“A fine line exists between promoting economic trade and exercising political action,” the accountants say. “Our concern is that a distinction between politically- and economically-motivated sovereign financing is not disclosed in EDC’s financial statements,” making it difficult for Canadian taxpayers “to determine whether a ‘bad’ foreign loan was primarily made at the direction of the federal government, or was a business decision of the EDC.”

Probe International, the watchdog group that commissioned the study, has also submitted the accountants’ report to Auditor General, Sheila Fraser. In a letter to Canada’s chief public accounts auditor, Probe International says the Rosen and Associates analysis points to the financial risk of EDC’s activities for Canadian taxpayers. In addition, Probe International believes the report would raise concerns for Third World citizens who are expected to repay loans extended for political reasons.

Rosen and Associates also found that:

• through EDC, Canadian taxpayers provide approximately twenty times the level of trade support in export development loans that each U.S. taxpayer does through Ex-Im without disclosing evidence of any benefits ($530 per capita in the case of Canada, versus $27 for the U.S.). As a result, EDC may be artificially supporting Canadian enterprises with government aid. The effect of this is “to promote mercantilism.”
• EDC appears to be less efficient than Ex-Im from an operating cost perspective and had an significant increase in reported administrative expenses of 114% over the 1998-2003 period.
• EDC is not as profitable as its closest U.S. counterpart, the Export-Import Bank, in terms of interest spread (from 1998 to 2003, EDC’s average interest spread has been approximately one-half of the Ex-Im Bank’s), something that should worry taxpayers given that more than half of EDC’s loan portfolio was classified as “below investment grade” or “impaired” in 2003. “The deficiency in profitability seems inconsistent with the apparent higher riskiness of EDC’s loan portfolio …We would expect to see a considerable premium being generated on these ‘high-risk’ loans,” the accountants say.These figures suggest that EDC may be pricing its loans too low, granting subsidies to exporters, forgoing an adequate margin on lending to cover risk, or taking market share away from private commercial enterprises, say the accountants. EDC may not be maximizing profits for the benefit of Canadian taxpayers, they say.Other things about EDC’s financial statements worry Rosen and Associates:
• Historically, EDC has been very active in the sovereign loan market, but sovereign loans have proven to be inherently risky and prone to loss, and have accounted for an average of 72% of EDC’s total impaired loans from 2000-2003;
• EDC has claimed that it does not rely on tax dollars and government appropriations to fulfill its mandate. Yet, it has received $522 million of debt relief from the Government of Canada from 2000 to 2003 to write-off its claims against sovereign nations;
• EDC’s impaired loans (loans which no longer have reasonable assurance of collection of interest and principal) as a percentage of gross loans receivable increased from 2002 to 2003. EDC attributed this to the “current economic environment.” When the auditors looked at the experience of several large Canadian banks over the same period, they discovered that commercial bank impaired loan percentages actually decreased. The decline in EDC’s position “was not simply explained by a systemic factor that affects all Canadian lending institutions,” they concluded;
• EDC’s poor quality of loans, combined with its increase in net loans receivable which have been financed primarily through borrowing, will eventually “compromise its ability to repay its debts as they mature.”Being a Crown agency, EDC’s liabilities are fully guaranteed by the Government of Canada, and, indirectly, by the Canadian taxpayers. Yet, the implied financial risk of EDC’s activities has not been adequately disclosed to taxpayers. “Taxpayers cannot easily assess the risk of loan default by EDC’s high-risk borrowers,” they warn. “A few taxpayers could be advantaged while all taxpayers are paying for risks such as bad debts.”

Rosen and Associates invited EDC to respond to their concerns about EDC’s financial reporting and accounting policies. EDC declined, telling the accountants instead to refer “to the significant amount of financial and other information available on our web site.” However, “in our view, complete and clear answers are not found on EDC’s website,” the accountants said.

• ---

  Probe International’s letter to Sheila Fraser can be viewed here.
  

  The “Financial Analysis of EDC” by Rosen & Associates Limited can be viewed here.

  ---

  For more information, CONTACT:
  Patricia Adams, Executive Director
  Probe International
  225 Brunswick Avenue
  Toronto, Ontario
  Canada, M5S 2M6
  Telephone: (416) 964-9223, ext. 227
  Fax: (416) 964-8239