Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 8 - Evidence - May 26, 2010
OTTAWA, Wednesday, May 26, 2010
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:25 p.m. to examine the current situation of the Canadian and international financial systems.
Senator Céline Hervieux-Payette (Deputy Chair) in the chair.
[Translation]
The Deputy Chair: I call this meeting to order. This afternoon, we will examine the current situation of the Canadian and international financial systems. I would like to welcome you, as well as my colleagues.
[English]
We are joined by Export Development Canada, which received funding and a somewhat different mandate as a consequence of the global financial and economic crisis. We are anxious to hear EDC's views on, and its response to, this crisis.
I welcome Benoit Daignault, Senior Vice-President, Business Development, and Ken Kember, Senior Vice President, Finance and Chief Financial Officer.
[Translation]
I was wondering whether you sent your president abroad before testifying before the committee. I am curious to know where he is. Did you lose him on your way over?
Benoit Daignault, Senior Vice-President, Business Development, Export Development Canada: We did not lose him. He is around here somewhere.
The Deputy Chair: Welcome. You may begin.
Mr. Daignault: Thank you for having me here today. I welcome the opportunity to speak to you about the ways in which Export Development Canada sought to achieve our goal of being a trusted partner to Canadian companies, during what turned out to be a turbulent year. For Canadian companies and their clients around the world, 2009 was a challenging year indeed.
As the credit crunch wrought havoc on the global economy, Canadian exporters saw export sales plummet by 24 per cent, the most severe drop since 1946. The credit crunch constrained the capacity of private sector financial institutions to support Canadian companies, triggering a surge in demand for EDC's financial assistance throughout 2009.
My colleague will provide you with the details on EDC's financial performance, but I want to highlight one number that I believe demonstrates the efforts EDC made to step up during the credit crunch. In 2009, we served a record 8,500 customers.
As you know, the Government of Canada introduced measures to reduce the impact of the credit crunch in Budget 2009. As part of this plan, the government authorized EDC to do more for Canadian companies through a two-year expansion of our mandate to support domestic business. We were tasked with putting more credit into Canada's financial system to help viable but struggling trade-related Canadian companies. And we achieve great success in this endeavour: EDC worked closely with Canadian banks, credit insurers and sureties to increase their capacity to serve Canadian businesses during the downturn, adding $2.5 billion in credit to the Canadian domestic market when it was needed most.
As part of this, EDC participated in the Business Credit Availability Program, which allowed us to fill financing gaps and bring much needed extra credit capacity to Canadian companies. EDC also worked with private financial institutions through risk-sharing agreements that gave banks the confidence to extend more financing to Canadian businesses. By December 31, EDC had provided $1.7 billion in domestic financing for Canadian companies.
Secondly, we collaborated with the major credit insurance companies to put agreements in place whereby EDC was able to provide reinsurance for Canadian companies' domestic receivables, sharing the risk 50:50. By December 31, EDC had provided $32 million in reinsurance capacity, supporting almost $103 million in sales.
We partnered with major domestic sureties and banks in order to bring additional bonding capacity to the market. Through this initiative, EDC was able to provide support for our partners' exposure — allowing our customers to have access to additional bonding capacity and potentially freeing up more capital. By December 31, EDC had underwritten $688 million in domestic sales by Canadian companies.
EDC's domestic activities directly helped 208 companies with their business in Canada during 2009; 179 of these were SMEs. Our domestic powers will remain in place until March 2011, as Canada continues to emerge from the recession. On the domestic financing front, we expect that demand will be lower, as capacity returns to the markets.
However, private lenders will remain cautious throughout the year and financial gaps will remain. In 2010, we expect to facilitate an additional $1 billion in domestic financing, $1 billion in domestic bonding and surety, and up to $300 million in credit insurance.
[English]
Some sectors of the Canadian economy, which were already struggling before the recession hit, have been particularly affected by the downturn and credit crunch. The auto sector in Canada faced a challenging year in 2009, to say the least.
However, EDC was able to provide support to help Canadian companies make it through the downturn. We provided $4.5 billion in commercial financial solutions to Canada's automotive sector, including $3.2 billion in accounts receivables insurance and $1 billion in financing. EDC was also responsible for managing funds committed by the Government of Canada to support the restructuring processes for Chrysler and General Motors. In addition, EDC administered $628 million in accounts receivable insurance, ARI, through the Canada Account, on behalf of the Government of Canada, for suppliers to North American automakers undergoing bankruptcy and restructuring proceedings.
The forestry industry also faced a unique set of challenges in 2009. EDC provided $16 billion in commercial financial solutions to Canada's forestry sector, including $15 billion in ARI and $870 million in financing. Over 500 forestry customers from across Canada accessed EDC's products and services in 2009.
To serve our customers better, EDC continued to expand its regional presence in Canada bringing services closer to the exporting community and its strategic partners clustered in exporting regions. For example, we opened new offices in Ville Saint-Laurent and Drummondville, Quebec, last year. These additions brought the total number of regional offices in Canada to 17.
EDC also grew its international network with new permanent representation established in Lima, Peru to serve exporters to the Andean region. This expansion increased our international representation to 14. Looking ahead to 2010, we plan to open new permanent representation in Istanbul, Panama City and Dusseldorf. Turkey is a rapidly growing market thanks to its unique position as a trade hub between Europe and the Middle East. Panama will cover the Central American and Caribbean region, while our representation in Dusseldorf will help Canadian companies to access the global supply chains of multinational companies based in Western Europe.
In all the business we carried out in 2009, we made corporate social responsibility a key consideration. We are committed to facilitating Canada's international trade in a socially responsible manner and to supporting our customers and partners in doing likewise. A review of our environmental policy and our environmental review directive completed by the Auditor General of Canada in 2009 found that EDC's environmental processes are aligned with international practices.
Also, EDC continued to support, and participate in, conferences where best practices regarding businesses and human rights are being developed. We also launched a four-year community investment partnership with Care Canada to help develop small businesses in various emerging markets.
We believe our corporate social responsibility, CSR, policies bring a competitive advantage to the Canadian companies that we deal with. Striking the right balance between meeting the expectations of Canadians while maintaining a level playing field is a priority for EDC. Over the past several years, the corporation has been strengthening its CSR practices continually in keeping with evolving international standards. These transactions are seen as having met some of the highest standards applied by financial institutions and export credit agencies.
There is no doubt that 2009 was a tough year for Canadian exporters. The domestic flexibility granted to us by the government enabled EDC to exercise fully its mandate for the benefit of Canadian companies.
I will ask my colleague, Ken Kember, to discuss EDC's financial results for 2009.
Ken Kember, Senior Vice-President, Finance and Chief Financial Officer, Export Development Canada: Good afternoon. It is my pleasure to be here today to provide you with an overview of EDC's financial results for 2009. As my colleague mentioned, the year was challenging for the Canadian export sector. I will take this opportunity to walk you through EDC's performance in a number of key areas that we use as indicators to measure our effectiveness. I will also provide an overview of our current financial situation and conclude with a bit of historical perspective.
[Translation]
The recession was felt throughout international markets in 2009. Declining commodity prices, the postponement of investment plans and a sharp decline in activity in the extractive sector negatively affected EDC's business volumes in 2009.
[English]
Last year, we facilitated a total of $82.8 billion in exports, investments and domestic business. This volume was down slightly from $85.8 billion in 2008. Given that Canadian exports fell by 24 per cent in 2009, that decrease in volume is well within the expected range. This decrease in exports means that EDC activity accounted for an even greater share of Canadian exports and, of course, this export activity was complemented by our role in the domestic market.
EDC performed strongly in 2009, stepping up our efforts to support Canadian businesses when they needed it most. In doing so, we made sure to look at the big picture. We took on more risk to help out in tough times, but we did so without jeopardizing our ability to continue to serve Canadian companies over the long term.
EDC's net income in 2009 was $258 million, which is an increase of $52 million over 2008. This increase was due mainly to higher net financing in investment income, primarily as a result of a lower cost of funds. This was offset partially by higher-than-planned claims-related expenses because of the global recession. Our net financing and investment income increased to $1 billion from $834 million in 2008. This increase was mainly due to a 38-per-cent decrease in our interest expense due to the low cost of funds.
The impact of low interest rates in 2009 was more pronounced on our cost of funds than on our loan revenue because of our continuing ability to borrow over the past two years at favourable rates resulting from investor preferences for securities issued by higher quality entities.
[Translation]
Our insurance premiums and guarantee fees increased, reflecting the greater risk in the business we took on, in addition to the business conducted under our temporarily expanded mandate.
[English]
Our provision for credit loss has also increased as a result of credit deterioration mainly related to financial institutions and aerospace sectors.
Finally, our administrative expenses totalled $246 million in 2009, which is a $6-million increase over the previous year. This growth was primarily the result of an increase in costs related to human resources to help us meet the increasing demands of our customers. In the face of 2009's challenging circumstances, our claims and recoveries team works with clients to help them manage their overdue receivables and mitigate their losses.
Even with these extraordinary efforts, the number of insurance claims paid was 2,300 — up nearly 60 per cent from 2008. The amount in claims paid out more than doubled to $258 million from $104 million in 2008. That increase was largely to be expected in the face of such tough times for businesses. Paying claims is an important part of EDC's role in supporting Canadian businesses. This year's higher claims profile demonstrates that we were there for these companies when they needed us — that we took on an appropriate level of risk.
EDC operates on a self-sustaining basis with no annual appropriations from Parliament. Our activities in and of themselves generate sufficient income to protect our assets and to support future business. We ensure that this situation will continue to be the case by obtaining an adequate return for the risks taken, by maintaining operational efficiency through containing costs and by appropriately managing our risks.
In 2009, we received an additional $350 million in capital from the government when they asked us to take on an expanded mandate to support Canadian companies during the downturn.
[Translation]
Since opening our doors in 1944, the government has invested a total of $1.3 billion of share capital in EDC.
[English]
By the end of 2009, this initial investment has supported almost $853 billion in exports and investments. EDC's shareholder equity has grown to $6.6 billion. As well, we paid dividends to the government of more than $700 million. In conclusion, these results demonstrate that despite the additional risk taken in 2009, EDC's financial performance remains strong. Through sound financial management, we have ensured that we have an adequate capital base to fulfill our mandate now and in the future. In that way, we can continue to be a trusted partner to Canadian business.
We will be pleased to answer your questions.
Senator St. Germain: In British Columbia, which I represent, EDC has performed excellent work in the forestry sector, about which I have received feedback. What did you do differently that you were not doing before, given that this industry was on its back because of the markets. What have you done differently?
Mr. Daignault: I would say that things were not different materially from the way we approached things before the crisis in that we have always applied commercial principles. The domestic powers were given to us with the condition that we use them in partnership with, or complementary to, the private sector and in viable business cases. We approached the forestry sector through our credit insurance program, the accounts receivable insurance program. By providing capacity in terms of receivables to small companies selling to bigger companies, or companies in Canada selling to overseas companies, we provide the assurance that companies will be paid for their shipping and for their activities.
That assurance creates a level of comfort across the supply chain such that companies in British Columbia and in Quebec were able to ship their goods because they knew they would be paid through the EDC insurance program.
Senator St. Germain: Why did we not provide this program before the recession? There was a crunch in the lumber industry in Quebec, Ontario and British Columbia, specifically because we are so dependent on this industry. I am trying to figure out what you did differently this time. Perhaps you have answered the question and I missed the response.
Mr. Daignault: The behaviour of companies changed drastically as a result of the crisis. Risk perception before the crisis was that risk was not particularly high. However, companies looked at risks when the crisis hit and determined they needed support because they did not understand the risks.
The trend is counter-cyclical. When risks increase, companies and entrepreneurs look at solutions like credit insurance. When the perception is that risks are not as high, they tend to let go and proceed without covering the risk.
Senator St. Germain: Many small business people, unfortunately, went down during the recession. They looked at what the government provided for General Motors and Chrysler. There was a bit of cynicism in the country in this regard.
Can you tell Canadians what has been paid back to date by GM and Chrysler, or is that information confidential?
Mr. Kember: No, it is public information. A partial repayment of approximately $1.3 billion was made of the original $10.8 billion extended to General Motors.
Senator St. Germain: That is all that has been repaid to date?
Mr. Kember: Of the $10.8 billion originally issued, $8.8 billion was converted to equity and transferred to Canada Development Investment Corporation, CDIC. EDC does not control that. I do not know the current market value of that equity. It will be on CDIC's books at its current appraised value.
Senator St. Germain: In regard to present challenges facing the euro and the entire economies of some European countries, is Canada taking any preventive action to ensure there is not a significant backlash on our economy? I think the situation is horrific and could be worse than the recession if it is not brought under control immediately. What steps are being taken in view of this economic crisis?
Mr. Kember: I will say two things in that regard.
First, Canada is well positioned vis-à-vis the situation in Europe. Our economy is doing well. When I travel for industrial relations purposes, it is clear that Canada's fiscal situation gives us a competitive advantage currently in comparison to those distressed markets.
Second, the situation adds to global risk. The perception of risk is heightened. This situation might lead to prolonging the recovery and slowing it down. We are watching closely the impact that may risk have on Canadian exporters.
Senator St. Germain: The low interest rate has allowed you to make more money. If interest rates go up, that increase creates a crunch.
Mr. Kember: That is correct.
A couple of things are happening. First, there has been a flight to quality during the financial crisis. Countries like Canada and the Government of Canada have benefited in terms of financing costs. Second, there is increased perception of risk globally for all currencies, with perhaps the exception of the U.S. dollar. We see a flight to the U.S. dollar as a safe currency, although I do not know whether it is a flight to quality. That has impact on our financial costs.
The Deputy Chair: I want to clarify something. When we asked you to appear, it was not for an annual report or the usual appearance before the committee. The invitation was in light of the crisis and what should be done for the future.
You have given us the situation in 2009 and a little projection for 2010. A comparison with the U.S. and the European Union or some of its economies — France, Great Britain and Germany — would be of interest to the committee. Where is Canada relative to the rest of the group?
The second biggest exporter in the world is Germany. China is the largest exporter. However, we should compare Canada with members of our usual club. Canada's exports were reduced by 24 per cent. What was the outcome in other countries, and what measures did they take as a result?
When the Business Development Bank of Canada appeared before the committee, we were given the impression that the saviour of GM and Chrysler was the BDC. We hear today that it was the EDC. I guess it was a club of saviours because you also talked about CDIC. Can you clarify your role versus that of the BDC and CDIC with regard to this major investment?
Mr. Daignault: There was a lot of activity around the automotive sector last year. EDC's support was mainly in regard to the credit insurance program to provide liquidity for the system as suppliers were selling to GM and Chrysler. EDC also administered the Canada Account investment into Chrysler and General Motors for the Government of Canada. This investment is essentially long-term loans made through the Canada Account and managed by EDC.
I understand that BDC supported the sector through their securitization program directed more toward the end buyer to ensure enough liquidity in the system; in other words, to ensure enough financing is available when you or I want to buy a car.
There is a complex supply chain all the way from tier-3 part manufacturing to the buyer. This supply chain results in the impression that there are a lot of players. The system is also well integrated with the U.S. It warranted the involvement of various needed players bringing different competencies to the table depending on the phase in the supply chain.
I hope that answers your question.
The Deputy Chair: Do you have figures regarding the developed countries compared to Canada? If you do not, the committee would appreciate seeing where Canada is situated compared to other countries. We are not at the top in our exports, although we export much worldwide.
Mr. Daignault: I can share some numbers with you from that perspective. From a regional perspective of the North American Free Trade Agreement — the U.S., Canada and Mexico — the 2009 gross domestic product shrank by 2.8 per cent. For 2010, we expect a 2.8 per cent increase.
At the same time, we have to realize that GDP growth rates of 1.2 per cent or 1.5 per cent are considered a recession. Therefore, last year was simply terrible across the board for the world economy. Western Europe — the U.K., the euro zone and some of the Western European economies — saw GDP shrink by 4.2 per cent. For 2010, we expect growth of 1 per cent.
If I compare that to developing countries, including Latin America, China and India, GDP growth was 1.7 per cent. We expect 5.5 per cent growth this year.
The message is that growth is always important because growth dictates what market you want to invest in. We expect 2.7 per cent growth in the U.S. We expect 1 per cent growth in Europe as a whole. Diversification has always been important, but there is an urgent need for those companies to diversify. The expected growth over the next five to ten years will not be related necessarily to Europe and the U.S. More importantly, we have been seeing emerging trade patterns. When we travel to Latin America, we connect with the major corporations, who are engaging with Asian- based companies in China and India. We see direct relationships from a supply chain perspective emerging between Latin America and Asia. The U.S. and Europe are no longer a part of that supply chain, which means that Canadian entrepreneurs must move beyond the U.S. and Europe if they want to participate in global growth over the next five to ten years. The importance of emerging markets is absolutely critical.
The Deputy Chair: This gives us the perspective of your work.
Senator Ringuette: How many offices do you operate in Atlantic Canada?
Mr. Daignault: We are in all provinces of Atlantic Canada.
Senator Ringuette: You have four manned offices in Atlantic Canada — not only store fronts?
Mr. Daignault: Allow me to explain our business model because we are different from other financial institutions. Because of the nature of our business, which is to understand supply chains, the major players across the globe, risks, political risks, currency and the like, we need a centralized place where we can add value and provide the underwriting. These activities cannot be delegated. Every decision we make involves many different factors around the world. From that perspective, we need to be centralized.
Senator Ringuette: I understand the need for a central office in the Ottawa region to provide the research for your customers. What do you have in Atlantic Canada?
Mr. Daignault: The other model is no different in Atlantic Canada than it is in the rest of Canada and the world. We work a lot in partnership with banks.
Senator Ringuette: I am sorry, Mr. Daignault, my question is: How many operating offices do you have in Atlantic Canada, other than store fronts or simply people with a phone number or an answering machine who respond three days later? How many physical operating offices do you have in Atlantic Canada?
Mr. Daignault: Four.
Senator Ringuette: You have four.
Mr. Daignault: Yes.
Senator Ringuette: You have one in each of the Atlantic Provinces. You indicated that you have opened two new offices, which makes a total of 17 across the country. You indicate that you have 14 offices outside Canada and that this year you will open three more offices outside Canada. EDC will operate 17 offices in Canada and 17 offices outside Canada. I do not know your operation outside Canada. As a parliamentarian, I understand that the knowledge and evaluation of businesses in foreign countries was under the Department of Foreign Affairs and International Trade. Now, I see that EDC has as many offices outside Canada as they have in Canada. I thought that DFAIT was responsible through our various embassies to supply EDC in Canada with that information for the provision of credit insurance to Canadian exporters. Where am I wrong, if I am wrong?
Mr. Daignault: It is a question of function; what EDC does and what trade commissioners are doing. EDC is a financial institution. The big values that we add to Canadian companies are connections and relationships with major buyers around the world. I will give you an example. We have representation in Chile, where we are located within the embassy. We always work around the world in close relationship with Canadian Trade Commissioner Service. For example, in Chile, we will develop a relationship with a company called Codelco, which is a major state-owned enterprise in copper mining. Canada has a strong supply chain in mining, for which we are recognized around the world. EDC endeavours to establish a relationship with Codelco, which means that EDC will supply Codelco with financing.
Senator Ringuette: Will you finance a foreign Crown corporation in mining?
Mr. Daignault: We finance foreign companies in transportation, mining, forestry, et cetera. By financing those companies, we add market conditions and capacity with one condition: that they work with us to find Canadian companies to become part of their supply chain.
Senator Ringuette: Is that not the role of the Canadian Commercial Corporation?
Mr. Daignault: The CCC has a different role — to offer contractual services when Canadian companies want to deal with governments. In many cases, there is an issue with contractual obligations between a private company in Canada and a foreign government. The CCC is the contractual agent that enters into a contract with the Canadian company and turns it into a contract with the foreign government. That is the main propose of the CCC.
Senator Ringuette: You indicated that in 2009, you served 8,500 customers. Are they all Canadian customers?
Mr. Daignault: They are Canadian customers only.
Senator Ringuette: How many foreign customers did EDC serve?
Mr. Daignault: For each foreign customer, we have a Canadian customer equivalent. We target approximately 250 to 300 major companies around the world on a proactive basis. We might have more customers as they contact us and there is a need for EDC. For every Canadian company engaging in a foreign market, there is a buyer. EDC has the capacity to make things happen and facilitate that transaction in Canada. A Canadian company might want working capital, might need credit insurance and might need its banker to issue a letter of credit. We support those needs.
Senator Ringuette: If a Canadian company wants or needs capital, in the case of a Crown corporation, they go to the Business Development Bank of Canada. If they identify a market, they will probably deal with the Department of Foreign Affairs and International Trade in an embassy to determine credibility of the importer in that country. EDC looks at the credit line and insures the credit of that export merchandise or service. Am I correct?
The normal scenario is that EDC completes the puzzle to facilitate Canada's exports with the Business Development Bank, the CCC and so forth.
Mr. Daignault: You describe very well what EDC does, but only a portion of what EDC does.
We offer credit insurance. However, we also offer bonding, which is a different product that targets different needs and different players. We offer political risk insurance that targets a different need and different players. We also offer term financing, working capital financing and project financing to target different situations.
Senator Ringuette: With respect to the 300 foreign companies that you indicated, is it possible to give us their names, the sector of activity and the country they are in? You are a Crown corporation and you must answer to Parliament regarding the amount of money involved.
Mr. Daignault: Subject to our normal restriction, I am sure we can supply that information.
Senator Ringuette: Please provide the information to the clerk so we all receive a copy.
[Translation]
Senator Massicotte: Thank you for being with us today. Your presence is greatly appreciated. I have fairly general questions for you, so I can better understand. You said that the rates you charge your clients are business rates. You play an important role, in terms of the rates you charge, because your job is to encourage exports. How do you strike a balance between these two things? How do you assess commercial rates and a typical level of risk? Last year, in the forestry sector, you lost $20 million. That is a very high-risk sector. How did you make that decision? If the risk is higher, do you charge more? At the same time, you play an important role in encouraging exports and in increasing Canada's GDP. How do you manage these two things?
Mr. Daignault: That is a very good question. An export credit agency must abide by certain basic principles. There are OECD standards to ensure that the Canadian government, or the American government do not award hidden subsidies through EDC or any other organization, and to ensure that no subsidies are given, which might provide an undue advantage to a Canadian or American exporter.
Therefore, certain markets are based on "consensus," and if, in one of these markets, EDC is called upon to provide assistance, it must apply rates which have been agreed to previously by all OECD countries.
That said, a good deal of our activities are what I would call "market-based." Therefore, the market in Canada or the United States is not deemed a "consensus-based" market, because its activities do not only involve credit; there are other types of transactions as well, which means companies have access to different sources of financing, even though in certain cases, as we are now seeing, there are capacity restrictions.
In those cases, we are not considered to be market makers, but rather market takers. We will set our prices or credit conditions, depending on current market conditions. This is why we are an organization which adds capacity to the market.
In terms of striking a balance, if we were a strictly private organization, and we provided the last 20 per cent of a transaction on a financing basis, we would use our position to apply a higher rate. This is our approach: we will deal with private sector conditions, even if we provide substantial capacity. We provide additional capacity at a marginal cost which is not different, and this is not the way the private sector would operate.
In terms of our profits, if we do generate a profit, we manage our business responsibly. But when we evaluate a file, we take into account two factors: first, we do not want to lose money, which means that we do not want to invest in a business which might result in a 50 per cent loss the next day. The benefits we can generate for Canada are an important factor. It is almost an evaluation criterion. If I were a business bank, if my return on investment was below 20 per cent or 22 per cent, I would not do it. In our case, we do not lose money, rather, we create benefits for Canada. Is it a case of A, B, C or D — the greater the benefit, the greater our inclination to take on risk.
Senator Massicotte: You say that your benchmark is the free market where the world consensus is to prohibit subsidies. I understand that the rate set under this consensus is a competitive one to ensure a reasonable return on investment. The point is to discourage countries from engaging in direct subsidies.
If that is the case, the benchmark is to obtain a reasonable return on investment in a free market. I see that you do not make huge profits; you only have a return on investment of 4 per cent, and I presume that the Government of Canada also guarantees your loans. That is very low. Your return on investment is 4 per cent, assuming there is no cost to providing a guarantee. But this is not how the market operates. Someone, somewhere, always pays for the guarantee.
If you operate in the marketplace, why are your profits not higher, unless your main objective is to help companies increase their exports?
Mr. Daignault: I have to say that increasing Canada's exports is our main objective. If there is a "consensus-based" market, this means there is no free market. Now, if you look at EDC's performance, our profits are indeed lower than that of a commercial lending institution, like a bank.
Senator Massicotte: By far.
Mr. Daignault: Indeed. There are several reasons for this. First, we offer a limited range of products compared to a bank, which establishes long-term relationships with some of its clients. It can begin with a loan, and then move to compensation services, fee collection and other related services. We, on the other hand, have to operate within our mandate. This means that we cannot collect the many fees a financial institution might charge to increase its profits.
Despite the fact that we have programs which we need to sustain over the long term, we are still stretched thin. For example, a business bank would never have a portfolio like ours. We are highly concentrated in some areas, for which a bank would charge higher rates. Profits are not the cornerstone of our decision-making process; rather, it is the preservation of capital.
Senator Massicotte: I accept your reasoning. When you talk about business transactions, you are saying that you expect a reasonable return on investment on your risk, which would come after your main objective of increasing Canadian exports. How does your rate of investment compare to that of other government agencies, such as in the United States or Brazil?
Mr. Daignault: I will have to get back to you on this point, as I do not have the information and I need to verify whether this information is comparable. All of the export credit agencies in the world are relatively different from each other. Most of the European export credit agencies do not make direct loans. The European credit agencies focus solely on guarantees.
It is a different model. And even if they were to decide to take on a long-term credit risk, such as financing, they would not do so directly. They would ask a bank to advance the funds, and they provide a guarantee to the bank.
[English]
Senator Tkachuk: I refer to pages three and four of your presentation for my questions. You talked about the increase in domestic financing for Canadian companies and about the sales in respect of insurance capacity. You said that by December 31, EDC had provided $1.7 billion in domestic financing for Canadian companies. Is that in addition to the normal amount of business for EDC, or is that in total?
Mr. Daignault: No; our normal export and investment business went down a little because exports went down by 24 per cent. However, we have been given additional powers to deploy our expertise in Canada. The $1.7 billion as well as the other numbers that you see in that section are in relationship to what we call "domestic business" related directly to our expanded powers.
Senator Tkachuk: That business is in addition to the normal amount of business.
Mr. Daignault: That is correct.
Senator Tkachuk: What will happen in 2010, 2011 and beyond? Will EDC continue with this business?
Mr. Daignault: As of March 2011, we will no longer have domestic powers because they were voted for a two-year period. For example, we will not be able to continue to provide financial support to Canadian companies. The initial view is that by the time we reach March 2011, the need will not be as strong as it is today, or was last year.
Senator Tkachuk: You hope that the economy will recover sufficiently such that the private sector will look after those needs and Export Development Canada will not need to be involved.
Mr. Daignault: That is correct. As I said, there are discussions to determine what the lay of the land will be in 2011, and whether there will be a need to extend.
Senator Tkachuk: I am not sure if you can answer this question but, if the government had not expanded EDC's powers with the $1.7 billion and $103 million, how much of that capacity would the domestic financial institutions have fulfilled without EDC's involvement?
Mr. Daignault: I would say that this is a real delta. At the beginning of 2009, the credit crisis caused many companies with banking facilities, in particular a few foreign banks and finance companies, to vacate the space because they had no more funding available. Thus, an entrepreneur that might need a line of credit for $100 million suddenly has only $70 million available because a portion of the bank's syndicate disappeared.
In the context of a real crisis, Canadian banks were somewhat limited because they were trying to manage their risks. They did not withdraw. They tried to maintain their presence but they could not come up with the additional 30 per cent or $30 million. Therefore, with the new domestic powers, especially on the lending side, we sat down with the banks and companies to develop a viable long-term solution. In many cases, EDC funded the space that was left vacant by the foreign banks and foreign financial institutions thereby enabling the company to continue to function. It is the same principle on the credit insurance side. As risks increased, private lenders cut their limits because they were trying to understand the risks. By adding capacity, we have been able to replace what the private sector left.
Senator Tkachuk: I have one further question. You also said that in 2009, you gained 2,270 customers who used your products and services for the first time. Why did you have that increase in your regular business customer base? It seems to me that these customers would have been in your regular export development business. You gained all those customers, which is nice, but in a recession it seems a little strange.
Mr. Daignault: A portion of our business is cyclical. As risks increase, companies decide that they need to insure their receivables because they do not know if they will be paid tomorrow. That increased risk explains the activity around new customers.
Senator Tkachuk: I understand.
Senator Moore: I want to follow up on Senator St. Germain's questions with regard to the financing provided to Chrysler and General Motors. You mentioned that $10.8 billion was provided to General Motors and that $8.8 billion was converted to equity. Who holds that equity?
Mr. Kember: It is held by CDIC, which is not the Canadian Deposit Insurance Corporation but the Canada Development Investment Corporation, I believe.
Senator Moore: What is that?
Mr. Kember: It is a federal Crown corporation that holds assets on behalf of the government.
Senator Moore: Does it fall under the Minister of Industry?
Mr. Kember: I am not sure.
Mr. Daignault: I would say that Industry Canada was the mastermind behind the transaction but we can get back to the clerk with that information.
Senator Moore: That leaves $2 billion to be repaid. GM repaid $1.3 billion, which leaves $700 million to be repaid. What are the terms, such as interest rates? When is that money to be repaid?
Mr. Kember: I do not have the details.
Senator Moore: How much money was provided to Chrysler?
Mr. Kember: A total of $2.7 billion was extended to Chrysler. The amount is still outstanding.
Senator Moore: None of it was converted to equity as in the case of General Motors.
Mr. Kember: No.
Senator Moore: Chrysler has not paid back any of the amount.
Mr. Kember: No.
Senator St. Germain: Excuse me, Senator Moore. Is the Canada Development Investment Corporation holding any equity with regard to Chrysler?
Mr. Kember: Not that I am aware of.
Senator St. Germain: I am sorry.
Senator Moore: That is fine. It is a loan. Do you know the terms of the loan? Is this an interest-free loan or is it at cost?
Mr. Kember: That loan was negotiated on behalf of the Government of Canada. Industry Canada, as Mr. Daignault mentioned, was the driver behind it so Industry Canada will have the details of the terms.
Senator Moore: It would be interesting to know the details. Senator Tkachuk asked what the $8.8 billion is worth today. Has its value increased?
Mr. Daignault: I am not able to answer that.
Senator Moore: It is a good question.
Mr. Kember: I believe the amount will show up, if it has not already, on CDIC's statements as it is a Crown corporation.
Senator Moore: It is equity. If the industry rebounds for this particular company, it can be a good deal. We do not know the value of the equity.
Senator Gerstein: The year 2009 can be characterized in many ways, not the least of which is the global recession and higher risk to lenders. In your opening remarks, you indicated that the net income of EDC increased by $52 million to $258 million for the year. At the same time, claims increased to $258 million from $104 million. You explained that increase by saying, "which is largely to be expected in the face of such tough times for business." Later, you say, "This year's higher claims profile demonstrates that we were there for these companies when they needed us — that we took on an appropriate level of risk."
What was the appropriate level of risk that you took?
You indicated that your criteria, as I understand it, were primarily to preserve capital to finance further growth. You also understood that the government asked you to reach out to provide things for Canadian business that you had not provided before. How did you change your criteria from 2008 to 2009? If you knew then what you know now, could EDC have done more for Canadian business?
Mr. Kember: Our basic criteria for granting credit did not change. We looked at the sectors where we were taking risk.
For example, we had a lot of concern around the auto sector. Our focus was to look at which companies we thought would be survivors once the GM/Chrysler situation was sorted through, and to extend credit in those cases.
We knew, even without changing our criteria that our risks were elevated and our current portfolio of credit insurance on our books would experience higher claims. It was inevitable; it was expected.
Could we have done more if we knew then what we know now? Hindsight is always 20/20.
First, no one anticipated the degree to which Canadian and U.S. governments would respond to the Detroit Big Three situation — provide funding at the speed they did and ensure all suppliers and sub-suppliers throughout the supply chain were paid. There was concern that would not happen quickly. Even if it took six months to sort out, many small- or medium-sized suppliers in the auto sector would not survive. That did not happen. We could look back and determine we could have done more; I do not know.
Second, the first half of 2009 was bad. We posted a loss for the first half of the year in our own results. We had the Chrysler/GM situation. No one knew where this situation would end up in terms of the global economy. It was not pretty.
We saw remarkable rebound in a number of sectors in the second half of 2009. We are involved in the aerospace sector and EDC was concerned about that sector. In the second half of 2009, aerospace companies and airlines were able to raise large amounts of money on public markets to give them the needed liquidity to come through that period.
We saw much improved results in the second half of 2009 compared to the first half given what we expected for the whole year.
[Translation]
Senator Mockler: Thank you, Madam Chair. As chair of the Senate Committee on Agriculture and Forestry, I have dealt with this issue somewhat. You have no doubt been following the market fluctuations and the depression of the Canadian dollar since the time when the crisis occurred, in 2009, up until now, in the various regions of Canada, the East, Quebec, Ontario and the Canadian West. What region in Canada was the hardest hit in terms of the forestry credit portfolio? According to the mandate that the current government has given you, what would that percentage be and did you see the crisis coming?
Mr. Daignault: I do not have current information regarding our portfolio broken down per sector and per region. With your permission, I would like to send this information to the clerk at a later date.
Senator Mockler: We have often heard testimony here in committee that we should perhaps restructure the forestry sector: just as we have a Farm Credit Corporation, we should have the Forestry Credit Corporation. I see Mr. Kemper smiling. In light of your experience, do you have any comments? Should we be adopting such an approach?
Mr. Daignault: I am not sure that EDC has all of the information in order to come out on one side or the other, but I think that there are certain aspects which are quite significant with respect to the forestry sector. First of all, obviously, there is the importance of foreign markets for forestry. On this matter, I think that significant support is being provided. And I know that EDC is playing a very important role in this sector, particularly with respect to credit insurance, and, to my knowledge, the BDC is also quite active, particularly with respect to small businesses. What we need to know is whether there are some shortcomings in what we do at present for viable forestry corporations. I do not have the information that would enable me to answer this question.
[English]
Senator Mockler: When you send us the information, can you give us the breakdown for the forestry sector regarding lumber, pulp and paper, value-added products and hybrid products you helped to maintain in the market?
Mr. Daignault: I am not sure if we have information for all those categories. We talk about pulp and paper and lumber, but we will have to check into our system to find that detail.
Senator Mockler: Can you provide that to all senators, chair, if the information is made available?
The Deputy Chair: Yes.
Senator Mockler: EDC's expanded domestic mandate was established for the last two years and will soon come to an end. Other senators touched on this issue. Should this domestic mandate be extended?
Mr. Daignault: I think it is for companies at large and exporters to answer that question, along with our shareholders.
In the case of EDC, we feel there is a need to ensure that companies are competitive globally, and I think they need the resources to do that. Currently, if you look at EDC's mandate, the domestic powers are not an argument to expand EDC's mandate. Essentially, these powers are a way for EDC to be more efficient at meeting its current mandate.
I can give you an example. As an entrepreneur, someone is considering acquiring a company in the United States. Let us also say that person needs EDC's expertise to do so, and the actual structure is U.S. based. EDC can help; we can do a structure in the U.S. and provide financing for that Canadian company.
However, if for any operational or tax reasons, if the same company — the same purchase and the exact same situation — tells us they do not want to do a structure in the U.S. but in Canada, we cannot do it. That is only a question of the regulations. It is not a question of mandate.
[Translation]
The Deputy Chair: I would like some information. According to your report, I see that you will be opening three offices, in Panama, Düsseldorf and Istanbul. A few moments earlier, you told us that the big markets were located more in India and China. Istanbul is not too far away, but still, this is not an Asian country. As for the European market, where Düsseldorf is located, there is not a big increase. In my opinion, Panama is certainly not a significant economy. Will Panama be serving Guatemala and the other nearby countries? How many offices do you have in China and India? You have 17 offices, but there is quite a distance between Shanghai and Beijing, and the volume of business must be quite incredible. Do you operate in a few cities in these countries?
So, basically, if we are to enter new markets and support our companies, I would like to know what initiatives you have taken for our exporters, that is, how our business people will benefit from your knowledge and skills in foreign markets? Who will contact them? What kind of support do they receive when they look for foreign markets, and who is there to help? My colleague talked about foreign trade and business relationships with other countries. You are on the ground, and they generally are, as well. So, who does what?
Everyone around the table knows full well that Canada's exports to the United States are significant, and our exports towards Mexico have increased significantly within NAFTA. There is a lot of room to expand our exports toward Asian countries, and not only from British Columbia.
In Quebec, my colleague is aware that we have recently send trade missions to India and China. Several businessmen accompanied the premier. I am wondering how a decision is taken to open an office abroad?
Second, how can we increase our business in South America, in particular with Chile, Argentina and Brazil, who are increasingly doing business with countries in the west, rather than along the north-west axis?
Mr. Daignault: First, EDC takes a sectoral approach. One of the ways we can really add value is by understanding how each of these sectors operates, and therefore how the major supply chains operate. We tend to concentrate in markets where Canadian companies are competitive, and these sectors represent a significant proportion of Canada's economy.
Let me give you an example: forestry and natural resources, which represent a significant sector of Canada's economy. I have a team which specializes in natural resources. The same applies for oil and gas, mines, technology and other sectors. We have sectoral strategies which help us understand who the major players are in those sectors throughout the world.
Of course, if Canadian companies are strong in one sector, when the time comes to evaluate a market, one of the criteria we will use is whether Canadian companies are already on the ground. Are the companies already operating in a particular market, or can Canadian markets potentially operate there? Is there enough demand in sectors where Canadian businesses are already fairly strong and competitive, and if so, can these companies do business there and export their products? Therefore, the size of the market, the relative strength of Canadian companies in their respective sectors, and their presence in a market are important points.
To that, we add the potential for growth. For example, if you take the German market, I will talk about Düsseldorf. On the surface, it might seem problematic or a bad decision to go there. People say that there is not much growth potential in Europe, and yet we have opened an office in Düsseldorf. Multinationals can always use good Canadian business know-how. When Canadians succeed abroad, it is not because of price, it is because Canadians have a technology or business know-how that confers a competitive advantage on a company which buys the Canadian goods or services, or it confers on that company another, very real, type of advantage.
Take the case of Germany. Our strategy in Germany will be very different from the one we will adopt in Istanbul or Panama. Our goal in Germany is to establish business relationships with CFOs and CIOs of large multinational companies. So the goal is not to help a German company in Germany, but rather to help a German company do business in South Africa, where there is a significant German presence. Canada is not very present in Africa. People who are already on the ground can choose to take a direct approach or an indirect approach to increase Canada's presence there. If a Canadian company becomes part of the supply chain of a multinational German company, that Canadian company will acquire experience and will naturally go towards those markets.
In the case of Panama, there is already a very strong Canadian presence, be it construction or infrastructure companies, and others, which are already well established. However, the Chinese presence is growing very quickly. There is a need to better support and maintain relations, and as far as managing portfolios is concerned, there is a greater need to be present in that market, as well as in Mexico, Peru, Brazil and Chile.
In terms of market presence, the reasons for being on the ground can vary from one place to another, but it is particularly important for Canadians to potentially establish themselves. Have I answered your question?
The Deputy Chair: Yes, at least now we understand why you went there. There is the case of a Quebec company, for which I will not reveal any specifics. What happens when there is a conflict between a provider and one of the companies you have helped, and which has worked with a foreign company, and then that company does not want to pay the Canadian company? This creates a problem for the Canadian provider. What decision-making process is involved in a case like this? I have to say that if I had to take out an insurance policy, it would be one that would cover every risk, because you might be dealing with someone who is acting in bad faith, and the court system in the other country might not be reliable. Sometimes, the courts in other countries do not operate under the same rules of law as we do. So what type of guarantee can Canadian companies obtain? Do you conduct an analysis before a deal is signed? You are there to help Canadian companies. If there is an incident, how is that problem solved? Do you apply pressure on a foreign company which does not honour its obligations? Do you defend your client? Canadian business people cannot enter into an endless litigation against foreign companies, can they?
Mr. Daignault: There are different types of insurance coverage. There is coverage against political risk, so if a company is expropriated, they can have insurance for their equity and their infrastructure in the foreign country. You can also take out coverage against business partners who are not acting in good faith. There are other types of protection, and one of the most popular types of protection is regular credit insurance.
Basically, this is a type of insurance you can take out in case your buyer goes bankrupt. What sometimes happens is that a foreign buyer does not go bankrupt, but there is some kind of conflict or trade dispute. If there is a trade dispute, depending on whether bad faith was involved and whether the Canadian company has taken out contingency insurance, that is one thing; but regular credit insurance simply awards compensation when a buyer does not have the means to pay for his purchase. That is basically the risk that is covered.
In cases of trade disputes, our approach is the same as that taken by the ambassador. A discussion takes place, this is what often happens, and the Canadian businessman will meet with the ambassador of the country and explain his situation. If the ambassador feels it is appropriate, further discussions will be held formally involving the Government of Canada to try to find a resolution. However, most cases involve normal trade disputes in which neither the Canadian government, nor EDC, become involved, or they do not have the expertise to determine whether a product was substandard or not. These situations can be fairly delicate.
The Deputy Chair: So, the person has taken out insurance, and the other person, to avoid paying, declares that his product was somehow substandard; you would not intervene to help with the compensation, because, in your words, the person should fix the problem himself. Except that it might jeopardize the Canadian company.
Mr. Daignault: If a person has taken out credit insurance, the risk of non-payment is covered; that is not the type of risk covered by this kind of insurance policy. If the buyer does not pay due to bankruptcy or a lack of financial viability, EDC will step in and pay, but then will be stuck with recovering the amount. The exporter gets his money and it becomes EDC's problem.
The Deputy Chair: So if the other party does not declare bankruptcy, the problem is even bigger when the party does declare bankruptcy. That is the situation, finally.
Mr. Daignault: It depends on the type of risk the company is covered for.
The Deputy Chair: When you offer insurance coverage, depending on what people want to pay, since there are different types of insurance and different levels of coverage, does the client choose the coverage, or do you decide for them, depending on the sectors they are operating in?
Mr. Daignault: The normal process is based on the specific needs on the client and EDC's ability to provide insurance depending on who the buyer is. In the case of credit insurance, EDC assesses the buyer. Depending on what is needed, a client can come to us and say: I have a problem with, or a concern with regard to, a buyer, and he is the only buyer for whom I want to buy insurance coverage. The client might also request coverage for his entire portfolio for his own peace of mind. Of course, the conditions and deductibles are all negotiable, depending on the needs of the business person or the company.
The Deputy Chair: In other words, the coverage is customized.
Mr. Daignault: Yes, absolutely.
[English]
Senator St. Germain: My question will be brief. In your meetings with Canadian business leaders, are you sensing reasonable optimism and confidence in the economy now as opposed to this time last year? For example, many people are concerned about the stimulus funding coming to an end, and about the situation in Europe. Do you think that a dip in the recession can affect the business community with which you have significant dealings?
With regard to the current European problems and the effect on the Canadian business that you support at the present time, do you see an expanded role for the EDC to help most of these businesses if the crunch is deep in Europe?
Mr. Daignault: In terms of the lay of the land, another recession or a deepening crisis will create a substantial negative impact on Canadian entrepreneurs. We are at a stage now of having seen most of the bankruptcies. Typically, after the recession hits bottom, companies tend to default any time between 12 months and 18 months later. If additional negative factors arise, we will likely see more bankruptcies and more restructuring than we see in normal times, even with the same kind of movement.
The situation in Europe can affect Canadian companies in two ways. First, as exporters to Europe, demand will not be as high and, therefore, it will be more difficult to create growth or maintain a level of sales. The second factor is credit availability and confidence in the market. For example, we know that many European banks have exposure in Greece, but we do not know what it is. Will these banks need some asset re-evaluations? Will the balance sheets of European banks be maintained? Will they need to take write-offs because of their assets in Greece? If the latter is the case, then the banks will have less appetite to expand overseas and create trade with Canadian business, which can also impact confidence. There can be another potential credit gap down the road.
Senator Moore: The chair asked about your offices in China and India, and Senator Ringuette asked about your offices in Atlantic Canada. Can you provide the clerk with a list of your offices in Canada and outside Canada?
Mr. Daignault: Certainly.
Senator Kochhar: Do you currently have offices in China and India?
Mr. Daignault: Yes.
Senator Kochhar: How many do you have?
Mr. Daignault: We have two offices in China and two offices in India.
Senator Kochhar: Are you expanding your business in those emerging markets? For a country like India and her emerging economy, two offices are not sufficient, given that you have two offices in some small European countries.
Mr. Daignault: Thank you for your point. I would say that for EDC, it is also a matter of the balance of being there and making sure that Canadian companies are present as well. We have been in India for five years, and we are still trying to create that inflow of Canadian companies into India. Canada is struggling with India from that perspective, despite our participation in trade missions and the like.
It is also important to understand that we work closely with Trade Commissioner Services and their 800 people around the world. Our view is that we are better at leveraging their presence and their expertise. It is better for us to do that rather than create another piece of real estate that parallels their presence. We complement each other so it works well from that perspective.
Senator Kochhar: Why did you put an office in Panama City and not at the existing commissions?
Mr. Daignault: There is a strong Canadian presence. We do not offer the same thing as trade commissioners. When a Canadian company knocks on the door of an embassy or a Trade Commissioner Services office, they ask for basic information about the market. When there is a real opportunity, EDC takes the lead. Services complement rather than duplicate.
Senator Massicotte: I congratulate you for saying basically the same things that your president said two weeks ago when he appeared as a witness before the Standing Senate Committee on National Finance. That is good news.
Mr. Daignault: Thank you.
Senator Massicotte: The only major difference is that he took more credit for his contribution to the deal with General Motors. He said that their experience helped a lot. I want to be on record that I hold your firm responsible if there are any problems with that loan or with the equity stakes.
Mr. Daignault: Thank you.
[Translation]
The Deputy Chair: We have conducted an excellent overview. Thank you very much, Mr. Kember and Mr. Daignault, for having provided us with your insight. Since you do not know what the future holds, it is difficult to predict how long this economic turbulence will last, or what tools will prove to be useful. Our mandate is to examine the tools we will need in the future, and so you might have to continue to think about that, because your organization is one of the tools the government uses to support our companies and help them find new market niches based on our expertise.
Export Development Canada is a major player both nationally and internationally. Thank you very much for your excellent testimony, and thank you to your team as well.
(The committee adjourned.)