Proceedings of the Standing Senate Committee on
Banking, Trade and
Issue 2 - Evidence, December 2, 1999
OTTAWA, Thursday, December 2, 1999
The Standing Senate Committee on Banking, Trade and Commerce met this day at
11:00 a.m. to examine the present state of the domestic and international
financial system (Export Development Corporation).
Senator E. Leo Kolber (Chairman) in the Chair.
The Chairman: Pursuant to the Order of Reference adopted by the Senate on
Tuesday, November 23, 1999, the committee is resuming its examination of the
state of the domestic and international financial system and, more
specifically, its study of the Export Development Act.
Our witnesses today are from the Export Development Corporation: Mr. A. Ian
Gillespie, President and Chief Executive officer; Mr. Eric Siegel, Executive
Vice-President, Medium and Long-Term Financial Services; Mr. Gilles Ross,
Senior Vice-President, Legal Services and Secretary; and Ms Louise Landry,
Vice-President, Corporate Performance and Communications.
It is the committee's intention that this be the first of several meetings on
this matter. We will be hearing from others witnesses and then, possibly, at
the end of the next few hearings we will invite this same group back to sum up.
Mr. Ian Gillespie, President and Chief Executive Officer, Export Development
Corporation: I should like to present a short prepared text, if I may. Then we
will be prepared to answer all your questions.
Thank you for the opportunity to appear before you. We have provided a written
submission that covers the issues raised during the review, as well as our
response to the areas where EDC has taken a different view from the Gowlings
I should like to give you some information about EDC and the role we play in
supporting Canadian exporters and investors in the global economy.
EDC is the only financial institution in Canada exclusively dedicated to
providing trade finance services to Canadian companies. During the last five
years, EDC has helped thousands of Canadian businesses generate more than $114
billion in foreign sales and investments. We expect to support more than $38
billion in 1999 and close to $40 billion next year. We do this by offering risk
management and financial solutions to companies of all sizes so that they can
take advantage of international opportunities.
I know this committee is familiar with EDC so I will not dwell on the mechanics
of our operations, but I will happily address any questions you might have at
the conclusion of my prepared remarks.
I will not repeat the content of the written submissions we have provided to the
senate committee, but will instead speak briefly to what I believe to be the
three fundamental issues.
First, EDC exists because there is a real need. Second, EDC meets this need by
balancing commercial and public policy sensibilities. In that sense, we are
trying to achieve the best of public policy with the best of private sector
methods. Third, Canada needs exporters. Exporters are clearly critical to our
Why is there a need for EDC and why are exporters critical to our economic
future? Because almost three million Canadian jobs rely on exports; because one
in three jobs are export jobs; because trade and investment are the keys to
Canada's future prosperity, and because there are regrettably few other options
for Canadian exporters and investors. EDC provides Canadian companies with
virtually all the financial tools they need to remain competitive on the world
stage. In that sense, globalization, as you well know, is all about remaining
competitive. That is why Canada created EDC; it was because Canadian businesses
During the recent SCFAIT hearings, this need was sometimes misplaced as a
secondary issue by some of the witnesses, but this need must be the primary
focus of the review -- to examine EDC's performance in meeting the needs of
Canadian exporters and investors and to assess our ability to respond to a
rapidly changing and increasingly competitive international marketplace.
It is important to recognize that we are talking about a conventional business
model here. We are a business. We are a financial institution. EDC does not
rely on tax revenues or taxpayers' dollars to operate. We do not receive any
appropriations. We rely on the interest and fees we charge borrowers, the
premiums we charge on our insurance policies, and the interest that we earn on
our investments to cover our operating costs and to grow our financial
The nearly $1 billion invested into EDC by the Government of Canada is not money
that has been allocated or spent by EDC in the way that money is allocated to
government departments on an annual basis. The money that the government has
invested is still on our balance sheet, available to support future business.
In simplistic terms, for an investment of nearly $1 billion, the Canadian
taxpayer has made approximately $800 million in the form of retained earnings,
plus building prudential reserves of more than $2.5 billion. The taxpayer has
thus earned a significant return on its investment in EDC, to say nothing of
the some $300 billion in taxable exporter revenue that has been supported by
EDC's financial products and services.
EDC is a unique business model that does meet this mandate, serving the trade
finance needs of Canadians. EDC does this by getting the balance right. By
this, I mean the critical balance that EDC strives for between its commercial
disciplines and its public policy mandate.
There are, however, a few key areas where I believe the review did not get the
right balance. The first is with respect to disclosure. Although EDC has met
all of its existing mandatory disclosure requirements -- indeed, EDC has been
cited by the Auditor General of Canada in three out of the last five years for
its excellence in annual reporting -- we agree with the review that we need to
continue to enhance our disclosure if we are to maintain the high level of
confidence that Parliament, the government and Canadians have in EDC.
Disclosure is a necessary requirement of a Crown corporation, indeed of all
businesses. However, it must also be carefully balanced with the customers'
need to protect their commercial interests and with the commercial practices of
Thus we agree with the diagnosis emerging from the review, but not necessarily
the prescription, which does not reflect a balance that sufficiently protects
the commercial interests of Canadian businesses. The Alliance of Manufacturers
and Exporters of Canada eloquently articulated this in their brief to the
Standing Committee of Foreign Affairs and International Trade. As an
alternative, we are working on a more comprehensive disclosure framework
against which our disclosure performance can be measured -- and, indeed,
enhanced performance measures are the key. We expect to be in a position to
report on this work in the early part of next year.
I turn next to the environmental assessment issue. What should be the
fundamental goal here? The goal is to have a positive and long-term impact on
the global environment. To reach this goal, all expert credit agencies, not
just EDC, must continue to strengthen their environmental assessment and
mitigation practices. Therefore, EDC is leading the way towards the goal of a
multilateral consensus based on our own environmental review framework. We
would be pleased to talk to you further about that. In that sense, we are also
helping to export Canadian values, as Jacques Lamarre at SNC also put it so
eloquently recently when he was in front of the Standing Committee on Foreign
Affairs and International Trade.
This framework is intended to provide a clear, transparent, common-sense
approach to evaluating the environmental impact of projects. EDC used extensive
public consultations, including a number of NGOs, in establishing its
environmental review framework.
Other export credit agencies welcome our practices, which we intend to use as a
foundation for OECD negotiations on common environmental guidelines, as
mandated by the most recent G-8 and OECD ministerial meetings.
By comparison, the review recommendations, while well intentioned, provide an
approach that does not reflect commercial practices and competitive
circumstances and, thus, does not strike the right balance.
The insured market for credit insurance in Canada has grown by over 400 per cent
in the last five years and private sector insurer's share of this market has
increased in both volume and premium. This proven growth capacity is in direct
contrast with comments by some witnesses that EDC is "crowding out"
the private sector insurers.
With respect to the specific review recommendations, EDC is already developing a
partnership with a Canadian company to offer a single credit insurance policy.
We hope to be able to make an announcement about that early next year. I should
also note, however, that we cannot support the recommendation to move towards a
sliding scale for eligibility for domestic cover. That recommendation would
decrease service to exporters and would even force EDC to withdraw coverage
from existing customers. The problem is that there are few alternatives for
Canadian companies, as the largest independent credit insurance broker
indicated in front of the standing committee in the last few weeks.
While the report touches positively on EDC bank relations in a number of areas,
I will comment on one specific recommendation, No. 14. However, first I will
remind the committee of what I said when I last had the opportunity of
appearing before you in relation to the work of the MacKay Task Force.
Trade finance is a niche offering for most Canadian banks, and only EDC is
exclusively dedicated to providing Canadian exporters and investors with the
financial solutions that they need to remain competitive on the global stage.
Thus, we strongly disagree with the recommendation on bank guarantees.
Exporters and we believe it would be counterproductive to offer largely
risk-free returns to the banks for medium-term financing. The answer is not
risk-free returns to the banks; the answer is drawing out bank and other
private-sector capacity to leverage our own balance sheet. We need committed
partners who will make the investments necessary to support companies of all
sizes going global. We cannot do it all. We do not have a large enough balance
sheet, nor will we ever.
Let me now turn to possible changes to legislation. We believe the committee
should endorse the open and transparent process and the broad thrust of the
review. We do not see the need for any substantive changes in the act.
As I have already made clear, we are concerned that certain recommendations may
impede EDC's flexibility in delivering programs valued by the exporting
community, particularly small businesses.
We do not support recommendation number 2, nor other recommendations, such as 6
and 8, that would reduce the operating flexibility of the corporation and could
ultimately hurt our capacity to adapt quickly to meeting the needs of our
We also do not support the proposed changes to regulations 9 and 11, which would
limit our operating capacity and flexibility. At this stage, we ask that the
committee recommend fine-tuning the Export Development Act to more effectively
meet the needs of Canadian companies. In particular it should do the following:
1. Address the methodology for establishing the contingent liability ceiling in
order to preserve EDC's operating capacity over an extended period.
2. Allow EDC to reach and serve more customers by endorsing our proposed
enhancements to the corporation's image and identity --
As one of the witnesses in front of the standing committee said earlier this
week, EDC is the best-kept secret in Canada.
3. Help EDC serve its customers more effectively through increased
representation in foreign markets.
4. Reschedule EDC under the Financial Administration Act.
5. Consider possible amendments that would streamline the management of Canada
6. Endorse EDC's efforts to modernize and strengthen our corporate governance
Let me conclude by reminding you that exports energize our economy. Over 40 per
cent of everything Canadians create is exported. That is a lot of jobs.
Behind each larger exporter that EDC supports are many thriving smaller
businesses. Behind each small business that EDC directly supports are many new
Canadian jobs. Canada's economic health is clearly intrinsically linked to its
capacity to export, and Canada's export capacity depends on EDC's ability to
innovate and manage risk.
Finally, Mr. Chairman, let me summarize what our customers have told both
Gowlings and the Standing Committee on Foreign Affairs and International Trade.
EDC provides a competitive advantage for exporters. From the smallest to the
largest, exporters need the insurance and financing solutions that EDC offers.
EDC is more relevant and critical than ever before. EDC is an integral part of
the solution for a winning Canadian global trade strategy. Exporters are
vulnerable without a strong, flexible and skilled EDC. They have few other
Gowlings said in their report that EDC is the recognized centre of excellence
for trade finance in Canada. Its staff are highly skilled and innovative and
they provide prompt, knowledgeable service. EDC is the role model against which
other export credit agencies in the world are judged. It is our hope that the
senate committee will put the needs of Canadian exporters and investors at the
forefront and act in their best interests when considering the review
As you know, at the end of the day, the interests of Canadian exporters and
investors are paramount.
Senator Meighen: Welcome, gentlemen and Madam Landry. I heard the chairman say
earlier that once we had had a full discussion with you and other interested
parties, you might be prepared to come back and talk to us again.
Mr. Gillespie: We would be delighted to come back. We have such a good story,
senator, to tell you.
Senator Meighen: I hope you feel the same way at the end of this morning's
session, and I am sure you will, because we are all very nice people here. We
just want to know the facts and nothing but the facts, as they say.
Let me just throw a general question to you and perhaps you could amplify on it.
I am informed that most export credit corporations or organizations similar to
yours in other countries operate on government appropriations. In other words,
my understanding is that they do not have to be self-sustaining.
Mr. Gillespie: Correct.
Senator Meighen: Your new mandate is to be self-sustaining. The obvious comment
on that is: does that not lead you to be averse to risk, because you have to
make more money than you lose on your transactions and, therefore, does that
not inhibit your ability to serve the needs that we are all seeking to serve of
Canadian exporters and investors?
Mr. Gillespie: An excellent question. You are absolutely right; other export
credit agencies do not have a self-sustaining mandate. The U.S. Ex-Im Bank is
perhaps one of the best examples. They support approximately $17 billion a year
in U.S. exports. EDC supported $35 billion last year and $38 billion this year.
In U.S. dollar terms, that is $27 billion, or something like that. So we are
supporting significantly more than the U.S. Ex-Im Bank, which last year received
an appropriation in the order of U.S. $750 million. In other words, they get an
annual appropriation that is more than the entire capital invested in EDC. They
are a lender of last resort. We are not. That is one of the big differences. If
you look at our track record in the last five years, we have grown from about $8
billion dollars in support to the $35 billion last year and the $38 billion
Senator Meighen: I am being the devil's advocate, but is that not simply because
you make non-risky loans more than risky loans, which perhaps are more
Mr. Gillespie: I do not think so. We have been aggressive on the risk; we have
been conservative on the accounting. That is by design. We think our best asset
is to help Canadian companies by offering solutions, but pricing to the risk of
The EDC of five or ten years ago had companies coming to it with markets such as
Algeria. They would say, for instance, "EDC, what is your price for
Algeria?" We would have some ridiculously low price, and then they would
say, "That is great. We would like to do $1 million." We would say, "We
cannot do $1 million. We will do $100,000," and they would say, "What
good are you if that is the case?" So we began pricing to the risk of the
market and we have been able to support their entire activity.
Over $9 billion of our activity was in very high-risk emerging markets last
year. More than half of our activities this year, and indeed last year, were
with credits that were below investment grade. That is very high-risk lending.
We certainly believe that the growth that we have supported is of a nature that
Canadian banks and other financial institutions would shy away from. That is
why we are one of the few games in town; certainly in Canada we are the only
game in town.
Senator Meighen: Why do you think that is so? Why is it in your view that
Canadian banks, according to what you have said, seemingly shy away from the
more risky loans? Is it because they are reluctant to charge, shall we say, an
aggressive rate of interest priced to risk, in other words?
Mr. Gillespie: I will ask Mr. Siegel to comment more fully, but I will say a
couple of things.
Senator Meighen: And do you price to risk?
Mr. Gillespie: We do price to the risk of the market; absolutely. That is
something that we had to establish very clearly in front of the WTO panel in
light of the Bombardier-Embraer, Canada-Brazil challenge. We were clearly shown
to be operating as a commercial financial institution, which we had fully
To answer your question more directly, the issue is that it requires an
investment in people and skills. EDC has the largest pool of trade finance
talent under one roof in this country. That is very much a niche market. It is
labour intensive. The returns are volatile. These are not risks that you can
easily hedge. That is why, when you saw what happened in Southeast Asia, people
just left in a hurry because they had to get out; but EDC has a habit of
staying in those markets longer; in fact our business grew in many of those
Canadian banks have not historically looked at trade finance as a major focus of
their activities. It is very much a niche business for them. But the returns
have become more volatile and, as you know, the Canadian banks, for the most
part, are looking at things like value-based management, ensuring they maximize
shareholder return. However, we are not a profit maximizer; we are an export
maximizer. That is one of the major distinctions that you will see with EDC and
the banks. We are operating in 160 markets. They are not. Those are all
There are also some institutional things happening with regard to some of the
BIS rules that require more and more capital to be dedicated to this kind of
activity. The banks are discovering that it is just not worth their while to
put out that capital for the kinds of returns that are available and the
volatility of those returns.
Mr. Siegel, would you like to add anything?
Mr. Eric Siegel, Executive Vice-President, Medium and Long-Term Financial
Services, Export Development Corporation: Definitely the capital issue is a
very key issue. Just to underpin some of the things you said, there has been an
enormous shift in the trend that we have seen in terms of the nature of the
risk. Ten years ago it was basically export credit agencies lending to sovereign
entities, and the system supported that. Today it is export credit agencies
lending to commercial entities. Governments have gotten out of the business
largely of undertaking project development. Governments are trying to get out
of the business of being the buyer. Therefore, all of the export credit
agencies have been forced to look at a very different risk profile.
The growth that you see in EDC is our ability to make that transition, in large
part because of the way we have been structured, because of our ability to have
a variety of services under one roof, a lot of flexibility, et cetera. Other
export credit agencies have struggled greatly with that.
The second issue is the rates; there is a movement afoot and it is well underway
amongst the European ECAs to actually raise their rates. They have been vitally
concerned with the draw on the treasury and, indeed, there is something
referred to in the OECD as premier harmonization. It is effectively a concerted
effort to get the rates up.
EDC has not had to struggle with that because we have largely tried to structure
our financing on a market-based approach. More often than not, we are the ones
who are going in alongside banks as a joint participant with the banks as
opposed to a separate or parallel lender, because we are able to structure our
financing on an entirely compatible basis: Common security, common rates, common
terms, et cetera. The other export credit agencies struggle because they are
really off in a corner, a parallel lender, and often are unable to directly
provide the finance; they have to work through other entities, and that only
adds to the cost of it and makes it even less competitive in fact.
A third thing is that in this shift to privatization there has been the
emergence of project finance. Everybody is quite aware of the tremendous
importance at now being able to have structured finance and off-balance-sheet
finance and limited-recourse finance as represented in terms of business
development around the world.
When you talk about the risk of lending, the risk today is as much, if not more,
a question of your ability to absorb market-risk and project-risk types of
structures as opposed to your ability to accept the old sovereign commercial
political risk. In that regard, EDC was well positioned to be able to do that.
We have that capability in house. If you compare that with, say, U.S. Ex-Im
Bank, they have a project finance group as well. Last year, we concluded some
15 limited-recourse deals. They did none. This year, they have six on their
pipeline, but they have yet to conclude any. We have done 26 so far this year.
For our financing program, that represents about 25 per cent of our total
We are viewed as experts, not just in Canada, but worldwide, and we are sought
out by banks to participate. We have become a competitive advantage, if you
will, to Canadian exporters because we can deliver something that they vitally
have to deliver.
It is not a criticism of the banks, but the Canadian banks have recognized that
maintaining project finance across a variety of sectors is tremendously
intensive in terms of personnel and capital, as Mr. Gillespie said. There are
huge overheads and it is necessary to maintain an international presence, and
the return on equity is just not there for them. We have seen them either reduce
the number of sectors that they are prepared to concentrate on or,
alternatively, to just plain shut down their capability. Some of the banks have
shut down their London teams or their New York teams because the return on
equity in their view is not there. There has been global concentration of banks.
There are bigger players out there who can put out bigger teams. The net effect
is that Canada is left vulnerable. We have been able to step up and fill a
void. That is why you have seen a lot of our growth on the medium- and
long-term side; it is because we are doing something that others cannot do.
Senator Meighen: Did I hear you say that the Canadian banks are increasingly
piggybacking or joining with you in export financing?
Mr. Siegel: Yes. Today it is interesting that we probably do much more with the
banks from a financing perspective than we ever have done historically. But we
are collaborating on a different side. We are collaborating on the corporate
finance side because they need capacity to get out there and bid and obtain
mandates. More and more they need EDC with them, not EDC guaranteeing them.
They need EDC to step up to the plate and take some of the risk and work
alongside them so that they have a critical mass to obtain mandates to
underwrite, to obtain mandates to syndicate, et cetera. We help make the market
for them in a sense.
Senator Meighen: It is to be hoped that the banks will tell us the same thing
and we will see an avenue that is going forward with great promise.
Mr. Gillespie, please do not take this the wrong way in terms of your
colleagues, because I am very impressed with the team you have here, but are
you able to offer remuneration competitive with the totally private sector or
do you have a difficulty in that regard?
Mr. Gillespie: It is a constant challenge, senator.
Senator Meighen: I am sure it is, but is there any restriction in law as to the
salaries you can pay or the way in which you can pay them?
Mr. Gillespie: As you know, maybe I am the exception. I am under a different
regime. We can go into that, if you want.
Senator Meighen: You can keep it in general terms.
Mr. Gillespie: We have been successful in ensuring that we have a strong nucleus
of people. That is a constant challenge for a number of reasons.
EDC has grown very dramatically. We have acquired those skills that Mr. Siegel
just talked about. We have a huge investment of those people. Our success is
only a reflection of the success of the Nortels, the Bombardiers and the 90 per
cent of our customers who are small and medium-sized businesses out there. They
need more people, with exactly the same skills as EDC has, to help them from an
internal point of view -- and guess what the only game in town is? "We love
our customers, our customers love our people." So we are vulnerable from
that point of view.
The market is getting more competitive in different areas: risk management,
project finance, the knowledge of economics in the whole IT infrastructure. I
would not say we are where we need to be to have the confidence to ensure that
we have all the right people and to ensure that we are able to get the skills.
It is not only a matter of retaining them; we have to draw them in, because as
we get bigger we need more and more infrastructure. We are constantly working
on that with the board to get them to realize that we have a very important
asset here that we do not want to lose.
Senator Meighen: But OSFI, for example, has guidelines that restrict it from
paying above certain levels. Do you have that?
Mr. Gillespie: We are not restricted other than in the sense that EDC cannot be
seen to be on a completely different page from the rest of the government. We
are a Crown corporation. The shareholder is the Government of Canada. The board
is very cognizant of that. They are also cognizant of what we are doing and
where we are trying to go and of the importance of EDC as an institution.
As John Ross said at the standing committee a couple of days ago, EDC is one
asset that the Canadian government has that works extremely well.
Senator Meighen: Those tend to stand out then, I guess.
Mr. Gillespie: That is right. With regard to the banks, we estimate that we are
doing in excess of $70 billion a year with Canadian financial institutions.
That is covering not only our support to our customers, which is driven through
their support, indeed through the provision of working capital and other risk
management products to the ultimate end customer, but it is also covering the
fact that for every loan we make we have to borrow it. We have foreign
exchange; we have derivatives; we have commercial paper; we have the whole
investment dealer borrowing program. When you add all of those things up, we
are doing something around $70 billion to $75 billion. We are in the top ten, if
not the top five, if not higher than that, as the best customers of some of the
Canadian financial institutions.
In that sense, the relationship with the Canadian banks today is far better than
it has ever been, even though we are supporting 10 to 15 times the business
that we were supporting 15 years ago. That is a major change. Part of that is
that people have got themselves out of looking at this business as simply trade
finance. It is the whole treasury side; it is the investment banking side; it is
trade finance; it is project finance; it is commercial banking; it is corporate
banking. That is quite a different angle.
You may not hear that from the CBA, but I would encourage you to talk to the
banks individually, because I think at the senior leadership levels there they
have an entirely different view of EDC and what we are doing and the nature of
Senator Oliver: Since you are all of these things, what is the advantage of your
being a Crown corporation? Why are you not just privatized now so that you
could deal even more directly with banks and other financial institutions
around the world? What is the advantage to you now of being a Crown
Mr. Gillespie: Senator, one obvious advantage to being privatized would be that,
probably from the CEO on down, we would all be paid more.
Senator Oliver: That is what Senator Meighen was getting at.
Mr. Gillespie: That would be very good news. However, this goes back to the risk
question. Are there other Canadian financial institutions or other shareholders
that would be prepared to take risks in 160 markets in the world, that would do
that $38 billion that we are going to do this year without any government
support, that would provide better service to our customers at lower cost? Our
efficiency ratio is one of the key ratios that the banks use in their annual
report. Their efficiency ratios are about either side of 70 per cent. This is
really a reflection of administrative expense to net operating income. We are
at 14 per cent. The lower number is better.
I do not think anybody would do it more cheaply. Based on our customer
satisfaction scores, I do not think anybody would do it better.
The privatization model would have to be such that you have the confidence that
the other shareholders would support more business to more companies at less
cost without any government support, and I have not seen anybody step up to say
that they are prepared to do that. It would be great if they were.
Senator Oliver: You said that the $1 billion that you got from the Government of
Canada is still there. So there is no reason why you could not pay that back,
go to the markets, raise another $1 billion and go on with your business and be
private and not have the constraints of the Crown.
Mr. Gillespie: You are right in one sense, senator, but again, if we go back to
the banks, right now they are looking for a 30 per cent return on equity
pre-tax, and 20 per cent after tax. Our return on equity this year is going to
be, say, 7 per cent. That is not exactly a compelling return for private
shareholders to get into, given the risk and the volatility that we just spoke
about. That is the problem.
While we are a commercial financial institution, we want to be the best of
private sector methods. We have to be from a risk management point of view. It
is highly dangerous stuff, but we also have to be the best of public policy and
find that balancing act that is so critical.
Senator Kenny: Mr. Gillespie, my interest is along the same lines as Senator
Meighen's questions. I understand why you are not keen on guarantees for bank
loans, but you did say in your remarks that export financing is a niche market
and there is a need for committed partners to leverage your efforts. How big is
the problem and what are you doing about it?
Mr. Gillespie: Again I will ask Mr. Siegel to make some further comments on
this, but first let me say that right now there is not a major problem. We are
not constrained in terms of supporting Canadian companies. That needs to be
However, as we go forward and build and support more and more Canadian companies
going global, and as our activity goes up, then there is the potential to run
into risk concentrations, with which we will have to deal one way or the other.
We would like to find some partners to assist us not only in supporting small
and medium-sized customers and doing that more effectively, but also on the
public-private infrastructure side internationally, where obviously EDC's
interest is in the benefits to Canada. Yet, these projects are very large. They
often entail substantial amounts of third-country supply, which is not a
terribly good use of EDC's balance sheet, as you might well imagine, but, at the
same time, without the full financing package being put together on the table,
the deal is not likely to come to fruition.
Mr. Siegel: As you say, it is really looking forward. As we look out globally at
what other countries can bring to the table, the problem is becoming more
pronounced in the sense that we do not have the large transnational
corporations that have captive financial institutions with them that you see in
Europe. We do not have the preponderance of policy banks that you see in Europe,
such as the European Investment Bank, Nordic Investment Bank. I could go on and
You are seeing a diminishment of the role in financing that the multilateral
development banks are prepared to play. Indeed, one need only look at Seattle
and at the type of pressure they are under, which makes it that much more
difficult for them to engage in particular projects. However, it will become
more of an issue. It stems from the use of our programs. Very often what we are
trying to do when we lend is to bring other players alongside.
For instance, we lend and we have a political risk insurance program that
historically used to be given to equity investors. It protected them and their
equity investment abroad. Today 50 per cent of that coverage goes to banks to
give them protection against political risk, if they are prepared to take the
underlying commercial risk in a project. We are trying to leverage more capacity
in there. We will take maybe a third of the financing requirement and try to
leverage out two-thirds by using our political risk insurance. That is more a
project-specific and transaction-specific example.
With respect to building capacity in a longer-term range, we have talked with
virtually every one of the Canadian banks to see, given the fact that they
cannot necessarily maintain the kind of presence in limited and project
finance, whether it makes sense to collaborate in some way and bring that
capacity together so that they can maintain a certain core capacity and
piggyback off the capacity that EDC has, and in a sense, in terms of Canadian
exporters, present a larger more critical mass, if you will, of advising and
arranging capability out there.
That is another example. We are in earnest in pursuing that kind of structure.
A third area that I have mentioned -- and it has been publicly announced -- is
that there has been a suggestion from the Department of Finance of a regulation
change that would permit Canadian pension funds to potentially participate in
EDC-originated financing and not be subject to the foreign property definition
in respect of their overall portfolio holdings.
We have been in discussion with some specific players who have been championing
this and have been discussing how they can, in effect, participate in EDC
financing and bring more capacity into the game, but through EDC. So they
benefit and they bring more dollars to the table. Those are three areas that I
Senator Kenny: On the second area you spoke of, Mr. Siegel, what sort of
response have you had from the banks about creating further capacity?
Mr. Siegel: Lukewarm, senator. One or two have indicated that they would look at
it more seriously. One or two have really tried to look at it more from the
traditional trade finance perspective, almost assuming that EDC would be a
guarantor, and that is not what we are talking about. We are not talking about
substitution of risk. We are talking about collaboration. I would say one or two
have just basically rejected it out of hand. It is not in their plan to do that
kind of lending so they do not see the merits of doing it.
Senator Kenny: It is not in their plan because they cannot make money at it?
Mr. Siegel: Yes, that type of activity is very capital intensive and labour
intensive and it is just not, in their view, a growth area.
Senator Kenny: Maybe I could ask to you say that again. The view of the banks is
that export financing is not a growth area?
Mr. Siegel: The view of some of the banks is that the area of project finance,
limited recourse, is not a growth area relative to some of their other
businesses and options, given the overall capital and labour intensity of that
In terms of specific trade financing -- and here you have to separate the short
term from the medium and long term -- I do not profess to know the internal
strategy of the banks, but you might judge it by the dedication of the
personnel: virtually all the banks have cut back dramatically their medium- and
long-term trade finance staff and, in some cases, have merged that with their
corporate banking operations as well. That part has been diminishing, and in
some cases even imploding. That is some indication of what their investment is
on that side of the business.
The Chairman: Could you explain why Bombardier would do business with you rather
than with their major banker? Obviously, their credit must be impeccable.
Mr. Siegel: It is not necessarily a question of Bombardier, although we do
support Bombardier through bonding programs and basically backstopping their
performance and their ability to perform; it is really a question of their
customers. It is Bombardier reaching out to regional airlines in the United
States in respect to their RJ program, the regional airlines. These are not the
majors. These are second-tier airlines that present different risk profiles.
Yet they still require the same type of financing support, long-term, large
amounts of financing to overhaul their fleets and to move quickly into the jet
It is a matter of Bombardier coming to us because there is a risk profile out
there that the banks have a limited appetite for. That does not mean they have
no appetite, but they have a limited appetite for what they can take on.
The same would apply on the ground transportation side. Bombardier and its
ground transportation group is looking at major transit projects around the
world. Many of these are back to the limited or project finance types of
structures to which my earlier comments would pertain. That is what their
financing requirement is and that is what the competitor is putting up in those,
because the buyers ars not prepared to arrange the financing themselves. They
want it arranged for them and brought to the table.
The Chairman: You are saying that Bombardier can sell planes to some little
feeder airline in Costa Rica, if Bombardier can help them arrange financing in
order to pay Bombardier?
Mr. Siegel: I am saying that Bombardier comes to us, as they go to any bank,
looking for preparedness to lend to airlines around the world. They may be in
Third World countries, they may be right next door in the United States. A
large part of their program has been right next door in the United States.
These are the regional feeders whom you may not know by name but who are
operating under a code share arrangement with United or with Delta or with
American Airlines; but the risk is not the same as for American Airlines or
United. The risk is for a second-tier operator who does not present the same
kind of financial strength or root network as these majors do. That extends as
you go, then, into emerging markets with airlines that do not have the same
strength. They need somebody who is prepared to lend to those parties.
The Chairman: Are you saying you make the money arrangements for the buyer?
Mr. Siegel: Yes, we lend to those buyers, Mr. Chairman, secured in many cases by
the aircraft itself.
The Chairman: Which is probably something Canadian banks will not do?
Mr. Siegel: I will not say that they are not prepared to do it. They obviously
have a risk threshold. Some risks they cannot undertake. In other cases, the
issue is how much they are prepared to lend -- that is, how much concentration
they can accept in one buyer or in one sector.
They are also doing other types of financing, for wide-bodied aircraft and what
have you. So they have limits on how much they can bring to the table. But
Bombardier has a huge appetite and requirement. They are now delivering close
to 100 aircraft a year in their regional jet program. That is a huge
requirement in terms of financing.
Senator Tkachuk: I would like to know whether you have a breakdown of the amount
of business you write in Western Canada and whether you could break it down by
provinces in Western Canada or if it just done as a region?
Mr. Gillespie: Senator, we can. I would ask Louise Landry to speak directly to
Ms Louise Landry, Vice-President, Corporate Performance and Communications,
Export Development Corporation: Yes, in fact we have a breakdown. It is in the
annual report. Every year we show our support by number of cuts, regional
destination and also province of origin. It is interesting to note that we are
very closely married to the actual destination of Canadian exports, particularly
in Western Canada. We do have this information. We can provide it to you.
Senator Tkachuk: What percentage of business would you say is done in, let us
say, the Prairies?
Ms Landry: I will do some quick math here, because we have it by province.
Senator Tkachuk: Why don't you put it on the record for Western Canada?
Ms Landry: I will start with Manitoba and go West. Manitoban exports, as a
percentage of Canadian exports, equals 3 per cent, and 2 per cent of our
support goes to Manitoban exports. So we are closely linked to the Canadian
profile, if you like, in that province. For Saskatchewan, 3 per cent of Canadian
exports are from Saskatchewan; 4 per cent of our support is for Saskatchewan
exports. With respect to Alberta, they have 9 per cent for the Canadian
percentage and 8 per cent for EDC's percentage. Finally, looking at British
Columbia, 9 per cent of Canadian exports are from B.C. and 12 per cent of EDC
support is on behalf of B.C. exports. We are very closely matched to the
Senator Oliver: Our report says that 72 per cent of what you do is in Ontario
and Quebec. What about Atlantic Canada?
Ms Landry: Let me mention that 72 per cent of Canadian exports are from Ontario
and Quebec. Therefore, our support matches again the Canadian profile.
There are very small percentages from the Atlantic, as you may appreciate. In
total, 4 per cent of Canadian exports come from the Atlantic provinces. I am
not going to name it by province, because some of them are decimal points; they
are very small. EDC support is 3 per cent, again very closely matching the
Canadian export profile.
Senator Tkachuk: It is like the chicken and the egg. Western Canadian jobs are
highly dependent on exports. Our agriculture sector is almost totally dependent
on exports. We are a trade region of the country.
When you see numbers that are low, does that get you more interested in that
particular region? In other words, do you have a mandate, or is it part of your
mandate, to actually stimulate further exports from a particular region that
may be low?
Mr. Gillespie: We have ten offices across the country. We have business
development efforts that go right from B.C. to Newfoundland and Labrador,
trying to increase the number of customers and increase our volume of activity.
The numbers that Louise was talking about in Western Canada show that our export
support there is actually higher than the Canadian export profile. The support
is less than that in Ontario simply because there is a lot of trade that is
automotive related in Ontario that we would not touch. In Quebec and the
Atlantic provinces, the amount of support is actually higher than the Canadian
export profile for those regions.
Having said that, one also has to be a little careful in the sense that our
numbers are based on the exporters served, wherever their head office is. So
what you would have, for example, in the case of Nortel, which is a major
customer of ours, if their plant was in Alberta, then the statistics we have
would be against Nortel's showing up in Ontario. Similarly, you could have
activity in the Atlantic provinces that might be potash, or paper, or fish, or
it might be all sorts of different things related to showing up against a
Quebec-based head office or an Ontario-based head office or a head office
somewhere else in addition to the Maritimes. So one has to be a little careful
with some of the numbers in getting overly precise.
The other interesting thing is that in our annual customer satisfaction survey,
which we just concluded for this year, the perception of EDC regional support
is actually highest in B.C. and the West, and in the Atlantic provinces it is
higher than it is in Quebec and Ontario.
Senator Tkachuk: Gowlings have said that they want to see more decentralization
of business decision-making by EDC, and that is something that you disagreed
with in your paper. I am wondering why that is.
Mr. Gillespie: There are a couple of reasons. Technology has -- I think it has
been referred to this way -- created the death of distance. Decisions can be
taken virtually anywhere in the world. So, in a sense, the issue is not where
the decision is taken. That can be at a computer sitting in Ottawa; it could be
sitting in Moncton; it could be sitting somewhere else in the world,
conceivably. That can be seamless to the customer. We are trying to ensure that
we have the right goods and services delivered for the customers as they need
them in their particular segment of the market.
We are beefing up, and have been beefing up, our business development efforts.
That is what we think is most critical in the region, because we are not
sufficiently well known. That is one of our biggest challenges. Our efforts in
the region are around building our awareness and reaching more and more
customers, performing the appropriate diagnoses, and then bringing those
decisions to wherever.
As an example, we have effectively a call centre for what we describe as the
emerging exporters segment, which are all the exporters that have less than $1
million in export sales. That is effectively a call centre. That is what the
exporters want -- very fast response times. That needs to be very consistent
and deliver the right answers time and time again. That is set up in Ottawa.
However, obviously from an exporter's point of view it could, with technology,
be sitting down the street. The exporters are not looking for a real, live,
human being; they just want to get the right answer.
With regard to our short-term insurance activities, one of the big interests of
our customer base is fast response time. If you go back about ten years, EDC's
response time on credit approvals was something like nine to ten days. We have
spent a lot of time and effort putting together some interesting technology
with the D&B in the States. A couple of years ago we got that down to two
days. In fact, we got a Canadian productivity award for that.
Because of the Internet we are just starting to pilot, and roll out to our
customers, some technology that allows the customers to access the credit
decision themselves right on line. We believe we can deliver that service in
two minutes. They type in the buyer they want to deal with in the world,
whether it is in the United States or in Europe, or in some emerging market,
because the data bases are not linked completely around the world, and after
they put in their customer they indicate the credit limit requested and the
terms and conditions that they will sell on. If we do not have the information
in our data base when they hit "submit request", that information
request goes down into the United States and draws out certain packets of data,
or it goes elsewhere in the world where we have this linked this up, populating
a decision support module within EDC that runs through various credit modules
and issuing a credit approval right back to the customer. Within two minutes, it
would say, "There is mail waiting for you." That is fairly
interesting. It is still in its early days, but that is where it is going.
That is why, in a sense, the decision making does not have to be in Vancouver.
The decision making is on the screen. That is what the customers are telling us
they want. They want instant access to decision making. That is where we are
going. They also need business development people who can help them do some
hand holding, particularly for the small and medium-sized businesses that form
90 per cent of our customer base. They need the right tools, the diagnostics to
make sure they are put in the right slot.
Senator Kroft: When you are making these comments about this kind of service,
are you talking generally across your credit and your insurance side?
Mr. Gillespie: The comments with regard to this two-minute response time is
around the short-term insurance product, which is where we are taking the risk
on foreign receivables against commercial and political risks. Short-term
insurance constitutes 70 per cent of our total activity. That is what I am
speaking to, where we are actually doing more than 40,000 credit approvals a
year. Now about 60 per cent of those are same-day approvals. Where it gets a
little tricky is in some of those emerging markets, where we just do not have
information and it takes some time to get in.
Senator Tkachuk: Is agriculture a large part of your business? I am specifically
speaking of the commodity market -- wheat, oats, barley, canola.
Mr. Gillespie: Yes, it is a significant part and a growing part. For that
reason, actually, we recently announced the creation of an agri-food team,
whereas before that service was provided within a couple of other industry
sector teams. We have decided that the size is now sufficiently big and the
skills sufficiently specialized that we need to dedicate staff to that area.
This is another area where we are working extensively with the banks. Often in
agricultural products, the terms of payment are a letter of credit. EDC does
not issue letters of credit, but we can insure them. This is where the Canadian
banks may not want the risk on that letter of credit but obviously want to
advise and confirm those letters of credit to their customers.
So the bank is the intermediary, but the bank does not want the risk. The banks
lay that risk off on EDC for a fee. We are quite active in markets like Mexico,
which is a very big market for Canadian canola and some wheat products.
Obviously we do not, for the most part, do the Wheat Board activities. They
have their own programs, which they can access, although we have done some
Wheat Board activity in some markets in the world where they ran out of capacity
elsewhere. We are working extensively with the banks. We are trying to grow our
business in that regard, and we have been quite successful.
Senator Tkachuk: And will this team be here in Ottawa or will it be out in the
Mr. Gillespie: It will be here in Ottawa, again because it is some financial
risk that we have to manage very carefully.
Senator Oliver: Senator Tkachuk's questions were in an area that I want to
pursue a bit more.
One of the things that this committee has studied in the past, and might study
again, is small businesses and small business equity and small business
financing, and so on. I heard what you said about your call centre for small
business and quick response and so on. As I understand what you do, you largely
deal with companies the size of Nortel, SNC, Lavalin, Bombardier, Siemens,
Boeing, et cetera. What percentage of your business is within those top six
people and how much is left for what I call small business?
Mr. Gillespie: Thank you, senator, for that question. I have to take issue with
your expression "we largely do business with." If you are looking at
the total number of customers, and we think that is the best measure of our
support in the marketplace, that is where I come back to saying that 90 per cent
are small and medium-sized businesses. What we define as small businesses are
those businesses with sales of less than $5 million, and a medium company is
one with sales of less than $25 million.
Senator Oliver: Those are the same numbers as we use.
Mr. Gillespie: Ninety per cent of our customers are of that nature. Half of our
customers are emerging exporters with export sales of less than $1 million. Our
support last year for the small business and medium-sized business activity was
$5.8 billion. That makes us the largest by quite a margin against other federal
providers of small business services. The Business Development Bank, I believe,
does $1.4 billion in activity to small business. EDC has $5.8 billion of small
business activity. That is $5.8 billion out of the $35 billion that I talked
about. In other words, 90 per cent of the customers are doing 15 per cent to 20
per cent of our volume, and that is 50 to 100 customers overall, where we have
doubled the number in the last couple of years. We have major initiatives
underway to try to make that grow across the country.
There is an interesting thing about the small business activity. I would bring
your attention to a couple of statistics in the Gowlings report. They talk
about EDC's customer satisfaction. We have our own annual survey and those
reports were just released and shared with the board yesterday. We had a result
of 80.4 per cent on customer satisfaction, which was actually the highest that
we have ever had.
Senator Oliver: Who did that study for you?
Mr. Gillespie: We did that study.
Senator Oliver: Was it self-serving?
Mr. Gillespie: No. Phase 5, I believe, is the consulting company that was used
to conduct the interviews. So it was an independent third party that did that.
The small business results are actually highest overall. We are slightly below
that number that I just gave you for the largest customers, simply because, as
you might imagine, their expectations are measured against the best service
providers in the world. They are trying to move a very large volume of activity
in pretty difficult places of the world and we cannot always find financial
solutions for them, but, overall, 80.4 per cent is pretty good.
Gowlings actually had Environics do a study as part of their review. I would
recommend that you read the Environics study, because there are a number of
very telling statistics in it, one of which was that 74 per cent of small and
medium-sized exporters could not think of one thing that EDC should do
differently or better to meet their needs, which I thought was a pretty
interesting number relative to the difficulty of managing this constituency.
Senator Oliver: In relation to one of the responses you gave to Senator Tkachuk,
you were talking about your quick response to a credit request. You said that
what people want is on a screen and so the interaction is between one screen
and another screen. However, once the credit is approved for what the client
wants, there has to be an individual there to do some negotiating on the rate
and on the terms and so on. Is there a long delay in getting a person to
finally deal with the customer to talk about the terms of the approval once the
credit has been approved?
Mr. Gillespie: Once the credit has taken on the decision, the customer knows
what the rate is. I am talking about short-term insurance here. I am not
talking about medium-term activity related to selling Bombardier aircraft or
something. I am talking about the short-term credit insurance program.
Senator Oliver: So there is no negotiation?
Mr. Gillespie: There is no negotiation. The customers understand, when they sign
up the policy with us, what the various rates are for the various risks in the
world based on the terms of payment. Obviously, a letter of credit is one of
the most secure risks and would have the lowest rates, again differentiated by
bank in the world, depending where that is. Open account, 180 days -- that gets
riskier. That is where you are starting to simply underwrite on the strength of
the commercial risk.
Those rates are established in the policy. Once the credit approval is issued,
the exporter has what he or she needs to do the business.
Senator Angus: Ms Landry, gentlemen, thank you for coming. We have had not
perhaps as long a time as we would have liked to prepare for this morning. We
could spend hours questioning you. I know my colleague, Senator Meighen,
indicated he would like to go on and on. However, I understand that there may
be a possibility of having you folks back again for further questioning.
The Chairman: Our plan is to have other witnesses in, such as some
representation from banks, whether it is CBA or the banks themselves. The
committee will have to come to that conclusion. Gowlings will have to come in
ot tell us something about their report. The plan presently, depending on your
wishes, is to bring these people back for a wrap up.
Senator Angus: Mr. Gillespie, some two or three years ago the Banking Committee
did a study of the government-owned credit granting institutions, reviewing the
gaps that existed and, therefore, justified having publicly-owned enterprises
in this field.
One of the recommendations the committee made was that the Canadian Commercial
Corporation be integrated with the EDC. That has not happened in the interim.
At the time, when the EDC reps came before us, they were not in favour of that
kind of a merger, but we recommended it in any event and we listed our
reasoning in the report.
As I understand it, the Canadian Commercial Corporation does a lot of the same
things in terms of facilitating the export of Canadian goods, arranging risk
management programs, finding financing and even standing in the shoes of the
exporter to give it a face, to give it a visible entity for the foreign buyer.
I am of the view that there is duplication, and that it would be good to have
CCC in with you folks. Could you comment on that first of all, please?
Mr. Gillespie: Senator, with respect, I do not think I will personally comment
on that, simply because the government took a decision earlier this year to
maintain the present structure of CCC and to appoint a full-time CEO of that
corporation. The question is best put to perhaps the minister or other
Senator Angus: There are many things that result from decisions by government.
Most of those things are on my list of questions, so we will see how we get
Obviously, you are a Crown corporation and you are a government-owned entity. I
guess at the end of the day everything that happens respecting your corporation
is a result of one government decision or another. Let us try one area for fun:
In the private sector, corporate governance has been very much in focus in the
last five or ten years. Since the Day report of the Toronto Stock Exchange and
the public companies in the private sector made great strides in answering the
question: "Where are the directors?", Boards of directors have
undergone radical change and substantial improvement in terms of getting more
involved and being accountable for the things they do. Indeed, there are
processes for ensuring that on an ongoing basis the boards are appropriate for
I notice that in the Gowlings report there are some recommendations that, while
they do not directly mirror the TSE guidelines, certainly go a long way. Could
you tell us where you are in terms of implementing these kinds of governance
processes at EDC?
Mr. Gillespie: That is an extremely important question and I will ask Gilles
Ross to speak more fully on that, but first I would like to make a couple of
very brief comments. One of the recommendations of Gowlings, which we fully
support, is to move EDC from Part 1 to Part 2 of the Financial Administration
Act. In my view, it is increasingly important to put more and more
accountability on the corporation and the Board of Directors of EDC. That is
going to be the best long-term model to ensure success. EDC has grown
dramatically. It is now a big, sophisticated, financial institution doing the
kinds of volumes that I talked about and taking risks in all of those countries.
Therefore, the governance of EDC is a most important matter.
We fully support having the Auditor General remain as EDC's auditor. In that
regard, we disagree with Gowlings, who believes that we should have a
private-sector auditor. In our view, that skill can be retained by the Auditor
General, if he has private-sector expertise brought to the table.
With respect to accountability, I do not think the answer is, "The more
hands the merrier." We have an extremely rigorous accountability regime
right now, even more so than the private sector in some regards. We have the
board, which in the majority is private sector, as you know. We have to file a
corporate plan. We have to file a corporate plan summary. The minister has to
approve it. The Minister of Finance has to approve our borrowing plan. The
Treasury Board has to as well. So the accountability is there more and more.
The real assurance that you and others should be looking for is to make sure
that the Board of Directors of EDC has the right skills to be able to manage
this organization going forward.
With regard to your specific recommendations or your specific comments on the
governance structure vis-à-vis the private sector, let me turn to Mr.
Mr. Gilles Ross, Senior Vice-President, Legal Services and Secretary, Export
Development Corporation: Indeed, we have a very strong corporate governance
structure at EDC. Our Board of Directors is very familiar with the Crown
corporation guidelines on corporate governance that were adopted a few years
ago. Our chairman and president are separate officers. In other words, the two
offices are not held by the same person, which is a strong concept in the
private sector. We have a very strong committee structure of the board. We have
at this stage six committees of the board that focus on different areas of the
Our directors invest the majority of their time in EDC on strategic direction.
They meet once a year, and that meeting is totally dedicated to setting the
corporation's direction for the year ahead. Of course they have to approve the
Even yesterday, by way of example, our board considered a director profile, with
which it agreed, that described the attributes that directors of EDC should
have and described the mix of skills that should be found on our board. We have
an important training program for our new directors when they are appointed.
This year in particular we have focussed very much on risk management and on
modern principles of risk management. Altogether our board is doing a good and
strong job of corporate governance.
Senator Angus: I appreciate those comments. Some cynic told me that the majority
of your directors are Governor in Council appointments, hacks, party bagmen and
partisan appointees. I would not know whether that is true or not, but the
recommendation in this report that we are talking about is that there would be
a committee that would recommend to the Governor in Council who should be
appointed to the board, rather than suddenly one day you wake up, Mr. Gillespie,
and you see in The Globe and Mail that you have a new director, which is, I
understand, how it has been happening for quite a few years.
Under these new corporate governance initiatives, in both the public and private
sectors, the concept, I believe, is to have a little more discipline in how
directors are selected.
With respect to the recommendation that is found just towards the end of the
Gowlings report, I was hoping you would specifically tell us how you are doing
with the implementation of that recommendation -- in other words, having you
folks suggest who would be good directors.
Mr. Gillespie: That is exactly the direction we are going and why the board
spent time at the Governance Committee yesterday in examining the appropriate
role profile for an EDC director. It is extremely important to have that
balance, whether it is people who have small-business knowledge, whether it is
people who are lawyers, whether it is people who have international experience,
or whether it is people who have experience in financial institutions. It is
critical that we have such a good mix on the board that ultimately we can
develop those lists of individuals who would be appropriate and present those
to the government and the minister in order that they would, one would hope,
give consideration to exactly those names.
Senator Angus: That is very reassuring.
Mr. Gillespie: Ultimately the decision will be theirs. We understand that. But
we can assist the process to ensure that they have a good sense for what would
be an appropriate decision, given the growing nature of EDC.
Senator Angus: The recommendation appears on its face to be a good one and I
certainly hope it will be implemented. I do appreciate that it is the
government who will ultimately decide.
Another area of government involvement, of course, is the background to this
report that we are examining. In the 1993 revisions to your act, there was
provision for a review, but "review" was not defined. It does not
talk about the type of review in any detail. Without casting any aspersions on
the people who were hired to do the review, in the wisdom of the government, I
was curious to notice that it was a law firm that was selected to do this job.
I am a lawyer myself, and it provokes me to at least ask you if you
participated or if the agency participated in the selection of the reviewers?
Mr. Gillespie: We had no involvement in it. The government went out with a
competitive bid, which my recollection was that Public Works established
certain criteria around which the selection would be ultimately made. In the
case of Gowlings, they supplemented their internal skill sets with some
external people. Gerry Shannon, for example, was retained by Gowlings, given his
history and knowledge of many of the issues that we are talking about. There
were some other people, as well. That was ultimately the decision of the
government through a very public and open process.
Senator Angus: I feel that this question is an appropriate question. It is not
designed to cast any aspersions anywhere. It is designed to determine the
objectivity of the report.
I know that at one time Gowlings were the regular lawyers for the EDC and then
there was a period when other lawyers were involved. At any time during this
study did Gowlings have any open mandates from the EDC?
Mr. Ross: No, Gowlings do not act as EDC's counsel. They had acted as EDC's
counsel up until 1982 or so, but they have had no mandates from EDC since then.
Senator Angus: We have been talking about the amount of money from a province
and so forth. I have always been curious to understand the quota system, if it
is a quota system, for countries. Is there an amount, for example, that you are
allowed to finance for Russia, or for the former Soviet Union, whatever it is
called now? Do you have an amount for each area that is a limit beyond which
you cannot go?
Mr. Gillespie: We have a risk management methodology that we have created that
helps us establish what would be appropriate exposure in the various markets in
the world that we operate in. This is something that has been part of the whole
risk management process that we have discussed with the board. There are
amounts that we look at from a country point of view and political point of
view. We also have industry concentration limits and single-name limits, based
on the various risks of the counter parties, similar to what you would find in
any other commercial financial institution.
Senator Angus: I have never really delved into it, because I have not had any
reason to, but I have heard it said that, on occasion, somebody with a project,
or a potential deal, say, in Russia, to use that example, has been advised by
EDC that, "Unfortunately, we have reached our quota and we are not lending
any more money to Russia right now." Does that happen, first of all, and,
if so, who sets those quotas? Does the government?
Mr. Gillespie: No, no, the government has no involvement in that. Absolutely, we
have limits. To take the case in point, in Russia, our short-term claims
experience this year is substantially higher than ever before. In part, $27
million has been paid out to Russia on Russian commercial banks.
Do we have an open appetite to take Russia today or tomorrow? They have some
serious problems, as you might imagine. There is still a serious hiccup there.
Yes, if a Canadian company were approaching us today on a bank risk in Russia
or a project financing in Russia, I would expect that the answer would be no,
unless they could demonstrate some pretty unusual risk mitigation strategies --
for example, offshore escrow accounts or some other mechanism that we could look
right through to where that money and that source of funds was coming from.
That is part of the way we operate as a best-practice commercial financial
institution. We have to manage those risks. If Russia goes into difficulty, we
are potentially going to go off cover in some of those markets where we are
going to get a lot more cautious.
Senator Angus: It is probably obvious why I am pursuing this. It is along my
theme that at the end of the day, the government's oversight of what you folks
are doing that counts, notwithstanding the provisions of the act. It is the
government that gets the pressure, for example, not you directly, at one of
these trade meetings, where Captain Canada is out there with his boys and
someone says, "Well, you should be doing more for XYZ country." So
they say, "Yes, we will do that. Canada is going to do more."
Do they then come to you and say, "Okay, EDC." It is not clear to me
how that works, because I have heard it said that going on a trade mission --
and I will use Russia again, because it is true that they are continuously
defaulting on their loans, so that it is a risk management issue, and I suppose
it is a problem between the government and --
Mr. Gillespie: Excuse me. I may be completely wrong here, but one of the reasons
that perhaps "Team Canada to Russia" did not happen earlier this year
was simply that, given the extreme economic hiccup there, taking a plane full
of potential Canadian exporters and telling them to do business there was not
really viable; they would then simply turn to you us and say, "EDC, I guess
you are going to do it for us." That is rather difficult, when you are
paying claims and trying to recover that.
Senator Angus: Let us forget about the example of one that is defaulting all the
time. Instead of Russia, take Algeria, Morocco or one of those sorts of
countries. I understand there still is a quota system. If a project is
presented, they would say, "If we have reached the quota on EDC's normal
lending portfolio, you might get money out of Canada Account" -- whatever
that is. I have seen articles that talk about this, saying that perhaps it
violates WTO rules. I always thought it was an extra slush fund of government
money that could supplement what you do. Could you clarify that?
Mr. Gillespie: I would be happy to. I think we need a conversation at some
point. You are hearing from all these people about things like quotas. We have
a risk management framework. We set that risk management framework and the
economists figure out what kind of exposure we should take in countries, based
on things like their foreign exchange earnings, their level of indebtedness to
start with, and so on and so forth.
So, yes, we come up with a framework for the various countries in the world that
exporters want to do business in, and, as we talked about, every so often
things do not go the right way or, indeed, they go exceedingly well and all of
a sudden we are reaching the point that we do not want to put any more money
into a given country simply because our risk concentration is becoming more than
What are the options? The options are Canada Account, and we can talk about that
further. It is the account where, for reasons of risk in excess of that which
EDC would normally undertake for its own books, the ministers can make
decisions in that regard based on the benefits to Canada as they understand
them; or EDC can stop lending and nothing further happens in that market, or we
look for opportunities to transfer the risk out of our own books onto somebody
else's plate to free up some capacity. There are a number of different ways in
which we are trying to make sure that we have sufficient capacity to meet the
needs of our customers.
Mr. Siegel: In respect of the Canada Account, the government does look to us,
however, ultimately to give them a recommendation, based on our assessment of
the risk, as to how they should provision for that. In some respects, that
underscores the governance that you were talking about. They, themselves, if
they want to proceed because they believe that the benefits would warrant that,
still have to look at the financial implications and they look to us to advise
them as to how we see it.
To underscore what Mr. Gillespie has said, it is rare that we have a market for
which we are just closed. You used the word "quota." The issue is
what sort of risk you can take in that market, and we come back to the fact
that there are ways to structure around those risks. For instance, we are
associated with a mining project in Russia that has been structured in such a
way that we believe it is a fair way to balance the risks in that market. It is
very difficult but we hope it will proceed.
You can go into some very difficult countries, and it is not just the simple
question of whether we are up to a certain dollar amount. Our exposure may be
undertaken in a variety of ways. The issue may be that we can take short-term
exposure, but if you want five-year exposure or ten-year exposure that market
is just too risky for it. We can support you with equity coverage. We can take
some of the political risk coverage against expropriation, against political
violence, against long-term transfer, but we are not going to be able to lend
directly and take that exposure.
It obviously takes on a number of dimensions. I would say it is pretty rare that
we face a situation where the country is just plain unable to go into that
market; but obviously the structures can be very complex -- I do not want to
use the word "onerous", but they can be complex, and then obviously in
respect to some transactions the cost benefit does not warrant doing that.
Senator Angus: If I understand well, you actually are very actively involved in
the administration of and the setting up of the structure of loans that come
from the Canada Account source; but those are generally higher risk loans,
loans that do not meet the parameters of your risk management system, and the
decisions on that money are made in the other place. Is that fair?
Mr. Siegel: Exactly. It may be a good risk, but when you look at the overall
magnitude of risk that we would have to take, it would be just too much for EDC
to take at one particular time. More rightly, it may be that the risk profile
is too high, but the government will look to us to structure it in the same
way, and in all other ways to go about it as an EDC loan.
The use of the Canada Account, either in respect of insurance or in financing,
has dropped dramatically and is virtually non-existent in respect of short-term
exposure and is in the order of less than 5 per cent of our total activity.
Basically, it is all done on EDC's corporate balance sheet.
Senator Angus: One of the objects, as I had understood it, of the EDC was to
give Canadian exporters a level playing field so they could get out there. It
stimulates Canadian industry and Canadian exports, but there are other
countries out there -- and I have asked these questions in the past -- that
only pay lip service to the rules of the game, and there is soft money and other
deals in some of those countries. But EDC plays fair, plays by the rules.
Mr. Chairman, I would like to explore that, when these people come back the next
time, and the whole issue of Canada Account versus the regular money, and the
question whether the game is changing now because of the WTO.
Mr. Gillespie: We would be pleased to come back and talk about those things. It
is important to note, however, that EDC is the role model against which other
export credit agencies are judged; indeed, those other export credit agencies
are becoming extremely envious of EDC's ability to have capacity and
flexibility to meet the needs of Canadian companies.
Senator Kelleher: Perhaps I should get rid of a couple of conflicts, before I
First, I am counsel to Gowlings. I played no role whatsoever in that report. I
was never a party to it and never discussed it with anybody. I never even saw
the report until it arrived.
My second conflict arises from the fact that I was the former minister and,
theoretically, EDC reported through me. I will disclose a bias in that,
certainly during my tenure -- and I go on the record for this -- I think EDC
did a pretty good job. I have very few complaints.
Mr. Gillespie: Thank you for that, senator.
Senator Kelleher: Having said the nice things, I have one or two concerns.
Recommendation 19 has to do with the establishment of places of business
abroad. I must say I have concerns there. You disagree that there should be
obtained the approval of the minister of trade for the establishment of offices
abroad. Quite frankly, I disagree with you on that. I disagree with you for
several reasons. To establish an office abroad, even a one- or two-man office,
as I know from my trade days, you are looking at $1 million a year. It is very
expensive to set up an office abroad. I do not know what you have in mind here,
but I would not have a problem if you were going to send a person into one of
our embassies or consulates abroad. That is a sensible solution; we have that
with the RCMP and Immigration; but to set up separate, independent offices
The other concern I have arising with that is that every ministry in government
wants to set up its own trade office abroad. Certainly, Agriculture is always
trying to do it; Fisheries is always trying to do it. We find that this tends
to lend to a splitting of trade activities abroad and it is not conducive to
What are your plans in this area?
Mr. Gillespie: Our disagreement with Gowlings goes back to the issue of
governance. Given the construction of the present board, where you have the
Deputy Minister of Foreign Affairs and International Trade on our board as well
as a representative from the Department of Finance, to name but two, the views
of the department can be well articulated at that particular juncture.
We are operating as a commercial financial institution; so we need to have a
business case for each and every office that we would open in order to be able
to demonstrate pretty clearly to the board that there is a value added through
this activity. We are not looking to duplicate the trade commission or its
service around the world. It is a great service and our role is quite different
The issue is that we do not right now have the power in the act to open offices
per se. We have a representative in Beijing now. We are looking to put a
representative into the Canadian Embassy in Mexico City, as well as in San
Paulo, Brazil. However, as you build that business model out, people are going
to ask, "Have you got the power to open offices?" The answer is, "Well,
we do not exactly have the power, but we can put a representative there."
Let us get the thing fixed.
In some jurisdictions it makes sense not to co-locate in the embassy, for good
and valid reasons that are unique to that market, cultural or otherwise. We
just want the flexibility to be able to respond. We are talking about a
long-term time horizon here in the most appropriate way possible. Our simple
view is that, if that business case is appropriately put together, brought to
the board, and they accept it with the input that they can hear from the
various public-sector directors that sit there, that should suffice.
Senator Kelleher: Well, you have my thoughts. We have yours.
The next area is a sensitive area. It has to do with recommendations 31, 32, 33
and branches off in 34, where we are dealing with the environment and
environmental guidelines and we get into the human rights guidelines. I know
that under NAFTA we have brought in sidebars, if you will, for environment and
labour. We all know from watching TV at night that environmental concerns are
certainly being expressed in Seattle.
I know and you well know that our competitors out there in the world do not
always follow the rules. We all know this with respect to trade financing,
rates being charged and the soft money financing that goes on. I see nothing
wrong with Canada's being in the forefront of trying to establish proper
guidelines. That is great. The goal is worth it. However, I get a bit concerned,
if we are going to be going out into that area, that we then, in order to make
ourselves look like Caesar's wife, voluntarily accept these guidelines
ourselves before they have been accepted by our competitors out there. If we
start doing that, you know and I know that we are not going to be able to get
very much done out there. I see you nodding your head.
Mr. Gillespie: We are on the same page on this one.
Senator Kelleher: I would like to have your thoughts to see if you can allay my
concerns in that area.
Mr. Gillespie: I will turn it over to Mr. Siegel to speak more directly to that,
but we fully agree that it is critical that the right balance is struck here.
That is why we have disagreed with Gowlings on the prescription that they are
Senator Kelleher: I noticed that and I agree with you on it.
Mr. Gillespie: If we set the Canadian bar so high that everybody else then
enjoys the fact that we have now taken the Canadians out of play, that does not
help us export our values to the world but only makes Canadian companies more
uncompetitive. At the same time, we realize that it is important for us to be
seen to take a leadership position and role in this internationally.
Mr. Siegel can amplify what we have been doing in that regard.
Mr. Siegel: There are a number of areas where we disagree with the
recommendations, starting with the fact that environmental review should be
built into the act.
EDC has already recognized that you cannot do business in the world without
being able to address environmental risks, and by that I mean not just
emissions; we are talking about looking at social issues as well. That is part
of the environmental review. We have to be focussed on it. It is good risk
management and it is also good corporate citizenship.
We have already stepped forward and developed our own environmental review
framework. It is not something we have all of a sudden started to do. We have
been doing it historically, but we felt there was a need to be far more
articulate with the public as to what EDC's approach is to environmental review
in respect of projects that it is engaging its support on. We put together a
framework that clearly sets out how we go about assessing environmental review,
the scope of the environmental review, whose responsibility it is to submit
information, and what EDC's ultimate philosophy is. It makes it very clear that
EDC reserves the right to turn down support for projects if the environmental
impact is too high. If, ultimately, after reviewing the environmental risks and
any appropriate mitigants that can be brought to bear, the environmental impact
outweighs the benefits of the project, then we will turn down the project. We
have made that very clear. I do not think we have to go further.
EDC is ahead of the market in that regard. The bulk of export credit agencies do
not have a framework of that nature. To formalize that even more will put EDC
more at an advantage; but EDC is taking a leadership role. We are developing a
framework that is fairly balanced, that protects the information that is
submitted to us, but commits us and obligates us to look at the environmental
review, and we now have a philosophy that we can take out and aggressively
promote amongst other export credit agencies. That is what we have been doing.
In the OECD consensus, we have been a driving force in getting those same
principles agreed to by the other export credit agencies and ultimately
encouraging them to adopt a similar framework to that as a responsible way to
move forward. Effectively, we all raise the playing field as opposed to putting
ourselves at a disadvantage relative to others.
I will not go into all the details, but we have taken similar steps with the
United Nations Environmental Program, and we are the only export credit agency
that has become a participant in that. That being said, we need to maintain a
Again we disagree with Gowlings when they suggest that what we should do is
adopt World Bank guidelines or standards and embody those as the minimum which
EDC would have to adhere to. There is an "apples and oranges"
comparison here. We are using a development institution and operating in an
entirely different environment. They are not operating in a competitive
environment. They are coming in and advising a board in the bottom-up
development of their project as to how to go about incorporating environmental
standards and issues. They are not operating in a competitive environment,
where the buyer has already made a decision to go ahead and pursue a project and
is now inviting competitors. To use World Bank guidelines and suggest that that
is applicable to NECA is, in our view, flawed.
That said, we follow very closely World Bank guidelines and any other
appropriate guidelines and the bulk of EDC's support for projects in sensitive
industries would meet or exceed World Bank guidelines.
The last area where we would take umbridge is the area of access to information.
Many NGOs would put forward the argument that the only way we can determine
that EDC is meeting its environmental responsibilities is to have free and open
access to information on projects that they are looking at. I go back to the
earlier comment that the majority of the projects that we are dealing with are
in the commercial realm. The information that is submitted to us is submitted
to us as commercially confidential. The environmental assessments are not
always the property of EDC. So it would be very difficult, if not impossible,
for EDC to comply with that kind of formula.
Senator Tkachuk: You may not be able to answer this, but I would like the answer
before we meet with the Gowlings group, if possible. According to your report
you had 3,200 customers in 1997. Could you get me the requests by region as
well? That would be interesting to me. In other words, how many applications do
you get from British Columbia, Alberta, Saskatchewan and across the country to
Atlantic Canada? I would like to know the total number of requests so that I can
compare them to the number in your customer base.
You mentioned that Bombardier, for example, is a customer. Who would be your ten
largest clients in Canada?
Mr. Gillespie: I would be guessing after the first few, senator. That is
information we should bring back to the committee.
Senator Tkachuk: Who would be one, two, and three, then?
Mr. Gillespie: Clearly, you have companies like Nortel and Bombardier in the
medium-term capital-goods size, but there are a lot of very large Canadian
companies that rely on our short-term insurance products, whether they are
exporting, for example, agri-food, potash, or forest products, where you are
getting very significant margins. We are taking the risk on their foreign
Senator Tkachuk: Could you actually break those down for me by insurance and by
extension of credit to their clients, if that is possible? Again, it does not
have to be done today. I do not know exactly how you do business with each one.
Mr. Gillespie: For some of that activity, particularly short-term activity, we
have to be a little careful about the issue of confidentiality. I will have to
talk to my counsel here about what we can give you in that regard. Some are
clearly public. Others who take our short-term insurance do not necessarily
want it known in the world that they are using EDC services; it could be a
Senator Tkachuk: I understand. I am asking you this because of the Gowlings
recommendation on decentralization; I am trying to get to the reasons, because
I will be asking them the same questions.
Mr. Gillespie: We will give you the profile across the country of where the
The Chairman: I want to thank the witnesses. This has been very interesting, and
we look forward to seeing them again probably some time next year.
Mr. Gillespie: Thank you for the opportunity to appear before you.
The committee adjourned.