Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 3 - Evidence, March 11, 2009
OTTAWA, Wednesday, March 11, 2009
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 4 p.m. to review and
report on the 2008 Legislative Review of Export Development Canada, tabled in the Senate on Tuesday, February10,
Senator Peter A. Stollery (Deputy Chair) in the chair.
The Deputy Chair: The document that we have been reviewing is entitled
"2008 Legislative Review of Export
Development Canada,'' which was tabled in the Senate on Tuesday, February10, 2009. That document examines how
EDC should continue to evolve in the future in order to address the competitive dynamics and demands of
international trade on behalf of its stakeholders and to make recommendations, where appropriate, including possible
changes to the Export Development Act.
I suppose what had confused me was that, like others, I assumed a legislative review was done by the legislature.
That is where I had been confused over the last few days in consulting with my colleagues. Apparently, the legislative
review is the review done by the group that was here last Tuesday.
We have as our first witness today, from Euler Hermes Canada, Mr.Paul Flanagan, Chief Executive Officer. He
represents people in the insurance business.
Mr.Flanagan, I would be delighted if you would make your statement and then be ready for questions.
Paul Flanagan, Chief Executive Officer, Euler Hermes Canada: Thank you for the opportunity to appear before you
today, honourable senators.
Euler Hermes is the world's premier credit insurer, offering solutions for the management of trade receivables from
credit insurance and financing of trade receivables to bonding and guarantees. Euler Hermes Canada has been present
in Canada since 1928 and is part of the Euler Hermes Group, the global market leader in credit insurance. The Euler
Hermes Group is part of the Allianz group of companies. In 2008, Euler Hermes Canada provided short-term credit
insurance to over 1,000 Canadian businesses of varying sizes, and we are proud to say that we worked with companies
in every province in Canada.
My comments today will be focused on the short-term export credit insurance market, which is part of the EDC
review that you are presently studying. Our position with respect to the short-term export credit insurance market is
clear and direct. In our opinion, EDC should withdraw from the short-term export credit insurance market. It is our
hope that the honourable members of this committee will adopt this position as part of any recommendations that you
make in your concluding report to the Minister of International Trade.
We acknowledge that when EDC was first created, significant gaps in the amount of insurance coverage available to
Canadian businesses did exist in the marketplace, and EDC's mandate was to fill those gaps. However, since that time
and, more specifically, over the last decade, the availability of credit insurance has dramatically increased. In other
words, market gaps do not exist today. The existence of a vibrant and competitive market now renders the presence of
EDC redundant. More troubling is the fact that EDC's continued presence in this sphere and aggressive competition
with the private insurers actually distorts the market in Canada. Simply put, the world has evolved over the decade and
so, too, should EDC's mandate.
Turning to the report from International Financial Consulting, which you are reviewing, I would offer the following
thoughts. Over the spring and summer of 2008, I was deeply involved in the consultation process. My company made a
formal submission and provided a significant amount of additional information to IFC — most of it at IFC's request.
Unfortunately, with respect to the issue of short-term credit insurance, the report lacks rigour and, more troubling
for us, several conclusions must be categorized as assertions of opinion as opposed to statements of fact. Many of the
issues we raised — backed by data and analysis — appear to have been dismissed while EDC's arguments appear to
have been accepted without challenge or investigation.
We trust that you share our concern that the pace of change and the shocks to the global economy which have
transpired since this report was completed last fall render its conclusions somewhat dated. However, to be fair to the
work of IFC, the report makes it abundantly clear that a market gap no longer exists. Moreover, the report
acknowledges that EDC is using taxpayer resources to actively compete with the private sector. In fact, EDC actively
competes with the private sector and occupies 75percent of the market for export credit insurance.
Since the last review of EDC, the credit insurance market has grown considerably in Canada. Today, there are six
stable and established insurers providing credit insurance and related products in this marketplace. IFC notes that this
increase, coupled with EDC's decreasing market share, is evidence that EDC is not distorting the market. However,
IFC fails to point out that the majority of the growth occurred after EDC exited from the domestic credit insurance
market and that EDC's share of the export credit insurance market, at 75percent, is evidence of their influence on the
IFC have stated in their report that competition from EDC is beneficial, saying that more competition is better for
Canadian exporters. While we fully endorse the benefits of a competitive market, we do not believe that a need exists
for government competition, given that a number of private insurers are actively competing for market share and
effectively serving Canadian businesses.
As a Crown corporation, EDC enjoys several advantages over its private competitors. As a government-backed
corporation, EDC has access to capital at a lower cost. EDC does not pay corporate income tax. EDC is not regulated
by OSFI and has no limits on capital adequacy and, in addition, there are few restrictions and minimal oversight of its
activity. EDC is not required to delineate and report results on its insurance operations; thus, it is impossible to assess
the return terms generated on this line of business.
As a government-backed corporation, EDC is viewed more favourably by banks, who are key drivers in the
purchase of credit insurance. Customers insured by EDC will be given more favourable terms by their banks in many
cases. In addition, EDC's size, capitalization and lack of accountability allow it to underwrite risks that the private
market cannot. While there may be instances in public policy where this is desirable, the ability to cover uninsurable
risks is a significant competitive advantage to EDC.
Credit insurance markets globally are open and transparent, with customers benefiting from this competition.
EDC's share of the Canadian market is estimated at 50percent, and in the export market that share rises to
75percent. This disparity is clear evidence of EDC's dominance of the market and its unfair competitive position.
Both IFC and EDC argue that as EDC makes profits, it is self-financing. This argument is fundamentally flawed
when you consider that EDC is exempt from income tax and, until 2007, did not return surplus funds to the taxpayer.
If EDC were a taxable corporation, we estimate that the profits made would generate in excess of $1.5 billion of
revenues. The total dividend payout to date of $600 million is, then, a poor return for taxpayers. EDC has recently
been allocated additional capital of $350 million. Our analysis also shows that EDC is significantly overcapitalized
compared to other financial institutions.
EDC's administrative expenses seem to vary from year to year but consume, on average — if you look at the report
from IFC, you will see this — 47percent of revenues. The industry average is generally 30percent, which suggests
that EDC is less efficient than the private sector.
With regard to the exit of EDC from export credit insurance, it is important to note that this decision would only
impact 6percent of EDC's total revenue base. This is only a small part of the overall EDC picture you are looking at.
EDC maintains that they complement the private sector and actively seek to increase private sector capacity through
cooperation. Our experience is that the level of experience with EDC is actually extremely low. At this time, Euler
Hermes Canada, the largest private credit insurer in Canada, has no arrangements with EDC. Instead of cooperation, I
can cite several instances, as they are a regular occurrence, of EDC contacting the clients of private insurers to take
these clients, even where a long-term relationship already exists. We are extremely disappointed that IFC did not
explore this issue more thoroughly.
To conclude, I reiterate our concern and opposition to IFC's main recommendation that EDC's mandate remain
unchanged. The facts presented to IFC by Euler Hermes Canada and other competitors reflect the reality of
fundamental changes in the global economic environment over the last decade and call out for EDC to withdraw from
the short-term credit insurance market.
Credit insurance is a global activity requiring sophisticated systems and truly global organizations to service clients
wherever they trade. It is no accident that the three major players in this market are global companies present in over
50 countries. EDC does not meet this test of long-term market viability.
Honourable senators, EDC is understandably a source of national pride and can point to a proud legacy of serving
national Canadian interests and exporters. We believe you have the opportunity to help chart the course for this
century. We recommend that EDC refocus and redouble its efforts to help Canadian exporters find new markets and
build capacity to further develop the skills and abilities of companies to trade globally with the resources that will be
unleashed due to its exit from the short-term credit insurance sphere.
In our opinion, the private sector has the capacity to support Canadian businesses. Where public policy requires
that the capacity available be supplemented, this can be achieved through collaboration between the private and public
sectors. We envisage cooperation that leverages the private market's efficiency and customer focus with EDC playing a
role as a provider of capacity where required.
Senator Corbin: My question to the witness is to ask if he rejects completely the findings of the IFC report with
respect to the export credit insurance business.
Mr.Flanagan: That is correct. We do disagree wholeheartedly with the findings of that report.
Senator Corbin: You made that plain, and it is not a bad idea to have it reiterated.
You allude to the lack of accountability, and you say that that lack of accountability allows EDC to underwrite
risks that the private market cannot. Would you elaborate on that point, please?
Mr.Flanagan: There are a number of layers to this, and it is an interesting question. The first problem is complete
lack of transparency with regard to EDC's credit insurance operation. If you look at all the other players in the market,
we are all required to report to OSFI our figures, results and balance sheets.
EDC's results are all presented together in their report. There are figures in there on credit insurance, but it is
difficult to break down how profitable the credit insurance operation is. If you look at the IFC report, there is almost
nothing in there regarding the profitability of EDC.
There is one table of data about which we have some serious questions. It is impossible for anyone looking at EDC
to say, "How much is the short-term export credit insurance part of it making a profit or not?'' It goes to the question
of whether EDC is self-financing or not, the true cost of what EDC is doing, and how to measure cost-benefit. We do
not know what the loss ratio is, apart from what has recently appeared, and that looks unclear to me. We do not know
how profitable or not EDC's business is.
What is the true cost to the taxpayer of EDC writing a risk that I will not write? The fact that EDC is in the market,
the good and bad are together and you have a mixture, so you do not know the true costs of the strategic decisions
regarding those difficult risks.
Senator Corbin: The other point you brought out quite clearly is the level of cooperation with EDC. Your company
has no arrangements with EDC. Do other private firms have that?
Mr.Flanagan: Yes, some of them do.
Senator Corbin: How does one go about entering into that kind of a deal?
Mr.Flanagan: You might have a large deal where big risks are involved. Someone might want a particularly large
risk, and we might say that that is a large amount of money on that risk and there might be a capacity issue. Then a
broker might go to EDC to ask whether they want to help out. Sometimes EDC approaches us, if they have heard that
we are not writing the cover on a particular company, and tells us they can help us. They might approach my client and
offer the help to them. There is no standard way of doing it. It all happens ad hoc. There is no place where you can go
and suggest that you work on a deal. Someone will suggest EDC, or EDC will come to you, but there is no system in
I have been in Canada since July2007, and in all that time there has been no activity with regard to joint deals. It
just does not happen. We are competitors, so we are, obviously, nervous of letting EDC into our deal because they
might steal our client. It is difficult to be supportive and a competitor at the same time.
Senator Corbin: Since you disagree with some of the views and observations of the IFC review, have you taken any
initiative to contact them in writing or otherwise to express your dissatisfaction, or is this your first opportunity to do
Mr.Flanagan: We did read the report with some disappointment. We did discuss what we should do, but we took
the view that the report had been done, produced and was now out of the hands of the IFC. We did not think there was
any great need to go back and argue point-for-point because we would just argue for the rest of the year. We decided to
use this opportunity today. The points I am raising here are the key concerns that we have, and we will do the same
when we go forward.
I will draft a similar paper later if I need to, but it has moved out of the hands of IFC now. We cannot go back and
have that report rewritten, so we just have to accept it.
Senator Fortin-Duplessis: Good morning, Mr.Flanagan. Last week, your competitor Ian Miller, from Atradius,
appeared before this committee. According to Aon Benfield Market News, Atradius was downgraded on March6,
2009, by Standard and Poor's, and now has an A credit rating. If I am not mistaken, Euler Hermes Canada still has a
Standard and Poor's AA credit rating, haven't you?
Mr.Flanagan: It is actually AA-minus.
Senator Fortin-Duplessis: Could you explain to us why Euler Hermes Canada seems to be in a better position than
your immediate competitors, given the present economic situation? What are your revenues? According to the 2008
Legislative Review, the "Big 3'' of global credit insurance dominate the global market, with an estimated share of
85percent of total short-term credit insurance; your company gets 36percent, Atradius, 31percent, and Coface,
19percent. Such a downgrading must necessarily have a considerable impact on the global market, doesn't it?
Mr.Flanagan: There are a number of questions there. The Euler Hermes group grade is AA-minus, and there are a
number of reasons for that. Our result was slightly better than the Atradius result, although it must be said in this
market credit insurers are having a very difficult time. My own group results are down considerably on the previous
year. This is normal for credit insurance. We make money for five years and then a recession comes along and we lose
money. That is the normal cycle.
Atradius had a high loss ratio last year, as we all did. They were particularly exposed to Spain because their parent
company is Spanish. However, I would say that it still has an A grade; it is still a very strong grade and I do not think
there is any doubt about the solvency of Atradius.
Euler Hermes is slightly bigger. We have a stronger group and a bigger balance sheet. We are also part of the Allianz
group, the very large German multinational group, which has an AA grade as well. Being part of that large group gives
us additional security. That is one of the main reasons.
You talked about market share. I think the impact on the global market of the leaders being downgraded will be
minimal. The grade is important, there is no doubt about that, but an A is still an A. As you quite rightly said, there are
plenty of other players in the market, so if someone feels uncomfortable they will just move to another credit insurer.
Senator Dawson: The minister yesterday used the expression that one of the reasons EDC is there is to protect
Canadians and Canadian clients from usury rates of interest that are charged by the private sector. Without getting
into the details of how much you do charge, what do you think of that comment? Do you find that the private insurers
in Canada are that much different from EDC as far as their charge is concerned? Would you be able to cope with an
The premiums at EDC have gone from $92 million in 2000 to $98 million in 2006, but their administrative expenses
have gone from $37 million to $58 million. Could you be doing a good job in your world if you had similar results?
Mr.Flanagan: No, as I said earlier, I was quite surprised by that table in the IFC report. If you look at the expense
ratio, it moves around quite a bit. It is 40, it is 45, it is 47, it is 60. I was listening yesterday and there was a comment
about exchange rates having an impact on that ratio, but I think the quantum of the expenses looks to us very high. My
cost ratio is 30percent, and that is the upper end of what it should be. With respect to the rest of my group, we are
probably in the high 20s. A cost ratio of 40percent or anything above 35percent would not be acceptable.
You need to remember that the business is driven by its combined ratio; its loss ratio plus its cost ratio. Those two,
added together, dictate the profit, and at 45percent it does not give much room to manoeuvre. That to me sounds
Senator Dawson: What about the rates?
Mr.Flanagan: That is an interesting one. If you talk to brokers in Canada, they will say that EDC is more expensive
than the private sector. That is the standard market view and I think IFC have said that. That has not generally been
my experience. I have competed with EDC a lot. I have seen them in most of the big deals. We are all more or less in
the same ballpark. If EDC are writing a particularly difficult risk that no one else is writing, they will charge more
premium probably because they can charge for the extra cover. I would say EDC's rates and our rates are generally in
the same ballpark most of the time.
The variation between mine and EDC's is the same as between mine and the competition. Credit insurance is a very
competitive market. There are a lot of brokers and it is very transparent, so prices are forced down.
Senator Dawson: I will send you the quote from yesterday so that you can answer in writing, if you would.
Do you believe we can find a way in which EDC would be subject to the same regulatory supervision by OSFI, as
you are and as the banks and everyone else is?
Mr.Flanagan: Yes, I do not see why not. It is a separate type of business. It should be relatively easy to generate a
separate revenue stream and a separate reporting line. It is only a question of de-consolidating the result. The key
would be in the allocation of costs. We are back to that again. The big question you cannot answer is how much
business is the credit insurance costing, because it is getting an allocation of the overall EDC pot of costs. That is the
challenge, but that could be done.
In an earlier life, I was an accountant working in the oil industry and I spent a lot of my time allocating costs
amongst various companies. It is complex but it is easily done. There is no reason why those figures cannot be split out.
It is interesting that in the IFC report we got no figures, and the consultant said that there were no figures available;
that it was impossible to break them out. I find that surprising; as a finance guy, the first thing you do is look at your
costs. I do not see why the credit insurance side cannot be set up as a separate organization, a separate reporting line,
and judged accordingly.
Senator Andreychuk: As I read your submission, you are indicating that you think that EDC should withdraw from
the short-term export credit insurance market, and you say that the impact on EDC would only be 6percent of its
overall business. I have a few questions flowing out of that. You have been in business in Canada for quite some time.
Has your business expanded? Why are you zeroing in only on the short-term export credit insurance market?
Mr.Flanagan: Euler Hermes has been in Canada since 1928 in various forms. I will not go back that far. However,
over that time our business has gradually grown, primarily in the domestic market. What is really interesting is that
since EDC exited the domestic market — because EDC used to trade in the domestic market — the premium earned in
Euler Hermes Canada has gone up by 87percent. EDC came out of the domestic market, the private sector came in
and competed, and we grew our market share. We now are more or less penetrated into the market and we cannot go
Trade, generally now, is no longer domestic and export. That is a very old-fashioned way of thinking about things.
All companies export. For us to offer a service to our clients, we need to offer export as well, which is what we do as a
group, globally. The reason we do not, and that we have a problem with EDC, is that they are in the market with
75percent of that market. It is difficult for us to grow our business with a player of that size who does not need to play
by the same rules as we do. They do not have shareholders, they do not have people looking over their shoulder, and
they do not have re-insurers. Basically, they have all the money they need and they trade away. Therefore it is very
difficult to compete against someone who is not playing by the same rules.
Senator Andreychuk: You go on in your statement to say that you think they should exit and that the businesses that
are competing for that market — I presume you will say that it is still a competitive market and not an exclusive
market, and that you can fill that market. But then you make the comment that you would still need to cooperate with
some of the public sectors, if I am reading you correctly. Which public sectors would you then need to cooperate with?
Would it be EDC again? They are always the backup, is that what you are saying?
Mr.Flanagan: Let me clarify that. I worked in the U.K. for 16years in credit insurance, and the way it works in
Europe is that 95percent of the insurance cover in this market is written by private insurers. This is one of the debates,
and I have been watching this debate. People have been going around in circles on this issue. I have a very simple take
on it, which is that some risks are uninsurable. Anyone who is in the insurance business will tell you that some risks are
just bad. If you want to ship $500,000 worth of PCs to a company in — pick a country, Nigeria, China, wherever —
which you have never heard of, you have never met, that is high risk. I will say to someone who wants to ship on open
credit to Nigeria today, I will say no, I am not covering that. That is accepted everywhere in the world.
If the government believes that, for the good of Canadian exporters, someone should pick up that risk, that, to me,
is not a business issue but a government strategic issue. That is what happens in the U.K.
When the U.K. privatized the ECGD — the EDC equivalent, which they privatized in the 1990s — the government
pulled out of the market completely but said it would set up an emergency re-insurance arrangement if anyone needed
it. However, that was never called upon in the 16 years that I was there.
I believe the key is that if there are risks that the government thinks should be covered, long-term capital goods, for
example, the private market probably cannot cover that at a reasonable price, then the government might decide, for
strategic reasons, that they will cover that risk. There is nothing wrong with that. Every market in the world does that.
If the private market looks at the risk and assesses it as uninsurable, and for public policy reasons the government
decides that this risk should be insured, that is where EDC would come in. If Bombardier are selling 20airliners, then
that is the kind of thing the government should be doing. It is down to the government to decide where they draw that
In Europe, the governments do not generally step in. The market seems to survive with just the credit insurers.
However, some risks are uninsurable. If you cannot get credit insurance, you do something else. It does not stop
The question is, what is an uninsurable risk and how much of that uninsurable risk does the government believe is a
case for covering, and that goes back to transparency. If the government says it will cover all of the risk, then as a
taxpayer I want to know what that is costing me in terms of payments for claims, and how many jobs, and what is the
cost benefit. We are not saying we need the government there. We are saying that if the government wants to be there,
we will be happy to work with them. It is a complicated system.
Senator Andreychuk: I am trying to understand. You are saying that you should be in the market and, if there is a
risk, the government should come in. EDC is saying the opposite, that they need more flexibility to help those
exporters more quickly and that it is competitive. We have a disagreement there.
There is a change to EDC coming up in two years. Were you consulted about the changes that are coming in BillC-
10, and what was your position on that?
Mr.Flanagan: I listened to the reports in the press, like everyone else, so it came as a shock to me, and everyone in
my company, because I thought that EDC was coming back into the domestic market, and then people started to
worry about their jobs. It was only later that we had contact and a meeting and discussed these changes. We were
involved very quickly, but it was news to me. It is an interesting point.
I know we are pushed for time, but if you think about the model being proposed now, and I know you discussed it
yesterday, the government wants to put additional capacity into the domestic market. EDC is doing that by re-insuring
the private market. That is exactly the model I referred to there. The government feels right now that they need to put
in more capacity. They come to the private sector, and we are the conduit for that sort of action. We are already set up
to do it. We do it. In two years time, if the government wants to back out, they do.
Senator Andreychuk: Do you support this?
Mr.Flanagan: Yes. It is a model you could apply to export credit insurance just as easily.
Senator Grafstein: This has been a very lucid presentation. You heard the minister yesterday explain that the new
powers of the EDC will now not only be related to export but also to the domestic market place. His explanation, as I
recall it, and I hope I am not quoting out of context, is that it will just be a little bit, not very much, but most of it will
be going to the export market. Are you in the domestic marketplace?
Mr.Flanagan: Yes, we are in the domestic and export marketplace.
Senator Grafstein: What is your position with respect to the latest new powers being granted to EDC with respect to
the domestic marketplace?
Mr.Flanagan: We were initially concerned. We were worried that it would be a re-entry of EDC into the domestic
market, which would be extremely damaging for my business. We have come up with an arrangement whereby EDC
acts as a re-insurer, so they will be putting capacity in, to give that capacity to the market, and EDC will be in the
Senator Grafstein: How do you know that?
Mr.Flanagan: We have had meetings with EDC.
Senator Grafstein: That is not what the legislation says.
Mr.Flanagan: We have been having conceptual thoughts of how it would work, and that is how we think it would
work. The legislation is designed to put credit capacity into the domestic market, and gives EDC the power to do that.
Senator Grafstein: Yes.
Mr.Flanagan: How EDC uses that power is open to EDC and, quite rightly, they are using the private market to do
that. We will have a system ready to go probably before the end of this month. If you have to do that from scratch at
EDC, you would be talking about months, so it was the right decision to get the money to the market quickly. I have
no problem with that.
Senator Grafstein: Can you tell me the size of the capital you deploy in our marketplace with respect to short-term
credit? Let us talk about numbers for a moment.
Mr.Flanagan: I write premium of about $40 million Canadian every year. I have insurance limits in place of slightly
less than $10 billion Canadian, and 55percent of that risk is Canadian risk, and the balance is risk overseas, so for
Canadian exporters overseas. I do not have a balance sheet as such because I am a branch of my U.S. parent.
Senator Grafstein: What would be the size of the total capital deployed by the private sector in the business here?
What percentage of the marketplace do you represent?
Mr.Flanagan: I am the biggest. Of the private companies, I probably have 25percent. I would say Atradius and
Coface probably have another 25. It is difficult to say.
Senator Grafstein: It could be $25 billion in the private sector.
Mr.Flanagan: I do not know the figures of my competitors.
Senator Grafstein: It would be useful for you to give us a sense of what we are talking about, in money terms.
Senator Grafstein: I am not big on econometrics without numbers. Principles are good, but dollars are better. We
can then more properly assess the risk-rewards with respect to the money deployed by the taxpayer and the money that
you deployed. It would be helpful to us. We come to meeting after meeting here, and we get general principles, but we
are talking about taxpayers' dollars here.
The Deputy Chair: Do you have a question?
Senator Grafstein: What is the size of the short-term credit market, and how do you define short-term credit?
Mr.Flanagan: Short-term credit is generally where the credit terms are a year. Anything above a year starts to get
into long-term. We can go as far as two years, and the official definition is two years' credit.
Senator Grafstein: Two years or less?
Mr.Flanagan: Two years or less, but most trade is 180 days, which is probably what most people use.
Senator Grafstein: Can you give us some analysis of where your costs were cheaper than the government's costs in
terms of the consumer and where you lost the business because they wanted to deal with the better credit of the EDC? I
understand. I would assume a person in business would, at one time, not look at insurance liquidity, but now I think it
is incumbent upon a good business person to look at liquidity and the credit rating of the companies.
Mr.Flanagan: Generally, as I mentioned earlier, for most of the last five years the private market has been, in most
cases, cheaper than EDC, and the IFC report does say this, but it also goes on to say that it was not so in every case.
When I am competing with EDC, if it is a particularly good bit of business, they will drop their rates to win.
Senator Grafstein: Why do you lose?
Mr.Flanagan: There are two reasons. One is their attitude for risk.
Senator Grafstein: Who are they?
Mr.Flanagan: EDC's attitude to risk. EDC can write risks that I will not write, going back to my simple case. Credit
insurance is sold on price and cover, and cover is often more important than price. If you can get all the cover you
need, you will go with the insurer who gives you the most cover. EDC are more aggressive because they have no
shareholders. They have a big balance sheet. They are not as commercial. The private market will have a similar
position on risks. We all do similar metrics; we all have the same models and we all come to more or less the same
conclusions. Often, the private market is saying, "No, we cannot do that,'' and EDC will come along and say,
can do that.'' That happens all the time. Of all the business I lose in a year, typically half of that business goes to EDC.
I continuously lose business to EDC, primarily on their risk underwriting.
The Deputy Chair: I will now call on Senator Peterson and then we will proceed with the next witness. I do not mean
to cut people off, but we have a busy timetable here.
Senator Peterson: Do you write political risk insurance?
Mr.Flanagan: It is included as part of normal export insurance, yes, so as part of the product, political risk is
covered. You get to ship your goods, and if there is a political risk, we will cover it.
Senator Peterson: Do you have any limits on the size of the policy you write?
Mr.Flanagan: The size of the risks?
Senator Peterson: Yes.
Mr.Flanagan: Theoretically, no. Every risk we write has a limit because we look at it and say we will do X or Y, but
we have no overall limit. Every policy is different. It depends on what our client wants. We will set a maximum liability
for the policy that will cover their four biggest accounts, so there are no limits. The limit is often set by the price.
Senator Peterson: EDC writes a lot of political risk. That must get them in the door, and then they need the low-
hanging fruit, which is this short-term credit, to offset the higher risk?
Mr.Flanagan: That is the argument. I understand that, but my feeling on that is that you are not seeing the true cost
there. Eightypercent of what EDC does, I do. We are talking about a small percentage of the things they do that I
cannot do. However, by putting it all together, in one whole lot, you are not seeing what the true cost of that risk is. We
should not lose sight of what the true cost of writing that risk is. In the final analysis, EDC's role is to support exports.
How do you know it is doing that successfully if you do not know what the cost or benefit is? Right now, the credit
insurance is in with everything else, everything looks profitable, and they do not ask for money from the taxpayer.
That is like paying the minimum charge on your credit card every month. It does not mean you are clear. You need
The Deputy Chair: Your presentation has been very instructive, Mr.Flanagan. On behalf of the committee, I thank
you for appearing.
We now have before us Mr.Avrim Lazar, President and CEO of the Forest Products Association of Canada, who
has appeared before the committee on various occasions when we were dealing with softwood lumber, if I remember.
Mr.Lazar, you know the usual procedure. You make the presentation and then we will have questions from the
senators. Do you have a text?
Avrim Lazar, President and CEO, Forest Products Association of Canada: No, I have what Ms.Morgan said I
should know before I speak.
Thank you very much for inviting us. This is timely. Certainly, when the schedule for reviewing the EDC legislation
was set, no one knew quite how timely this would be.
As you are all aware, the Canadian forest industry is suffering under markets that are now lower than they have ever
been. Not only has demand plummeted, but most of our customers are destocking, basically selling off what they have
in stock, because they cannot get access to credit to buy more. That is causing a vicious cycle of falling prices leading to
As you all know, it was a failure of the credit system that led the global economy into this recession. It might not
have been the thing that pushed down the deck of cards but it certainly is the deck of cards that fell. As I am certain
many of you are aware, credit is a necessary precondition for business working. Credit is like oxygen. You can be
competitive, brilliant, have great markets and good profit margins. If you cannot get credit, if you cannot renew credit,
if your suppliers cannot get credit, if your customers cannot get credit, business does not happen. Even the strongest
athletes turn blue when there is no oxygen. This is absolutely vital.
The single, clearest priority for all of Canadian industry and business, in terms of government action to support the
recovery, is to find ways to put more credit oxygen into the system. Traditionally, EDC's niche has been to step in
where the private suppliers of credit are not servicing business with a special sensitivity to the export nature of our
economy. We have always been impressed with the quality of the work and the contribution they make.
At this time, when it is not business as usual, we are glad to hear the government has announced an extension to
their powers. They need higher spending limits, broader authorities, and a broadening of their capacity to include,
perhaps, financing for domestic merger acquisition activities of Canadian companies where the impact would be
increased exports, and perhaps financing imports that are critical to exports.
As an example, if we were to buy a new paper machine that would make us more competitive for exporting the
paper, because most of our paper is exported, having access to credit to retool to be able to export would be useful.
Of course, EDC could finance projects that are not necessarily tangibly linked to specific exports, but where it could
be established that the net result would be an increase in exports. In a country that fundamentally lives off exports, if
you take our non-government GDP away, more than half of what we do, how we earn a living and sustain Canadian
well-being is through selling stuff outside the country. If you take that into account, anything that better finances our
ability to be competitive will be useful.
Let me underline again, in the past there were private credit markets that stepped in but now we find that even when
you have a normal line of credit, it is often not able to be renewed. The creditor is not available. The cost of borrowing
money, the cost of credit has shot way up and we are in a very thin oxygen situation. Canadian business needs EDC
and their sister organizations to pump some more air into the system.
You have my apologies for driving that metaphor to extreme.
The Deputy Chair: I think we get the picture. Does Ms.Morgan have something to say?
Mr.Lazar: I just used all her lines.
Senator Wallin: Welcome. It is good to see you. Can you give us some notion of how many of the companies in your
industry use EDC? Is it something you turn to regularly?
Mr.Lazar: Yes, the vast majority use EDC. It is an essential part of the fabric of the Canadian forest industry. We
export more than two thirds of what we make. We use EDC, for example, to secure the credit lines to ensure the
receivables, to help with export development. It is very important.
Usually, when you mention various government institutions to forest industry executives, you do not always get the
most generous spirited response. You mention EDC and you get a bit of a smile.
Senator Wallin: Would you also use EDC funds, or would they would fund you, in a sense, for something that
would be considered a domestic transaction of some kind?
Mr.Lazar: It is always export-oriented.
Senator Wallin: Every machine is paper that will land up across a border?
Marta Morgan, Vice-President of Trade and Competitiveness, Forest Products Association of Canada: Until now, the
vast majority of transactions our companies have had with EDC have been in the area of receivables insurance for their
exports. We are one of EDC's largest clients as an industry in that area.
Now, since the credit crisis, our companies are turning to EDC for a broader range of credit support.
Senator Wallin: Just to follow up on that, and it will be my last point, you have said quite strongly that in the credit
crisis, other options and places you might have gone to have dried up or they have been limited. Have you had recent
experience with that or any anecdotal evidence you could give us in the last couple of months?
Ms.Morgan: Yes. Our companies are reporting to us that in the area of receivables and insurance, the private
insurers have completely vacated the market for those markets to which we export, which would be, for example, U.S.
newspapers and U.S. housing; anyone involved in the U.S. housing industry. EDC has stepped in behind the private
insurers in a major and significant way, which has allowed our companies to keep receiving that sort of insurance. That
is one example.
Senator Wallin: It is not that you have chosen them because they have a competitive advantage over the private
companies; you are saying that the private companies are not there for you?
Ms.Morgan: We always used them, and now we need even more from them because the private companies have
Mr.Lazar: We have heard from the companies that if you had credit from a Canadian bank and wanted to renew
exactly what you have, usually you can get it; but if it is not from one of the big banks, or if you need any extension,
there is no one to talk to and the cost is way up.
Senator Corbin: Mr.Lazar, I had the pleasure of hearing you at an Aboriginal committee meeting some months ago
where the matter at hand was your commendable initiatives with respect to our First Nations enterprises. I was quite
impressed by that presentation.
I have only one question for you. A couple of Thursdays ago in the Senate, we considered government estimates. I
noticed an item on the order of $450 million arising out of the payout from the Canada-U.S. agreement to the forestry
industry, which is being carried over from the previous exercise, as I understand it, to the current exercise.
I guess you are not aware of what I am alluding to. In other words, this is money that normally ought to have been
paid under the agreement to the forestry industry that has not yet been paid. Do you have any comments or are you
not quite aware of what I am talking about?
Ms.Morgan: Our understanding was that, immediately subsequent to the agreement being signed, EDC repaid
those duties to Canadian companies in advance of them getting the funding back from the U.S. government and that
the system worked extremely well, that EDC was very competent, very fast. Our member companies were very
appreciative of the speed with which they received the reimbursement of their export duties.
As to the item in the estimates, I am not familiar with what that might be at all, but we have certainly heard no
complaint on that issue from our member companies.
Mr.Lazar: In parentheses, seeing you opened your questioning on First Nations businesses, yesterday Chief
Fontaine awarded Canada's forest industry a very high honorary golden feather for our participation in joint economic
development, so I think the companies I represent feel proud and honoured.
Senator Fortin-Duplessis: Last December, with the support of opposition members of the provincial House of
Assembly, the government of Newfoundland and Labrador passed legislation to expropriate all Abtibi Bowater assets
in the province, except the mill in Grand Falls-Windsor.
How has this legislation affected the forestry industry and your ability to compete globally?
Mr.Lazar: The immediate impact is not obvious because global investment is down, global demand is down; but
within six months, and certainly no longer than a year, investment will return. People do have capital to invest. We like
to think that investors are completely rational beings and they do the calculation,
"If I invest here, my return will be
such-and-such.'' However, they also have a piece of intuition that goes into each calculation as to,
"Is this a place
where I can safely put my money?''
The Newfoundland government branded Newfoundland first and foremost — but by association the rest of Canada
— as a place where there is a risk, because if the government gets annoyed with you, or it feels like it, it will
expropriate. Without commenting on the actual case, our position is pretty clear. We thought that it was wrong.
Regardless of that, it does have an impact on the attractiveness of Canada as an investment destination.
It is even worse because, as you probably know, capital has no allegiance. Capital can go anywhere. It can go to
Brazil, the Southern U.S., Russia, Indonesia. All you have to do is click the computer button and the money heads in
that direction. We are in life-and-death competition to get investment into Canadian mills in order to increase our
competitiveness and keep jobs here. This certainly does not help us.
Senator Grafstein: Welcome, Mr.Lazar and Ms.Morgan. I just returned from Washington where we were
confronted by a new initiative by 10 American senators and some governors to reopen the softwood lumber dispute.
My concern is this is not a time for vulnerability on this front because we have many battles to fight in the United
States with respect to their "buy American'' talk.
Does the EDC provide an arguable benefit, based on the evidence that we heard from Mr.Flanagan that this is
somehow an indirect subsidy because of the cost of insurance for export? Has that ever been raised as an issue?
Mr.Lazar: Not to my knowledge. Our experience is that if benefits are available to industry at large, in other words
if they are not specific to the forest industry, we are pretty safe. EDC has always been involved. The U.S. has other
arrangements that help their exporters. No one has ever raised this to my knowledge. Ms.Morgan, have you heard
this? No, it is not a risk.
Senator Grafstein: Can I sum up your evidence by saying hooray for EDC?
Mr.Lazar: I would say three cheers, but I would add to it, "and more, please.''
Senator Downe: I want to return to the situation referred to earlier about Newfoundland and Labrador. I am not
from Newfoundland and Labrador but I am from Atlantic Canada. My understanding of the file is that the company
refused to do any significant investment in the plant, employment numbers were falling for years, and when they
decided to pull out, they wanted to maintain other rights that they had for mineral and natural resources in the
province, and the Newfoundland government, supported by the opposition in the Newfoundland legislature, passed
the motion to retrieve the assets of the Newfoundland people.
Your position, I understand, is that you support the company and not Newfoundland. Is that correct?
Senator Downe: That is because of your fear of investment, you said? There would not be enough investment, but
the argument Newfoundland would make is that there was no investment in the plant, anyway. It was no longer
efficient, and that is why the company wanted to close it.
Mr.Lazar: Let us take it from three perspectives. The first is, if you are an owner of a resource and are not happy
with how someone collecting rents on that resource is behaving, do you seize their property or do you use your
regulatory and persuasive powers to sit down and find a solution? The bottom line is that if the product is being sold
for less than the cost of production, then the only question is who wants to spend year after year losing that amount of
money? If Newfoundland can find someone else who can do it, we will be very impressed.
The second issue is how do you get jobs in Newfoundland? You have the resource. You have a great workforce. You
have the entrepreneurial spirit. What is needed is the investment. Investors are less interested in anything other than
making a return, so in the long term I do not see how Newfoundland workers are helped by this particular piece of
The last piece is, in the end, that the federal government will probably be held accountable for it under NAFTA.
That remains to be played out, but if the interest of investment in Newfoundland was foremost, it does not really feel as
though that would happen in this way.
Should the Newfoundland government think about the other parts of those assets? Should they force the company
to sit down? I certainly heard Mr.Patterson say, over and over again in the press,
"We want to sit down and work out
a productive solution with the Newfoundland government.'' Again, I will not speak for the company. I do not
represent the company; I represent the industry as a whole. Speaking for the industry as a whole, this is the last thing in
the world that we need when we are trying to attract investment into Canadian mills.
Senator Downe: I appreciate that answer. As a senator from Prince Edward Island, I do not speak for the
Government of Newfoundland and Labrador. However, there is certainly a lot of support for the idea that the industry
was taking advantage of Newfoundland and Newfoundlanders. Newfoundland had unanimous support in the
Mr.Lazar: I understand it is very popular. I represent a lot of companies that are selling products at less than it
takes to make them. We are trying to figure out how to get from where we are today to the time when markets return
so that we can start to make money without closing our plants. Every month that you operate at a loss, the amount of
money that you have in the bank goes down, and eventually you are gone.
Senator Downe: Do you expect a return in six months on an investment?
Mr.Lazar: I expect that, yes.
Senator Downe: What do you base that on?
Mr.Lazar: If you look at when global markets are likely to return, everyone who has been making predictions has
one thing in common: They have been wrong. Somewhere in the next 12 to 18 months, we expect demand for lumber to
come back steeply because the Americans will need to start building houses again. Their population is increasing
quickly, their lumber yards are empty and their interest in living in tents has not been demonstrated as yet, though we
have been checking on the sales of tents for a while to make sure they are not switching. They will want to build houses
and the demand for lumber will go up.
Similarly, global pulp and paper supplies are dwindling. Many of our overseas customers have destocked because of
the credit problem. They do not want to have extra stock because credit is difficult. When demand comes back, it will
come back sharply.
Some Canadian companies in the West and in the East still have money for investing, as do internationals. If you
look at global investment markets, the big investment firms in New York and overseas have been eyeing Canadian
assets as being underpriced, undervalued and of a high potential. They are waiting for the moment when it is time to
jump in and invest heavily.
Global GDP is expected to double in the next 20 years and there will be no one, aside from us, the Scandinavians
and the Russians, who will be able to supply that marketplace. Although we are in trouble now, we are confident that
the market will come back globally and that we will be extremely competitive. People are looking at us for investment,
and, yes, every time a dollar is invested in Canada, we can keep jobs.
The Deputy Chair: I have had the experience of hearing you before. It was interesting then and it is interesting now.
Senator Dawson: You said earlier, Mr.Lazar, that you used EDC a lot. Do you use private insurers as well?
Mr.Lazar: Certainly. We use all sources of credit we can find. It is normal practice for businesses to use all available
resources. EDC has a special list.
They are insuring receivables for exports.
All our companies have credit here and in the U.S.
Senator Dawson: We have had private insurers come to us and say "We feel threatened by EDC. If we feel that we
cannot get a fair share of the credit insurance market in Canada, we are not sure we will stay in Canada.'' As a strong
defender of private enterprise, which we have heard from you over the last few minutes, would it not be good for the
health of Canadian industry that there be a private presence in the export insurance field here in Canada?
Mr.Lazar: Our view is that wherever it can be done and is being done by the private sector, it is better than
government. Where there are holes in the market system that can deeply affect employment in Canada, it is worth
government stepping in to sustain employment in Canada. The experience of my member companies is that the private
insurers have not been available to them in any way that supports us in the current situation, and that the costs have
gone way up because everyone has a feeling of increased risks. No, we do not want them to go away. We want them to
stay here and we want to continue to do business with them, but not at the cost of our going through this crisis and
I will give you an example. You have a sound company whose prospects everyone agrees are very good. Yet, they
cannot get the credit they need. If they shut down, when the market comes back the employees are gone. It will take
months to restart the mill and their best customers will develop loyalties with someone else. During this particular
period, it is a question of necessity.
The Deputy Chair: It is stretching it to say that this question has much to do with the Export Development
Corporation, but it has everything to do with what you do.
If there is a controversy here, it is a question of the role of the private insurance companies. That is something the
committee members have heard quite a lot about, and will have to decide what they think. However, you talk about
recovery. That interests all of us, given the atmosphere in which we are living.
In terms of the Canadian forestry industry, I have developed an interest in Russia. I was in an area of that country a
couple of years ago and I ran into a Swede who was there to develop a forestry operation. He told me that a lot of
things are happening in Russia regarding their vast forests, and so on. What is the story? Have they become large
competitors of Canada?
Mr.Lazar: They have the three essential ingredients that are necessary for success five years from now: Trees,
energy, and water, on land which is not good for agriculture. If you are like Brazil or Indonesia and you have good
agricultural land, you will go out of trees and into biofuels and food, because that is where the shortages will be found.
Good agricultural land will be better used, both socially and economically, for food and biofuel.
Basically, the Boreal forest is good for forests. Right after the famine, they sent the Irish and the Ukrainians to try
and farm there, and the smart ones moved to town; the others starved, I believe. It will be used for the production of
fibre. The Scandinavians, the Canadians and the Russian will be producing that.
Russia has three major problems. The first is a lot of geography and a lack of infrastructure. The trees are far away
from markets. They service China well because Siberia is right there. China has turned Russia into an economic colony.
They have taken their raw logs. If you go to the border of China and Russia, all the mills are across the border on the
Chinese side, so they keep all the jobs. That is why the Russians have started an export tax. The Europeans are also in
there, especially the Finns but also the Swedes, because fibre prices in Europe have gone through the roof. The
European Union's response to their Kyoto commitment is to find sources of renewable fuel. They have put huge
subsidies on energy generated from wood. The price of fibre for making lumber and pulp and paper in Europe goes
through the roof because you can burn it with less hassle and get a good return. The Finns have been using Russian
timber to increase the supply.
Again, the Russians have threatened an export tax. They are very highly leveraged. They can no longer get credit.
Apparently EDC does not lend to them. They are not as fortunate as we are, and development in Russia has come to a
They are also plagued with a very high rate of illegal logging and subsequent deforestation because the illegal
loggers do not come back and plant in the middle of the night. As many have reported, there is also an element of
gangsterism, all of which impede the speed of growth.
Will they be good competitors in the long term? Yes, they will be really good competitors, and we will need to go toe
to toe with them. In the medium and short term, however, they have a long way to go before they can expand enough
in a serious way.
The Deputy Chair: Thank you, Ms.Lazar and Ms.Morgan. This is very interesting because the committee is also
seized with a China-Russia study and Canada's trade, and that is important information for us. You have added a
great deal to our deliberations.
Mr.Lazaar: Thank you for the invitation, and good luck with your deliberations.
The Deputy Chair: Our next witnesses are from the Canadian Bankers Association; Mr.Terry Campbell, Vice-
President Policy, and Mr.John Lancaster, Director of Financial Institutions & Trade.
Terry Campbell, Vice-President, Policy, Canadian Bankers Association: Thank you, honourable senators. We have
circulated copies of our presentation in French and English.
We welcome the opportunity to participate in the 10-year review of the Export Development Corporation and the
bill. As you probably know, the Canadian Bankers Association works on behalf of 50 domestic chartered banks,
foreign bank subsidiaries and foreign bank branches operating in Canada. We work to promote an understanding of
the banking industry and its importance to Canadians and the Canadian economy.
For many years, Canadian banks have worked with EDC to enhance Canada's export trade and to grow Canada's
trade finance capacity. Canada's banks are major users of EDC's risk-mitigating products. EDC guarantees and
insurance enhance banks' ability to lend where risks are higher than private sector lending limits allow, or where terms
are longer than commercially feasible. In making export credit insurance available in the Canadian financial services
marketplace, EDC has significantly enhanced banks' ability to lend against exporters' insured foreign sales receivables.
Also, EDC guarantees of bank loans enable foreign buyers to purchase Canadian goods and services.
We are pleased to be included in the 10-year review. It is our view that, as with any Crown corporation that operates
alongside private sector institutions, it is vital to very carefully define EDC's public policy mandate so that its role,
going forward, is clear and unambiguous.
The review of the Export Development Act was launched before the full force of the economic crisis hit Canada and
before the current recession, and we know that in the meantime the government took steps, in its January budget, to
address the impacts of the crisis, including providing EDC with a temporary two-year ability to undertake domestic
financing. Extraordinary times call for special measures, and we understand and support the government's initiatives
regarding EDC. We recognize and appreciate the government's emphasis that the powers be temporary in nature and
that they not be used to displace private sector lending. We also appreciate and agree with the theme in the budget of
the importance of partnership and cooperation. Indeed, the members of the CBA are very much looking forward to
continuing to partner with EDC for the benefit of our customers.
As you conduct your review of EDC's role and mandate, it is obviously important to consider the longer-term
horizon that is beyond the two-year period for EDC's new powers when we all hope that the economy will be back to
normal, or at least more predictable.
Making recommendations about the future based on the extraordinary circumstances of today does not necessarily
lead to good public policy or a sustainable role for the agency. We thought it would be useful to propose for your
consideration some principles that we think would be useful for this committee and the government to use in
considering what the future role of EDC should be.
The first principle from our perspective is that EDC, indeed any Crown financial agency that provides lending,
should complement private sector institutions; that is, they should act in a way that enhances the capacity of financial
institutions to lend and to help their customers. The flip side of the coin is that the agency should not operate in a way
that displaces, crowds out or duplicates private sector lending.
The second principle is fairly obvious, but it is important to enunciate it. It is that, in our view, EDC's role is most
appropriately and most effectively that of a facilitator and supporter of export trade by Canadian companies.
Taken together, these two principles lead to a number of questions that we think need to be addressed when EDC's
role is being considered, going forward. First: Is the function being considered for EDC clearly related to trade?
Second: Is the function being considered for EDC structured so that it would be delivered in partnership with a private
sector lender and clearly aimed at enhancing that lender's ability to finance the customer? Third: Does the activity
duplicate or potentially duplicate the activities of private sector lenders or other government agencies in the market?
Finally: Is there a clearly documented need for the change in mandate?
It is our view that these questions and these principles would provide a useful framework for assessing a range of
proposals that you will hear about EDC's role in the future and in making recommendations for public policy, going
forward. We recommend them for you to adopt in your review.
In the meantime, while the economy remains in its current distressed state, we support EDC's temporary
involvement in the domestic financing field as we work cooperatively to ensure that Canada's economic health is
Chairman and members of the committee, we appreciate the opportunity today and we look forward to your
Senator Downe: I notice that in your brief you talk about the temporary measure for the EDC, but the proposed
budget implementation act, as I am sure you are aware, indicates in section263(1):
Paragraph10(1)(a) and subsection10(1.01) of the Act, as enacted by subsection260(1), are repealed two years
after the day on which they come into force.
However, 263(2) states:
The Governor in Council may, by order, extend the period referred to in subsection(1).
In other words, cabinet, without any parliamentary review, can extend this provision. As income tax was temporary
after the First World War, this may indeed not be temporary.
I assume you would not support this as a long-term initiative of the EDC?
Mr.Campbell: It is telling that the government decided to only go, in the first instance, for a temporary period. They
could have made the decision, when the budget was announced and the budget bill came out, to change this aspect,
going forward. I think it is significant that they have put some time limits around that. This is clearly seen as a step
beyond where they were as an exceptional type of thing.
We are, right now, in the middle of some very great economic turmoil and we understand the reasons that the
government has moved forward. Going forward, a case would have to be made for a post-two-year period, and our
hope would be that, as we get closer to that time and as there is consideration of that aspect, that there should be a full
consideration of it, so that people can understand the rationale for moving or not.
Senator, I come back to the point I made in my comments here. Before you charge an agency or provide it with a
mandate, or before you change that mandate, there has to be a clear and documented compelling need. For instance,
that there is a gap or a need to do so. The case is yet to be made in that regard.
Senator Downe: Thank you for that answer. We seem to have two sides of the story here. One is that the banks have
totally seized up credit and, therefore, we need to pump all this additional funding not only into the Export
Development Corporation but into the Business Development Bank and other institutions. We are spending money
that we do not have. The country is entering into a massive deficit situation that is projected to last for years.
The other side of the argument is: Thank heavens for the banks. The banks are responsible; they are conservative
and they have not lent a lot of money to people who cannot pay it back, which is the root of the financial problem in
the United States. Representing the Canadian Bankers Association, I think I know on what side of that argument you
would come down. However, how would you address the other concerns expressed?
Mr.Campbell: I agree with your characterization of the two sides. Regarding the first characterization, and
depending on how you measure it, banks in Canada are about 25percent of the financing marketplace, taking into
account all financing, and they are about half of the business credit. We have seen over the last several months and,
perhaps, the past year that when the problems have occurred they have been on the financing side, and typically on the
non-bank side. Commercial paper is gone; it is down significantly. Securitization has virtually dried up. Leasing
companies are pulling out of the marketplace. I went onto GE Money's website and it says
"We are no longer writing
business in Canada.''
Financing companies are gone. There has not been an IPO in Canada in six months. U.S. firms such as Bear
Stearns, Lehman Brothers and Merrill-Lynch that used to buy securitization are gone; they do not do that anymore.
We are seeing a pull-back on the non-bank side. On the bank side, according to Bank of Canada data, month-over-
month during the last several months, lending from the banks has actually increased by double digits. We are trying to
take up the slack. In January, compared to January2008, bank lending was up 11percent. In December, I think it
was up 13percent. November was up 14percent compared to the year before.
Business customers who used to get financing from, say, an offshore institution that had come into Canada —
perhaps opportunistically — cannot now get that financing. I can cite an Atlantic Canada example, if you like. Those
firms are now gone and the customers are turning to the banks. We are seeing our lending ramp up but we cannot take
up all the slack.
Broadly speaking, we are supportive of the new programs that the government has put in. The example, of course,
was that of High Liner and an Icelandic bank that came in and lent in a way that we would never do. You mentioned
prudence. It is now gone, and a bank — the Bank of Montreal, in fact — has had to step up to fill that facility.
The thing that has stood us in good stead, coming into the crisis worldwide, is that we are prudent, careful lenders.
Again, this is not just us saying so but the regulator in another committee said the same thing yesterday. We lend to
people who pay the money back. We stand by our customers and try to use all of our tricks to help them get out of
trouble. Regardless, we are prudent lenders, and that has put us in good stead.
I will return to your question. There is no question that there are access-to-credit challenges in the marketplace. We
think that some of the programs the government has put in are very good. Our members are working with them, both
on the business credit availability program and the Canada secured lending program — it is hard to remember the
names. We think they are good things. We hope they work.
Senator Andreychuk: I think Senator Downe has made my job a little easier.
We are studying the review of the Export Development Corporation and a report was produced, which I am sure
you are familiar with. Do you agree with that report in the main and the direction it is taking for the future of EDC,
subject of course to the economic situation now and the intervention that has been made?
Mr.Campbell: It is a big report. It covers a lot of territory, as you know. There are a number of individual
recommendations. I would say, in the main, certainly from our perspective as lenders, we think it is heading in the right
I would particularly point out that we very much like the commentary and report about the importance of acting in
a complementary way to lenders and not crowding them out. That works at cross-purposes. We like the idea of the role
of enhancing capacity to lend. That is an important thing.
There is a specific suggestion in there about medium- and longer-term guarantee programs and the programs that
EDC does. The report characterizes it as perhaps not its most exciting recommendation but we think it makes sense for
EDC to sit down with the banks that are particularly active in those areas and see if EDC can move more in that
direction and sort out the problems.
We think, in the main, it is heading in the right direction.
Senator Andreychuk: You said there are two principles for EDC. One should be to complement private sector
institutions and the other is the role of being a facilitator and supporter of export trade by Canadian companies. I do
not think there is disagreement about that.
The difficulty is for some public sector body such as EDC and the government to determine what is complementary
and when it turns into competition. Let me play the devil's advocate. It seems that the competition and difficulties arise
when our Canadian companies are competing overseas for markets and they are nudged out by a whole host of other
countries who use all kinds of mechanisms to prefer their companies. Therefore, EDC does some things that, if you
look at it, seem like competition to the banks but really is necessary to create a climate that ensures the viability of the
Canadian companies overseas.
How do we fine tune what we mean by "complement,'' because everyone is saying that is really their role? When
does the "rubber hit the road,'' as we say in Saskatchewan? When is it competition and when is it prudence on the part
of EDC to be there in a more forceful way? It may cut out one or two of the banks or one or two of the lending
institutions. However, that is hindsight. When you are using foresight, what are the principles?
Mr.Campbell: This is where you have a fair degree of "vague'' and there is no clear, bright line. I think one of the
other, earlier witnesses this afternoon was talking about global supply chains and that a company can just look
domestic but export length is part of this chain. There is no question that it is difficult to draw that bright line.
I will approach it from a different point of view. You are right: EDC has played a role where they will support an
export market start-up whose risk is way "beyond.'' Our hope is that a measure of success would be that such a
company can graduate into private sector suppliers of finance.
One of the best indicators of whether something is complementary is something that EDC has told us, and the
president issued a press release a few days ago saying more or less the same thing: They prefer to see business come to
them from the banks. A customer would go to the bank needing financing for an export product, the bank would like
to lend, and there is a risk aspect. The bank would then go to EDC and say "Can you help us out here on the
insurance?'' To me that is a very good example of how complementariness would work. The more we could see that
sort of thing, the better.
The other thing I would point out from the report here is that, in terms of buyer finance, where there is lending to
that foreign buyer to buy a Canadian product, it is only onepercent of EDC business now from a guarantee side, and
much of it is on the direct financing side. We prefer to see more emphasis, on EDC's side, on having workable
guarantees on that medium and longer term. If we could move EDC further along that road, it goes some ways to
addressing your question.
Senator Corbin: This is probably the obverse of Senator Downe's approach to the matter. There is, in a sense, a
sunset clause in the new arrangements for EDC. There is this proviso for an extended two-year capacity. I have in mind
the comments made by the Governor and the Deputy Governor of the Bank of Canada before the House of Commons
committee. The economy could start turning around as soon as August or early fall, but then there would be a need to
keep these provisions alive up to the two-year term.
Of course, it is all guesswork. Nobody knows what the future holds for us, but if things did turn around strongly,
would you advise that we put an end to the new responsibilities of EDC before the end of its two-year term?
Mr.Campbell: I take your point, senator, that we are into the game of speculation here. All of us around the table
would hope that, in fact, it does bounce back quickly and strongly. I am not into the game of making predictions.
I cannot put words in the Governor's mouth, but my understanding of the approach that is being taken here is that
you need to have a range of tools in your toolkit. I have heard that expression used, that you use as necessary. The two-
year time frame to allow deals to be worked out and deals to be worked through seemed to have some logic around it.
My suggestion would be that we have noticed over the last few several months that EDC has made some efforts here
to have a closer and more meaningful dialogue with the CBA and with individual banks. It was not the case before, but
we are seeing much more of that. We get the chance to ask them the kinds of questions you are asking about: How will
you do this if things turn around? Are you overbuilding capacity? Are you ramping up in the bad times and then are
you left with all these bodies? It is a useful thing.
The way to deal with that, as the circumstances change, is dialogue, which is important. It could be bilateral
dialogue with the banks such as: "How are these cases working out? Is the marketplace changing? Are you needed? We
would like to forward this case to you,'' but we are having few of those dialogues. If we could have more of that kind of
dialogue, it might be the way to calibrate rather than a change of statute, in which case you are talking about a
Senator Corbin: Normally, Mr.Chair, witnesses come before this committee to answer questions, but these
witnesses have put questions to us.
The Deputy Chair: We are all in a questioning mood.
Senator Corbin: Would you care to expand on the four points you make? I think that would be useful.
Mr.Campbell: We posed here four questions, and they all hang together. This is not just for EDC. I would
characterize this for government agencies, particularly government agencies that operate in what most people would
see as the private sector. If I had to pick a question that I thought was the most important, it is the last one: Is there a
clearly documented need for a change in mandate? The concern you always have is that you are always fighting last
year's battles. The general is fighting last year's war. You see an issue right now, and you provide a bunch of powers
that in a steady state may not be necessary or appropriate, or at least not the same kind of thing.
When people talk about a financing gap, let us be really clear here about where it is. What is the best way to go
about addressing that? I think of all the questions we posed and in the interests of time, that is the one I would focus
Senator Wallin: I want to make sure I have my numbers correct. You say you do 25percent of all financing in
Canada and provide half of all business credit?
Mr.Campbell: Business credit, that is right.
Senator Wallin: Is that pre-economic crisis?
Mr.Campbell: That is a very pertinent point — pre-economic crisis. We are seeing, particularly on the lending side,
it was something like about 46percent, 48percent. We are finding that a lot of customers who had usually gone to
non-banks are not finding that credit any more and they are coming to the banks to find that credit. That number has
been moving up over the last several months, and it is now in the mid-50s. There is an adjustment there.
Senator Wallin: Would you characterize yourselves as risk-averse?
Mr.Campbell: I would characterize us as prudent. I could be called risk-averse. We have to balance two sides. We
want to lend and make a return but we also have to protect, not just out of a fiduciary duty, but by legislation we have
to protect our depositors' money, and there is that fine balance. It is fair to say that we are more risk-averse. We do not
go up the risk scale very much because we are regulated, prudent financial institutions.
Senator Wallin: The fact of what EDC does, in a sense, helps you indirectly?
Senator Fortin-Duplessis: Mr.Campbell, Mr.Lancaster, you said in your statement that the first principle should be
that EDC complement private sector institutions. In other words, EDC's role should be to increase private institutions'
capacity to help their customers. You said that EDC should not operate in a way that displaces, crowds out or
duplicates private sector lending. As the economy is slowing down, and a very serious financial crisis is affecting the
whole world, some companies have a lot of difficulty finding credit. In your opinion, could EDC provide such
financing at a lower rate than Canadian banks?
I would go back to the point that there is no doubt that there is a credit problem. We have had large sections of what
have formerly been active lenders either shrunk down, not growing as much or completely pulled out, so there is a need
for more credit.
The way that I think is appropriate that it happen — and EDC has been very open with us and they agree with this
characterization — is that it be done on the basis of partnership, if you like, in a cooperative way; where there is a deal,
there is financing, there is risk, there is referral and forwarding, and we bring EDC in. They have told us that is their
preference. Quite frankly, what the government has laid out in both the budget and in the budget implementation bill
emphasizes that complementary and cooperative aspect to it.
I suppose one can make an argument as to whether the dollar volumes are enough and whether it is happening
quickly enough, but with the kind of operation that we have seen through, particularly, the business credit availability
program that was announced only a month and a half ago, we have EDC at the table, BDC at the table, the banks,
Credit Unions and CBA at the table, and there is an effort there to identify the problems and work them out. They deal
with each other bilaterally. We have great hopes that that will help the situation along. That would be the preference.
Your specific question as to whether EDC should lend at a lower rate, I think that is getting into the issue of
working at cross purposes. Credit can be made available but it has to be priced properly. If it is not priced properly,
you will end up with a whole bunch of problems down the road. You will find that if it is not priced properly, it will not
be made available. When you actually price it properly, institutions are enabled, whether government or private sector,
to actually continue lending.
I am not sure if that is a direct question but that is how I would approach the issue you raise, senator.
Senator Fortin-Duplessis: Could we say then that Canadian banks are less willing than EDC to take risks in order to
provide financing to Canadian exporters?
Mr.Campbell: The way I would characterize it is, we will assess a credit application or request for a loan based on
our normal credit-granting criteria. We have not changed those. The hard economic times have come. We have not
changed our standards. We have not ramped them up. What has changed is risk in the system and we need to take it
into account. It is fair to say that, by its nature, EDC can take on more risk; it is built to take on more risk than we can.
You are talking in the context of EDC itself being a direct lender. We would prefer to see a greater emphasis on
helping banks manage that risk, take on that risk by moving more into the guarantees, and particularly in the medium
and longer term, or on supplier-financing the insurance side. The more they can offer those guarantees, the more the
risk is diminished. That actually increases our capacity to lend more.
That would be the preferable way to proceed on the issue.
Senator Grafstein: Again, Mr.Campbell, welcome. We are wearing a different hat today. It is nice to see you.
Mr.Campbell: It is good to see you.
Senator Grafstein: This is a very curious set of questions here because it relates to your recommendations, which are
not as precise as I would like, but let me see if I can sum up your recommendations to this committee.
You buy the government's idea of PPP — public-private/private-public partnerships — and you buy the fact that
government instruments such as the EDC are a very important part of the component. You even say to us, taking on
some of the issue with having a sovereign guarantee underneath it, which is the government guarantee to help you
manage those risks, and in this way we should be able to get more credit into the marketplace more quickly for those
loans that are a little bit riskier.
The way you propose to do that is to have greater ongoing dialogue with the EDC. You have indicated as well that
the EDC is more open to this dialogue than in the past. That is all to the good.
As other senators have said, we are looking at a report that we think is stale-dated. We are trying to come up with
recommendations for a stale-dated report but trying to look forward, having in mind that we have heard there has been
a massive change in the terms of reference in the EDC as we speak. It is a complicated series of issues. The question is,
where can we give the taxpayer value-added?
Let me propose a more formal structure between the banks. We have heard from the insurance companies about a
more formal structure of consultation, sort of an advisory board. Would that be a helpful thing? As opposed to doing
this episodically, if we recommended, as an example, a formal advisory board composed of the EDC, the banks and the
insurance companies, for example, on those issues, a board that would meet on a regular basis and deal with these
issues on a systemic basis, would that be an improvement to the process here? It would allow the consumer faster and
easier access to problem-solving as opposed to having bureaucratic or turf wars. Much of this is turf wars.
Mr.Campbell: That is an interesting recommendation. I have not thought about it particularly but, since you pose
the question, I am always of the view that the more dialogue among groups you have and the more structured they can
be is a good thing, because the more dialogue you have, the more problems get identified and resolved. Courses of
action based on incorrect assumptions can be addressed. To the extent that you are facing the same problem, you can
resolve it directly.
I have always been of the view that more dialogue is better. Senator, when I said that we have had more dialogue
with EDC and more dialogue with BDC, that was not always the case. Things are better now than they were before
when the dialogue was not happening.
In terms of an advisory board, we would have to ask ourselves, advising whom? Is it advising the minister or is it
advising management of EDC? One always hesitates. I am not speaking for the banks now. I have been on the
government side and on the banks' side. When one structures things in advisory boards, they can become somewhat
Senator Grafstein: I agree with that.
Mr.Campbell: I would be careful about building new structures that take on a life of their own.
Senator Grafstein: We have to come up with a better process of dealing with the public and private sectors and
where we draw the lines. I am not sure an advisory committee is right, but maybe you could give some consideration to
that. I want you to look back at your own banking experience. Back in the 1980s and 1990s, the banks were very much
against consumer one-stop protection, and we worked out a system and it works now quite well.
Mr.Campbell: It does.
Senator Grafstein: It works surprisingly well. There is one-stop shopping among banks, insurance companies and
financial institutions relating to consumer protection.
This is a different form. This is to protect or enhance the ability of business to get at their business, and to get fast
and speedy responses to their initiatives so that the process is not time-consuming. Could you give some consideration
to that? Talk to the insurance people as well and talk to EDC. Perhaps you might come back with a note to us because
we must make recommendations. I am trying to be concrete.
Mr.Campbell: I hear you loud and clear.
Senator Peterson: Do you do anything with EDC other than lending on their guaranteed bank loans?
Mr.Campbell: Maybe I can turn to my colleague, Mr.Lancaster.
John Lancaster, Director, Financial Institutions and Trade, Canadian Bankers Association: Yes. Mostly, EDC's
business is short-term credit insurance, which allows banks to give value for Canadian exporters' receivables. That is at
the end of the scale with many customers and small volume deals. EDC's relationship with the banks goes right up the
scale to large scale co-financing, where EDC and the banks will work together on a project or co-financing transaction.
I know one of our member banks submitted a report to this committee, mentioning specifically the co-financing deals
they had worked on with EDC.
There are situations in which banks rely upon EDC credit, whether it is insurance from them or guarantees of loans
made to smaller exporters, but there are also situations in which we work hand-in-hand, and work together on the
same syndicated loan.
Senator Peterson: In those cases, do you have money at risk?
Senator Peterson: It is not covered in any guarantee?
Mr.Lancaster: Not at all.
The Deputy Chair: Thank you very much. I want to thank the witnesses for their very interesting testimony. Thank
you for coming here today, on behalf of our members.
I would now like to say a word to the members. We are not here next week, but the following week we have two
meetings. We have to talk to Senator DiNino — no one is trying to do anything underhanded, here — because we
think that two more meetings are about all that we need. The witnesses on March24 are from the Conference Board of
Canada and the Canadian Manufacturers & Exporters Association of Canada will be before us on March25.
The steering committee will meet and discuss this agenda, but with the approval of the members the plan might be
that we have explored this issue pretty extensively and we would now like to get back to our study on Russia and
Mr.Lazar's comments about forestry there were interesting. If there was a plan — and Senator DiNino would be
the one to explain this to the members — we might be able to prepare a report. We should be giving some instruction to
our researchers to prepare a draft that the members can look at in the normal course of events.
Senator Corbin: I am a little concerned that, perhaps, you are proceeding too fast to arrive at the end of this
The Deputy Chair: Thank you very much to the witnesses. This is just some in-house business.
Senator Corbin: We do not know what the next witnesses will say.
The Deputy Chair: No, we do not.
Senator Corbin: There are things that we do not know. Our task has been enlarged because of BillC-10. We will
want to take into account the findings of the committee which is tasked with examining the provisions affecting the
EDC and BillC-10. Not only that but we will be meeting with the Canadian Manufacturers & Exporters Association.
They are the head speakers for a number of people. We have yet to hear directly from individual exporting companies
or concerns. This is just food for thought but rather than asking the staff to prepare a draft report, I would prefer that
the staff, after the examination of the next witnesses the week after we come back, present a paper of the findings of the
committee thus far; that is, a résumé of our findings — not necessarily a draft report with recommendations. At that
point, after having an opportunity to study the staff's paper, then we could decide amongst ourselves if we want to
suspend the examination of EDC. We have all the time in the world to do this. We are not under the axe here. We can
take the full two years to continue our study, if we so wish. I am not suggesting that we do that, but there is no time
limit to this exercise.
I am asking that the wise people of the steering committee examine my suggestion and hold your horses back a bit.
The Deputy Chair: There is no attempt to hurry this but on behalf of the steering committee I am concerned that we
do have an agenda on Russia-China, and we would like to get back to that.
Senator Corbin: We can attack that any time.
The Deputy Chair: Absolutely, and we did last night. We had part of last night's meeting, and in bits and pieces, such
as Mr.Lazar today. It is useful for the staff to have this out on the table so they know what our thinking is. I do not
think there is any particular dispute here.
Senator Andreychuk: I appreciate that we have witnesses and we do not seem to have any more witnesses other than
the two sessions.
The Deputy Chair: Yes.
Senator Andreychuk: I think the steering committee should make an assessment if that is it for witnesses and then
determine what your next steps are.
Senator Corbin: The steering committee should also hear our views at that point.
Senator Andreychuk: Exactly, but they can figure out whether there are more witnesses or if that appears to be a
good representation. We should then sit down and find out where we go from there. I would like the steering
committee to meet and report back to us.
The Deputy Chair: Honourable senators, that is why I brought the item to everyone's attention, so we are all more or
less on the same wavelength. With that, we will adjourn.