Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 2 - Evidence, March 4, 2009
OTTAWA, Wednesday, March 4, 2009
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 4:05 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: I would like to welcome everyone to this meeting of the Standing Senate Committee on Foreign Affairs and International Trade. This is our second meeting examining the document entitled ``The Legislative Review of Export Development Canada,'' dated December 2008.
The objective of the legislative review was to assess how Export Development Canada, EDC, 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, from the Department of Finance, are Ms. Lise Carrière, Chief, and Mr. John Davies, Director, International Finance and Development Division, International Trade and Finance.
Later we will hear from Mr. Ian Miller, Chief Agent and Country Manager of Atradius.
[Translation]
Mr. J. Davies, Director, International Finance and Development Division, International Trade and Finance, Department of Finanace Canada: Mr. Chair, I will be commenting on three areas: the role of the Minister of Finance with respect to EDC, the recent measures affecting EDC that were announced in the budget and the impact of these measures on the legislative review process.
[English]
I will first talk about the roles and responsibilities of the Minister of Finance in order to give you the context of what our responsibilities are.
While the Minister of International Trade has the lead responsibility for EDC, the Minister of Finance plays an important oversight role given the roles set out in the Financial Administration Act and the Export Development Act.
Regarding the Financial Administration Act, the Minister of Finance approves the short- and long-term borrowing authorities of EDC and makes recommendations on EDC's corporate plan to Treasury Board.
Regarding the Export Development Act and regulations, the minister's concurrence is required to provide additional capital to EDC, to support a transaction under the Canada Account, to make regulatory changes, and to allow EDC to support domestic insurance and credit transactions. The key point here is that the Minister of International Trade works with the Minister of Finance on issues affecting EDC, although the Minister of International Trade is primarily accountable for the institution.
It is important to note, however, that EDC is affected by broader powers held by the Minister of Finance. These include responsibility for the policy framework and legislation governing the financial services sector, since EDC is a major provider of insurance and financing services; managing the government's overall financial exposures, which, in EDC's case, include exposures of over $28 billion in contingent liabilities and $26 billion in borrowings, which are consolidated with the government's finances.
The Minister of Finance also has responsibility for negotiating multilateral or bilateral agreements affecting the global rules for export trade finance through the Organisation for Economic Co-operation and Development, OECD, or other international organizations, and for debt relief policy, including negotiating any bilateral debt write-downs of another country's exposure to Canada held through the EDC which may take place through the Paris Club of official creditors. At the end of 2007, EDC had $2.2 billion in sovereign debt on its books. In a nutshell, those are the Department of Finance Canada's responsibilities regarding EDC.
I will now go through Budget 2009 measures affecting Export Development Canada. Budget 2009 includes a package of measures to improve access to financing for the economy and to protect and strengthen Canada's financial sector. As part of this package, the government has provided new flexibility and resources to its financial Crown corporations — Export Development Canada, Business Development Bank of Canada and Canada Mortgage and Housing Corporation — so that they can extend additional financing to Canadian businesses in the current extraordinary circumstances.
There are four significant measures in the budget that affect EDC. First is a temporary change to the mandate of EDC to enable it to support domestic trade as well as export trade to fill gaps in the market and to do so more quickly. EDC will be working with financial institutions and private credit insurers to complement and leverage their capacity to support Canadian businesses during these extraordinary economic times. This change will be in place for two years to allow for the completion of the legislative review and to provide enough time for EDC to work with financial institutions to close gaps in market access.
The second area of change in the budget involves increasing EDC's contingent liability limit from $30 billion to $45 billion. This will enable EDC to grow and enhance its guarantee and insurance programs, for both export and domestic markets, in order to encourage commercial banks to continue to advance loans and increase access to financing — a key challenge for Canadian manufacturers. This change gives the corporation more flexibility to respond to the crisis, is aligned with its own demand growth projections and will save time given the repeated need to increase the contingent liability limit over the past few years, which is done through the supplementary estimates process.
The third area of change in Budget 2009 involves increasing the Canada Account limit from $13 billion to $20 billion. This was done to ensure that the government has the capacity to directly provide credit and meet the financing requirements of businesses in strategic, hard-hit sectors of the Canadian economy, if needed. This increase is close to the existing $13-billion limit set in 1987, adjusted for inflation. The Canada Account's purpose is outlined in section 23 of the Export Development Act. It supports transactions that cannot be taken by EDC's corporate account but are deemed to be in the national interest. The most recent example of a Canada Account transaction is the recent support to the auto sector.
The fourth and final area of change in Budget 2009 involves increasing the authorized capital limit of both EDC and the Business Development Bank of Canada, BDC, from $1.5 billion to $3 billion to allow the government to inject additional capital into its financial Crown corporations should it be required in the future in order to increase the availability of finance. In the economic and fiscal statement, the government provided EDC with an additional $350 million in capital, bringing EDC's capitalization to about $1.3 billion.
[Translation]
In essence, increasing the authorized capital limit of EDC will allow the government to inject more capital into Canadian companies during these troubled economic times.
[English]
Regarding implementation of the budget measures, as I mentioned, the $350-million capital injection has already been provided. The $3-billion loans to the auto sector are being facilitated through the Canada Account and are under negotiation at this time. The Department of Finance Canada and the EDC are working with private insurers on implementation of the budget measures related to EDC's role in the domestic credit insurance market. The department is leading the working group in this regard.
EDC is participating in the Business Credit Availability Program, known as BCAP. It will improve access to financing through enhanced cooperation between private sector financial institutions and the government's financial Crown corporations, EDC and BDC. BCAP will deliver at least $5 billion in incremental financing to businesses, largely small- and medium-sized enterprises. The Department of Finance Canada is leading the steering committee in regard to putting BCAP together and implementing it.
Other legal and regulatory changes in the budget require approval of the proposed budget implementation act before they can be enacted. The minister will provide a full report on budget measures in his report required by March 26.
Finally, I will discuss the legislative review. The first point to make is that the legislative review is an important opportunity to discuss the long-term mandate and focus of the EDC in a changing business and public policy environment.
Although the report prepared by International Financial Consulting was written before the financial crisis and, therefore, has been overtaken somewhat by current events, it correctly focuses on the long-term role for the EDC. In contrast, the budget measures related to the EDC were taken to respond to the current economic context and address the short-term needs of Canadian businesses. Mindful of the legislative review, changes to the mandate of the EDC introduced in the budget will be limited to two years, as I mentioned earlier. The point to underline here is that Budget 2009 does not prejudge or presuppose an outcome of the legislative review.
[Translation]
I understand the committee members will be meeting with the Minister of International Trade as well as with EDC officials. I also understand that you will be meeting with partners, including private insurers.
[English]
We look forward to seeing the committee's recommendations. The Department of Finance Canada's views will be reflected as part of the government's overall response to the committee's report.
The Chair: Is it correct that Ms. Carrière will not be making a statement?
Mr. Davies: No. She is here to help.
[Translation]
Senator Dawson: Mr. Chair, I put a question yesterday to the witnesses who prepared the report. It concerned some comments that were made about the competitive position of the banks versus that of EDC, about the fact that banks are required to file regular reports with the Office of the Superintendent of Financial Institutions, whereas EDC is not. EDC is a Crown corporation. Its loans are guaranteed by the Consolidated Revenue Fund of Canada. The corporation has an automatic AAA credit rating.
You are with the Department of Finance. The rules administered by the Department of Finance affect the advantage they have over banks and private insurers. Do you think that it would be in the interests of the Department of Finance to have EDC come under the OSFI?
[English]
Lise Carrière, Chief, International Finance and Development Division, International Trade and Finance, Department of Finance Canada: We looked into the question previously of whether EDC could come under the Office of the Superintendent of Financial Institutions, OSFI. We had discussions with experts in our Financial Sector Policy Branch. The answer we received is that OSFI cannot regulate a Crown corporation; it regulates banks and private insurers. That issue was addressed, noting that although EDC had advantages in terms of its cost of funds, there was no evidence that EDC was passing along lower pricing on its loans or anything that would be seen as unfair competition from Canada.
Senator Dawson: We also know about the overlapping with BDC. Are you saying that BDC does not report to OSFI either?
Ms. Carrière: I have not had such a question related to BDC, but Crown corporations are not regulated by OSFI.
Senator Dawson: That leads me to the fact that because they are Crown corporations, they have a strategic advantage that private corporations do not have. However, because they are in the business sector, they are not subject to access to information. It is the best of both worlds. You take advantage of both sides of an issue by having that coverage.
I know you were told that OSFI does not have jurisdiction, but do you not think it should have jurisdiction?
Mr. Davies: We are from the International Trade and Finance Branch. We can go back and talk to our Financial Sector policy people who look after the regulation of banks for the Department of Finance Canada. I can look into the question for you of whether they have examined it in more detail, but we are not experts on that.
The Chair: For clarification, it was my understanding that under the Federal Accountability Act, EDC does fall under the access to information legislation. Am I correct on that or not?
Ms. Carrière: Yes, you are correct; EDC falls under the Access to Information Act.
The Chair: Does BDC as well, or do you know that? In reviewing the EDC material I was made aware that it does follow the Access to Information Act. Do you know if the same thing applies to BDC?
Ms. Carrière: I am not an expert on BDC.
The Chair: That is fine. Thank you kindly.
Senator Dawson: I was under the assumption that it was not covered.
[Translation]
Senator Fortin-Duplessis: Thank you, Mr. Chair. It seems that EDC is capable of assuming a higher level of risk than the private sector. It has the means to assume a considerable level of risk. EDC's net revenues totalled $1.24 billion in 2004, $1.29 billion in 2005 and $1.2 billion in 2006. However, net revenues fell to $473 million in 2007. These net revenues suggest that EDC could assume even more risk. The unavailability of capital — a very real problem for SMEs — makes it very difficult for them to integrate world markets. If you concur with my analysis, what additional steps do you think EDC could take to make up this shortfall?
Ms. Carrière: The government has announced several measures in budget 2009 aimed at helping EDC lend more support to SMEs and to all companies in Canada. The measures that have been proposed allow EDC to play an added role in the area of domestic financing and to play a role in the insurance and credit sector in terms of domestic accounts receivable. From our standpoint, these measures will help Canadian companies that are having a hard time finding a source of financing.
Other measures have been taken. The government has provided a $350-million capital injection and with this money, EDC is expected to provide an additional $1.5 billion in loans. In the months ahead, the government will be reporting on the results of these initiatives. In light of the economic crisis, the government and EDC have clearly been very keen on trying to help Canadian companies that are having a hard time finding some financing.
Senator Fortin-Duplessis: I have another question regarding an entirely different matter. Assigning EDC staff to work at offices abroad is, to my way of thinking, an indispensable practice, one that should continue and perhaps even be expanded. I am pleased to see that the 2008 Legislative Review of Export Development Canada recommends that the Export Development Act be amended to give EDC the authority to establish offices outside of Canada. However, I believe that EDC should send staff to locations where they will prove to be the most useful and effective for Canadian companies, rather than to limit this action to diplomatic establishments.
What are your views on the feasibility of housing EDC staff, if necessary, at a location other than a diplomatic establishment?
[English]
Mr. Davies: This is a good question to raise with the Minister of International Trade. Again, our responsibilities for the institution are not direct. We do not get into day-to-stay suggestions about how to manage their resources. I know EDC shares a number of office spaces in our embassies abroad. There is generally a good correlation between our embassies and consuls abroad with the importance of our trade partners and so on, but the Department of Finance Canada does not usually get too involved with those kinds of decisions and allocation of resources.
Senator Wallin: To follow up on the comments we had with Ms. Smallridge yesterday, looking from an outsider's point of view, you are in that middle ground — not quite outside but not managing day-to-day. It is just another question, because we are all wrestling with this a little bit because the world has changed so dramatically, which was part of the problem with the report done there.
What is your assessment? The concern about access to credit in this country for small, medium and even large businesses is very real. The banks seem increasingly reluctant to participate at this point. Is this the time for EDC to step up or expand? One of the recommendations is that more business should be done using strategic risk capital and that that should be expanded and made more available to enable EDC to do that. Is that a good idea?
One of Ms. Smallridge's points — and she was not really being critical but was just assessing the situation — was that there is risk averseness in EDC and also, in fairness, that just given the times, which no one could react to quickly, this was not on their agenda. Do you want to grapple with that?
Mr. Davies: Three of the four budget measures I went over are all about increasing the limits, the existing constraints that are either in regulation or in law, which gives more potential for more resources and more flexibility for the EDC to act. That was done obviously on purpose. From that point of view, I think the stage is set for the EDC to come in and deal with any kind of market failures going on there in terms of access to credit.
Regarding the second level as well, things are set up to improve. That goes to the point I was making about the BCAP and working with the private insurers. This is to ensure that not only the Crown corporations work better together, that EDC and BDC do not overlap but are in much higher coordination, but also that the Crown corporations work well with the private sector and that all these groups have the private sector involved, are working together and sharing information together, increasing the level of transparency and trying to work and respond to the issue of the lack of credit and lack of, perhaps, insurance availability and so on in the market. From our point of view, the stage is set. This may not be the last time I will have to go and look at the limits and so on, but that is certainly the hope: that EDC, BDC and the private sector will have the resources and the policy environment to go forward.
Senator Wallin: Do you share any of the concern about risk averseness, or do you think that was just a result of the situation, and now that has changed and therefore the attitude might change as well?
Mr. Davies: The Canada Account in particular exists for when the level of risk for EDC is too high, it cannot bear that risk, and it goes to the Canada Account. Raising the limit of the Canada Account implies that a particular buffer has been set up and we can deal with that.
Senator Wallin: Was that at their behest? I am not sure.
Mr. Davies: Again, when we look at how the numbers and how the existing limits are increased, it was more that going into the last budget with the most flexibility we can give was a reasonable increase. In the Canada Account case we adjusted for inflation what was back in 1987 when the original limit was set in law, which seemed to be a good proxy given where the limits are now.
Senator Wallin: As much as it can be, was it an external motivation?
Mr. Davies: I think it was more of a collective. There is a lot of dialogue going on now between us.
Senator Downe: I am curious as to why, with the additional funding that was given to Export Development Canada, it was allowed to enter into domestic transactions. A domestic transaction is defined. The corporation can provide credit to a person with respect to a transaction that does not relate directly or indirectly to the carrying on of business or other activities outside Canada. That sounds like the mandate of the Business Development Bank of Canada to me.
Mr. Davies: The first point is that the obvious initial response is to the crisis. We are looking at everything we can do to respond to the crisis and expand the availability of credit. The second point is that it is a temporary measure. The whole point of the two-year limit is to take stock in two years of whether or not this makes sense and hear the outcome of the legislative review and so on.
In this day and age, it is hard to separate what is for export and what is not. Since 80 per cent of the Canadian economy is geared to export, BDC is often involved with companies that do export and so on. Just from a more practical point of view, EDC already has the capacity to do domestic financing with ministerial authorization, so what is going on here is a lifting of those regulations to make it easier and to make things go faster.
The Chair: Senator Downe, may I ask a follow-up question? It is really a policy issue. Do you think it would be more appropriate to ask the minister when he comes next week about why EDC instead of BDC? That really was the question, not why we should infuse more capital and put more money and take more risks. Since it is domestic, why not do it through BDC?
Mr. Davies: If that is the spirit of the question, it is more policy.
The Chair: I think that question would be best put to the minister, Senator Downe.
Senator Downe: Thank you for your views, Mr. Chair, but I do not share your views at all, because in the presentation they talked consistently about particularly this additional funding that went into the budget as the reason they are here today. We can ask the minister, but they raised it. I am asking the follow-up. I am not sure I agree with your analysis and that two years is a temporary measure. Even though the minister has the right to invoke domestic transaction, that has normally not been done, and this changes Export Development Canada really to export and interprovincial development Canada. It is a whole different mandate than exporting outside Canada. I accept the argument of the credit restraint, but I am not agreeing that this was the place the money should have gone. There are other agencies within government that would have done that job better.
My second question is who commissioned the review of the Export Development Canada. Was that Finance Canada or EDC itself?
Mr. Davies: I believe the Department of Foreign Affairs actually hires the consultant as part of the ten-year legislative review. We play in with other departments in the terms of reference. Again, the Minister of International Trade is the lead here.
Senator Stollery: Is it a five-year review or a ten-year review?
Mr. Davies: Ten years.
Natalie Mychajlyszyn, Analyst, International affairs and Defence, Parliamentary Information and Research Service: It was initially five years, and then after the initial five years, it was ten years.
Senator Downe: Chair, I did not take your previous advice, but I do seek your advice as to how we can question who commissioned this report and their level of comfort with the work that has been done. Would that be the minister next week or the Minister of Foreign Affairs?
The Chair: That is not a policy issue. I thought the other one would be a policy issue, but you certainly have the right to ask the question. I just did not want the witness to feel uncomfortable in handling an issue that is more policy, but I think that question is appropriate to them as well.
Senator Downe: I have questions on the report itself.
The Chair: Can I put you down for a second round for after we get through the rest of the list, which is getting longer as we go by?
Senator Downe: Thank you very much.
Senator Grafstein: I am interested in talking to the Department of Finance. Am I correct that the reporting mechanism here is to Parliament through the Minister of International Trade, and am I also correct that the Department of Finance has an overview of the financial aspects of the corporation?
Mr. Davies: That is right.
Senator Grafstein: Therefore you are the proper person to talk about the Department of Finance's overview of the funding and the administration of this entity from a financial standpoint?
Mr. Davies: Yes.
Senator Grafstein: How much money is at play here in EDC from a financial standpoint, in total dollars? Does the Department of Finance, in order to supervise or provide oversight, have any metrics in terms of jobs created or new business development as a basis to determine whether EDC is effectively using the dollars it is allocated from the federal budget?
Ms. Carrière: I am not sure I understand your first question about how much money is at play. Are you talking about whether EDC depends on appropriations? If that is the case, the answer is no; EDC does not receive any appropriations from the federal government.
Regarding the oversight in jobs created, EDC does report on and does look at Canadian benefits when it provides loans, and it does report on the number of companies it provides services to and the dollar amount of business that it does in a single year, and it does provide some estimate of what it thinks is a percentage of GDP arising from all its activities supporting Canadian exporters and businesses.
Senator Grafstein: In response to my first question, Mr. Davies agreed that the Department of Finance provides oversight. What is the nature of its financial oversight?
Ms. Carrière: We approve the borrowings of EDC, and Finance Canada also looks at a corporate plan and makes a recommendation to Treasury Board as to whether the corporate plan should be approved.
Senator Grafstein: The borrowings by EDC using the sovereign guarantee are ultimately an amount of money that the taxpayers are at risk for if something goes wrong; is that so? I am just trying to understand the responsibility the Department of Finance has to the taxpayer for oversight of this institution.
Ms. Carrière: The borrowings are the amount that EDC raises in financial markets so it can lend to Canadian businesses.
Senator Grafstein: I understand that, but that is not my question. How much does it borrow, for instance? What is the current borrowing? Give us a round number.
Mr. Davies: It is about $26 billion in borrowings and about $20 billion in continued liabilities, so altogether over $50 billion.
Senator Grafstein: Is the taxpayer at risk with respect to that money if something goes wrong and EDC cannot repay those borrowings?
Ms. Carrière: Yes.
Senator Grafstein: All right. The government has a financial oversight of some $50 billion. Therefore, having in mind that the government or the taxpayers are at risk for $50 billion, can you give us some indication of the numbers of jobs that are created as a result of this financial risk to the taxpayer? This is not a new question. It is a question I heard being asked over and over again in Washington by the federal government there as they pour tens of billions of dollars, even trillions of dollars, into their recovery or stimulus package. It is a question of accountability. What is the taxpayer getting as a result of this risk, and could you bring it down to jobs created or jobs hoped to be created or business stimulated? I am trying to get a metric so we can somehow compare the effectiveness.
We were told yesterday that this is a superb organization. I do not quarrel with that, but I want to see how superb it would be in terms of job creation compared to similar institutions.
Mr. Davies: The best answer to that would be EDC itself, which does look at its business volume per year and how many companies benefit directly from EDC. It has probably converted that or made an estimate of how many Canadian jobs are being supported from that.
That is not necessarily the only factor in terms of how the Department of Finance looks at placing a marginal dollar.
Senator Grafstein: My question is not directed to EDC. I understand it does that, but do you look at those numbers to fulfil your mandate of oversight? In other words, what are the metrics you look at to say everything is going okay and you step back because there are no losses? What are the metrics you apply to see whether the deployment of this money, which the taxpayers are at risk with, is doing a good job? How does the Department of Finance surveil this issue other than to say, ``We had so many cases; we did so many deals; we underwrote so many things''? That is all good — I am not suggesting it is bad — but now we have to do some comparative analysis.
When you go into deficit, as Canada is, I think it is incumbent upon us as a parliamentary oversight committee to make sure we understand the oversight within the government and try to make it comprehensible to the taxpayer.
Mr. Davies: It is a good question. Our annual road into EDC, again in conjunction with the Minister of International Trade, is the annual corporate plan. The corporate plan sets out the short- and medium-term strategies for EDC. That is the chance when we say is this consistent with Canadian public policy and a good investment for Canada. Again, there are other ways of oversight in terms of improving on the borrowing plan, making transaction oversight, and due diligence on Canada Account transactions in particular. Are they supporting Canadian exports, investments, insurance and so on, the reason they were created? The annual road in is the corporate plan and that is the primary policy oversight we have.
The Chair: I will admit that just a few moments ago I was given a corporate plan. I have not looked at it, and we received only one copy. I will have it distributed to each and every one of you so that you will have it for the next time. I have just opened it up, so I am not sure what it contains.
Senator Grafstein: I hope members of the committee will forgive me on this, but it is incumbent upon us when we are in deficit to look at taxpayers' every dollar to ensure it is being properly deployed.
The Chair: I would suggest, senator, that it is incumbent upon us at all times to see what value we are getting for the investment we are making, and I think the question is a valid one. I will come back to you.
Senator Mahovlich: You mentioned earlier the government's $3 billion set aside for the auto industry. Now, there are three major auto companies here, and one decided to say ``thank you but no thanks.'' It was not going to accept. I do not know why or how it can do that, not accept the money when it is not making any money and the other two companies will accept help and financing. Can you explain that to me?
Mr. Davies: Not really. I am sorry. We do not look after the auto sector. The negotiations are ongoing with Chrysler right now. Ford, I believe, is not looking for any government-backed loans, and I believe in the short term GM is not looking for them either. We are not the experts on the auto sector and what is going on right now. EDC is working on the loans with Chrysler in negotiations with the Minister for Trade, Industry, and the Province of Ontario.
Senator Mahovlich: You only see the funds floating into the EDC?
Mr. Davies: No, our sector experts in finance are part of that discussion as well.
Senator Mahovlich: Thank you.
Senator Andreychuk: I will pick up where Senator Downe had asked some questions. This review seems to point out that EDC is doing a good job and is a leader in its field with the like-minded countries we compete with. It also makes the point in various ways about the need for more flexibility. The report says it is very difficult to say what is international and national anymore, that the two are linked differently because trade agreements, manufacturing patterns, service industry patterns are so different now and they may be in more than one spot around the world.
Was any thought ever given to looking again at BDC along with EDC to create a new mechanism that could fulfil both markets rather than spending so much time to determine what is a national, internal company as opposed to an international one? It seems that the report did not address that fully. It is inferential. What would you think of the blending of the two together in a new, modern corporation?
Mr. Davies: I think the emphasis right now is on collaboration through the BCAP program, getting EDC and BDC working with the private banks to get money flowing to businesses that need it. It is much more on information sharing, working together and not competing or overlapping or making any kind of redundancy right now in a market that desperately needs more credit. That is probably more the perspective, not the perspective of creating new institutions or bodies but getting the existing ones, which work pretty well, working even better together.
Senator Andreychuk: There is inherent slowness when you collaborate, and one of the keys of business is swiftness, getting to the job. I appreciate your point not to create a new institution, but why would you not talk about combining the two, just to play devil's advocate here?
Mr. Davies: I just have not seen any discussion of that. Technically, they have different mandates and different clientele. EDC is much larger with more foreign-oriented projects, and right now, given the crisis and what can be done in the crisis, the emphasis is on getting them to work well together.
Senator Andreychuk: We are here reviewing the report on EDC, and that was written at a time before the crisis and the government's addressing of it through the budget process. As you indicated, EDC will be doing things in the next two years. The rules will be changed in the next two years, and it seems to me we are looking to review a report that is already out of date, because what will happen in the two years will dramatically change the landscape.
Looking at it to see if we could anticipate whether this was a fair and adequate assessment two years down the line, it has no application to the distortion now, necessary as it is, and so therefore, what value does this report have except as a good analysis of the work done in an accountability mode as opposed to a future trend?
Mr. Davies: That is a good point. The report focuses on the long term, for example what EDC's role should be over time. Many good points need to be considered that are part of the debate on domestic financing, governance and so on that will last beyond the crisis.
We look at the report not as a legislative review but as one piece of the legislative review. It is to inform debate on this process, which will happen in parallel with the House of Commons Finance Committee, as part of bringing it up to date, so to speak. I would look at it more that way.
Senator Corbin: This is the first time that the committee has been asked to examine a report of this nature, so we are beginners, in some respects. Senator Grafstein has had more experience than most of us in dealing with this kind of matter. I am not sure whether I should address my questions to these witnesses, Mr. Chair, so I stand to be guided.
The Chair: If it is a policy question, it should be addressed to the minister, but perhaps the officials can respond.
Senator Corbin: What is the relation of these witnesses to this report? Do they represent the Department of Finance? I will put the question.
I refer you to the Export Development Act, which is annexed to the report, page 98, Capital and Shares, section 12 under Borrowing. For clarification, I will quote the text:
The corporation may borrow money by any means, including issuing or selling bonds, debentures, notes and other evidences of indebtedness of the Corporation.
What is meant by ``evidences of indebtedness'' that is not already covered by any means previously listed? Is that legalese? I would like to know what the reference is in that statement.
Mr. Davies: You might have caught us on this one. In my mind, it is the legal catch-all phrase for all other types of borrowings that the EDC could do — other types of instruments that are too numerous to list in an act.
Senator Corbin: That is already caught in ``by any means,'' is it not? Perhaps it is a matter of drafting, so I will not belabour the point.
The Chair: For clarification, we often see the term used in financial circles to describe various elements that could include futures or other investment or monetary means of borrowing. It is an all-encompassing term that is often used in financial terms.
Senator Corbin: It allows for a creative process.
The Chair: Yes, it allows for a creative process, which has its own risk. Is that what you were getting at?
Senator Corbin: Yes. Following, paragraph 13 says:
At the request of the Corporation, the Minister if Finance may, out of the Consolidated Revenue Fund, lend money to the Corporation on such terms and conditions as are fixed by him.
Can you give us an example of the terms or conditions that would be fixed by the minister? Again, it is wide-ranging.
Mr. Davies: We have yet to use this provision.
Senator Corbin: It is a useless provision.
The Chair: It is in case of emergencies only.
Senator Corbin: I refer you to paragraph 15, Reserves and Provisions, which says:
The Corporation may establish one or more reserves or provisions out of which may be paid any losses sustained by the Corporation in the conduct of its business.
Do we ever get to know if and when the corporation loses money? Are figures published to that effect or is that another just-in-case clause?
Ms. Carrière: EDC publishes an annual report. I believe the annual report for this year will be released this week. There are lines on its balance sheet showing allowances. EDC has not incurred losses in terms of its overall corporation and has always been in a profitable situation.
Senator Corbin: Always?
Ms. Carrière: Yes, as far as I know. Perhaps back in time it had some losses, but in recent years EDC has been profitable. Now, that is not to say there have not been losses on a single loan, but the corporation as a whole.
Senator Corbin: That is what I meant. Would losses on specific loans be confidential information?
Ms. Carrière: I would like you to ask that question of EDC.
Senator Corbin: We will do that.
Senator Stollery: I will pass and let Senator De Bané speak.
Senator De Bané: Mr. Davies and Ms. Carrière, the raison d'être of EDC is to empower exports. The Canadian domestic market is too small. Finance is a central agency and one of the few departments that has an overall responsibility for the economy. Recently, Michael Porter, the Harvard guru on competition, wrote a four-page article about how the United States is less and less competitive in today's world. When reading his four-page article, I noticed that he has three ranking lists about competitiveness. Those three tables show that the United States is no longer very competitive and ranks twentieth to twenty-fifth. Strangely enough, Hong Kong ranks number one.
I was struck by the fact that Canada is either just ahead of or just after the United States on the table of analysis of competitiveness. Mr. Porter does not talk about U.S. financial institutions not giving enough support to exporters. That topic is totally ignored. However, he does talk about the many obstacles to greater competitiveness in his country.
In each of those, I said to myself that applies to my country too. I was not surprised that we were at the same level as the United States on that list.
Is it out of order to ask what you think of that, namely that we are losing not through EDC, which is doing its job, but we are gradually losing our competitiveness compared with other countries?
Mr. Davies: I am not sure whether it is out of order, but it would be only my opinion. We were asked to come here to talk to you about EDC and the legislative review only.
Senator De Bané: Yes, but I am sure members of the committee would like to have your opinion about how to make our country more competitive. It is self-evident that our domestic market is too small; we have to export and we must export to our immediate neighbour, which is the wealthiest country on earth.
Mr. Davies: I think the Minister of International Trade would be an excellent person to ask that question of when you see him next week.
The Chair: If you are uncomfortable answering, I accept that.
Senator Downe: Does the Department of Finance Canada have concerns about the report done by the consulting company? Are you concerned that there might be a conflict given the lack of consultation the company did in its town hall meetings across Canada, the duplication of government officials at the meetings, including the fact that officials from EDC and from the Department of Foreign Affairs and International Trade were at every town hall meeting where the discussion was about the mandate of EDC?
Mr. Davies: As I said before, our view is that this report is only one piece of a broader legislative review. I am not aware of what the budget was or the time constraints on putting it together. I think the authors did a good job. The report presents the debate very well. I do not see it as the end of consultation or the beginning. It is only one piece.
Senator Downe: Has the Department of Finance Canada any concern about this report?
Mr. Davies: I am saying that we have not looked at the report from that perspective and no one had raised that point before.
Senator Downe: You have no other concerns about this or any other aspect of the report? You accept it?
Mr. Davies: I accept it as one piece of the legislative review.
Senator Downe: Has the department filed any concerns or comments with the consultant who did the report about the quality of the report?
Mr. Davies: No.
Senator Downe: Thank you.
Senator Stollery: On a point of order, Mr. Chair, I know we have other witnesses, but I would like to suggest possibly that we deal with the items for the Steering Committee at this point in the meeting, basically the budgets. Otherwise, we will not have any money.
The Chair: I have no problem with that.
I would like to thank Ms. Carrière and Mr. Davies for your testimony this afternoon. Thank you for coming.
Before we deal with the next set of witnesses, we have an operational budget that the steering committee recommended for approval. It is being distributed. This is the usual initial request for funds to conduct business.
We have four separate budget items. First, to continue the study as authorized by the Senate on Russia, China and India, we are asking for $2,500 in expenses that are normal for this kind of study until the end of the fiscal year, March 2009. Second, for the review of the Export Development Act, we are asking the Senate to approve a budget of $2,000 for the same purposes. Third, for any legislation as may come before us from time to time, we are requesting an additional $2,500. That may cover expenses like messengers, et cetera. It is all listed in there. Fourth, there is also a general budget, which is quite normal when we first form. This is normally referred to as an emergency budget of $10,000. It is for any and all things required to conduct our affairs. The clerk tells me that this totals $19,500. There is nothing contentious. It is standard.
I would ask for a motion, if possible. Questions, first?
Senator Andreychuk: I would like clarification concerning the conference item. It is pointing out conference fees and transportation of possibly $1,000. I understand that whole page is for attendance at a conference. Would this be subject to the steering committee's approval of that application?
The Chair: Absolutely. This is only a small amount of money that would allow us to conduct business and run the affairs of the committee as we have for many years. Are there any other questions? May I have a motion?
Senator Dawson: Do you want to move them separately or all together?
The Chair: All together, unless anyone has an objection.
Senator Dawson: I so move.
The Chair: All in favour?
Hon. Senators: Agreed.
The Chair: Thank you kindly. Mr. Deputy Chair, does that meet with your approval?
Senator Stollery: Yes, thank you. Everything went smoothly and according to Hoyle.
The Chair: As indicated at the beginning of the meeting, our second witness is a gentleman by the name of Mr. Ian Miller, the Chief Agent and Country Manager for Atradius, an insurer of a global nature that operates within Canada. We could say it is a competitor to EDC. Otherwise, I understand that you are in the same business. You are headquartered in the Netherlands, is that correct?
Ian Miller, Chief Agent and Country Manager, Atradius: That is correct.
The Chair: Let me extend a warm invitation to you. We will hear your comments, after which we will engage in questions and answers for the members of our committee. You have the floor.
Mr. Miller: Thank you for the opportunity to appear before this eminent committee on the 2008 statutory review of EDC.
Let me begin by introducing my company. Atradius is a global credit insurance company that operates in Canada and is headquartered in the Netherlands. With 80 years of experience and 140 points of service in 40 countries, Atradius is one of the largest credit insurers in the world, with annual revenues of $1.8 billion euros.
Using our databases, we have access to credit information on 52 million companies worldwide. We make more than 22,000 credit decisions daily. Our growth has been significant, and we hope it will continue.
As you read in the report by International Financial Consulting Ltd., the global credit insurance market has three main players: Euler Hermes at 36 per cent, Atradius at 31 per cent and Coface at 19 per cent. Together, we have a global market share of more than 85 per cent and manage risk portfolios of more than $1.3 trillion. Each of these carriers has operations in Canada. Atradius believes we should be close to our clients and to the risks we underwrite. In short, even though we are a global carrier, we are very local to communities in Canada.
I am sure that you are familiar with how credit insurance works. Basically, when a policyholder sells to a buyer that has been approved for coverage, if the buyer does not pay, then the insurer will. Canadian businesses purchase accounts receivable insurance or credit insurance to protect themselves against commercial risk for domestic accounts and against commercial and political risks encountered in the countries to which they export.
Credit insurance enables Canadian businesses to protect their cash flow and profits, expand sales to new customers and markets and borrow more working capital by insuring against the potential insolvency of or the failure to pay by one of its customers. Canadian companies typically pledge their accounts receivable to lending institutions under operating lines of credit to increase their working capital and leverage their equity. Credit insurance is particularly useful for exporters, as Canadian lending institutions typically do not accept uninsured foreign receivables as collateral.
Atradius wants to expand in Canada. Unfortunately, we are becoming a little discouraged in our efforts. EDC controls in excess of 75 per cent of the Canadian export credit insurance market. This is an anomaly internationally. For example, private insurers fill 91 per cent of the credit insurance market in France; 95 per in Germany; 90 per cent in the Netherlands; and 97 per cent in the United States. Like Canada, each of these countries has an export credit agency. Yes, they are different, but they all encourage private insurers to meet the needs of their exporters for credit insurance. Canada does not. In fact, through our communications with the European Union, we are told of agreements where the governments of the European Union will not credit insure a transaction that can be insured by the private sector.
Atradius has only one issue to raise with this committee. We ask that you look very closely at whether the government should continue to control more than 75 per cent of the short-term export credit insurance market in Canada and whether EDC should compete directly with the private sector in this market.
At its inception, EDC's role was to fill gaps left by the private sector. We now have a mature export credit insurance industry that can do this on its own. EDC's role needs to shift from competing directly with and thus undermining private markets to complementing private markets. It cannot do this by taking away our market share, creating barriers to entry, distorting markets or causing credit insurers to exit or fail to enter the Canadian marketplace.
Let me be clear that Atradius respects and admires EDC. It is an important Canadian institution. It has served Canadians well in its support of international trade. It has evolved and continues to evolve through these difficult economic times. That is very good news for our economy. However, we hope that EDC will devote more effort to helping small and medium businesses to build their capability to export and play on the world stage and to path-find their way to government and especially private sector help. Although small businesses are only 1.8 per cent of the total value of Canadian exports, they must be encouraged to grow.
Unfortunately, the report tabled by the Minister of International Trade recommends the status quo again for EDC's role in short-term export credit insurance for at least the next five years. According to EDC's statute, that means it will be 10 years before Parliament gets another chance to consider this issue. The report fails to recommend that EDC divest itself of its short-term export credit insurance business line. Further, it fails to even envisage a set of circumstances when this might be possible.
I am concerned that EDC has had an extraordinary influence over the review process and on the report by International Financial Consulting. It makes one wonder if this exercise is not so much a sober evaluation of the role of EDC in the market but, rather, a promotional exercise to allow EDC to expand its presence in the Canadian economy. I am sure that you, too, will be disappointed in some of the analysis. The IFC report provides some broad figures not previously available to the public but fails to analyze their significance, such as on page 33 where one wonders why the expense ratio increased by almost 50 per cent during the period examined.
That brings me to the transparency issue. EDC does not provide adequate financial information to its shareholders, nor does it need to comply with OSFI regulations. This is wrong. For example, up until the release of the report, it was impossible to get information on the short-term credit insurance business line, despite the fact that it is used by over 80 per cent of their customers and represents over 65 per cent of its business volume. I do not know whether EDC's accounts substantiate the consultant's conclusions, but neither do you.
Finally, let me address the issue on your minds about the effect of the current economic crisis on all of this. Like all industries, adjustment will occur in our sector as well, but, as much as possible, we must adhere to the principle that markets should decide on acceptable risks, not government. Does this mean somewhat more difficult credit? You bet. We will not be driven to taking unsound risks. If government decides to do so, taxpayers need to know that when government decides to assume these risks it is because of government policy overriding public interests or market failure.
Taxpayers also need to know that in assuming risks that the private sector cannot take on, there is potential for downstream costs and public liabilities — higher defaults, staying on risk longer and raising public expectations for continued government support. Governments are also vulnerable to charges of picking winners and losers. Most important, government intervention distorts markets. Governments must be very cautious about such consequences.
Let me give EDC its due. It played an effective early role in filling a market gap, but it has outlived its usefulness in this area. We now see EDC as a market follower, not a leader in new products and services, and it is a competitor, and possibly a predatory one at that. The export credit insurance industry is now a mature one in Canada, and it is it time for EDC to step aside and cease its competition in the short-term credit insurance. This is a time for openness and collaboration in the economy, not competition between government and the private sector. We must aim for complementary and collaborative roles instead.
Atradius asks this committee to review this matter fully. This committee is in a strong position to look objectively at EDC. Atradius recognizes the difficulty for government in doing this, to stop doing something it has been doing for some time. Government naturally values continuity, tries to preserve its employment base and pensions, and it constantly seeks opportunities to grow. This is the case with EDC.
It is always useful to get back to first principles when facing a dilemma. EDC was established to fill market gaps. Its role is to support and develop trade. This includes ensuring that Canada has strong, private financial institutions to support exporters, as well as ensuring that exporters are well served. Rather than delay the inevitable, we ask you to set an early goal to explore ways to shift towards private markets. We must develop transitions and processes that will move us in the right direction.
Let me conclude by thanking the committee for the opportunity to present Atradius' views. We strongly recommend to you that EDC withdraw from the role of primary insurer and shift to a role of reinsurer in the short-term export credit insurance. This would in no way affect government's option of acting as an insurer of last resort when public interests outweigh private market risk taking or when national or regional interests are at stake. That role is not in question.
Senator Dawson: Thank you, Mr. Miller. When the legislature wrote this bill the first time they answered to a need from the market and decided to create EDC. One reason we are here is because it must be revised. We will seriously take into consideration your remarks and the remarks of all the other players, and I am sure that people from the other side will have the same attitude. The existing economic crisis will not make our process as easy compared to a more traditional economic situation.
I notice that at least one of your competitors will be here next week. Yesterday I asked the question about credit evaluation and the fact that EDC gets AAA credit evaluation because the government covers all of its loans. The report of the study said that Euler Hermes has AA. By the standard of the report, you have A, and Coface has AA-. When people decide where to take their business, the option of AAA is probably more attractive than Atradius would be. I understand that right away EDC has a competitive advantage.
I also see in the report two comments, one on the fact that the report tabled 10 years ago said that OSFI — and I know we got an answer that I did not find satisfying — cannot control EDC. Why could we not recommend that they have the same responsibilities towards reporting to the Department of Finance that the other institutions have?
One of the recommendations we take out of the report is that there be a brokerage advisory panel of specialists established by the Department of Foreign Affairs and International Trade. That addresses the predatory practices by EDC in your written statement. Having said that, you also mentioned that governments do things and that to convince them to stop is pretty hard. What do you think of this recommendation? Does that go partway to having better control over them?
Second, are you subject to OSFI?
Mr. Miller: Absolutely, yes.
Senator Dawson: Thus all three major competitors, when they deal with these issues in Canada, have rules that apply to them that are different than those applied to EDC?
Mr. Miller: That is correct, senator, yes.
Senator Dawson: My question is mostly about the advisory board that is recommended. Does it go partway to assure that out of this report some kind of transparency or competitive environment would be forced upon EDC?
Mr. Miller: That is a great question. I have prepared responses to about 400 questions, and that was not one of them, so I will have to wing that one.
From my point of view, the brokerage community makes its living by getting the lowest price. The brokers' job is to get the best deal for their client. It is a very unusual situation inasmuch as it is the insurers who pay them, but it is the insurers' clients who benefit. I can only think that if it is the brokers monitoring the pricing, it is a bit of having the fox in the henhouse. They are looking for the lowest prices and the best structures for their clients. I suppose a committee watching over that would be helpful; however, I do question that, since it is composed of brokers.
Senator Dawson: Have you studied the report that was tabled 10 years ago? Have you become bigger players? That report talks mostly about the banks and not about international, privately established lenders coming to Canada to guarantee loans. Has that changed substantially over the last 10 years?
Mr. Miller: I believe that the overall credit insurance market within Canada has grown, and the private sector has grown with it. Atradius itself was not in the market 10 years ago; it started in 2001. Yes, it has changed markedly since then.
Senator Wallin: I think you were in the room earlier for some of the other testimony. We were talking about the current economic situation, and my question at that point was about whether we thought EDC was too risk-averse. You raised some of those issues in your opening remarks. We appreciate your concern for the Canadian taxpayer and your comments on government and also your note that EDC was considered to be very effective.
I now want to ask the same of you about risk averseness. I hate to cite single journalistic sources, but our time for research on this committee is short and so I will anyway. There was a piece in the Edmonton Journal on January 5, 2009, talking about your company saying that you are raising prices by as much as 50 per cent and reducing coverage on thousands of companies in the U.K., including suppliers to the biggest U.S. automakers. There was another piece in the Daily Telegraph in November 2008 talking about your concern about high risk, that without any significant change in their trading performance you are marking companies more high risk without really seeing any change in their behaviour, and that was forcing businesses to request payment of cash on delivery or to slash sales or whatever it may be. At that point, your company confirmed that it had reduced its exposure to companies in Britain. You described this — not you personally, or maybe you did — as acting prudently.
Can you talk to us a bit about your notion of being risk-averse in this marketplace?
Mr. Miller: Certainly. The prices for credit insurance premiums are set based on risk. I do not think there can be any doubt in anyone's mind that the risk has skyrocketed recently. That is a much more complicated question than you may realize, because during an extremely benign credit environment over the last five years up until mid-2007 when the credit crunch became apparent, prices for credit insurance had dropped unbelievably. They were at the lowest rates we had ever seen anywhere. It was the softest market in the parlance of the industry.
The prices have been going up reflecting that. Second, our costs are going up. Obviously we sell credit insurance, but in addition to that we use credit insurance, in that we reinsure a portion of our risk through the major reinsurers in the world. There were some other articles, too, that reflected a 40 per cent to 50 per cent increase from them. What you are seeing is both cost-driven and the actual cost of the product as a result of the risk.
As far as the risk assessment on buyers goes, absolutely we are being much more cautious these days. Perhaps I can give a short war story here. In October I believe it was, we looked at a buyer in the United States. We went through the credit committee process and all that stuff and decided, yes, this buyer is experiencing problems. It looks like it is getting worse, but we can stick with it. We calculated the cash burn, and it looked like maybe August we should take another serious look at it. That filed in December, which gives you an idea of the rapidity with which events are taking place right now. All of it has to do with, obviously, lower consumer spending, but in addition to that, you see banks declining to renew credit lines.
When I look at the results from the claims perspective and see us approaching, or in some cases exceeding, 100 per cent claims ratio, which is disastrous in our industry, we know that it is truly serious out there. We then have to take action to ensure that we are not insuring ones that clearly will go bankrupt. More important, we must advise our customers of the same.
The auto sector is quite interesting. We advise our clients on credit intelligence. If we see one of our clients' customers experiencing a cash problem or financial difficulty, and we determine that that financial difficulty is not as serious, we will work with our clients to make sure that they continue selling to that client through the cash crunch, whatever the reason might be.
A client selling to General Motors, for example, which is well on its way to filing Chapter 11, might have built its entire business around GM. Whether they are insured, if they have been fed intelligence that they should be watching out for General Motors because it is in trouble, then we have provided them with the ability to diversify their business away from something that could put them out of business because they are too concentrated.
Senator Wallin: I find it interesting, and you have raised some good points. Obviously, we know you are trying to break into the Canadian market and you might not have been concerned about the role of EDC quite so much eight months ago when you began that quest. Earlier you raised some concerns and said that governments should not be picking winners and losers and creating an unfair advantage. In this country, and we hear it all the time in comparison to the United States, we have a regulated banking sector, so we are not subject to the same kinds of crises and problems that we are seeing in the U.S. The downside to the regulation is that we have banking institutions that are highly risk- averse and, in these particular times, withholding credit from small and medium-sized businesses. Yet, we are seeing you do the same and describe it as being prudent. Is not everyone subject to that kind of prudent behaviour? In the Canadian context, given that we are limited in other access points because the banks are so limited and restrictive, does EDC have a different role here than it might have in the U.S. or in another country?
Mr. Miller: I highly promote EDC as a company. To clarify, we have been in the market for eight years, not eight months, but I am not sure whether I misled you.
Senator Wallin: No, that is fine. I was referring more to the economic situation.
Mr. Miller: EDC does have a role. If the government, as it has done in this budget, has decided that it is in the Canadian interest that certain funds be allocated in a certain way, EDC is as good an institution to do that as any.
I am concerned that when EDC owns 75 per cent of the market, it will continue to crowd us out again. I have to answer to my management in Europe and say, ``Well, yes, you should invest in Canada, but the market is quite limited such that the government controls 75 per cent of it.'' If it were done in a different way, such as through reinsurance so that it was not crowding out the private sector, then it would make all kinds of sense.
Senator Wallin: Is that more of a concern for your own board or are you talking about your client base?
Mr. Miller: I am sorry?
Senator Wallin: Is this a good place to expand and invest? What is the competitive environment like?
Mr. Miller: As a private company, we are concerned about our shareholders, our management and where to expand, whether in Canada, China, Japan, et cetera. We are in 40 countries around the world.
Senator Corbin: One thing strikes me in your statement, Mr. Miller. As I said earlier to the other witnesses, this committee is new to this kind of exercise. We ought to know more but we do not; we are learning. At page 2 you say that EDC controls in excess of 75 per cent of the Canadian export credit insurance market. At page 3 you elaborate and say that you want us to look very closely at whether the government should continue to control more than 75 per cent of the short-term export credit insurance market.
I would like you to explain how EDC effectively controls that market. I see nothing in the law or in the supporting regulations that would enable EDC to exercise that kind of control. My question might be naïve, but I would like you to elaborate on your point.
Mr. Miller: I would interpret your question to be what advantages does EDC have over the private sector that it can control 75 per cent of the market so that when we bid on business against EDC, we do not win it and EDC maintains it.
Senator Corbin: How often does EDC win?
Mr. Miller: At least 75 per cent of the time.
Senator Corbin: Can it underbid anyone?
Mr. Miller: Absolutely. It has the ability to underbid anyone or, more important, it has the ability to take on risk that the private sector might not feel is commercially feasible. That is how they do it. They have the government backing.
I have to stress how important that AAA rating is. Just last week, we had a client in the Maritimes that was very happy with us. They were quite ready to continue with us but they had to change their borrowing arrangements and, in doing so, the chartered bank that took it over insisted that it have EDC cover. After they peeled me off the roof, I got hold of the bank and asked why they were not accepting our paper for this. The response was, ``It is sovereign rating; why would we not accept it when we need the sovereign rating?''
There are all kinds of reasons — I could talk for a long time about the reasons EDC currently dominates that market and why it becomes a difficult investment decision for us to increase our presence in Canada, knowing that EDC has this advantage, this control over the market. As well, at any time that control could increase. For example, in the budget, suddenly they are given new economic might. That suggests to me that investing in the market, knowing that EDC might at any time be granted additional economic might, would be very insecure because that investor could be crowded out almost immediately.
Senator Corbin: That is a good explanation and I thank you for it. I will wait for the second round for further questions.
The Chair: We might have sufficient time to do a second round.
Senator Andreychuk: Mr. Miller, you have explained your case very well. You knew what EDC was when you came into the Canadian market, so you must have looked at some niche opportunities not filled by EDC. Are you trying to increase the market, or have you seen EDC react to your interventions and take over some of the turf that you had carved out for yourself? I am not clear where you are going.
Mr. Miller: I understand the question. If I may differentiate, there is the export credit insurance market and the overall credit insurance market. The overall credit insurance market has grown markedly over the years because of domestic credit insurance, that is, where EDC does not play.
That is the niche we came into, and we have grown our presence in that area. We have competed against EDC. We occasionally win against EDC, but, overall, EDC has responded to the competition the same way you would expect a private sector company to respond: they have emulated products; they have matched pricing; they have done all these things, in addition to having the AAA backing that considerably helps their risk acceptance and their ability to work with banks in financing lines of credit, and so on.
Senator Grafstein: Mr. Miller, thank you for your testimony. You raise some profound questions for us in this economic situation that has overturned all of our compliant principles. We have never looked at many questions before because we never had the need to, but now we must look at fundamental questions.
I want to say that, from my perspective, it is important that we continue to expand our market in Canada for short- term and immediate-term export credits, because our prosperity depends on trade, and I am a free trader. The more products we have, the better and deeper the market is for local producers and exporters. You have me on that front.
Having said that, I want to look at the market itself and some of the questions you have raised. If I understand your capitalization, you have 1.8 billion euros in your capital; you are a private company.
Mr. Miller: That is our revenue; our capital is about 1.1 billion euros.
Senator Grafstein: Let me take it as being 1.1 billion euros. The euro is about 2:1 to the dollar, so that is about $2.5 billion Canadian.
Mr. Miller: The exchange is about $1.50 to the euro.
Senator Grafstein: Let us take it as $2. Let us give you the benefit of the doubt with your good will and all the rest of it. Then compare that to EDC. They have a capitalization of $50 billion. Probably one of the reasons why they have AAA rating is because they have $50 billion backing them as opposed to $2 billion; whether it is sovereign loan or not, it is simply the size.
With this second question, I am trying to understand your problem. Part of your way to leverage your capital is to reinsure risk. Does EDC reinsure its risks?
Mr. Miller: I do not know for sure. I understand that possibly it does have reinsurance treaties as well, simply not to the extent that the private sector does.
Senator Grafstein: Therefore, your reinsurance risks are higher. Does that not take us into the question of insurance derivatives, and so on, and the difficulty and the problem that AIG and others are having with respect to third party derivatives? I take it that you are into that business as well.
Mr. Miller: Actually not.
Senator Grafstein: What would happen is that your reinsurer would then turn around and to hedge some of his risk would move into derivatives and third party risk. Is that right?
Mr. Miller: Senator, I do not think it is. It is my understanding that the credit derivative market is considerably different than the credit insurance market.
Senator Grafstein: I see. I am talking to the chair about this because he should know. We are talking about the insurance risk market as opposed to the banking risk market. Manufacturers Life Insurance was trading at about $54 and is now trading at less than 50 per cent of that. Part of their problem was that they were into the derivatives markets in a terrible way.
The question is whether it is fair that a customer, in order to decide whether to undertake a piece of business with you to get credit insurance, should now be concerned to be transparent and look through to see whether or not the provider is strong enough to meet their particular customer demands. How does a customer in Canada satisfy himself with your company?
I have a little problem with the rating agencies these days. You will see in the next month or so that we will introduce a new bill to deal with this issue.
If I am an exporter and do not know what is going on, I want transparency here because I want security of supply. How do I get transparency with you other than to rely on the credit agencies? How do you answer that to an exporter looking to do a deal?
I am talking about your company; let us not deal with the others. You are a private company, as I understand it, and your numbers are not disclosed. Other than relying on credit agencies — which I would not if I were anyone in Canada, based on our practical experience in the last year — what would you say to an exporter watching this that wants to use you as opposed to EDC?
I believe in free markets and expansion, but answer this question for me. I am your exporter. I want to export something to a friend and I want credit for it.
Mr. Miller: I have had to answer that question several times. I would go to the rating, because we are all rated by the same companies. Therefore, it gives you some clue and, of course, we publish financial statements. I would also direct you there. Finally, I would direct you to OSFI, where we are regulated to the hilt and required to put up funds with OSFI in trust.
Senator Grafstein: As an insurer.
Mr. Miller: Yes, as an insurer, so that our customers can be satisfied that these funds are held in trust. In the event that a treaty has failed, those funds would be used to satisfy policy liabilities and claims. Our current excess is somewhere around 500 per cent or something like that.
Senator Grafstein: Let us assume for the moment that we took your argument and we agreed — I am not suggesting we are — that the market should be expanded and you should have more space in the marketplace. How would you propose for us to do that? Would we curb EDC? According to testimony in the last couple days, EDC has been quite successful in meeting the needs of Canadian exporters. How do we to help you without hurting EDC and the exporters who rely on their AAA rating?
Mr. Miller: Right now they rely on the AAA rating because it is there. If it was not there, they would be relying on our rating.
What would be a good model for Canada going forward? I am glad you asked that question. There are several possible models, but the one we would favour is again EDC reorienting itself to becoming a reinsurer and supplying this capacity to the private sector. It currently has quite a large book of insurance of its own. There is no reason it has to be a primary insurer. If it hived that off and became a separate company, owned possibly partially by EDC, it would add capacity to the market. It would add competition to the market. It would be backed by the reinsurance treaties that we are backed by, but at the same time it would have EDC influence to enable it to continue to ensure that the exporters are getting help if for some reason there was a market failure or a gap that was created.
Senator Downe: Did I understand your testimony correctly that the Office of the Superintendent of Financial Institutions requires you to have a high capital level?
Mr. Miller: OSFI requires that we put up assets in trust.
Senator Downe: Have you requested or has OSFI offered to reduce the percentage or level of assets you have to maintain? I ask that question because Manulife, for example, has approached OSFI and asked that its capital levels be lowered, and the superintendent agreed to lower them. Have you requested that, or has OSFI offered that?
Mr. Miller: We have not requested it, but I have seen correspondence that referred to the case you just mentioned. However, since we are overcapitalized at the moment, we have not explored it further.
Senator Downe: My second question pertains to the review that was done. I notice your company has participated in a number of the meetings, at least four. What is your view of the report that has been prepared, and what is your opinion of the process leading up to the preparation of the report?
Mr. Miller: I was very disappointed in the report itself. I found it to be anecdotal in nature and not at all analytical. In fact, it is my view that for much of the analysis provided in that report, exactly the opposite conclusions could have been drawn from the analysis they provided.
I also feel it was heavily influenced by EDC, and one of the best examples is in the domestic financing question, which has nothing to do with us but it was just so blatant. The conclusion drawn in the report was that there are gaps in the market because EDC told us there are. Based on that conclusion, they make a recommendation that EDC make provisions to participate in domestic financing.
Probably the most disappointing feature of the report was the failure to examine other paradigms, such as the one I just discussed with Senator Grafstein, that the private sector and EDC could coexist without competing against each other. The only comments made were that they said great caution should be exercised before considering any of these, rather than actually considering them or coming to a conclusion that there might be other paradigms out there that would work.
Senator Downe: I found it very strange that EDC attended all the meetings. I would assume there was some confidence about what was being said or words would have to be measured carefully not to annoy the company that had 75 per cent of the market in many cases, but we will deal with that when the minister comes.
Senator Corbin: Do you belong to the Berne Union?
Mr. Miller: We do, actually, through our Dutch state bank business.
Senator Corbin: What does the union do? Is it like a G20? Do you talk and talk and talk?
Mr. Miller: It is a bit of a boondoggle, actually. I will give you a quick answer, because I am not 100 per cent sure, but I believe it is an association of all the ECAs around the world. It really just meets to discuss ECA-type business.
Senator Corbin: EDC is also a member of that.
Mr. Miller: Yes.
Senator Corbin: You are not the principal in the company, but I suppose that you would raise the sort of issue you brought to our attention here today at union meetings?
Mr. Miller: We have certainly raised it with the European Union, and we have raised it through the Dutch state bank, yes.
Senator Corbin: Today, are you speaking strictly for your group, or is this also the perception of other private interests across the board?
Mr. Miller: Other private insurers, you mean?
Senator Corbin: Yes.
Mr. Miller: I believe other private insurers would have the same testimony that I just gave.
Senator Andreychuk: Your brief seems to talk about what governments should do and what kind of risks they should cover and what ones they should not. Encouraging private entry is what you are getting at. You also pointed out that Canada was different from the European situation. Governments there make many other intrusions. It is not as free and open a market in Europe as you seem to say. Would you agree with me?
Mr. Miller: I am sorry, senator, I do not know the other intrusions to which you refer.
Senator Andreychuk: We do not have time. The economies in those countries are controlled in ways that make it just as difficult for private companies to do business. I wanted to know to what extent you agreed with that. What I really want to get into, though, is that Europe is also now looking at changes because of the economic situation. Are their economic measures changing your ability to do business in Germany, France or Holland?
Mr. Miller: I understand the question now, senator. If you actually look at what is happening overseas, the European Union is an excellent example. They will not insure a risk that can be insured by the private sector. That is in the union's agreement. However, yes, because of shortfalls in the market right now, governments are entering the arena, typically through a reinsurance type of facility, so that is what you are seeing there. Again, as we propose, it would make an excellent example for Canada to follow.
[Translation]
Senator Fortin-Duplessis: Thank you, Mr. Chair. I have something to say, and it has nothing to do with you. I wanted to bring to your attention the fact that even though we have access to interpretation services, the first witnesses who testified did not provide us with any kind of text that we could follow. Another witness, Mr. Miller, brought along with him an English text. We live in a bilingual country. Generally speaking, even though I am a francophone senator from Quebec, I am entitled to a certain amount of consideration. In future, some thought should be given to providing me with the text in French, because it makes my job easier.
Earlier, Mr. Miller, you mentioned the famous AAA rating that Standard & Poor's had given to EDC. My colleague Senator Dawson talked about this. How is your company rated?
[English]
Mr. Miller: First, I apologize for my French. I wish I could have helped more. We did want to submit this in French. We just unfortunately did not have the time to put it together.
[Translation]
Senator Fortin-Duplessis: I was not criticizing you in particular.
[English]
Mr. Miller: I understand. I am sorry. As far as our rating, it is an A rating with Standard & Poor's.
[Translation]
Senator Fortin-Duplessis: One A?
[English]
Mr. Miller: It is one A.
Senator Stollery: I am a bit puzzled. I had already heard that EDC will go into the domestic market. Like most people, with the Export Development Corporation, it seemed to be a way of financing and encouraging exporters, which seemed straight forward.
I know that it is six o'clock now and I realize that we will have the EDC people and the minister before us, but what is your take on the fact that EDC has now decided to go into the domestic market when that does not appear to me to be a natural part of its mandate?
Mr. Miller: It is certainly an argument we faced before when EDC entered the domestic credit market back in 1998. It was in it for about three years, I think, and then ultimately the government suggested that it exit. They EDC turned its domestic business over to I think it was London Guarantee at the time.
As I mentioned previously, our niche right now must be the domestic insurance, and the fact that EDC has been given the power to enter that is very disturbing. Again, it comes back to an investment decision. Can I convince my management and shareholders that it is a good idea to invest in Canada when at any time the government can decide to enter and take our business away, crowd us out of the business?
Senator Stollery: I understand that. I understand your point of view. We will have officials from EDC and will ask them, but why do you think they have decided to go into a market that does not appear to me to be the natural market that they should be in? What is your take on it?
Mr. Miller: My opinion is that it was just a vehicle by which the government could dispense some of its promises through the budget. If they did it through a reinsurance role —
Senator Stollery: It makes no sense?
Mr. Miller: As a reinsurer, I do not see a problem there. BDC cannot do insurance; it does not understand insurance. EDC does, so maybe it is the best vehicle for that. All I am asking is that they not crowd out the private sector.
The Chair: For clarification, Bill C-10, the budget implementation bill, contains a provision that extends some additional capital to EDC. Part of the recommendation is to go into the domestic market. I think we talked about it a bit before. This is what Mr. Miller was talking about, I think.
Senator Stollery: EDC will go into the domestic market before we have completed our study?
The Chair: It must be approved and authorized by the budget.
Senator Corbin: If I may be allowed to say something, you would think that if they are to change the thrust of their raison d'être, if they withdrew that, they would bring an amendment to the EDC legislation and not do it through the budget.
The Chair: We should discuss that with the minister when he comes. That is a good question.
I want to make sure we understand. Mr. Miller, in a nutshell, you are saying that the presence of EDC and the expansion of EDC's business created a less competitive market, and you are suggesting that it should be more focused on the higher risk market that it occupied at the inception or focus on reinsurance as opposed to direct insurance. Is that the recommendation you are making?
Mr. Miller: Yes. We would prefer that EDC focus on reinsurance rather than crowding out the private sector on the primary insurance level.
The Chair: I think you said earlier that you would not be opposed to their looking at risks that the private market would not look at, for a variety of different reasons; is that right?
Mr. Miller: That is correct. It would allow them to pursue government policies by accepting that risk, yes.
The Chair: As contained in the budget this time because of the economic conditions that the country and, as a matter of fact, the world are in today.
Mr. Miller: Yes.
The Chair: Thank you very much. As I said at the beginning, you were very clear with your statement. You certainly assisted us in our deliberations. Good night, thank you and good luck.
Mr. Miller: Thank you again.
The Chair: On Tuesday we will meet earlier, assuming that the motion I presented in the Senate today to allow us to meet at 4 p.m. on Tuesday, March 10 is approved, to hear from the minister.
(The committee adjourned.)