The Ottawa Citizen
May 15, 2000
Canadian policy-makers have a curious tendency to think hybrid public-private organizations offer the best of all possible worlds: the efficiency of the private sector and the financial muscle of government working smoothly to further the public interest. In fact such hybrids, from the CNR to PetroCanada to the Export Development Corporation (EDC), tend to reflect the least desirable qualities of private and public organizations.
The problem has nothing to do with the intentions of those who create or run them. It a question of poor design. Commercial firms have a legitimate interest in secrecy and profit, but are obliged to keep prices reasonable and maintain a fair degree of openness by pressure from consumers who have what economists call an “exit option” (normal people call it “the right to shop elsewhere”).
The tendency of government entities to become arrogant and fiscally reckless can’t be controlled that way, because in the nature of government there can be no “exit option.” If you don’t like Mel Lastman, Mike Harris, or Jean Chretien, you can’t refuse to obey their laws the way you can refuse to buy a certain make of car. That’s why government agencies must be subject to strict access-to-information rules: Voters, through politicians, can only control them if we know what they’re doing.
The trouble with hybrids like the EDC is that their legitimate interest in commercial secrecy makes political oversight difficult or impossible, but customers have no “exit option” either. The results are problematic in a number of areas. For instance, in the Spring 2000 issue of its in-house magazine Exportwise, EDC president and CEO A. Ian Gillespie boasts that “In 1999, we served … 16 per cent more customers than in 1998. We also measure our success by the volume of export sales and foreign investment that we help our customers generate for Canada.” Not, be it noted, by the profits, just the volume. Since the EDC is in the business of assuming risks that would frighten off private banks, the increase in volume is bad news for taxpayers. As Mr. Gillespie tells exporters “EDC is in the business of taking and managing those unexpected financial risks on your behalf. As evidence of our increased risk profile, total claims paid in 1999 as a result of Canadian trade in 66 countries jumped to $134 million, from $72 million in 60 countries the year before.” Commercial banks don’t boast about an increase in bad loans, because if they make them at all, it scares depositors away.
The lack of consumer discipline operates in even less savoury ways. When not even the World Bank would fund China’s massive Three Gorges dam, widely deplored both for its environmental and human impact, the Export Development Corporation stepped in with loan guarantees. No consumer backlash was possible.
As for political scrutiny, that is not supposed to mean that two of the companies whose sales to the Chinese government were backed by the EDC, General Electric and SNC-Lavalin, are big donors to the Liberal Party. It’s supposed to mean politicians keep government agencies in line on behalf of voters. That is an inherently weak form of discipline because we only vote once every four years for a federal government, and cannot “unbundle” our vote. Even if you were angry enough about a 1994 EDC loan to vote against the Liberals in 2001 over it, and even if they lost, no one would think it was over that issue. And it would not be. So you actually have almost no leverage at all over the EDC even if you know what it’s doing.
But you don’t, because on grounds of commercial secrecy the EDC keeps much of what it does from public and political scrutiny. When it makes a “strategic alliance” with London Guarantee, owned by Power Corp., whose president is the prime minister’s son-in-law and for whom his election campaign manager, John Rae, is an executive, you are asked simply to trust them that this is sound economics and politically untainted. Don’t.
If the EDC could operate as a private entity, political control wouldn’t be necessary. If it can’t, it must become a purely public entity whose books are open to public scrutiny.
Until then, we are stuck with the worst of both worlds