By Probe International

All aboard the EDC money train: The Export Development Corporation uses government money to prop up smokestack industries while discouraging private-sector competition in the credit insurance business

(January 11, 1999) The Export Development Corporation funds environmentally-damaging industries with taxpayer money, writes Patricia Adams.

The Export Development Corporation, though unknown to most Canadians, is the federal government’s chief pork-barrel agency, in 1997 dispensing some $7-billion in sweetheart loans while backstopping another $23-billion in cut-rate insurance policies and guarantees to almost 4,000 favoured corporations. Some of this money comes from a $13-billion cabinet-run slush fund – called the Canada Account – which EDC administers. All told, taxpayers now face EDC-related liabilities of more than $15-billion, much of it to further projects unfit for private-sector financing.

The biggest beneficiaries of EDC largesse are smokestack industries and other casualties of the modern age. Take GE Canada Inc., an outpost of the Connecticut-based GE corporate empire, the world’s largest and, by many accounts, best run company. While the parent GE manufactures its high-tech power generation technologies in South Carolina and Italy, it puts its outdated megadam facilities in Lachine, Que. GE Canada’s unabashed method of operation? To milk Canadian taxpayers in selling to Third World countries and other subsidy-dependent customers.

To keep EDC flush with the cash exporters covet, GE Canada and other exporters back 1993 legislation that allows EDC to poach business from Canada’s private insurance industry. With that 1993 legislation – and EDC’s mandate – now up for review, the insurers are fighting back and the exporters are fighting for their lives.

As Gerald Rowe, GE Canada’s assistant treasurer, recently told a government review conducted by the Ottawa law firm of Gowling, Strathy & Henderson, without EDC financing “you will not make the short list and you will not win the order.” GE Canada has trouble getting conventional credit, Mr. Rowe explains, because for-profit financial institutions “are oriented toward what is good for the shareholders, not for the interests of Canadian clients engaged in international business.”

In round one of this battle – a 1993 Parliamentary hearing into EDC’s future – Mr. Rowe even more starkly put his case for the dole in representing Canadian exporters who build and install large infrastructure projects abroad. Without “our good friends at EDC, we certainly would not survive,” he stated flatly, adding that without a bigger EDC, these technologically challenged exporters were also doomed. “[EDC’s current funding ceiling is] not good. That will cut us off at the knees and we’ll be out of business.”

Economic viability rarely drives Third World vanity projects and other large industrial infrastructure projects. “Export financing drives large infrastructure projects,” Mr. Rowe told the Gowling review. World Bank statistics tell the same story. About half of all new export credit agency commitments in recent years have supported project finance, “mainly for large infrastructure projects in power generation, telecommunications, and transport.”

While all Western countries have export credit agencies, Canada’s EDC is a rogue. While the others increasingly privatize their operations to get out of the private sector’s way, EDC increasingly competes with its private-sector counterparts. While the others shun environmentally damaging projects, EDC embraces the world’s worst, to the great detriment of Canadian taxpayers.

The Canadian nuclear industry – one of the country’s greatest sinkholes – would be long gone without the EDC funds that greased money-losing Candu sales to South Korea, Argentina, Romania, and, most recently, $1.5-billion to China. To obtain the next Candu sale, to Turkey, EDC has committed a further $1.5-billion loan.

China also tapped EDC to build the Three Gorges dam, the world’s largest, which will force 1.9 million people from their homes, and flood 150 cities and towns and 100,000 hectares of farmland. Yet the Three Gorges dam is so environmentally risky and monumentally expensive – its power will cost three times that from cleaner cogeneration and gas alternatives – that it was rejected by such long-standing dam proponents as the World Bank, the U.S. Bureau of Reclamation, and the U.S. Ex-Im Bank.

And in Thailand, EDC backed Babcock & Wilcox in building Mae Moh, an extraordinarily polluting lignite plant branded “one of the most serious public health disasters in Thailand’s history of economic development” by a respected Bangkok-based journal.

Although EDC insists it only matches the subsidies from other export credit agencies, its clients know better. Says GE Canada’s Mr. Rowe: “In recent years we have seen Canada’s Export Development Corporation become, in our opinion, and the opinion of many of our consortium partners, the most flexible, competitive, and marketing-oriented [export credit agency] in the world.” Quebec’s exporters, who receive a disproportionate amount of EDC largesse, are “obviously appreciative” said a Quebec government brief to the Gowling review, which lauds EDC for having “gained, among export credit agencies, an enviable reputation in project financing.” Even EDC’s own spokesman, Rod Giles, described his agency as “sort of the black sheep in the export credit agency family in that we’re always trying to do things differently and be innovative.”

EDC claims to be financially self-sustaining and not to cost taxpayers money. But if it couldn’t borrow money at preferential rates; if it paid taxes, earned a return for its shareholders, and lived by financial regulations governing the private sector, it would be out of business tomorrow. Over the past eight years, the federal government transferred to EDC nearly $600-million from its consolidated revenue fund to let it quietly write off an equal amount in bad debts from Third World and Eastern European countries.

Export credit agencies have no legitimate economic function. As put by Eugene Lawson, a former vice-chairman of the U.S. Export-Import Bank, export aid is a “lousy and costly way to do business.” Jeffrey Garten, dean of Yale’s School of Management, says: “In the best of worlds, governments ought to get out of this business altogether.” Speaking of export credit agencies, The Economist says “Governments love to think, usually mistakenly, that their economies will be better off if they help things along than if they leave well enough alone.”

EDC is the worst of this very bad lot. Rather than reviewing its mandate with an eye to expanding it, the federal government should take this opportunity to shut it down.

Patricia Adams is an economist and the Executive Director of Probe International, a Toronto-based environmental and economic think tank.

Financial Post, January 11, 1999

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