(August 28, 2013) Proposed changes to regulations governing Export Development Canada don’t go far enough.
By Patricia Adams for Probe International
Ottawa’s proposed changes to the regulations governing Export Development Canada, which would temper the domestic activities of Export Development Canada (EDC), don’t go far enough.
While the amendments, which are now before Cabinet, are a good first step, they fail to effectively reduce the agency’s reach. Curtailing EDC’s $87 billion business would help reduce EDC-sponsored distortions in Canada’s economy, the misallocation of scarce capital and barriers to investment from Canada’s private financial institutions.
The proposed changes are a response to a temporary expansion of the Crown Corporation’s powers introduced in 2009 as a result of the credit crisis of 2008. Though the expanded mandate for EDC was to remain in place for only two years, it was extended for another year in the 2011 federal budget and then again in 2012.
Over that time period, EDC has used its new powers to ramp up its domestic activities. Between 2009 and 2011 EDC provided around $11 billion in domestic support – with about $7.8 billion dedicated for direct lending to Canadian business.
Yet, EDC has been able to expand its business over the years, not with competition-induced business acumen, but thanks to its many cost advantages as a result of its access to the public purse. EDC does not pay income tax; it does not need to generate a market pre-tax return on equity; it does not need to go to market for relatively expensive equity, and it can borrow cheaply by issuing debt backed by the federal government or by borrowing directly from it, at preferred rates.
EDC ultimately transfers private risks to the public sector, thereby socializing these risks, and creating moral hazard by allowing exports, investments and projects to proceed that are not economically viable. The export agency has in the past supported smokestack industries, like nuclear power, that would have died long ago had it not been for government life support.
By expanding EDC’s mandate, Ottawa allowed it to mine commercial quality business to offset higher-risk business, in effect supporting marginal or unworthy investments with internal cross-subsidies.
And though EDC celebrates its role in helping small businesses across the country tap into the global marketplace and reach new customers, many of Canada’s largest corporate names also rely on the government agency to subsidize their businesses – including Bombardier Inc., Valeant Pharmaceuticals International, TransCanada Corporation, Magna and Encana, among many other corporate heavyweights.
EDC is also prone to political meddling. A study by one of Canada’s leading forensic accounting firms revealed that it is impossible to differentiate between EDC’s commercial and politically-mandated activities. “A fine line exists between promoting economic trade and exercising political action,” Rosen & Associates Limited said in a 2005 report for Probe International. “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.”
The authors said the implied financial risks of many of EDC’s activities were not adequately disclosed to taxpayers – making it difficult for the public to determine how risky the agency’s operations truly are.
Those risks are not insubstantial. According to a recent report by the C.D. Howe Institute, EDC’s borrowing costs are 30-50 basis points lower than those of highly-rated private competitors – an advantage that allows it to pursue a riskier portfolio of investments than its private sector competitors. If its impaired loans and losses are not properly provisioned for, taxpayers are then left to clean up the mess.
Yet Ottawa’s latest proposed amendments to the regulations governing EDC fail to fully address many of these concerns. Under the new rules EDC would be allowed to provide domestic financial support to firms where exports and foreign sales account for at least 50% of total annual sales without ministerial approval – whereas, prior to 2009, it had to seek approval whenever it proposed to extend domestic financing. EDC will now also have to ensure that its domestic activities “complement” those of the Business Development Bank of Canada (BDC), another Crown Corporation, and private institutions.
With respect to domestic insurance transactions, prior to 2009, EDC could offer support without seeking ministerial approval for firms with annual export transactions business volume as little as 15% of total annual volumes. The new regulations will raise that trigger to 50%.
In effect, compared to pre-2009 conditions, EDC’s domestic insurance activities would be curtailed, and its domestic finance activities would be expanded. But its power to engage in domestic business would be solidified as the 2009 amendments to EDC’s enabling legislation, the Export Development Act, would remain unchanged.
Furthermore, the new regulation’s attempt to ensure that EDC’s domestic transactions “complement” those of the private sector will prove to be toothless given EDC’s many advantages – cheap capital and relaxed reporting requirements. The private sector will silently shy away from countless transactions and services for which they suspect they cannot compete with EDC’s powerful purse.
Taxpayers, who ultimately foot the bill for EDC’s activities, will be unable to oversee EDC’s activities because of the Crown agency’s virtual exemption from the Access to Information Act.
According to Julie Trépanier, Chief of the International Finance Section of the Department of Finance Canada, Cabinet is expected to decide this fall which, if any, of the amendments to the regulations are put into force.
Read Probe International’s submission regarding the Regulations Amending the Export
Development Canada Exercise of Certain Powers Regulations, Statutory authority, Export Development Act, sponsored by the Department of Finance and Department of Foreign Affairs and International Trade here.
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