Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 4 - Evidence, March 24, 2009
OTTAWA, Tuesday, March 24, 2009
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 5:48 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 DiNino (Chair) in the chair.
[English]
The Chair: Honourable senators, I would like to welcome you to the Standing Senate Committee on Foreign Affairs and International Trade meeting. The committee is currently examining the document entitled ``The Legislative Review of Export Development Canada,'' December2008.
The objective of the legislative review was 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 EDC's stakeholders; and, to make recommendations where appropriate including possible changes to the Export Development Act. Appearing before the committee today is Mr.Glen Hodgson who has been a witness before this committee several times. He is the Senior Vice-President and Chief Economist of the Conference Board of Canada. He will make opening remarks after which I will invite our members to ask questions.
Glen Hodgson, Senior Vice-President and Chief Economist, Conference Board of Canada: Thank you for the chance to come before the committee again, Mr.Chair. I will make only a few comments.
In the interests of full disclosure, I will start by telling senators here that I have worked on three reviews of EDC. I did a review in the early 1990s when I was at the Department of Finance. I was one of the authors of the regulations that constrained some of EDC's activities. I then led the review for EDC in the late 1990s, which was a four-year process and one of the more exciting things in my career, and brought about changes to the Export Development Act. It is nice to be an independent voice this time, after having been a bureaucrat giving advice to the ministry and having been within the corporation.
I have three general comments to make and then I have a few specifics I want to touch on in the recommendations.
First, I had a chance at EDC as the deputy chief economist to develop thinking about the fundamental nature of trade today. I came up with a buzz word that reflected our thinking, ``integrative trade.'' In French, the best translation of that is ``commerce d'integration.'' I think it is important to use that as the cornerstone, the model, which reflects Canadian trade today. Firms today are able to take apart their supply chains or production model and reposition it almost anywhere around the world. They can do it from Canada to the U.S., situate parts of their production in Asia or draw upon imputs from Europe. That is guided by foreign investment.
EDC has embraced that to a great degree as their fundamental business model. I will not take credit for that because I only came up with the brand. Canadian government thinking has also evolved in the last five years. More and more people in Foreign Affairs Canada and the Department of Finance see that as the underlying model. EDC embraces the model, so I support the fact that that is the foundation for how they are offering support to Canadian exporters and investors.
Second, it is important to recognize that EDC is more than a gap-filler. EDC's evolution — I like that word very much and the Chair talked about the evolving model — has been away from being the lender and insurer of last resort to being a provider of services across the whole financial system to exporters and investors of all kinds.
The right way to look at EDC is that it should be hard-wired into the Canadian financial system. It is not there to simply fill gaps when the private sector falls away, because you will not have the skills and experience you need in bad times — like now — if you are not there throughout the business cycle. I prefer the concept of EDC being hard-wired into the system, dealing with the banks, private insurers, exporters and investors of all kinds as a partner offering service and advice on an ongoing basis.
Third, I will draw upon something I learned when I lived in the United States for a while: if it ain't broke, don't fix it. Nothing is broken at EDC. Therefore, there is no fundamental reason to fix anything. EDC is working well and has had spectacular growth in terms of its coverage, business volumes and the number of firms it serves. It is taking a bigger space in Canada's trade environment and that is a good thing. If anything, today we are talking about fine tuning. There are small minor course corrections needed to ensure EDC has the mandate and tools to do the most it can for Canadian exporters and investors.
Regarding the recommendations, I read the report and brought along the recommendations. What struck me in the review was how much of it was oriented to process. There were very few recommendations addressing hard things that needed fixing within the business model. If EDC is to service clients more efficiently and make them more competitive, there should be commitment to streamline process as much as possible — rethink things.
I know the advice from Diana Smallridge and her team was very clear in the report. I would be reluctant to see more process heaped on the backs of the corporation, making it more demanding for them to do their jobs. There job is to ensure their clients are as competitive as possible in a very competitive world. EDC is not a monopoly service provider. Every day, it is dealing with the private market and with state insurers for many other companies trying to ensure that Canadian companies have a foothold in the global marketplace. An efficient structure is the best way to achieve that. EDC should have all the tools necessary to deal with integrative trade and I believe it has that. The review tacitly acknowledges that.
For example, I welcome recommendation 16, dealing with regulations being amended for domestic financing. I like that mention is made of things like EDC being empowered to play a role in domestic mergers and acquisitions where that activity would allow a Canadian company to compete more effectively internationally. I like 16(e) around financing for imports. This is something I pointed to in a report approximately three years ago in regard to giving EDC all the tools including import financing to ensure its clients are as competitive as possible.
With respect to credit insurance, this is still the core business at EDC. I have seen EDC's market share in decline since the late 1980s. When I was with the Department of Finance at that time, EDC was the market. Following that, more private insurers arrived on the scene and were more creative and able to serve more Canadian companies. EDC's market share has fallen since that time and it is less than half the Canadian market now.
That is good because there is choice and more overall capacity for Canadian companies. That is also why I would not want to see EDC withdraw from the credit insurance market. There are times when the market goes down, like right now. I am sure you have had private insurers come and speak to you. There are clear challenges now in the global financial markets. This is the time when EDC needs the tools and experience to step up. Seeing EDC's market share decline slowly over time is good and having more players is good, but having EDC there as the anchor provider in credit insurance is important.
One area where I do not agree with the recommendations is with respect to recommendation one. I know EDC has now voluntarily stepped back from the domestic credit insurance market. Presumably, they are doing that based on what is available in the market now. However, it is somewhat naive to think that if there were gaps after the fact, EDC could step up and magically fill the gap. You are either in the game or you are not. If you are not in the game, it is very hard to step up.
It is an appropriate corporate decision to decide not to offer domestic cover. That is something EDC can do because it has more knowledge of the market than anyone else. However, it goes back to the fundamental design of the model. You cannot sit on the sidelines and expect to step in at some point to become a player in the game. It is somewhat innocent to say that if there were large gaps, EDC could step up after the fact. That is the only recommendation where I took exception to the advice given by the reviewers.
My last point is that during my time at EDC, I came to understand and know BDC, the Business Development Bank, quite well. We are now at a point where I think it is imperative that the two organizations work together almost as one. I do not think you have to change the structures. I did a review during my time in EDC on whether there was benefit in integrating EDC and BDC. We found that the costs would be greater than the benefits.
To serve the Canadian business community, it is important to have a partnership formed between the two; to have clear lines of communication; and, probably most important, to have clarity from the Government of Canada itself on where the boundary line should be between their operations. They serve the same clients with some of the same services. That is not always a bad thing, but they can trip over each other on occasion. Therefore, it is important for the Canadian government to provide guidance to Parliament and also to the two organizations — BDC and EDC — about where the right boundary line is situated.
Those are my opening remarks, Mr.Chair, and I look forward to the dialogue.
The Chair: Would you like to give us some of your thoughts on the changes to EDC contained in the budget implementation bill?
I am sure you may get questions on that. I do not want to put you on the spot. We understand you came prepared to deal with this report and the report obviously reflects a period of time prior to the economic turmoil that we find ourselves in, which led to the budget implementation bill. If you are comfortable with it, we would like to hear two or three minutes on that.
Mr.Hodgson: I will start by saying that, in advance of the economy falling into recession, I thought it important for the Conference Board to step up and have a view on what we could do to try to push off recession or deal with it. One of the things I identified early on is talking about the opportunity the government had to put more capital into both BDC and EDC to give them greater capacity to deal with the gaps which have emerged in the marketplace. That briefing has been on our website since November.
I was pleased to see in the budget that more capital was provided to EDC. However, I was also encouraged that they have been encouraged to step into some of the gaps in the private market right now, domestically. There has been a falling back of credit around the world. Even though the aggregate numbers show that credit has grown in our economy over the last year, I took the time yesterday to download some of the reports from the Bank of Canada to see where we are.
There has been no new net credit provided to business by the private banks since Augustof last year. That seems to be an opportunity for EDC to step up, work with private credit providers and try and fill some of the gaps that exist in the marketplace. Therefore, I am very supportive of the fact they have been offered more share capital, which is the special capital they have for risk, and to play an expanded role as long as there are these gaps in the domestic financing market.
For example, I noticed there was a recent transaction where EDC stepped up to fill a hole to ensure a syndication was completed to allow a transaction to go ahead. That is exactly what EDC should be doing right now.
Senator Stollery: The way I understood previous witnesses, it is really the private sector that seems to have a complaint that EDC, which is after all the Export Development Corporation, is once more becoming involved in the domestic market. You will know the genesis of all of this as well as anyone. The domestic market says that the EDC has advantages that they do not have. Some of the companies who appeared before us, including some pretty big ones — international insurance people — made that argument. Could you expand a little on their argument that the competition of EDC in the domestic market is unnecessary?
Mr.Hodgson: That is a very good question. I have heard that issue raised before and, frankly, I heard it in 1993 when I was at the Department of Finance. We had visits from the private insurers, who are all different now because of mergers within private credit insurance around the world. At one point, there were scores and now the industry is basically down to three or four players.
Certainly EDC has advantages. They do not pay taxes. They should not as a Crown corporation; it makes no sense for the federal government to tax its own corporation. The real issue is service to clients, to exporters in the front end. The mantra at EDC when I was there was that the corporation did not compete based on price, so they are not undercutting the private market through price. However, they may be competing based on service — on coverage through the business cycle.
Right now is a classic case where EDC has the capacity to step up and stay open and market longer; they can stay open for particular buyer names and other countries for longer. Ultimately, that serves the interests of the Canadian exporter, and I think that is a good thing.
Therefore, I would not put a lot of currency in the story about EDC having advantages in terms of its finances. Of course it does; it can borrow money at the cost of the Crown and does not pay taxes. However, the real issue is pricing in the marketplace. If EDC does not undercut based on price but offers credible service through the business cycle, I think that is what you ask it to do. If the private market wants to step up and match EDC based on price and coverage for a particular name or a particular market, that would be a good thing.
Senator Stollery: I will let other people go on but I guess it was not the export market because I think we all understand the purpose of EDC is to assist exporters in ensuring that they get paid. The question was the domestic market. As I understand it, EDC had gone out of the domestic market.
Now, I think they are not — I cannot remember the term that they use in the insurance business — primary insurers. Is that the right word? They are not primary insurers in the domestic market. There is a bit of wrinkle there, as I recall the testimony.
Mr.Hodgson: One further comment: The whole reason for giving EDC the power to provide domestic credit insurance was to give clients the chance to go to one insurer. It is called a one-stop shop. In other words, they did not have to shop around for multiple policies to cover all of their business.
If you are a company manufacturing in Canada and some of your buyers are offshore and some in Canada, ideally, you would like to get credit insurance for all of your business. That was the logic behind it. As the report says, EDC has chosen not to be a player in that market. That is a choice I would leave to management at EDC because I do not see the competition as being unfair.
Fundamentally, if EDC is guided by the Government of Canada not to compete based on price, then the private insurers do not have a lot to complain about. They are then challenged to offer the same cover, either through the business cycle or the same degree of cover for a given buyer as EDC.
Senator Stollery: We are in the business cycle. We know we are in a fairly serious recession, but we have been in them before and we will be again. As I understand the insurance business, companies make money in four, five or six years and then have a fairly tight time because they get a lot of claims when there is a recession. As a person whose family has gone through two depressions, I am aware of that.
The Chair: I want to close a loop on that. I think Senator Stollery was referring to testimony that suggested that EDC, to the domestic market, would be a re-insurer as opposed to the primary insurer. Is that the question you were asking? Is that your understanding?
Mr.Hodgson: In my time at EDC, it was acting as a lead insurer by offering policies that covered all the other sales from firms as well as exports. However, from reading the report, it appears they have withdrawn from that role now.
Senator Andreychuk: I wish to receive a clarification. You started out by saying that, strategically, EDC has to be in for the long haul; it should not be filling gaps. However, with BillC-10 and the present situation, you then said there are gaps they need to fill.
That is the dilemma: It is a changing field and the capacity to respond seems to come from EDC, that is, the government. Private companies are never aware of who the competition will be on that basis since the government can move in and out. That destabilizes any strategic planning by companies coming into Canada, as I understand it. How would you respond to that?
Mr.Hodgson: These are special times. We have seen the falling away of access to credit around the world. We have seen it in Canada. The kind of ``Band-Aid'' that EDC was given for domestic financing was short-term; I believe it is a two-year term. By the end of this year, I am hoping that we see more normal credit conditions.
Remember that Canadian firms have probably lost access to a third of their normal banking financing. I have not done detailed research on this. However, when I talk to colleagues on Bay Street, they say about a third of normal Canadian business financing happens outside Canada; they can go to foreign banks and non-banks. However, all of them are shut down right now.
Canadian banks are stepping up and doing more. Certainly the report from Mr.Flaherty, for example, on the Department of Finance website, talks about growing credit but there will be gaps in the marketplace. Therefore, why not use a tool already available to help address those gaps, knowing you will not go the full distance.
My opening remarks were addressed more to EDC's role in terms of trade investment support. There have been times when people have said, ``Well, EDC can go away in the good times and step up again in the bad times.'' I do not believe that for a second because you do not have the competencies, skills, experience and underwriting capacity unless you are building through the whole business cycle. That was my fundamental point at the opening.
Senator Andreychuk: We have had conversations about ``in Canada, out of Canada.'' However, it is increasingly difficult to trace what is export, import, foreign controlled or what is Canadian content because of the nature of the change in international trade. Are you satisfied that they are addressing those issues in their research here?
As one who has been inside, outside and now hopefully neutral in looking at it, are they addressing the supply chains and the differences in international trade, and are some of the previous definitions artificial now?
Mr.Hodgson: First, I think the reviewers understand how trade has changed. They have a really strong track record in terms of doing analysis around the world. EDC itself has adopted a variety of policies inside that allow it to weigh how much of its capital base it will put toward various transactions — things like the Canadian benefit policy. They do evaluation now on a transaction-by-transaction basis to see how many jobs are being sustained or supported in Canada and how many offshore, recognizing that is the fundamental nature of the beast today.
There are many sectors, for example, where the Canadian supply is a very small portion. Yet, if those companies are not supported, they may shift all their production outside Canada. That is well understood within EDC, within the government and within the review as well.
I was comforted by what I saw in terms of the analysis of the review and the recommendations that emerged. That is why I only saw one small pick in terms of disagreements with the recommendations.
[Translation]
Senator Fortin-Duplessis: Mr.Hodgson, I am delighted that you could join us.
Earlier, on listening to your presentation, I understood you to say that EDC needed to be more transparent. It should start by publicly disclosing its profits and losses. In your opinion, what consequences would greater transparency and accountability entail for EDC, its corporate clients and the Canadian taxpayer?
Mr.Hodgson: Thank you very much for your question.
[English]
This was actually the central issue covered in the last review, which took place between 1998-99 and about 2004 by the time it was done. There was a huge discussion on transparency, which is why EDC adapted. Many of its practices have a transparency policy, for example.
The key issue for me is international competitiveness and not giving away things that could be used by our competition around the world. It is clear to me that trade investment is a highly competitive issue. Everybody around the world is trying to win market share from everybody else. The danger of going too far down the road on transparency is you end up feeding information to the competition.
We need a high degree of transparency on EDC's operations as whole. Their financial statements are very strong; the Auditor General is their auditor. You can look at their annual report and see the kinds of operations they carry out in great detail.
However, when you get down to the transactional level, you have to be careful not to give too much away and inadvertently feed the competition — from China, Japan, France or wherever around the world — information that would allow them to undercut Canada's exporters.
EDC is only a vehicle to facilitate trade being carried out by 8,000 or 10,000 companies across the country. Those companies potentially could be hurt if we give too much away. That is the kind of balancing act we went through in the last review and I think we more or less got the balance right.
[Translation]
Senator Fortin-Duplessis: Mr.Chair, if there is a second round, I will have other questions for the witness. Right now, I will give my colleagues an opportunity to put their questions.
Senator Dawson: Further to what Senator Fortin-Duplessis was saying about transparency, do you consider it normal that EDC is the only player not subject to the oversight of the OSFI in the area of loans, insurance and financing?
[English]
You are happy that at 50percent, they have gone down from 100percent to 50percent. That means your glass is half empty. The reality is that the private competitors say at 50percent of the market, there is more place for us and we should be taking more than 50percent of the market.
I understand they have gone from 100percent to 50 per cent, but would you not think — defending the Conference Board — that having private enterprise occupy more space is having a glass fuller, not half empty?
Since you have gone through these three studies and you have an historical sense, how can you explain the administrative costs that have gone from something like between 20 and 25percent 10 years ago to something like 50 to 55percent today? How can we think that is not the nature of the beast being protected by government?
If your private partners at the Conference Board doubled their costs by double over the last 10 years when everybody else was trying to reduce costs, you would probably have less profitability. There are three issues: profitability; glass half empty — how much is the fair marketplace; and OSFI.
[Translation]
Why does the OSFI not have the same responsibilities toward EDC as it does toward other corporations?
[English]
Mr.Hodgson: I will start with private insurance first because the glass is no longer the same size. It is probably six or eight or ten times bigger than it was when EDC had the whole market. That is the good thing.
There is a lot more choice now for exporters when they go to the private insurance market. There are other players here and the breadth of coverage is huge. Having had a chance to look at other systems out there, Canada is one of the few countries that still has a public sector credits insurer active.
One of the two reviewers ran the British export credit system for a number of years, and he has had a chance to look at everybody. He thinks that everyone has to design a system that works for them, which I think is spot on.
In Canadian circumstances, where we do not have private insurers in terms of credits, where we are at the behest of insurance companies based in other parts of the world, it is probably in our long-term interest to have a state player there to keep the market honest.
I have nothing against private competition. The fact that the market is many times larger than it was the first time I did the review in 1993 is a good thing. There are many more firms that have access to credits insurance, and probably at a lot more competitive price. It is also good for EDC to have its market share shrinking, because they have to dance that much faster to ensure they are offering a competitive product in the market.
If, over the next 20 years, EDC's share shrinks to 20percent and someday disappears, that would not be a bad thing. For the moment, however, having more private players as well as EDC in the market will be good for all Canadian business.
I will take the OSFI question next. It is there for different purposes, I understand. I have never worked closely with OSFI but I have had a lot of engagement with them. They are there to ensure there is no systemic risk for the whole Canadian banking and insurance system. They are there to ensure we have adequate information and oversight of banking practices.
Obviously, they have done their jobs well because Canada has come through the global financial mess unlike almost anybody else. Our system is intact. We do not have a dime of taxpayer money put into the balance sheets of the Canadian banks.
EDC performs a different purpose. It is there as the Government of Canada to ensure that there is enough capacity in terms of insurance and financing for our exporters. It is a different beast, 100percent in the public sector, with oversight almost daily by the Department of Finance, Treasury Board and Foreign Affairs and International Trade Canada.
I ran many meetings in my 10 years at EDC, ensuring that the Government of Canada knew exactly what was going on inside. We answered questions and exchanged information in this way. OSFI does not have that kind of access, I am quite sure, to the private banks and insurers overseas.
Theoretically, it is an interesting notion but I do not think there is any more oversight required than what EDC already has from the Government of Canada. I hope that can be as streamlined as much as possible to allow management to focus on its core job to provide service to Canadian exporters and investors.
On your third point, what were the ratios relative to? Those are two numbers that I do not have. You suggested 25percent.
Senator Dawson: I do not have the chart in front of me but for the last ten years, they compared the loan guarantees versus the administrative costs. It went from about 22percent in 2000 to about 50percent today, but I do not have the chart in front of me.
Mr.Hodgson: I would love to look at the numbers. If you look at the big ratios, you see that EDC's staff size has declined by 100 people over the last five years and their business line has grown by two thirds. Maybe it is around a particular program.
The Chair: You might wish to take that as notice and send a comment to the committee through the clerk. We will distribute the information to the members.
Senator Dawson: I would be satisfied with your comment.
Mr.Hodgson: I can speak to it today, now that I see what it is. The senator has referred to administrative expenses within claims and expenses, which means administration relative to the short-term insurance business. You are right. It has grown from $37 million in 2000 to $58 million in 2006. However, simple things like inflation and salary increases would explain a great portion of that.
Senator Dawson: Look at the other column.
Mr.Hodgson: Do you mean the combined ratio?
Senator Dawson: Their numbers have not doubled, which means that the administration costs more today than it cost then. There must be some explanation.
The Chair: It might be unfair to Mr.Hodgson to put him on the spot like this. I would prefer that he look at whether the cost to administer and operate the EDC proportionately has grown too much? Is it an acceptable increase in your opinion? Is that correct, Senator Dawson?
Senator Dawson: Yes.
The Chair: We would appreciate it, Mr.Hodgson.
Mr.Hodgson: I should take you up on your offer to send a written response.
The Chair: We do not want to be unfair to our witnesses.
Senator Zimmer: Mr.Hodgson, you have touched on this but I would ask you to expand. From your experience, what would you say is the biggest setback faced by Canadian firms dealing with the EDC that impedes their ability to meet the challenges of today and tomorrow?
Mr.Hodgson: Senator, would you expand on what you mean by ``setback?''
Senator Zimmer: I would consider a setback to be anything that occurs that causes firms to change their course of action and to respond to your corporation in a different way.
Mr.Hodgson: In my experience with EDC, the single biggest challenge that firms have faced was the price — surprise, surprise. Businesses always want to pay less for service and the corporation always had to think about operating in the black over time. Therefore, the single biggest challenge or complaint I heard was that their prices were too high. I heard that through many short-term and medium-term transactions. As well, I was involved in a few negotiations and the price is always the key variable because businesses have to build that into their sales price to their foreign buyer. At the same time, you have seen the growth in business volumes that EDC has experienced. I am old enough to go back to the early 1990s when the corporation did $11 billion in business.
Senator Zimmer: That is not old.
Mr.Hodgson: I am feeling it now. I can remember when EDC was doing only $1 billion to $2 billion in business. The year I joined the EDC, it did $11 billion in total business. This last year, they were up to $85 billion in total business. Clearly, price is an important variability in completing a deal, but it is not the only thing. On the flip side, people seem to value highly the risk capacity and the ability of the corporation to stay engaged in markets for the long haul. When private insurers think they have to pull back for a given name or country, the EDC can usually find a way to stay there. They might have to change coverage ratios or the price might have to adapt accordingly but, at the end of the day, they are in for the long haul. You get what you pay for in life, hopefully from the Conference Board of Canada as well.
Senator Zimmer: What do you predict will be the greatest challenge for Canadian firms engaged in international markets over the next ten years? Do you think that our Canadian firms are prepared to face such challenges?
Mr.Hodgson: Part of our job at the Conference Board of Canada is to do economic forecasting but we also have a research centre around trade and investment. We analyze in depth the kinds of challenges facing Canadian companies. The single biggest challenge is that we have been living in a very blessed neighbourhood. We have been living beside the United States through the whole of our existence and we have taken advantage of the fact that Americans like to spend. Now, we are entering a period when the American consumer will have to pull back. At one time, 87percent of our exports were to the United States. With strong growth, we did not feel a compelling need to diversify. The big challenge will be how to maintain our market share in the United States, knowing that it will not grow as strongly, and how to find new markets elsewhere — China, Southeast Asia, new opportunities in Europe, Latin America. The imperative for Canadian companies to diversify their source of buyers will be critical.
We have seen some of that over last two or three years. We have seen Canada's trade with the United States plateau since 2000, when you take price effects out. We have seen some diversification almost by accident towards Europe and Asia. We have to become much more aggressive, knowing that countries like China or India will be the dominant growth markets for the world economy for the next ten years.
Certainly, the EDC has signalled their understanding of that. They are opening offices in these markets and trying to build more capacity. They will work with the Government of Canada, pursue more trade opportunities and be there for companies. We will have to move away from the U.S. market.
Senator Zimmer: Thank you for that embellishment.
Senator Wallin: I have a short point of clarification. Mr.Hodgson, you said that you had read that there had been no new net credit offered by traditional banking sources since August2008. When did that end?
Mr.Hodgson: It was until the end of February. The Bank of Canada has an excellent report on their website that examines banking assets and liabilities, and they have a weekly report. You can find the most up-to-date data available on their website. It was striking for me to look at the aggregate numbers that we are receiving, for example from the Department of Finance, because Minister Flaherty is reporting,, on a fairly regular basis, the developments in our capital markets. When you look at the source data, you will find it striking. Credit flows to firms increased in August, and in Septemberall the financial markets around the world blew up. Credit grew until Decemberand then declined in Januaryand February.
Senator Wallin: That might be what is at odds with the testimony from the CBA on this matter. They were starting to see a turnaround, or they had responded in that sense. That was in Decemberand now we are seeing something else for the last two months.
Mr.Hodgson: We have reached the point in my business where we have to look at the real-time data weekly or monthly to keep track of things. I have no doubt that there is healing going on in our financial markets. The fact is that the banks are telling us they do not have to use the full $125 billion available to them to buy mortgages, which was intended to free up their balance sheets so they could begin lending again. That means they are able to access credit in the inter-bank market at a better rate, so normalcy is slowly coming back. However, month by month we are watching the flow of credit fluctuating. I would hope that over the next few months, we will see the restoration of normal credit patterns.
Senator Wallin: Your point remains the same that it is still not enough and the EDC needs to be in that marketplace.
Mr.Hodgson: Yes, senator. It is not enough largely because the nonbanks have fallen away. You cannot go to New York to float a bond issue. It is just not there. The big names that we all know have closed up shop in Canada and gone home. Arguably, London might be more affected than Wall Street.
When we wash all the bad debt in Eastern Europe, for example, this will register on European banks' balance sheets first. As that rolls out over the next three to six months, London will go through a tough period.
Senator Wallin: I appreciate you making that important point. There is a difference between the banks and the non- banks in terms of access, and that is why the role has become more important, if you will. Thank you for that.
The Chair: Our next witness is here. Looking at the time, I know a couple of colleagues wanted to go a second round. I will put Senator Fortin-Duplessis and Senator Zimmer first as questioners of our next witness.
I would like to thank you again, Mr.Hodgson, which is probably the third or fourth time I have done so. We appreciate your presence and, as usual, you add value to our deliberations. If you could supply the information that Senator Dawson has asked for or anything else that may come to mind in the meantime, we would be happy to receive it.
[Translation]
We will begin with a presentation by Mr.Jean-Michel Laurin, following which committee members will have an opportunity to ask questions. Mr.Laurin is the Vice President of Canadian Manufacturers and Exporters. Welcome, sir, to the Senate. You have the floor.
[English]
Jean-Michel Laurin, Vice-President, Global Business Policy, Canadian Manufacturers and Exporters: As the chair pointed out, I am the vice-president, global business policy, for Canadian Manufacturers and Exporters. I would like to I say a few words about our association before I start my presentation and talk about the short-term challenges that our members are facing right now, as well as some of the longer-term challenges this review also needs to address. I will then have comments about financing specifically. We have been collecting stories from our members. I would like to share data related to that with you. Then we will have a bit of time left for questions at the end.
My association, Canadian Manufacturers and Exporters, represents, as the name indicates, the largest business sectors in Canada. Manufacturing and exporting together represent a significant share of our GDP. Manufacturing is responsible for 16percent of GDP; and exporting, if you include service exports and energy exports, accounts for over a fifth of our gross national product.
By and large, our members are responsible for two thirds of Canada's exports, which is to say that the manufacturing companies are responsible for two thirds of Canada's exports. We ship $605 billion worth of products every year in Canada and throughout the world. Overall, our members are the businesses who represent EDC's clients.
With respect to the timing or the context of this review, we were involved with this back when the Department of Foreign Affairs and International Trade started this process it started about a year ago. I think the situation could not have changed more within a year than it actually did. You are currently in a difficult position, having to look at this review. As this is a 10-year long-term review, you must look at some of the longer-term issues that need to be addressed. At the same time, there are some serious short-term challenges that need to be looked at. I would like to talk about them a little bit.
If you look at the short-term situation — Mr.Hodgson previously talked a little about it — you are seeing financial markets in turmoil. That has an impact, even though the Canadian banking and financial system is probably in a stronger position than many other countries around the world.
We are seeing less credit and less financing available in the Canadian market. Some of the Canadian banks have been doing a good job trying to step up and provide additional financing, but a lot of the foreign institutions have disappeared from the Canadian market. For example, with respect to the asset-backed commercial lending market, many of the firms have left the Canadian market. Therefore, our members are seeing fewer offers and less supply of financing available.
Simultaneously, we are seeing a higher level of risk and uncertainty in markets. We are seeing more of our clients being late with their payments. We are seeing more companies and export markets going bankrupt. There are higher risks of receivables and inventories. We are seeing orders postponed and investment in capital projects in Canada and abroad being delayed because of a lack of financing. We are dealing with a market where there is more risk than ever before.
Probably one of the key issues for our members right now is a meltdown in customer demand. There has been a lot of talk about the problems that the automotive and forestry sectors are facing, but this is a challenge that manufacturing companies are currently facing, regardless of which industrial sector they are in.
With regard to credit specifically, Mr.Hodgson made some comments about that in his presentation earlier. We need really up-to-date data because the situation is evolving so rapidly. We will actually be revealing the results of our latest business conditions survey later this week. This is a survey we do every month with manufacturing and exporting companies across Canada. We ask them what they are seeing in the markets. This way, we can obtain that information much faster than Statistics Canada can.
We have been doing the survey for a few months now, and most companies are expecting their orders to fall over the next three months, but the situation is somewhat improving. We have 49percent of companies saying that orders will fall within the next three months, but only 14percent of the companies say that orders will fall over 30percent. Back a month ago, this figure was at 33percent. Therefore, the percentage of companies that expect significant decline in sales over the next three months has been reduced by half.
When you look at financing specifically, the surveys indicate that this is the key issue that companies are facing right now, especially if you talk to exporting companies. This is the number one challenge they are currently facing. Fifty- ninepercent of the companies we survey say that they are experiencing some difficulties accessing adequate levels of financing.
As I said, this is a key issue for our members currently. The types of financing that are not available are, for example, obtaining financing for working capital purposes, obtaining a larger line of credit, obtaining capital investment and finding money to invest in new technology. These are the types of financing that companies are having a hard time accessing right now.
We have been raising those short-term challenges with the government. Over the last few weeks and months, there has been a response from the government. They put some additional measures in place in the last budget. We have been in close contact with the government, with EDC, the BDC and all the different players involved in this to ensure that the measures announced can be implemented rather rapidly. I think it will be much easier now that the budget has actually been accepted.
Going forward, I think these measures should help alleviate the situation for our members in the short term and help position Canadian companies so that they can better compete in international markets in the mid or long term.
Looking at the longer-term challenges before we turn to questions, we understand that for this country to be successful economically in the future, we need to ensure our companies can export and compete and win in global markets more successfully than ever.
What we are seeing when we discuss these issues with our members is that it has been very difficult to maintain market share in the U.S. and in key export markets over the last few years. Obviously the appreciation of the Canadian dollar has had a major impact. Companies have responded by cutting costs, improving productivity, developing new products and trying to expand their business in new markets that they were not looking at before.
I think everyone agrees that to be successful in today's environment you need to run your business differently than you did before. I am sure many of you have regular interactions with companies in your regions. Everyone understands — especially those doing business outside of Canada — that we need to change our business models pretty quickly to be successful in international markets. I know the report about that.
We are also seeing patterns of trade change. For a long time we just talked about strict exports. Now we are talking about integrative trade, companies are sourcing parts and inputs from different parts of the world. They are bringing them to different locations around the world — some in Canada — to assemble products and then re-export.
Even in the manufacturing sector, which I represent, we are changing the definition of manufacturing. It is not just really making a product, it is delivering value to your clients through a tangible good. A lot of that value comes from marketing, from research and development, from being able to establish partnerships with suppliers and customers, being able to invest in research and development and so on. A lot of the value is embedded in the product but it is not necessarily the product itself.
There are some business opportunities as well in the market right now that we need to pay attention to, especially if you are looking at the situation in the long term. We are looking at global markets and markets in turmoil. We have many members coming to us right now saying they see — despite the fact that their sales are going down, despite the fact that there are all these challenges in the market — an opportunity to buy some competitors and increase their market share. There are many of opportunities for acquisitions and to grow in new markets.
The U.S. and Canadian markets have been growing more slowly than some of the emerging markets. Many companies are interested in expanding their businesses in these markets. At the same time, a lot of effort has been made by many people in Canada to help these companies succeed in international markets.
In that context, the key issue for this review is ensuring that Canadian businesses that are active on the global stage have access to appropriate and adequate levels and types of financial services. We need to ensure that government is there to support companies when the private sector does not have the ability to do so.
We have been talking to our members about this issue, and EDC has been a valuable business partner for the past 10 years. Since the last review, I have talked to a number of members. Overall, EDC has been quite responsive to the needs of our members as economic conditions have been evolving. They are seeing patterns of trade emerging. Even within the existing legislative mandate they have been able to do many new things that they were not doing before. I know they have opened some offices abroad. They are looking at participating more in projects abroad to bring export business to Canadian companies. They have been able to take a little more risk in some of the emerging export markets. I know members have noticed that, and they certainly appreciate EDC's role in that regard.
More recently we have had to work closely with EDC, the BDC and the Department of Finance specifically, to tackle some of the most immediate problems that our members are facing in accessing capital. Everyone from the government side has done an admirable job in trying to tackle this difficult, complex and rapidly changing problem.
I do not know what the impact of the budget will be. Everyone is working together to ensure that those measures are put in place quickly and respond to the needs of businesses. We are on the right path. The key issue going forward is ensuring that institutions like the BDC and EDC have adequate levels of financing and capacity to fill the gap that is in the market right now.
I will close with that. Maybe we can start our question and answer period.
The Chair: Just to be quite clear, I would like the record to show that CME's membership accounts for approximately 75percent of the total manufacturing in Canada, approximately 90percent of Canada's exports, and that 85percent of the members are small- and medium-sized enterprises. I hope that those watching at four o'clock in the morning will appreciate how important your organization is to us.
[Translation]
Senator Fortin-Duplessis: Good evening, Mr.Laurin. The federal and Ontario governments are poised to give General Motors and Chrysler about $4 billion in refundable short-term loans. The loans will be administered by EDC and $2.7 billion of this amount will come from the Government of Canada.
At the same time, the Canadian government will provide assistance to auto parts manufacturers in the form of improved access to credit through EDC's client account insurance.
In your opinion, do we not run the risk of seeing other sectors that also depend on EDC impacted by this focus on the auto sector?
I will put my second question to you right away. In your opinion, how will this new initiative impact EDC operations in other sectors of our economy?
Mr.Laurin: Thank you very much. That is an excellent question. Much has been reported in recent weeks and months about the problems plaguing the auto sector, especially in Canada and the United States.
Some misinformation has been circulating to the effect that most companies are having problems obtaining credit. It is important to understand that this situation is due to a dramatic, rapid and marked decline in consumer demand, something that no one was expecting.
Much has been said about auto sector businesses. According to our most recent surveys, these business were the first to experience problems. As a rule, businesses that sell consumer goods are the first ones to feel the effects when demand falls off.
However, our surveys also show that automobile and auto parts manufacturers are not the only ones affected. The entire manufacturing industry is Canada has been hit. The problems are national in scope, not merely confined to Ontario.
Therefore, in response to the question as to whether consideration must be given to the auto industry, I would have to answer yes, because if you look at the economy of Central Canada, in particular the Ontario economy, the auto industry is a major competitiveness pole. As such, it generates positive economic spinoffs for many other industrial sectors.
For example, with respect to issues like manpower development, the presence of research institutes in the auto sector benefits businesses and a number of industrial sectors. Of course, there are many businesses such a plastics, pressure die-casting and steel manufacturers. We may think that they are less affected by this crisis, but their biggest customers, or at least some of their main customers, often are associated with the automobile industry.
Therefore, we should not look at the auto industry as operating in a vacuum, or being separate from the Canadian manufacturing sector. On the contrary, economic sectors interact a great deal with one another.
Personally, I am not concerned about the new measures targeting the auto sector, because I do not feel that they will adversely affect other measures designed to assist other sectors. Perhaps we have not talked about them as much, because they have not caught the attention of the media quite as much. However, while some of the programs and measures unveiled in the recent budget do target the auto sector specifically, many others are designed to help exporters in general. We may not have heard about these measures as much, but they also provide support to businesses operating in other sectors of the economy. For example, armed with new powers and additional financing, EDC has already begun to announce agreements with businesses operating in other sectors, including one with a business in Manitoba in a sector parallel to the auto industry.
We have focused considerably on the automobile industry, and I believe it is important that we do so, otherwise we could lose a major force in our industry.
However, even though we have not discussed it as much, additional measures are available to support businesses operating in other sectors of the economy.
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Senator Zimmer: Mr.Laurin, you have touched on the first portion of my question, but I will ask it and the second part.
Do you think there is currently an adequate volume of varying financial resources available for Canadian companies looking to enter the international market?
Can you provide us with an approximate percentage of Canadian firms that are deterred from entering the international market based on the simple fact that they cannot acquire sufficient financing?
Mr.Laurin: That is a very good question. I am not sure I have an answer for you. As to whether there are enough resources, it is subjective. I represent exporters, and I will always say there are not enough resources.
If you look at financing specifically, there is a need for greater capital and financing in markets right now. We have definitely been asking the government to step in and provide additional liquidity in financial markets, and they have stepped up and provided some of that. We have not seen the results of those measures yet, but we will be tracking the results in our surveys in the upcoming months.
You are talking about a global credit crisis, which is not a problem created by the Canadian government or anyone in Canada. We have been quite fortunate to have institutions that are solid. Our banks overall have a solid balance sheet; they have not been as affected as banks in other countries. However, there is a need for additional financing and credit in markets right now.
I partially answered your question. We do need more financing in markets right now.
As for the answer to the other question about ensuring adequate levels of financing, it would be quite complex. The fundamental problem that needs to be addressed is making sure that the balance sheets of the international banks become more solid. That means that they have to deal with how they value assets within those balance sheets. They also have to work out how to ensure that the mortgage situation in the U.S. gets sorted out. President Obama's administration is probably tackling this problem first and foremost.
We need more financing in markets. The government has stepped in and had probably done what it could. We will have to see and re-assess the situation in a couple of months' time to see if what we did was appropriate.
The next question was about the percentage of firms that are deterred from entering the international market because they cannot get funding. We have seen the downturn in U.S. market, which is our traditional export market to which 55percent of Canadian industrial production is sold. We sell more in the U.S. than in Canada. With that market having all sorts of problems and with demand going down, we have been getting more calls from members of companies wanting to grow outside North America than we have ever received before.
Financing is one of the issues that companies face when they try to grow in international markets, but there are a number of other issues, for example, lack of internal resources.
Many companies are trying to manage this downturn in the short term, and finding financing is one of the hurdles they have to get over to gain market share in other markets.
However, I do not have a specific number to give you. It is probably a question we could ask. Much of the financing that our members are looking for right now is either operating a line of credit or just working capital, in other words, the type of financing that Senator Fortin-Duplessis was talking about. Companies are seeing a downturn in their sales for which they were not prepared, and they need additional capital to get through the downturn and reposition themselves for the future.
It is exactly the situation the auto industry has been facing, but it is a situation that any manufacturing company that is selling in the United States is facing right now.
The Chair: Mr.Laurin, you suggested you might not have full answers. We would appreciate it if you could do some research and complete your answer, if you are able to do this. You can send it to our clerk and he will distribute it to the members of our committee.
You touched upon the changes that the recent budget bill made to EDC and BDC, but dealing principally with EDC, the area we are looking at. There are two major changes, if I understand it correctly. One is the entry into the domestic market, although it is for a limited period of time. I believe it is two years, renewable. The other deals with additional capital. Could you take either one of those and tell us how your organization feels about it and what benefit you think you will derive from it?
Mr.Laurin: When we look at the additional powers, they have to do with domestic financing. In other words, usually EDC needs to ensure there is an export benefit, namely, that their financing will help a company export directly or add capacity to their business so they can export more. That has been relaxed now. They can do domestic financing. It responds to a clear need in the market.
Banks themselves admit that less than half of business financing in Canada is provided by Canadian chartered banks. Many foreign firms were in Canada providing non-bank financing, such as asset-backed commercial lending. In other words, if you buy new machinery for your plant, someone will finance or lease it. Those firms have, in large part, exited the market. We see an important need for companies to insure their domestic receivables, and that is something that EDC could not do before.
Relaxing the rules and making sure they can fill the gap in the market right now, when it comes to traditional domestic financing, is certainly needed. We asked the government to come up with innovative measures to ensure adequate levels of financing in the Canadian market.
In terms of some of the additional financing that has been provided, this is just normal. There is more need for EDC's services now than there was before, so it is just normal that appropriate levels of financing are provided to EDC so that it can play that role.
One of the concerns we have is that we would not want EDC to be in a position where it has to choose one or the other. In other words, they now have to do more domestic financing. There is a role to play in that regard, and we certainly thought it was a good idea to do that. At the same time, we want to make sure EDC can also fulfill its traditional role, which is to help exporters and provide export credit insurance and also to provide financing for companies trying to grow their business in international markets.
It will be important not only now but also in the upcoming two years to ensure that EDC has appropriate levels of financing and capacity so that it can play the role it needs to play in the market right now.
The Chair: Is there a need for the expansion of its powers? We know that a number of financial institutions have, as you said, exited the market, so that particular availability of financing is gone.
Since there is a downturn in the economy, do your members need these additional services? Will they be able to take up the additional capital made available to these companies?
Mr.Laurin: Our members are saying that there needs to be more liquidity in the market and more capital available at competitive prices.
The Chair: Are your firms doing enough?
Mr.Laurin: As to whether there is a real need for EDC and whether the government needs to step in and do this, there is a clear need for it.
Canada can use the situation to its advantage from a business perspective. Right now, everyone in the markets is looking for cash. Liquidity is a key issue, not only in Canada but around the world. If our businesses are able to access capital and find liquidity, there are many opportunities.
Our members tell us they are hurting now, but they know that everyone in their market is hurting and that there are opportunities. Some companies are in a very difficult position, and Canadian companies could be a position to acquire them. They could be in a position to acquire market share and expand into new markets because some of their competitors are retracting from those markets.
Many companies are preoccupied with their financial situation in the short term. However, if they look at the situation strategically, and if they can find the money, there are many things they can do to reposition themselves in the market. The problem that everyone in the world is facing now is how to find the liquidity.
Canadian financial institutions are in a relatively solid position when they compare themselves to their competitors around the world. If we can use that to our advantage and if we can leverage the fact that we have a strong export credit agency in Canada that already has a good business relationship with the majority of the country's exporters, Canada can improve its competitive position in international markets.
In the short term, yes, there are challenges. However, if companies can find the money, they will do something valuable with it.
The Chair: I appreciate your candid answers. Your testimony has been very informative. On behalf of all the members of our committee, we thank you for your time. Your testimony will be useful for the preparation of our report. We will certainly see you the next time.
Mr.Laurin: Thank you, Mr.Chair.
The Chair: If senators can stay for a couple of minutes, we have a couple of issues to deal with.
Senator Stollery: Senator Dawson, who had to leave, had a point of order about the witness we were talking about earlier today.
The Chair: That has nothing to do with this witness.
Senator Stollery: No, but it is a point of order.
The Chair: I understand from the clerk that we will be dealing with that tomorrow, instead of today, if you do not mind.
Senator Stollery: Okay.
The Chair: Colleagues, the meeting is adjourned until tomorrow at 4 p.m.
(The committee adjourned.)