By Probe International

Statement to the Standing Committee on Foreign Affairs and International Trade on the Review of the Export Development Act

Patricia Adams

November 16, 1999

Statement
to the Standing Committee on Foreign Affairs and International Trade

House
of Commons, Canadian
Parliament, on the
Review of the Export Development Act

Thank you Mr. Chairman.

My name is Patricia Adams. I am the Executive Director of Probe International, a public interest research group based in Toronto. We have been monitoring the environmental, social, and financial effects of the Export Development Corporation’s operations for more than 20 years. Our research on EDC is probably more extensive than that of any other independent group in this country and we publish it in books, in articles in major Canadian newspapers, and in magazines. I have submitted some of those to this committee as evidence. We also have 20,000 supporters across this country, many of whom have written to various Prime Ministers, Ministers of International Trade, and their own members of Parliament expressing their concerns about the costly and damaging activities of EDC.

We have participated in this current review and submitted our comments on the Gowlings report to the Minister for International Trade. We believe there are fundamental problems with EDC and that Gowlings’ recommendations will not address those problems.

The Export Development Corporation transfers the private risks of international business to the public sector. By socializing this risk, it spawns moral hazard allowing exports, investments, and projects to proceed that are economically unviable. EDC interrupts important messages, conveyed by the market to recipient governments, that good governance and the rule of law will attract honest business. By doing so, EDC has bankrolled bad governments against their people and spawned crony capitalism. With its preferential financing, tax, and regulatory position, EDC has crowded out the private sector financial industry, in order to make money to finance projects that the private sector is too prudent to support. Because of its exemption from the Access to Information Act, EDC’s activities are sheltered from public scrutiny. The absence of public sector oversight and market discipline make EDC’s activities a perfect breeding ground for corruption and for business activities that destroy the environment, sink Third World citizens in debt, and cost Canadian taxpayers money.

Probe International agrees with the dean of the Yale School of Management, Mr. Jeffrey Garten, and The Economist magazine, which argue that governments ought to get out of the export credit business altogether, that the marketplace has been corrupted by the presence of government. There is a lively debate internationally and domestically challenging the very public policy purpose of export credit agencies in general, and EDC in particular. Gowlings dismissed that debate. Indeed, we believe that the Gowlings report is biased in favour of those who wish to maintain EDC’s privileged status — a handful of subsidy dependent, high profile, politically important, large corporations – while discounting the view that EDC’s commercially viable activities should be privatized and its high-risk, “lender of last resort” activities eliminated altogether.

I will touch on just a few of the shortcomings of the Gowlings Report.

While Gowlings got the clear and compelling message from the insurance industry that EDC should withdraw from the credit insurance business, Gowlings’ recommended creating a Big Brother of the insurance industry in which EDC and the private sector would come up with a single credit insurance policy to develop the market and create private sector capacity.

Gowlings’ answer to criticism from the banking sector that EDC takes away its business was to recommend that the government create a guarantee facility to support greater participation by the private banks in officially supported transactions.

This public-private collusion to create a monopoly, this corporate welfare, this buying off your opponents with tax dollars is offensive to taxpayers and it is bad for the Canadian economy.

I disagree with many of the recommendations in the Gowlings’ report, but I do want to say that the Gowlings report did make a very important contribution to the debate over the need for EDC. That is, perhaps inadvertently, Gowlings shot down the myth that EDC has laboured to create, that it is a commercially viable, self-sustaining enterprise.

Gowlings did so by acknowledging first, that the financial benefits conferred on EDC from its crown status – EDC can finance its activities at preferential rates on the good faith and credit of the taxpayer, it does not pay taxes to the government or dividends to shareholders, it doesn’t have to obtain reinsurance or abide by the same regulations or loan loss provisions that the private sector must – “likely confers a competitive advantage” over its private sector competitors. And, two, Gowlings confirmed that EDC must mine the profitable private financial services sector – both banking and insurance – to finance the high-risk projects that the private sector is too prudent to support – otherwise known as its “lender of last resort” activities, which account for 70% of EDC’s business. “In short,” says Gowlings, “without commercial quality business to offset its higher risk business, EDC would require substantially more capital as well as annual government appropriations.”

In other words, so it can finance the likes of money-losing Candu reactors in Eastern Europe and the Third World, the destructive Three Gorges dam in China, polluting gold mines in Guyana and Kyrgyzstan, and (and this is very important) evade the annual wrath of taxpayers, EDC needs specially conferred legislated powers to use the good faith and credit of the Canadian taxpayer to compete unfairly with the private financial services sector to make money. This notion that EDC is a commercially viable institution is a hoax. The emperor has no clothes, and Gowlings helped the public to see it.

Those of us who have watched EDC over the years have known that EDC doesn’t exercise due diligence, it responds to political interference. EDC supported the Three Gorges dam in China because Prime Minister Chretien told them to, on the eve of the first Team Canada trip to China. Everyone knows Three Gorges is an environmental and human rights disaster in the making. Now it looks as if the dam will be the world’s most notorious white elephant. Three Gorges is expected to have difficulty finding customers for its power. Why? Because its power, at 8¢/kilowatt hour, will be at least twice as expensive as the power from high efficiency gas turbines that are cheaper, cleaner, more efficient, and a more readily available way of providing power to that vast nation. The Three Gorges dam has the Canadian flag all over it. No foreign financiers, public or private, would fund Three Gorges until EDC started the race to the bottom. The Three Gorges dam will haunt the good name of Canadians for generations to come.

EDC watchdogs have also known that EDC misinforms the public. In 1996, EDC President Paul Labbé wrote to Probe International supporters stating that Guyana’s Commission of Inquiry into Cambior’s massive cyanide spill did “not indicate the company was responsible for the spill.” In fact the Commission found exactly the opposite and said that the mining company knew its tailings pond was storing large quantities of a noxious substance that could cause environmental harm and financial loss if it escaped into the Essequibo river. The company, therefore, had a legal obligation to ensure that the substance did not escape, and that the company should be liable for losses and damage.

EDC shamelessly uses economic double-speak. To the Canadian taxpayer, EDC claims it makes Canadian exporters competitive as if those exporters produce a better product than their competitors. But to EDC and its clients, here is what “competitive” really means. In 1986, when speaking to the Canadian Exporters’ Association, Peter Haines (a former CIDA Vice President) explained that “The best way to be competitive is, of course, to avoid the competition altogether and that is essentially what … we did on the Chamera Hydro Project in India.” Mr. Haines was referring to the $650 million in cofinancing from CIDA and EDC that helped lock up the contracts for Canadian companies. He admitted that “there are immense front-end costs in taking a project off the market,” but he argued that these costs were well worth bearing.

Lastly, let me turn to the issue of disclosure. EDC’s exemption from the Access to Information Act gives EDC the power to shelter its activities and the financial liabilities it is creating in the name of taxpayers, from scrutiny. Without the good faith and credit of the Canadian taxpayers, there would be no EDC. Yet, here is what is deemed too commercially confidential for Canadians to know. Because we can’t see a list of EDC’s loans, insurance packages, and guarantees (as we can with the World Bank, for example), it is difficult to tell if the portfolio is sufficiently diverse to protect taxpayers. Nor can we know (as we think is the case), if relatively few large firms are getting the lion’s share of EDC support. We don’t know if the rules and regulations laid out by the Office of the Superintendent of Financial Institutions and the Bank for International Settlement for the private sector are adhered to by EDC. We can’t even know which exports, projects, and foreign investments Canadian citizens are backi.

Nor can we know what losses EDC is incurring.

In 1990, I wrote to then president of EDC, Mr. R.L. Richardson, requesting details of the Paris Club rescheduling of EDC’s loan to Argentina for the Candu reactor. He responded saying that the information was confidential, although there were press stories about Canada losing $100 million on the deal. At the same time, I wrote virtually the same letter to the United States Export-Import Bank, requesting the details of Ex-Im’s loan to the Philippines for the Bataan nuclear power station. Ex-Im treated my request as a Freedom of Information request and responded promptly with details of its original loan and with an accounting of the rescheduling agreements, plus a repayment schedule.

And the Honourable Paul Martin refuses to tell us how much Canadian taxpayers have compensated EDC for its bad loans to Third World countries that were written off. By my calculation, and I’ve cobbled this number together with historical information from EDC and its Annual Reports, since 1990 taxpayers have paid nearly $700 million to EDC to get bad debts to such countries as Zaire, Benin, Cameroon, Republic of Congo, Guyana, and the Ivory Coast off its books.

No public officials are standing up for the public’s right to know. Every five years the Auditor General carries out what is called a Special Examination Report of EDC, a review of the economy, efficiency, and effectiveness of EDC’s operations. Earlier this year, I asked the Auditor General for a copy of EDC’s 1994 Special Examination Report. No, they said. They are not permitted to disclose it. Ask the client, EDC. I did. They refused on the grounds that it was confidential. I then submitted an Access to Information request to the Department of Foreign Affairs and International Trade. After a thorough search of the files, no copy could be found. Apparently the 1994 report was submitted to EDC’s Board of Directors, but never to the Minister of International Trade. Two weeks ago, I asked EDC for the Auditor General’s 1999 Special Examination Report and was once again turned down on the grounds that the examiner (the Auditor General) did not require that it be submitted to Parliament, so it too remains confidenial.

The status quo is abysmal. It is an affront to our democracy.

As I carry out my research on EDC, the term I hear most frequently to describe EDC is “slush fund for the government in power.” Despite EDC’s best efforts to portray itself as something else, an increasing percentage of the public, its competitors, even its clients know otherwise. This committee needs to stand up for citizens of this country who find EDC’s operations morally repugnant, environmentally unsustainable, and financially unsound and dismantle EDC in an orderly fashion.

 

Further Reading:

EXPORT DEVELOPMENT ACT, Report of the Standing Senate Committee on Banking, Trade and Commerce, Chair : The Honourable E. Leo Kolber, Deputy Chair : The Honourable David Tkachuk, March 2000

 

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