By Probe International

Patronage Canada

(April 2, 1997) Probe International’s Executive Director, Patricia Adams, looks at some of the disastrous projects backed by the Canadian Crown corporation, the Export Development Corporation.

Poor countries weep, and we do too, when business and government get in bed with each other

Just before midnight on Saturday, August 19, 1995, the earthen dam holding back a waste pond at a Canadian-owned gold mine in the Guyanese Amazon erupted, spewing 3.2 billion litres of cyanide and heavy metal-laced effluent into the Omai river. Forming a crimson plume, the effluent snaked its way down a narrow tributary leading to the Essequibo river, Guyana’s main waterway.

Guyana, a former British colony on the north coast of South America, is neither a model of efficiency nor of good governance, yet its government knew a political catastrophe was at hand. Within hours it sprang into action: Via helicopter, boat and runners, it tracked the Omai Gold Mine’s plume and warned people by loudspeaker to stay out of the water. It hastily posted danger signs, warning people not to drink, swim, bathe, wash or fish in the river, and to keep their livestock away from the river’s edge. The government then rushed drinking water to communities throughout the region.

Within two days, the news of cyanide flowing down the river had devastated the country’s fishing industry, with the origin of all fish now suspect. In the markets of Georgetown, Guyana’s capi- tal, catches could not be sold, and some Caribbean countries banned all seafood products from Guyana. Other industries, too, suffered in the wake of the spill. Farmers could not sell produce grown along the river, small mining and logging operations were put on hold and local abattoirs, which wash the meats with river water, had to shut down. Guyana’s fledgling tourist industry, boasting river eco-tours on this northern tip of the Amazon rain forest, received cancellation after cancellation. Roger Moody of the London-based group Mine Watch, an authority on mining operations, reported that the cyanide plume killed the spectrum of life in the Omai river, from fish to microbes, and caused a ticking time bomb in the Essequibo by leaching out heavy metals such as cadmium, copper, zinc, iron and mercury. Within five days, the crimson plume stretched the full 115 miles from the mine to the river’s mouth. Throughout the country, Guyanese citizens adopted cries reminiscent of the Yankee Go Home calls that rang throughout Latin America in previous decades: Take Your Poison Back Home to Canada; Stop Killing Our People; Let Omai Pack Up and Leave.

Guyana’s worst environmental disaster was brought to its hapless citizens courtesy of a Canadian Crown corporation called the Export Development Corporation. Though little known to the Canadian public, every major Canadian exporter knows the EDC: This trade promoter doles out billions in taxpayer-backed loans and insurance to make uneconomic projects fly. EDC is the steroid that Team Canada pumps itself up with on every high profile trade mission. It functions as a kind of Patronage Canada, a federal government patronage agency that channels taxpayer support to exporting corporations. EDC money also goes to banks and other lenders and to foreign governments, many of which do not respect the rule of law, many of which have abysmal human rights records and non-existent environmental laws. Through this Crown corporation, Canadian taxpayers became accomplices to environmental tragedies like the Omai spill; we unwittingly helped perpetuate repressive regimes such as those of Ceauescu in Romania, Mobutu in Zaire and the junta in Argentina; we added to our national debt; and we perverted Canadian foreign policy.

EDC has financed an impressive string of fiascoes that has left havoc in its wake for the people affected by its projects while lining the pockets of the Canadian corporations that receive its largesse. West of Guyana in Colombia, EDC backed the Guavio hydroelectric complex, which has become synonymous in that country with white elephant. As Colombia’s leading news magazine, Semana, pointed out, the cost overruns alone from the ill-conceived project equalled half the nation’s entire budget for social programs. Colombians suffered as a result, but not Canadian General Electric, which carried out the work.

In China, EDC is bankrolling the sale of a Canadian supercomputer to help the authorities coordinate the forced resettlement of 1.3 million people from the Yangtze valley, many of whom are rumored to be destined for Tibet as part of the Chinese government’s colonization program. The resettlement will make way for the Three Gorges dam, the largest civil works project in the world. White elephant is too diminutive a term for the dam, a two-kilometre-wide wall across the Yangtze river. Hidden costs have tripled its official cost estimate to US$34 billion, and one Chinese banker told the Wall Street Journal that he expects a final cost of US$77 billion. Because the dam is being built over fault lines, seismologists fear its weight will induce an earthquake. Even without an earthquake, the dam will destroy the Yangtze’s ecosystem, imperil endangered species and submerge archeological sites dating back to 10,000 BC.

To please its political masters and corporate beneficiaries, EDC has stepped into this breech despite overwhelming evidence that it’s a boondoggle. The World Bank has warned that the project will not be economically viable. The U.S. Bureau of Reclamation, the world’s foremost dam building agency, withdrew from the project after supporting it for 50 years, on the grounds that the dam is neither environmentally nor economically feasible. Chinese and foreign experts believe the Yangtze’s sediment-laden waters could destroy the dam’s power turbines, cause flooding and disrupt navigation. Even the Chinese minister of energy believes that China does not need its power — conservation and efficiency improvements to the country’s backward energy complex would satisfy an economy twice China’s size. The only beneficiaries of this disaster-in-the-making are the Chinese leaders and bureaucrats who use megaprojects like these to distribute largesse to cronies; their Canadian counterparts who distribute largesse for political ends; and recipient companies like Ontario-based Monenco-AGRA, winner of one contract, and Quebec-based Canadian General Electric, who hopes to win a contract to supply the dam’s turbines.

EDC’s recklessness spans a generation. In 1974, EDC financed the Argentine government purchase of a Candu nuclear reactor that continually breaks down, threatening the environment, creating chaos for the economy and resulting in millions of dollars in losses to Canadian taxpayers. In this case, the Canadian recipient of EDC patronage was Atomic Energy of Canada Limited (AECL), a Crown corporation that markets the country’s sorriest invention, the Candu nuclear reactor. Because the Candu could not sell on its own merits, the government enlisted the EDC, to the eventual shame of many taxpayers.

Ten days after EDC financing was put in place, AECL put $2.4 million into a Swiss bank account for an “agent” to clinch the sale, leading to bribery investigations by Canada’s Auditor General, a parliamentary inquiry and a public furor. In response to such questionable activities, the Canadian government decided to make a virtue of this vice. Revenue Canada pronounced that Canadians could legally bribe foreign officials and even made bribes tax deductible, provided the briber received a receipt. The trade minister of the day, Jean Chretien, urged Canadians not to put their “head in the sand” and pass up overseas sales by being rigidly moralistic: “Commercial practices in other countries sometimes are different from ours. I am not about to condemn the morals of anybody. It would be very presumptuous for Ca-nadians to tell other people how to conduct their morals.” Many Canadian taxpayers think that economic progress requires holding our noses at times and taking on, through bodies like the EDC, these social, environmental and financial risks. Certainly our government would have us believe that export credit makes good economic sense for the recipient country and for us. Yet the evidence indicates otherwise.

The tenacious hold of a primitive economic theory

Virtually all governments use export credit to win foreign contracts for favored firms or to guarantee these firms’ foreign investments abroad, on the presumption that these deals would not otherwise occur.

The theory behind export credit is called mercantilism, the dominant economic theory of Adam Smith’s day, and one which he assailed. The theory went that a country would get rich by subsidizing exports, restricting imports, and hence amassing foreign exchange. Mercantilism operated through a web of decrees, tariffs, regulations and royal patronage plums to shipyards and porcelain factories, tapestry works and arsenals. Under the mercantilists, industrial growth depended upon a politically administered national economic policy, with the spoils going to well-connected industrial interests.

Though utterly discredited in theory, mercantilism has never been stamped out. Today, government-financed export credit agencies like the EDC promote mercantilism. Britain’s is called the Export Credits Guarantee Department; the United States has its Export-Import Bank; France, the Coface; and Japan, the Export-Import Bank of Japan. These agencies subsidize exports by using public funds to finance, insure and otherwise guarantee payment to their country’s exporters, even when the purchaser is all but bankrupt, as hap-pened throughout the 1980s Third World debt crisis.

Rather than scrutinizing their projects’ viability, as real lenders are wont to do, the export credit agencies instead concentrate on marketing their export promotion funds, assembling a dazzling array of loan packages, credit lines, insurance programs and loan guarantee schemes to make sure Third World purchasers have the necessary money to buy their countries’ goods and services.

For the markets that the export agencies consider “spoiled” — those already accustomed to receiving low-cost financing — the export credit agencies and their government masters usually draw on more heavily subsidized funds to create what is known as “credit mixte” — a package of greatly discounted financing added to conventional export financing. The purpose, says EDC, is “to match . . . subsidized fi- nancing offered by competitors.” In Canada, this greatly discounted financing is disbursed from a $13-billion fund known as the Canada Account, when export contracts deemed to be in the “national interest” involve too much risk even for the EDC. From the government’s point of view, EDC is the perfect patronage vehicle to deliver money to favored corporations. Out of sight and beyond public scrutiny, EDC is exempt from the Access to Information Act, exempt from environmental laws governing government-financed projects, and it pleads commercial confidentiality to questions about its most basic activities.

Governments use export agencies to create jobs to win elections in key constituencies. In Britain, the law permits the Export Credits Guarantee Department to provide financial support for vote getting and other political purposes in exporting to what one British trade official called “dodgy markets.” Even those in charge of export credit agencies don’t claim they create wealth. Robert Richardson, EDC’s former president and chief executive officer, admitted that concessionary financing is not economical. “If other countries didn’t do it, we wouldn’t either,” he told the Financial Post. “Our approach is merely to match others.”

Officials at the U.S. Export-Import Bank made the same point in 1990, when, to conduct trade warfare, the Bush administration authorized a US$500-million program to combine subsidized export credits with foreign aid. “We think it’s a lousy and costly way to do business,” said Eugene Lawson, vice-chairman of Ex-Im, who announced the initiative in order to “attract the attention of our allies.” The initiative served notice to America’s competitors — principally Japan and France — that the U.S. would subsidize its exports until everyone gave up the costly practice.

EDC’s claims that it makes Canadian exporters competitive is also economic make-believe. These Canadian exporters haven’t won contracts because they’ve produced a better product for less money than their competitors: Rather, the Canadian government has subsidized them more than other governments have subsidized competitors. The effect of this on a nation’s economy is unhealthy, as documented by a French study that tidily expressed what everyone in the business knows, but few admit: “Export-credit subsidization wastes France’s scarce public resources in promotion of the wrong industries exporting the wrong products to the wrong markets.”

From a company point of view, export credit agencies offer a carefree and cheap way to avoid the risks of business. Omai’s majority owner, Montreal-based Cambior Inc., would not have invested in the gold mine without a US$163-million political risk insurance package from EDC. “We have shareholders, we want to be safe,” Cambior manager of investor relations Robert LaVallire told me. Unlike EDC, he found out, private insurers fear to tread in this area. EDC also steps in to ensure profits in projects too risky for the world’s banks and investment dealers. During a recent debate over EDC’s financing of a Candu sale to China, a Canadian bank executive explained that no commercial bank would lend against a nuclear power plant.

Export credit particularly benefits politically powerful firms. In the U.S., the Export-Import Bank, which financed two-thirds of Boeing Aircraft’s commercial jet sales abroad, became known as “Boeing’s Bank.” Britain’s corporate interests were so distraught at the prospect of losing their export financing that they stared down Margaret Thatcher when she tried to get rid of the Export Credits Guarantee Department in 1990. After a deluge of submissions by bankers and industrialists defending the ECGD’s services to exporters, the House of Commons Trade and Industry Committee defied her attempts to curb corporate welfare.

Export credit agencies do more than assume risks for companies; they simultaneously allow them to overcharge their customers. A 1969 World Bank report headed by former Canadian prime minister Lester Pearson discovered that Third World importers were paying inflated prices for goods and services financed with Western export credits, because these credits often financed projects where the only “feasibility study available is one prepared by the equipment supplier.” Because publicly subsidized export credits protect corporations from the competition, these corporations become uncompetitive, producing ill-suited goods at inflated prices. As an industrial subsidy, export credits are utter failures, creating coddled enterprises that depend for their survival on continuing state subsidies.

That these exports provide little value for money often matters little to the purchasing governments. Countries pushing reckless development schemes, like spendthrifts running up their credit card balances, don’t concern themselves with high financing rates. Because export credit agencies enforced less “rigorous tests of economic desirability,” the Pearson study found that export credit “provides a temporarily painless way of financing projects conceived by over-optimistic civil servants, by politicians more concerned with immediate political advantage than with potential future economic problems, and by unscrupulous salesmen for the manufacturers of capital equipment in developed countries.”

By allowing our corporations to ignore the financial risks of dealing with dictators, export credit helps sponsor bad governments and crony capitalism. When EDC stepped in to insure Cambior against the risk that it might have its assets expropriated, that it might not be able to transfer its funds out of Guyana and that it might not be able to enjoy its assets due to war and insurrection in Guyana, it interrupted an important message that the private sector would have otherwise sent to governments that don’t respect the rule of law or the rights of their citizens: “Clean up your act, prove to us that your government is legitimate and has the confidence of the people, show us the courts work fairly, govern your nation democratically, and then we’ll invest.” Or as Cambior’s LaVallire put it: “If you have $10 in your pocket and you can invest in Canada or Colombia, then where do you invest? Canada!”

In protecting the corporate sector from the need to make prudent investments, export credit agencies have cost their own taxpayers plenty. In 1990, the U. S. Export-Import Bank went into technical insolvency when it was forced to establish a US$4.8-billion reserve to cover the one-third of its loan portfolio deemed delinquent. Britain’s ECGD was forced to set aside reserves against its delin- quent debts. So, too, did Canada’s EDC, after Canada’s Auditor General accused it of misleading taxpayers with financial statements that didn’t conform to generally accepted accounting principles.

The export credit agencies have their own way of pretending that their bad loans aren’t bad: They wish away the problem by rescheduling delinquent debts and then keep mum. Under rescheduling, if a debtor falls behind on interest, the creditor converts the interest to principal. If a debtor falls behind on principal, the government may adjust repayment dates or provide a repayment holiday. Little wonder Canada’s former auditor general, Kenneth Dye, called rescheduling “a shield to hide from public scrutiny losses the government has suffered or is likely to suffer on its sovereign loans. Paperwork disguises reality.” Or that Eugene Rotberg, a former World Bank treasurer, sees a “financial charade” in loan rescheduling: “If someone owes you money and you say “You don’t have to pay it for ten years,’ then ten years go by, and you don’t collect, and another ten years” well you may not wish to call that forgiveness for bookkeeping or political purposes, but you’re not getting paid. . . . Now I’m not going to talk about how many angels can dance on the head of a pin, but that is de facto forgiveness.”

EDC argues that it does not cost taxpayers money, claiming it operates on a self-sustaining basis because it does not come back to parliament every year for bail-outs. But by borrowing its funds on the good faith and credit of Cana- dian taxpayers, EDC weakens Canada’s credit rating and increases the government’s borrowing costs. Were taxpayers to withdraw their guarantees of EDC’s borrowings on international financial markets and wash their hands of the risks that EDC assumes, EDC would cease to function.

EDC’s patronage harms Canada’s economy, and it harms us as taxpayers. But more importantly, it demeans us as citizens. By involving itself as a financial player in the business dealings of faraway countries, the Canadian government becomes a crass vested interest and a hypocrite when it claims otherwise.

Documents obtained using the Access to Information Act show the Canadian government’s unseemly behavior in the aftermath of the Omai mine disaster. While Canada’s Department of Foreign Affairs was telling the press and public that the spill was primarily a private sector concern, feigning a hands-off approach, our High Commissioner in Georgetown was at the centre of negotiations between the company and the government. His single-minded goal was to get the Guyanese government to reopen the mine, without asking too many questions about the mine’s use of cyanide, not only to protect Omai — the continent’s second largest gold mine — but other Canadian mining operations. The documents show Canadian government fears that the “Guyanese people are growing increasingly suspicious that [the] mine’s technology might not be [the] best one for Guyana’s conditions” and that the Guyanese government’s enquiries into the “method of gold mining in Guyana will . . . impact directly on Canadian gold mining operations probably throughout South America.”

The impact would also hit the federal government’s books. Had the Guyanese government listened to its people and sent Cambior packing, a Cambior insurance claim against EDC would have followed. Fears over cyanide could spill into other countries. Because of the financial consequences for its own Crown corporation, who would then face potentially colossal claims throughout the world, the Canadian government became a behind-the-scenes lobbyist, making Canadian corporate interests Canadian government interests. In such ways, EDC’s financial interest in foreign operations like Omai compromises Canada’s foreign policy. Canadian citizens want our government to promote human rights and other democratic reforms in countries like China. Instead of representing the aspirations of Canadian citizens abroad, our government, compromised by business dealings it’s too ashamed of to disclose, panders to business interests.

Export agencies are anachronisms that do no good and much harm, at home and abroad, economically and environmentally. Their defenders are an unholy alliance of exporting corporations and patronage dispensing politicians. Their victims, to greater and lesser degrees, can be found wherever they have their operations, and right across Canada, because we all subsidize its operations with our tax dollars. The sooner that the public forces these business and government interests to get out of bed with each other, and the export agencies are shut down, the better for us all.

Spring 1997 The NEXT CITY Magazine

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