December 21, 1998
Until 1960s, private commercial banks other financiers serviced their exporting clients and imposed on them discipline market. Pearson Commission, struck World Bank late 1960s investigate Third World poverty led Canada’s Lester Pearson, analysed newly created export cred agencies observed once started guaranteeing commercial trade, prudent lending guarantees private sector gave way free-for-all. private banks are becoming “less concerned about borrowing country’s cred worthiness because facility export cred insurance,” Pearson Commission warned. Imprudent use export redits “involves very real dangers.”
Pearson Commission found export credits were an expensive form external finance. Though interest rates offered borrower were favourable, exported product would usually marked up, much 100 percent.
To its dismay, Pearson Commission discovered export credits often financed projects whose only “feasibility study available one prepared equipment supplier,” that borrowing countries pushing reckless development schemes often favoured export cred agencies because enforced less “rigorous tests economic desirability.”
More than one project rejected financing World Bank Group on economic grounds has been promptly financed an export credit. most unfortunate aspect export credit finance: provides temporarily painless way financing projects conceived over- optimistic civil servants, politicians more concerned with immediate political advantage than with potential future economic problems, unscrupulous salesman manufacturers capital equipment developed countries.
All this, according Pearson Commission, created both an excessive use short-term export credits finance long-term investments serious balance payments problem developing countries: “Since mid-1950s, [this] has been major reason need reschedule the debts number countries, notably Argentina, Brazil, Chile, Ghana, Indonesia, Turkey.”
“This rescheduling will more difficult future if export credits are imprudently used,” predicted Pearson Commission 1969.
Imprudently used were: Export cred programs continued full throttle throughout 1970s. Then debt crisis h 1982. While debt crisis 1980s frightened commercial banks away, export credits became an even more important source external financing Third World Western exporters. By late 1980s, according estimates National Foreign Trade Council, an American export industry association, one-third $30 billion year capital goods traded worldwide financed through tied aid export financing packages.
Over past decade, annual new commitments officially supported export credits have increased over fourfold, about $26 billion 1988 $105 billion 1996. 1990, 15 percent Third World’s debt owed export cred agencies. By 1996, 24 percent the total indebtedness developing countries owed export cred agencies, accounting for 56 percent their official debt.
That debt has been so unsustainable Canada has had forgive many EDC loans Third World nations. According correspondence Finance Minister Paul Martin (December 9, 1998), since 1991, Canada has forgiven over $2 billion worth debt owed various Canadian agencies Benin, Cameroon, Democratic Republic Congo (formerly Zaire), Republic of Congo (Brazzaville), Egypt, Guyana, Honduras, Ivory Coast, Madagascar, Poland, Senegal, and Tanzania. As much $600 million may have been debts those countries owed EDC. Precise figures are unavailable because Mr. Martin refuses release numbers “in order respect agencies’ [EDC others] needs commercial confidentiality.” EDC has released these numbers just few years.
We predict new unsustainable debts will created export cred agencies (ECAs), including EDC, will required forgive them future. According World Bank, about half new ECA commitments recent years has supported project finance, “mainly for large infrastructure projects power generation, telecommunications, transport.” makes ECAs single largest public financiers large-scale infrastructure projects developing world, exceeding far total annual infrastructure investments multilateral development banks bilateral development aid agencies.
By providing state financing projects private sector considers too risky, EDC helps blunt incentive recipient governments reform. If money available Chinese government pay Candu nuclear reactor, without any conditions attached, why should the government China, enforce rule law, introduce transparent fair regulations the financial sector, respect rights its citizens scrutinize wisdom Candu system before buying one? Export credit, says Economist, “slows down economic reform.”(2)
By allowing Canadian corporations ignore financial risks dealing with dictators less odious governments are otherwise unpredictable, unstable, unaccountable, EDC helps sponsor bad governments crony capitalism. When EDC stepped insure Cambior against risk its Omai gold mine assets might expropriated, might not able transfer its funds out Guyana, might not able enjoy its assets due war insurrection in Guyana, interrupted an important message private sector would have otherwise sent to governments don’t respect rule law rights their citizens: Clean up your act, prove us your government legitimate has confidence people, show us that courts work fairly, govern your nation democratically, then we’ll invest. Or Cambior’s manager investor relations Robert LaVallière put it, “If you have $10 your pocket you can invest Canada Colombia, then where you invest? Canada!”(3)
6. EDC Spawns Moral Hazard
By transferring risk international business dealings private sector Canadian taxpayers — socializing risk — EDC creates moral hazard among exporters, Canadian companies making foreign investments, banks whose loans are guaranteed EDC. Cambior’s manager investor relations, Robert LaVallière, put succinctly when he said his company would not have invested Omai gold mine without US$163-million political risk insurance package EDC. “We have shareholders, want safe.” Speaking about the Candu sale China, commercial banker, quoted Globe Mail, said commercial bank would lend against nuclear power plant.
Moral hazard created when an investor, lender, exporter can take financial risk with little fear loss. That weakens integrity financial contracts scrutiny contracting parties would otherwise apply each other. results excessive risk taking because third party — Canadian taxpayer case EDC — bears risk.
One foremost magazines on megaproject financing, Project Finance, described recently how export cred agencies use tax dollars convince private sector take risks otherwise wouldn’t. its annual review export cred agencies year, Project Finance noted the wake Asian contagion Russian meltdown, private project sponsors were returning to protective embrace export cred agencies. These sponsors had grown impatient with the export cred agencies, even questioned their relevance. “Many claimed agencies were too bureaucratic, too unresponsive needed evolve.” Instead, projects were consummated with bonds loans with minimal amount guarantees support. “In hindsight, bankers and sponsors realise went [sic] far,” said Project Finance, adding, “the export credit agencies are back fashion.” (4)
Ten days after EDC financing Candu sale Argentina put place 1974, Atomic Energy Canada, which markets Candu, put $2.4 million into Swiss bank account an “agent” clinch sale, leading bribery investigations Canada’s Auditor General, a parliamentary inquiry, public furor. response such questionable activities, Canada government decided make virtue vice. Revenue Canada pronounced Canadians could legally bribe foreign officials even made bribes tax deductible, provided briber received a receipt. Then Trade minister Jean Chrétien explained: “Commercial practices other countries sometimes are different ours. I am not about condemn morals anybody. would be very presumptuous Canadians tell other people how conduct their morals.” Chrétien urged Canadians not put their “head sand” pass up overseas sales being rigidly moralistic.
Now, according recent internal World Bank report, more than 20 percent World Bank loans Suharto-led Indonesia were “diverted” bureaucrats politicians. Much the corruption, said report, occurs culture “blatantly expects civil servants supplement their incomes such means.” Of funds intended compensate citizens whose land was expropriated dams forestry projects, government officials their relatives pocketed an estimated 50 percent 80 percent.
For years World Bank insisted had tight control over its monies, none lining pockets politicians their families. That, world now knows, false. World Bank loans were public assets turned into private assets, though Indonesian public large remained liable pay those debts back.
EDC’s Candu sale Argentina associated with bribery corruption, has co-financed many same projects with World Bank (such Yacyreta Pangue dams) and extended cred governments world’s most notorious kleptomaniacs — former president Suharto Indonesia, former president Mobutu Sese Seko Zaire, name just two. Corruption regarded such major problem an economically debilitating phenomenon that multilateral efforts are underway curtail it. Corruption not an inherent part Third World culture. Rather, result lack public sector oversight market discipline is typical EDC’s transactions. As EDC has operated dark, unscrutinised, unchecked environment, forensic aud should done its operations over years, assure taxpayers its transactions have been honest.
8. EDC Hides Its Activities Canadians
EDC’s exemption Access Information Act gives EDC power shelter its activities its financial dealings public scrutiny. exemption prohibits competitors insurance industry, example, proving unfair pricing practices. blindfolds Canadian public who are concerned about EDC’s activities. For example, EDC will not tell us if considering supporting particular exporter overseas investment before commitment made. In contrast, World Bank provides such information. Nor will EDC tell us if has supported a particular project past. standard response receive EDC’s Public Affairs Advisor is, “Unfortunately I cannot help you because practice respect clients’ potential clients’ right privacy regards their financial affairs.”
Similarly, EDC will not disclose information about status state its outstanding loans. In 1990, I wrote then president EDC, Mr. R. L. Richardson, requesting details Paris Club rescheduling EDC’s loan Argentina Candu reactor. EDC responded, saying the “details regarding principal interest payments loan” “rescheduling terms for Argentina are confidential.” same year, I wrote U.S. Export-Import Bank, requesting similar details Ex-Im’s loan Philippines Bataan nuclear power station. Ex-Im responded promptly with details its original loan with thorough accounting the rescheduling agreements, plus repayment schedule.
EDC’s access public resources without public accountability unacceptable. EDC should be subject Access Information Act. act would protect legitimate business claims for commercial confidentiality protecting public’s right know what EDC doing on its account. Inexplicably, private sector seems have an attitude entitlement — are somehow entitled public resources EDC without concomitant responsibility report to EDC’s shareholders taxpayers. I believe that, if private sector does not like disclosure requirements public agency, should rely on private sector resources instead.
Finally, many EDC’s sovereign loans have been forgiven result Paris Club agreements. While Minister Finance will say which countries’ loans have been forgiven, he will not reveal their value, order respect EDC’s needs commercial confidentiality. We can see such need. These forgiven loans were state-to-state transactions. Taxpayers have right know how many their government’s loans other governments have been forgiven order evaluate the risks taken on their behalf, management skills public agencies operating their name.
As former Auditor General, Kenneth Dye, stated 1989 Annual Report Parliament, “Without good information, Parliament cannot legislate. Without good information, governments cannot govern. Without good information, Members Parliament cannot hold governments to account. These things have always been true.”
On its environmental record:
On its environmental record, EDC grossly distorts reality shamelessly misleads Canadian public Canadian Parliamentarians. January 1996 letter member Parliament, former EDC President Paul Labbé claimed EDC an environmentally responsible export credit agency.(5) EDC’s 1997 Annual Report repeats claim: “EDC has long taken environmental concerns into account its analysis risk, since transactions are not environmentally sound may, addition their damaging effects, not viable thus may poor cred risks.” The evidence these statements must false, overwhelming.
Probe International has been monitoring activities international financiers past two decades. details have managed secure about EDC’s activities only scratch surface. Nevertheless, can unequivocally say EDC has supported majority damaging projects brought public attention past 20 years. As such, rivals World Bank an environmental destroyer. According information, EDC far away most environmentally reckless export cred agency world. We think another statement, EDC public affairs advisor Rod Giles quoted an Inter Press Service article, better indicates kind of care EDC takes with environmental effects its projects: “We did not ask Monenco AGRA, a Canadian company, environmental assessments when gave $12-million loan supply equipment Three Gorges dam China, nor did ask such an assessment when we insured $1-billion sale Candu atomic reactor Romania.”
EDC has tenaciously lobbied against having comply with Canada’s environmental assessment laws, which would force EDC conduct public environmental assessments such projects Omai gold mine Guyana Three Gorges dam China. now attempting draft an Evergreen Document — voluntary environmental review procedure would follow. Environmental review procedures, especially ones enforced proponents voluntarily, are corruptible political interests, are unreliable, are therefore unacceptable.
1996 letter, Mr. Labbé claimed EDC ensures high environmental standards embedded Canadian technology products are made available other countries. Yet with the Three Gorges dam, an investigation Complaints Committee Association of Professional Engineers Ontario found standards used Canadian engineers their feasibility study dam differed those would used Canada. Furthermore, those engineering companies — including Hydro-Québec, BC Hydro, SNC-Lavalin Acres International — failed complete an environmental assessment dam instead, relied on a thoroughly discredited Chinese assessment declare project feasible.
Mr. Labbé grossly misrepresented Guyana’s Commission Inquiry into Cambior’s massive cyanide spill its Omai gold mine, claiming falsely Commission’s report “does not indicate company responsible spill.” fact, Commission stated that:
The tailings pond built receptacle storing large quantities noxious substance, wit, water with high concentration cyanide, if were escape, could foreseeably cause harm environment, particular Essequibo river, well result in financial loss residents other users river. Therefore, company had legal obligation ensure substance did not escape: excuse employed competent engineers execute work. Therefore, Commission’s view would be liable foreseeable loss damage direct result effluent entering the Essequibo River.
Furthermore, Dam Review Team, its final report on causes tailings dam failure said, “We are loss explain why design construction these critical elements dam, whose importance its safety were evidently recognized understood, were executed so inadequately.” They concluded, “in retrospect, clear Omai tailings dam designed and constructed bound fail.”(6)
Claiming makes Canadian exporters investors competitive
EDC’s claim making Canadian exporters competitive economic make believe. Canadian exporters win contracts with EDC backing haven’t won them because they’ve produced a better product less money than their competitors: Rather, Canadian government has subsidized them more than other governments have subsidized competitors. effect on a nation’s economy unhealthy, documented French study tidily expressed what everyone business knows, but few admit: “Export-cred subsidization wastes France’s scarce public resources promotion wrong industries exporting wrong products wrong markets.”
Claiming operates on commercial basis
EDC’s claim operating on commercial basis grossly misleading. Rather, operates on good faith cred Canadian taxpayer: loans, guarantees, insurance packages offers are subsidized. Some advantages EDC enjoys over private financial services sector include: EDC does not pay taxes; borrows money preferred rates Canadian government; not subject supervisory regulatory requirements; does not face demands earn competitive rate return shareholders.
A report U.S. Commercial Service explains how EDC undercuts both Ex-Im Bank and commercial banking sector with its subsidized lending insurance rates.
Essentially [EDC] acts like commercial bank commercial markets, providing generous credit terms exporters their buyers, enforcing looser cred standards buyers than Eximbank would require. EDC more generous accepting foreign content than Eximbank, bending its own rule least 50 percent Canadian content cases where an important product market being targeted development. EDC will finance entire amount loan up 85 percent value export (the OECD limit), covering both Canadian foreign content.
Moreover, EDC’s cost funds (its borrowing cost) often lower than commercial banks with which competes. enables very aggressive its pricing credits. can borrow Canadian government rate — Canadian Interest Reference Rate (CIRR) — if lending U.S. dollars, can price its loan Eximbank’s low rate, mentioned above. That rate currently 6.3 percent fixed five years, which even better than floating LIBOR rate plus spread, adjustable upwards after six months.
Exim’s cred terms standards are tougher than EDC’s, its U.S. content rule 51 percent or greater, only finances U.S. content portion item being exported. While its cost of funds its lending rates are low, so are EDC’s, EDC, unlike Eximbank, operates the developed world where competes directly with commercial banks are lending U.S. companies market often higher rates.(7)
protecting private sector necessity making prudent decisions, pushing these exports overseas investments political purposes, export cred agencies their political masters have cost their own taxpayers. 1990, U.S. Export-Import Bank went into technical insolvency when forced establish US$4.8-billion reserve cover third of its loan portfolio deemed delinquent. Britain’s Export Credits Guarantee Department (ECGD) was forced set aside reserves against its delinquent debts. So, too, did EDC, after our Auditor General accused misleading taxpayers with financial statements didn’t conform to generally accepted accounting principles.
EDC other export cred agencies have their own way pretending their bad loans aren’t bad: They wish away problem rescheduling delinquent debts. Under rescheduling, if a debtor falls behind on interest, creditor converts interest principal. If debtor falls behind on principal, government may adjust repayment dates provide repayment holiday. Little wonder Canada’s former auditor general, Kenneth Dye, called rescheduling “a shield hide public scrutiny losses government has suffered likely suffer on its sovereign loans. Paperwork disguises reality.” Or Eugene Rotberg, former World Bank treasurer, sees a “financial charade” loan rescheduling: “If someone owes you money you say ‘You don’t have pay ten years,’ then ten years go by, you don’t collect, another ten years — well you may not wish call forgiveness bookkeeping political purposes, but you’re not getting paid….Now I’m not going talk about how many angels can dance on head pin, but de facto forgiveness.” EDC rescheduled loan Argentina Candu reactor sale, but denied losing any money on deal.
EDC argues does not cost taxpayers money, claiming operates on financially self-sustaining basis. But government does bail EDC out its bad loans: government has instructed EDC forgive sovereign debts more than dozen countries date. To keep EDC’s books unscathed result forgiving these debts writing them off, government of Canada makes payments EDC compensate amounts otherwise would have been due debtor countries. Thanks bailout, rapid growth gross loans receivable, to reinstatement impaired loans performing loans, EDC has managed reduce its impaired loans percentage its gross loans receivable 37 percent 1993 14 percent 1997. EDC’s rapid growth loans receivable is, part, due $1.5-billion loan China for Candu sale. Unusually, government Canada, rather than Chinese government, has accepted responsibility loan case default.
By borrowing its funds on good faith cred Canadian taxpayers, EDC weakens Canada’s cred rating increases government’s borrowing costs. By its own admission, EDC seeks out higher risk markets than private sector can tolerate.
Earlier year, EDC issued press release reassure Canadian companies doing business in Southeast Asia would them. “Despite recent declines investor confidence in Southeast Asia due current financial crisis, EDC remains open business. fact, EDC is increasing its business activity region well positioned help Canadian exporters maintain their long-standing presence many key markets.”(8) Ian Gillespie, EDC President and CEO, went on explain “While question risk doing business Asia has increased, thus posing significant selling financing challenges exporters, EDC help shoulder risks convert challenges into opportunities. We are long haul.” When became apparent claims paid out under risk management programs first half of 1998 had grown 35 percent, EDC remained undaunted, explaining increase “is clear evidence EDC’s value Canadian companies competing internationally.”(9) Rather than acting cautiously on behalf taxpayers, EDC intends march boldly into Asia next year, despite signs those economies are not prudently managed.