By Probe International

Repeal the Act and privatize this Canadian SOE

In its submission to Ottawa’s 2018 Legislative Review of the Export Development Act, Probe International calls for a repeal of the Act and the privatization of Export Development Canada (EDC). Probe argues the federal government’s export-financing agency shares many of the same characteristics as China’s controversial state-owned enterprises (SOEs), characteristics that ensure market distortion and stunt private development.

PI_final_EDC_submission

November 9, 2018

Diana Smallridge, President and CEO
International Financial Consulting Ltd
World Exchange Plaza, P.O. Box 81119
Ottawa, Ontario
K1P 1B1

Dear Ms. Smallridge,

Probe International welcomes the opportunity to provide input for the 2018 legislative review of
Export Development Canada (EDC) and its governing legislation, the Export Development Act
(EDA).

Probe International has reviewed and evaluated the environmental and economic consequences of
EDC’s activities since 1980. The results of our work (books, studies, articles and speeches) can be
found on our website.

It is our position that EDC, a state-owned financial enterprise (SOE), should be privatized and the
EDA repealed.

EDC, by its own reckoning, has played a substantial role in Canada’s trade agenda for 75 years,
growing from a small office of four people serving 13 customers in 1944 to a global enterprise
with offices and representatives across Canada and around the world, facilitating over those years
more than $1.4 trillion in exports and foreign investment by Canadian companies. Last year alone,
EDC served nearly 9,400 companies and facilitated more than $100 billion of international
business. EDC’s interventions in Canada’s economy have expanded from the traditional roles of
an export credit agency (ECA) financing and insuring exports and the political risks of Canadian
investments abroad to an agency that uses its capital to “develop” trade, make equity investments,
and now to intervene in Canada’s domestic finance and insurance industries, all at the bidding of
the federal government. Last year, EDC reckons it “helped generate $67 billion of Canada’s GDP,
nearly 4 cents for every dollar earned, and helped sustain 523,808 jobs.” EDC has also been asked
to do double duty as an aid agency, running Canada’s new Development Finance Institution,
which will invest in developing country projects that do not meet a market test of viability. In its
own words, “EDC has one of the broadest mandates of all ECAs.”

EDC has become a multi-purpose SOE with deep resources. In its submission to this review, EDC
appeals for still deeper resources.

Like all SOEs, EDC’s ability to operate is derived from its government backing and so its
operations are determined by government policy, not market forces. Moody’s says EDC’s triple-A
credit rating reflects “its status as an Agent of Her Majesty in right of Canada. EDC’s obligations
constitute direct obligations of Canada and EDC’s ratings therefore mirror those of the
Government of Canada. As a Crown corporation with Agent status, EDC can bind the Crown by its
actions, with the Crown ultimately fully liable for those actions undertaken by EDC within its
mandate.”

Standard and Poor’s calls EDC a “government–related entity” deserving of a triple-A credit rating
because of:

  • The corporation’s critical role in supporting Canadian exporters and the importance
    of the trade sector in the national economy and its integral link with the Government
    of Canada;
  • The likelihood of EDC receiving timely and sufficient extraordinary government
    support being almost-certain; and

 The corporation’s status as an agent Crown corporation (an agent of Her Majesty in
right of Canada).

SOEs the world over operate with government-granted advantages over their private sector
counterparts, be they insurance companies, banks, or steel manufacturers. Chinese SOEs, whose
policies are widely seen as undesirable by various western governments as well as many of the
world’s leading economists, have many of the same characteristics as EDC.

EDC borrows at the federal government’s preferred rates giving it, according to the C.D. Howe
Institute, capital that is 30-50 basis points cheaper than what is available to its private competitors.
A hallmark of Chinese SOEs is their access to cheap, even free, state capital. Both EDC and
China’s SOEs can issue debt instruments backed by their respective governments.

Chinese SOEs, especially the “national champions,” are given tax favours over their competitors
so they can fulfil their roles as powerful tools of the Chinese government’s economic policy. EDC
is exempted outright from either the need to generate a market pre-tax return on equity, or the need
to pay premiums or income taxes.

When it comes to regulation, EDC need not adhere to the same supervisory and regulatory rules
that bind Canada’s private sector insurance and finance sectors: it is neither subject to the Bank
Act nor regulated by the Office of the Superintendent of Financial Institutions. Likewise,
according to the US State Department, Chinese regulators are routinely outranked in the
Communist Party structure by SOE executives, weakening enforcement of whatever weak
regulations are in place to start. In the absence of an independent judicial system, China’s SOEs
are rarely the defendants in legal disputes, and when they are, they almost always win.
These protected environments – or ecosystems, as EDC calls them – allow both EDC and Chinese
SOEs to subsidize exports, crowd out local competitors, and maintain dominance in their
politically protected sectors. The effect is to distort the markets in which they operate and stunt the
development of the private economy. Euler Hermes’s submission to this review explains, for
example, how EDC’s government-granted “competitive advantages” shut out the vibrant credit
insurance industry and reduce competition and innovation, especially to the detriment of Canadian
small businesses.

Despite their state-sanctioned privileges, Chinese SOEs underperform the private sector, according
to official analysis in China, but are nevertheless profitable. However, official data issued by the
Chinese government is highly unreliable. Independent analysis by the distinguished Chinese
economist Mao Yushi’s think-tank, the Unirule Institute of Economics, shows that when the costs
of all the cheap or free inputs are counted, China’s SOEs lose money. Mao calls China’s SOEs
“termites eating away the country’s resources.” The efficiency with which EDC uses its taxpayer backed
capital and therefore the opportunity cost of its existence is unknown because the fine
details of its finances are kept under wraps. For example, according to Euler Hermes, it is
impossible to know how EDC’s profits are generated and, in particular, if EDC’s short term credit
insurance operations are profitable because of EDC’s lack of transparency.

Though Canada and China both have access-to-information laws, when it comes to EDC and
China’s SOEs, they are for show, not disclosure. Attempts by a researcher with the Transition
Institute, one of China’s foremost public policy think-tanks, to get information on the Three
Gorges dam, which EDC funded, were entirely unsuccessful. Attempts by Probe International to
secure details of EDC’s support for Chile’s electricity sector were similarly unsuccessful. As we
discovered, although EDC was brought under the Access to Information Act in 2007, broad
exemptions allow EDC to keep virtually all its records secret. We are now in the truly bizarre
situation in which Canada’s Access to Information Act is EDC’s chief defense against disclosure,
guaranteeing near-complete secrecy of its operations. These same broad exemptions were used to
eviscerate the records of EDC’s Political Risk Insurance (PRI) policies in Libya (some 40,000
pages) that Probe International applied for under the Act, leaving taxpayers in the dark about
losses associated with these PRI policies after the fall of the Gaddafi regime.

EDC’s ironclad secrecy also shields EDC from public scrutiny of its overall operations. A 2005
report by one of Canada’s leading forensic accounting firms, Toronto-based Rosen and Associates,
criticized EDC for not disclosing the distinction between politically- and economically-motivated
sovereign financing in its 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.” EDC’s opaqueness extends to its Canada
Account. Even Canada’s Auditor General, which conducts an independent audit of EDC, had
difficulty sorting out basic details about an EDC-Canada Account $13.7-billion loan cobbled
together in 2009 to save GM and Chrysler during the 2009 global economic meltdown. In his 2014
report, Canada’s Auditor General cited a lack of transparency over the bailouts: “it was impossible
for us to gain a complete picture of the assistance provided, the difference the assistance made to
the viability of the companies, and the amounts recovered and lost.…There was no comprehensive
reporting of the information to Parliament.”

It is noteworthy that this year’s Public Accounts revealed that $2.6 billion of that original
automotive bailout has been written off. CBC reports “The write-off, among the largest ever for a
taxpayer-funded bailout, is buried in a volume of the 2018 Public Accounts of Canada, tabled in
Parliament on Friday….The reference contains no explanation for the write-off, identifying neither
the business that received the loan nor the sector of the economy.”

This opaqueness in EDC’s operations almost triggered a trade war in 2000, when OECD trading
partners accused EDC of illicitly financing deals through its expanding “market window”
operations to avoid the voluntary constraints all OECD members accepted to stop taxpayer-funded
cut-throat competition. In its defense, EDC claimed it was operating according to the competitive
constraints of privately owned institutions and pointed to its profits (and now the dividends it pays
to the Government of Canada) as proof of its commercial nature. Nobody believes that explanation
but EDC. EDC uses its substantial cost advantages and its legislated secrecy to break trade rules,
hide cross subsidies to favoured firms, and turn private risk into public risk.

Euler Hermes in its submission to this review points out that EDC’s recent losses in the insurance
sector demonstrate that EDC has been taking a disproportionate amount of risk. Rosen and
Associates noted in their 2005 study that more than half of EDC’s loan portfolio was classified as
“below investment grade” or “impaired” in 2003 and that EDC was not as profitable as its closest
U.S. counterpart, the Export-Import Bank. “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 said. These figures suggest
that EDC may have been 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.

This much is known: 50 percent of EDC’s loan portfolio in 2017 is classified as “below
investment grade” or “impaired.” The Auditor General in his 2018 Special Examination of EDC,
a once-every-10-year review, chastised EDC, saying, “we found weaknesses in how the
Corporation managed risk and in how the Corporation managed credit risk. Combined, these
weaknesses amounted to a significant deficiency.”

Worse, the Auditor General said, “some of the weaknesses in risk management were not new,” but
were reported in the Auditor General’s Special Examination ten years earlier. “This finding
matters because the Corporation’s business was to assume the risk of others, and it operated in an
environment of changing risk.”

EDC’s disregard of the Auditor General, whose job it is to serve parliamentarians so they can
oversee government activities and hold the federal government to account for its handling of
public funds, reflects a disregard for Parliament that mirrors the protected status of Chinese SOEs.
This disregard for and warping of the normal tools of accountability by EDC extend also to its
environmental decisions, which are virtually immune from judicial review. A study by Probe
International illustrates how EDC can set its own environmental standards for project approval and
exempt projects from scrutiny. As with Chinese SOEs, EDC has no environmental standards to
follow except those it chooses. It is judge, jury and executioner on the environmental
consequences of its operations. This is especially egregious given that EDC finances Canadian
corporate exports and investments in projects such as China’s Three Gorges dam and mining
projects throughout the world.

Like Chinese national champion SOEs, EDC leverages the favour of the state to disproportionately
dominate its “franchises,” as EDC calls them. But it does so at the expense of the private sector
and the economy. EDC laments in its submission to this Legislative Review that Canada’s trade
performance in the 21st century has been the worst among G-20 countries, not understanding that
EDC has been a drag on productivity, that it has diverted capital from the private sector to be used
for political purposes, that it shuts out the more efficient and competitive private finance sector,
and that it has become the profit center to which Canada’s exporters gravitate and hide behind.
EDC is not the answer to Canada’s lacklustre trade performance but part of the problem, just as
Chinese SOEs are holding the Chinese economy back.

The most disturbing similarity between EDC and Chinese SOEs comes in their perceived right and
ability to stop the citizens of their countries from asking for accountability. While we may be
repulsed by the ability of the Chinese Communist Party to lock Nobel Peace Prize winners in jail
until they die, or to shut down websites and the offices of public policy think-tanks like Unirule5
and the Transition Institute, we are not surprised. China is an authoritarian dictatorship with a faux
judicial system that serves the Communist Party only.

In a disturbing echo of the heavy-handed political culture in which the Chinese SOEs operate,
Canada amended the EDA in 2001 to include the power to prohibit the use of EDC’s name or
letters in its English and French acronyms in any prospectus or advertisement, or for any other
business purpose, on pain of a $10,000 fine or imprisonment for six months, or both. This very
submission, indeed, violates the law as it stands, and runs the risk of drawing a $10,000 fine or
incarcerating its author. While EDC maintained that this amendment was necessary to protect its
name and brand, copyright lawyers roundly dismissed this claim and together with the Senate
exposed that its true purpose was to chill public criticism of EDC. Section 24.2 in the EDA is a
stain on the most fundamental rights of Canadians.

Use of Corporation’s name or initials

  • 24.2 (1) Except with the written consent of the Corporation, no person shall in any
    prospectus or advertisement, or for any other business purpose, use the following
    names and initials: “Export Development Canada”, “Exportation et développement
    Canada”, “Export Development Corporation”, “Société pour l’expansion des
    exportations”, “E.D.C.”, “EDC”, “S.E.E.” and “SEE”.
  • Offence
    (2) A person who contravenes subsection (1) is guilty of an offence and liable on
    summary conviction to a fine not exceeding $10,000 or to imprisonment for a term not
    exceeding six months, or to both.
  • 2001, c. 33, s. 12.

EDC lacks transparency and lacks accountability, harming the democratic process. Not only does
it serve no desirable economic purpose, it harms the Canadian economy by holding back
productive areas of the economy. EDC’s sole raison d’etre, as with China’s SOEs, is to support
politically favoured activities for the political gain of the party in power. The public good would
best be furthered by privatizing this SOE.

Yours sincerely,
Patricia Adams
Executive Director
Probe International

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