment, the budget bill. I gather that in Bill C- 10, they will temporarily extend the mandate of the Export Development Corporation to include the domestic market.
Let us see what that means. Company A in Canada sells something to company B in Canada, and company B finds itself unable to extend its line of credit, for example, which seems to be of concern. As we all know, Canadian bank reserves are lower than they were because of the value of the assets they hold, and they do not extend the line of credit to a domestic company to purchase from another domestic company. To my way of thinking, this mandate is not the Export Development Corporation's; this is something else. What do you think?
Ms. Smallridge: Senator, I am not sure that I have a comment on that. I will stick to our report, if I may.
Senator Stollery: You talked about this issue in your report. As you said, you made recommendations. I am trying to define those recommendations. You recommend against that, I think you said.
Ms. Smallridge: Yes.
Senator Stollery: I agree with you. I am not as knowledgeable about this topic as you are, but it does seem to be another organization, if it guarantees Canadian sales between companies in Canada.
Ms. Smallridge: We made the recommendation, unless significant market gaps have emerged. I am not in a position to answer, because I have not been in the country for the past two months. I spent six weeks in New Zealand this Christmas. I do not know. You will have to ask the government and EDC. Obviously, they have made the argument, believing that gaps have emerged since we submitted our report that justify this temporary involvement in domestic credit insurance.
The Chair: That issue is one of policy, which we will address with the appropriate officials when they come before us. Thank you for your opinion.
Senator Wallin: As you said, in your words, your review anticipated a changing global and competitive environment. No one could have predicted how dramatic that change would be, or the speed and severity of the change.
I wanted to follow up on Senator Stollery's question, but I think you have commented on that subject. Maybe you do not have an opinion on whether anything would justify stepping back in, in terms of the lack of availability of domestic insurance.
Recommendations 13 and 14 on page 84 are that there should be ``active steps to ensure that new business is done to utilize existing Strategic Risk Capital,'' and ``that serious consideration be given to additional Strategic Risk Capital being made available. . . .'' Can you elaborate on recommendations 13 and 14?
Ms. Smallridge: Yes, EDC has a strategic risk capital pool of money that it could have paid back to the government in dividend. It is kept within the organization to take on higher-risk initiatives. We were given a list of the type of transactions EDC was undertaking, but we felt there could have been more, and that more capital could have been put towards that area, all the more so under the current conditions.
The recommendation says that EDC has its own typical risk assessment that it needs to perform for its own account, and that with this pot of money, it should be able to take higher risk; not unduly hazardous and unjustified risk, but higher-risk business where the return might be lower than otherwise.
Senator Wallin: Are you implying that EDC is risk-averse, or that the circumstances are so dramatically different that it is not their mindset?
Ms. Smallridge: Probably a bit of both.
Senator Dawson: I have four questions. In the last committee report, the committee said that EDC has not articulated a convincing argument as to why they should remain de facto sole provider of consensus-based loans in Canada. At the least, the banks should be given an opportunity to compete on a level playing field.
That report was 10 years ago. Do you think progress was made during those 10 years or will we make recommendations at the end of this report that will be put aside?
Second, you commented on the lack of transparency at EDC, basically being a Crown corporation that has the protection of a private company without having any responsibilities of a private company because they do not report to a real board. They do not report to Office of the Superintendent of Financial Institutions, OSFI, while most of their competitors must report regularly to OSFI. Is there an imbalance between their role and the role of the private domain? They receive triple-A ratings because all their loans are guaranteed by the government. When they compete with private companies, again, is that competition unfair, if you add the two other factors that I mentioned at the beginning?
Finally, with regard to the so-called budget bill and the notion of overlap between EDC and Business Development Bank of Canada, BDC: If the capital has been increased by $1.5 billion, and EDC contingency fund, the Canada Fund, is increased by billions, will EDC not be competing with BDC in the domestic market, and is that not exactly what you recommend against in your first recommendations?
Ms. Smallridge: I hope I can pass on that question, because I do not have the answer to the budget bill. You will have to ask EDC and BDC. We highlighted the overlap, and the risk of overlap. I do not know how that is playing out under today's circumstances.
Working backwards, on the transparency question, I would not have put it as strongly as you did, but we made recommendations about OSFI — OSFI-like reporting. That recommendation is important regarding the fact that EDC is forced to put in the public arena the same level of information that its private competitors do. That issue is an accountability issue and a responsibility issue.
On the previous committee report about consensus-based loans, at the time, 10 years ago, Canadian banks were not receiving the kind of guarantee facilities that other export credit agencies were providing their banks in support of their exporters. EDC has developed a guarantee program that is similar to the other agencies.
Banks still have a few issues with the program. We have said in the report, you need to pursue these issues and sort them out. There is a will within EDC to provide banks with competitive facilities, but it was probably the least exciting recommendation of our report.
[Translation]
Senator Fortin-Duplessis: Good afternoon and welcome, Madam. The question I have for you concerns the triple-A credit rating granted by Standard & Poor's to Export Development Canada. That credit rating is based on the fact that EDC is a Crown corporation at 100 per cent, which means that its debt liability is a direct liability for the Canadian government and constitutes a charge to the Treasury. However, EDC generally draws on its own resources to fund its debt. I imagine that EDC's debt is due to exporters or developers who do not reimburse their loans.
Ms. Smallridge: Is that your question?
Senator Fortin-Duplessis: It is one of my questions, because I have others as well. I would like to know where that debt comes from.
Ms. Smallridge: Can I answer in English?
Senator Fortin-Duplessis: Yes.
[English]
Ms. Smallridge: I think I will be clearer in English than I might be in French. EDC, as with any financial institution, borrows money in the name of the government on the basis of the triple-A credit rating, and then on-lends to foreign buyers to purchase Canadian goods. The obligation, the asset, is between a foreign buyer and EDC, and EDC has borrowed that money to on-lend. Because of its triple-A credit rating, it has access to cost of funds that are lower than an institution whose credit rating would be lower than triple A.
Back to the question of consensus loans, EDC can provide loans to foreign buyers at competitive rates, so that when a Chinese buyer is deciding to buy a power plant from Germany, Canada or France, the rates are the same. This is the way it works in Canada and it is normal. The liability is matched by the asset. I hope that answers your question.
[Translation]
Senator Fortin-Duplessis: In your view, does this triple-A credit rating give EDC an unfair advantage over its competitors?
[English]
Ms. Smallridge: This question is about — and someone mentioned Pascal Lamy — the use of government subsidies to confer a benefit. It is a question of whether the cost of funds is translated to cheaper rates to the borrower. There is no evidence of that from the lending portfolio; that EDC is undercutting and therefore creating a subsidy that is unfair and unlevel toward Canada. That point is a key one.
Another point that was raised earlier was the quality of EDC's insurance product as a triple-A rated insurance company compared to its competition, who would be less than triple-A — how the banks treat that insurance policy as security and whether they prefer that EDC insurance policy over the private sector. We covered that point in the report by saying that it is not really EDC's fault if banks prefer EDC over the private sector. Some banks that we spoke to had no preferential treatment. That issue shows up in the insurance side as well as EDC's lending side, but we saw no evidence that EDC used its triple-A credit rating unfairly.
[Translation]
Senator Fortin-Duplessis: Does the capital that EDC presently has enable the corporation to correctly fulfill its mandate?
[English]
Ms. Smallridge: I assume you are referring to the new capital in the budget, and I do not feel I am in a position to comment on that subject. I can only speculate that they will use it wisely, but you will have to ask them.
The Chair: Before I go to Senator Corbin, I have a quick question that is germane to the discussion. Does EDC take risks that private and other investors are not taking? Are they undertaking risks that are greater risks than the private sector would undertake, in your opinion?
Ms. Smallridge: We mentioned the strategic risk capital. Apart from that question, I think the issue of whether EDC is taking risks may be that they might stay in a market longer than the private sector would. They might keep a credit limit open for a buyer longer than the private sector. That question is a legitimate one.
Whether that decision is an advantage or not, we did not see it that way. We saw it as a commercial decision. EDC, apart by from being owned by government, is Canada first; it makes a decision to support a buyer perhaps longer than the private sector.
Senator Corbin: I have a few innocuous questions. Is it the first time you have conducted this type of legislative review?
Ms. Smallridge: In Canada, yes: We have done similar projects around the world.
Senator Corbin: It is the first time you have conducted a statutory review for Export Development Canada.
Ms. Smallridge: Yes.
Senator Corbin: Who performed the review previously?
Ms. Smallridge: I believe it was Gowlings.
Senator Corbin: Have you discussed anything with them in the course of your review?
Ms. Smallridge: No.
Senator Corbin: Would there have been merit in doing so?
Ms. Smallridge: I suppose; we certainly would have welcomed a chance to speak with them.
Senator Corbin: Did you examine their report?
Ms. Smallridge: Yes, we knew it well.
Senator Corbin: How are you chosen to conduct a review like this one? Is it through a bidding process?
Ms. Smallridge: Yes.
Senator Corbin: You do not go into the red when you are undertake this sort of work I am sure — but that is beside the point.
Among the many recommendations you make, which one is the most important or consequential, and the one we should focus on, in your opinion? You wrote the report.
Ms. Smallridge: There are probably a couple, but my number one is the one we have already discussed, namely, the short-term credit insurance and the transparency issue; and the need to be more open with the outcome of that business and report the way private sector insurers report under OSFI. There is no reason to believe that EDC is doing anything wrong, but transparency goes a long way to build confidence in the market.
Senator Corbin: You were not doing an audit?
Ms. Smallridge: No.
Senator Corbin: That makes all the difference in the world. That is for someone else to do.
I will now ask an even stranger question. This review is a statutory review; we must do it. It amazes me that in English it is called a legislative examination. You would think that legislators would undertake this work but they farm it out to a company and then we must examine the company report and complete the examination quickly; that is what we are told.
In your candid opinion — and I say this in a positive fashion — now that you have completed the report and you have heard people discuss the various issues with a number of players, if this statutory review had not taken place, would the world turn as usual? That is, are there sufficient safeguards, or what have you, allowing the EDC to operate professionally? In other words, is there a need for a five-year statutory review? That is a candid question.
Ms. Smallridge: It is, and you will only receive candour from me. Whether it is in this review or others, when agencies are put under the microscope, they know where the weaknesses are, and they know the areas where they need to focus. This report could have been one page. The process of having this report and this review accelerates change and improvements. That is my candid view.
The Chair: Preventative benefits.
Senator Mahovlich: In this current global situation, how many banks or export development banks in America have gone broke in the last few years?
Ms. Smallridge: The U.S. model is very different from Canada. They have a government agency guaranteeing the commercial banks — Citibank, Bank of America, Wachovia, and so on, all the big banks.
Senator Mahovlich: We do not have a similar situation?
Ms. Smallridge: No, it is a different arrangement.
Senator Mahovlich: Are they all in trouble?
Ms. Smallridge: It is not that they are in trouble. They are finding it challenging to access funds to support themselves.
Senator Mahovlich: What changes to this review would you recommend?
Ms. Smallridge: To our report?
Senator Mahovlich: Yes.
Ms. Smallridge: Nothing; it has withstood the test of this crisis. We have looked at the report in detail again since the events have taken place over the past two months. This report is a 10-year retrospective.
Senator Mahovlich: Should the government have more regulation?
Ms. Smallridge: I do not necessarily think so. It depends on what you mean by that; whether that was a general question or not.
Senator Mahovlich: Should government regulate more to ensure that things are done correctly? I think that was the problem for the Americans. Overall, there were no regulations and they were throwing money around.
Ms. Smallridge: The press reports have been encouraging about the state of the Canadian banking sector. We are the model not only for export credit industries but also for banking agencies worldwide.
The Chair: You have identified the fact that since you wrote the report, the world has changed a lot. Would you change your report today if you were writing it this week?
Ms. Smallridge: No; we would not change our report.
The Chair: Second, you suggested in your report that EDC should open overseas offices. Do other competitors have overseas offices? Are they a standard feature of these types of organizations?
Ms. Smallridge: The EDC is more than an export credit agency. Other countries have other types of institutions that perform similar functions and they have offices abroad. It is not unusual to see Germany have an office in Brazil. The answer is yes to your question.
The Chair: Seeing the market as we know it today, do we need an EDC?
Ms. Smallridge: Yes.
The Chair: Why?
Ms. Smallridge: Because Canadian companies need to compete internationally. That need is even more so with China, India and Brazil, who have agencies that are far bigger than EDC and who are competing against Canadian firms. That issue alone is enough for EDC to have the fire power that it has. Beyond that, there are many domestic issues and reasons for the EDC, I believe.
The Chair: The role that EDC plays is not fully played by its competitors?
Ms. Smallridge: It depends on how you define the competitors because they may have agencies that do a couple of things EDC does. There is great benefit in the fact that we have them all under one roof, in a coordinated fashion.
The Chair: Any there other questions for our witness? If not, let me thank you on behalf of all our colleagues. Your report will be studied further, as you understand. We will have a few more meetings yet. We appreciate the fact that you took time to be here today.
Colleagues, I have an announcement and information that the minister is available to visit us next Tuesday, at 4 p.m. I will ask permission of the Senate to allow us to sit outside our normal sitting time. If my request is questioned, I hope that you will support my question when I put it to the Senate either tomorrow or the day after — I think we need one day's notice.
We will reconvene tomorrow at 4 p.m., when we will have officials here from Finance Canada. Some of the questions asked earlier can be asked of them. At 4:45 p.m., we will have one of the world's largest credit insurers, Atradius. For some of the folks that are visiting us today, we look forward to talking to you tomorrow at 4:45.
(The committee adjourned.)