Corruption

What does EDC do? A guide to ‘Canada’s secret trade weapon’

Here’s what you need to know about the most powerful financial institution you almost never hear about.

The Ottawa headquarters of Export Development Canada. Credit: Justin Tang/The Globe and Mail.

By Matthew McClearn, published by The Globe and Mail on June 1, 2019

Read the original version of this article at the publisher’s website here

Export Development Canada once dubbed itself “Canada’s secret trade weapon.”

Although “weapon” might not be quite the right word, EDC is a powerful tool used by the federal government to meet trade objectives. Founded in 1969, it’s a Crown corporation that helps Canadian exporters succeed in foreign markets by providing government-backed loans, guarantees, insurance and other financial services. EDC enjoys one of the broadest mandates of any of its peers worldwide.

Despite playing a crucial role in federal trade policy and borrowing about $10 billion annually, EDC receives little attention and is loosely regulated compared with most financial institutions. Critics complain that EDC is a “black box” that reveals little about its activities. Compounding matters, EDC’s services are often confused with those of other federal bodies such as the Business Development Bank (BDC), which focuses on helping entrepreneurs.

With 1,500 employees scattered across 20 countries, EDC said it supported more than 13,000 customers last year, although that’s a small portion of the 120,000 Canadian companies EDC considers to be “export ready.” Here’s what you need to know about the most powerful financial institution you almost never hear about.

Part financier

One of EDC’s major activities is providing comfort to banks, in the form of loan guarantees. For example, it will guarantee a bank’s loan to a Canadian exporter or its customers to encourage banks to lend more to support Canadian exports.

EDC also lends directly to Canadian companies, for instance, to expand their overseas operations or buy infrastructure. It will also lend to an exporter’s foreign customers to finance their purchases of Canadian goods and services. Such offerings set it apart from other Export Credit Agencies (ECAs), which typically act as lenders of last resort if they are permitted to lend at all.

EDC also lends directly to Canadian companies, for instance, to expand their overseas operations or buy infrastructure. It will also lend to an exporter’s foreign customers to finance their purchases of Canadian goods and services. Such offerings set it apart from other Export Credit Agencies (ECAs), which typically act as lenders of last resort if they are permitted to lend at all.

EDC more than doubled its loan volumes over a decade
Total value of direct financings facilitated ($ millions)

 

Financings facilitated (in millions of Canadian dollars) Total value of financings
2009 11148
2010 12472
2011 13734
2012 13754
2013 17497
2014 20613
2015 24277
2016 26587
2017 26756
2018 27109

EDC will even lend to foreign companies that haven’t yet bought anything from Canada. While EDC discloses little or nothing about the terms of such loans, it often describes them as being for “general corporate purposes” or “support for future procurement.” EDC hopes to use them as leverage to persuade those foreign companies to buy from – or partner with – Canadian suppliers. But while EDC has celebrated such loans as a resounding success, critics question this, pointing out that it can’t compel customers to buy Canadian and that the program has never been subject to a comprehensive independent review.

EDC prides itself on taking greater risks than the private sector would entertain, and its commercial loan portfolio testifies to this. Last year almost half of it was deemed below investment grade – more colloquially known as “junk.” Its loans to foreign governments are riskier still: its largest sovereign customers include Angola, Serbia and Indonesia, and nearly all of that portfolio (89%) is rated junk.

Part insurer

EDC is also in the business of protecting Canadian businesses against losing their shirts overseas. One example is accounts receivable insurance that covers eventualities such as when foreign customers fail to pay. EDC also offers contract frustration insurance, which covers losses arising when customers go bankrupt or major contracts get cancelled.

Credit insurance, EDC’s oldest product, has remained steady
Credit insurance facilitated, in millions of dollars

 

Insurance Arrangements Facilitated ($ millions) Credit insurance
2009 52658
2010 52073
2011 62872
2012 54087
2013 56224
2014 56020
2015 60175
2016 55724
2017 55827
2018 58555

And then there’s political risk insurance, which helps Canadian companies operate in some of the riskiest corners of the globe. This insurance protects Canadian companies that have invested in foreign projects or operations: it covers losses arising from expropriation, war and revolution, and other risks for up to 15 years.

While political risk insurance represents a tiny portion of EDC’s revenues, it exemplifies the agency’s huge risk appetite. Since 2011, EDC has paid two claims (each in the amount of $300 million) to a single policy holder, Calgary-based Suncor Energy, for operations in Syria and Libya that were lost in the upheaval of the Arab Spring uprisings.

 

Part venture capitalist

Unlike most export credit agencies, EDC can invest directly in domestic and foreign companies, private equity and infrastructure funds. It has injected hundreds of millions of dollars into venture capital funds based in China and India, and made smaller investments (typically less than $15 million each) in private companies.

EDC’s venture capital and private equity investments represent a small component of its overall activity: As of the end of 2018, its investments portfolio stood at $2 billion. Documents obtained under the federal Access to Information Act suggest EDC wants the government to raise its ownership cap, which has long been fixed at 25% of an entity’s total equity.

Taxpayer-supported, nominally supervised

EDC doesn’t receive funding directly from federal coffers. Rather, it finances its operations from its own revenues, and also borrows billions of dollars every year. (EDC owed $55 billion at the end of 2018.) But while EDC claims to be self-financing and self-sustaining, as a Crown corporation it benefits from the federal government’s AAA credit rating. If EDC were unable to make good on its obligations, the Canadian taxpayer would be obliged to step in.

For decades, private-sector competitors have accused EDC of using its cheaper borrowing costs to compete unfairly with them. The federal government has consistently rejected those allegations.

EDC evidently has broad discretion to launch major initiatives without federal input. For example, in 2016 it declared it would grow its customer base fourfold, to 30,000 clients, by 2020 – an ambitious objective it hadn’t disclosed in its corporate plan. Brittany Fletcher, a spokesperson for Global Affairs Canada, said Ministerial approval was unnecessary because the target was “aspirational.”

THE WORLD ACCORDING TO EDC

EDC has foreign offices across the globe. Although it’s prepared to do business nearly anywhere, it assigns ratings to individual countries that take into account political risks, the probability that governments will default on debts, and other factors.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RISK RATING

High Risk [red]

Medium – high risk [orange]

Medium risk [yellow]

Low – medium risk [light blue]

Low risk [dark blue]

EDC foreign office

MATT MCCLEARN AND JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: EDC

Global footprint

In addition to its presence across Canada, EDC has foreign offices in Beijing, London, Dubai, Moscow, New Delhi and 15 other cities.

It plays a central role in Canada’s trade relationships with some of the world’s most important economies. In 2018, for example, it supported more than 600 of the approximately 1,000 Canadian companies that export to or invest in China. In 2017 it facilitated $3 billion in trade with India, more than 70% of Canada’s total exports to that country.

All told, EDC says it facilitated 14% of Canada’s total exports and direct investment outflows in 2017, with the United States far and away its biggest market.

According to its website, it’s “closed” for business in just four countries: North Korea, Russia, Saudi Arabia and Syria. It’s eager to expand trade where Canada has little or no presence. In recent years it has identified Iran and Myanmar as “markets of opportunity.”

A tool of government

More than four-fifths of EDC’s Canadian customers are small and medium-sized enterprises – a fact EDC regularly trumpets. But that obscures a crucial fact: A handful of large, politically important companies receive outsized levels of support. EDC has long emphasized that it operates on “commercial principles” and that it “does not provide subsidies of any kind to any industry.” Yet it is essentially a state-owned enterprise, one to which the government turns regularly to achieve political ends.

This is particularly evident within the Canada Account, used to support transactions that EDC deems too risky but are nonetheless deemed to be in the “national interest.” It was through the Canada Account that the federal government lent billions of dollars to General Motors and Chrysler during the financial crisis of 2008-09. (Last year the government quietly wrote off a $2.6 billion loan to Chrysler.) In August, EDC announced a $5.2 billion financing for the Trans Mountain pipeline under the Canada Account. In December, EDC offered $1 billion in loans for oil exporters as part of a broader federal support package for the struggling oil and gas sector.

Canada is not alone in backing exporters. Since the United Kingdom established the world’s first ECA exactly a century ago, virtually every economy of appreciable size has established one, if not two.

Some critics allege EDC’s influence has long seemed greater than Canada’s stature in global trade would justify. EDC is substantially larger than its American equivalent, for example. “EDC’s loan figures imply that Canadian enterprises are possibly being artificially supported by government aid, to promote mercantilism,” noted a 2005 analysis of EDC’s financials by Rosen & Associates, a forensic accounting firm. “The benefits of the relatively larger export assistance on a per capita basis are not apparent.”

Defenders of export credit agencies have long argued that even if they offer subsidies in disguise, any country that opted out on principle would merely surrender jobs, revenues and prestige to competitors. With U.S. President Donald Trump openly pursuing protectionist trade policies, accusations of “mercantilism” have perhaps lost some of their sting. And among its political masters in Ottawa, there would seem to be little appetite for restricting EDC’s expansive powers.

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