FAIT Committee Meeting

STANDING COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE

COMITÉ PERMANENT DES AFFAIRES ÉTRANGÈRES ET DU COMMERCE INTERNATIONAL

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, November 4, 1999

• 0937

[English]

The Vice-Chair (Ms. Colleen Beaumier (Brampton West—Mississauga, Lib.)): I call the meeting of the Standing Committee on Foreign Affairs and International Trade to order. We have been doing a review on the EDC.

This morning we are privileged to have with us Guy David from the Gowling, Strathy and Henderson group; Gerald Shannon, chair of stakeholder consultations, the review team; Stan McRoberts, research economist, the review team; and Maxime Faille, lawyer, project assistant of the review team. Welcome, gentlemen. You said you had reviewed our minutes of the last meeting. You're anticipating what's here for you today.

Are you going to be making a presentation?

Mr. Guy David (Lawyer, Project Leader of the Review Team, Gowling, Strathy and Henderson): Yes, thank you very much, Madam Chair. We will make a short five- to ten-minute oral presentation. Afterwards we'd be happy to entertain questions from the committee.

The Vice-Chair (Ms. Colleen Beaumier): Thank you. The floor is yours.

[Translation]

Mr. Guy David: Thank you, Mr. Chairman and committee members for having invited us to speak with you about the EDC review.

First of all, I'd like to introduce to use the members of our team as well as our organization. Gowling, Strathy & Henderson is a prominent legal firm with offices in several locations around the country. We received a mandate from the Department of Foreign Affairs and International Trade to review the powers and operations of EDC since the 1993 legislative review.

The primary objective of the review was to assess EDC's operations and success in discharging its mandate in light of the 1993 amendments to the act.

• 0940

EDC was given a number of new powers to discharge this expanded mandate. This includes the power to make equity investments, to engage in leasing, and to provide domestic financing and domestic credit insurance. In light of the growing importance of investment in relation to trade, EDC has also interpreted its broadened mandate to include support of trade- related investment.

EDC's capabilities in international trade and project financing are widely recognized and respected in the Canadian financial community, as was clearly observed during the course of our analysis. These are also respected internationally among such institutions as the World Bank, IFC and others. EDC's risk assessment and management skills are most often noted. Other ECAs also respect the Corporation's financial talents and skills.

[English]

In fact, EDC has developed a unique blend of commercial culture with entrepreneurial enthusiasm, while maintaining its sense of public responsibilities as a crown corporation. However, we found EDC's commercial orientation is creating a certain amount of tension with those who believe it should observe the same standards of accountability as do other government agencies. On the other hand, its strong competitive ethic leads to tension with private sector competitors, who believe that as a crown corporation EDC enjoys unfair advantages. I'm sure you're going to be hearing more about this as your deliberations continue. Banks and insurance companies in particular make this complaint. This theme appeared in many aspects of the review.

EDC's own enthusiasm for rapid evolution into new lines of business is also beginning to grind against the natural limitations of crown corporations. This has created tensions with certain government departments that in some respects would prefer EDC to be less aggressive in the exercise of its mandate.

In conclusion, we found EDC to be fundamentally different from the private sector institutions with which it competes and with which it also cooperates. EDC is driven by a mandate to support and develop Canada's export trade and Canadian capacity for engaging in export trade. By contrast, the private sector institutions are profit-driven, looking to provide those services that will yield the greatest return on investment.

In the end, EDC is a successful niche player in the financial services industry, and it does enjoy very strong support and loyalty from its customers, the Canadian exporters. In view of the strong support enjoyed by EDC from the exporting community and the lack of compelling argument to constrain its activities, we are not recommending that any of EDC's new powers granted in 1993 be withdrawn. However, in recognition of the accelerated pace of its evolution toward a commercial orientation, we do recommend that certain of EDC's operations be placed on a purely commercial footing.

In particular, except for project equity investment, we recommend EDC's equity investment power be undertaken solely through a taxable subsidiary that operates on commercial principles. We've made a similar recommendation with respect to leasing powers. We believe this would result in EDC's taking a more strategic approach in the exercise of its powers, an approach aimed at developing capacity rather than simply a transaction or case-by-case approach in deployment of powers.

[Translation]

While we are impressed by EDC's performance and the vocal support of its customers, we are quite concerned about the slow pace of development of Canada's trade finance capacity beyond the walls of the Corporation.

Canada is far too dependent on trade for its economic well- being to place excessive reliance on a single financial institution. Thus, a primary objective of the review has been to recommend changes that will augment and diversify Canada's trade finance capacity. Some of these recommendations are directed at inducing greater participation by other financial institutions, while others support proposals for new initiatives by EDC.

• 0945

We are particularly concerned about the limited participation of the Canadian banks in medium-and long-term trade finance, and in financing Canadian-led projects. Therefore, we have recommended—and this is one of our main recommendations—that the government create a guarantee facility to support greater participation by the banks in officially supported transactions. It should be housed in a small agency separate from EDC so as not to compromise the current role and future evolution of the Corporation.

[English]

In 1993 the Export Development Act was amended to permit EDC to provide insurance coverage on domestic as well as foreign receivables. The grounds stated were that the domestic market was not being fully served. Exporters, and in particular SMEs, or small and medium enterprises, found it very inconvenient to manage more than one insurance company relationship with respect to their receivables.

The result has been that EDC's domestic business has flourished but domestic service providers, both foreign-owned insurers and domestically owned factors, have objected about unfair competition.

Of particular concern to us is the maintenance of adequate competition and capacity in the supply of domestic credit insurance. If EDC were removed from the market, we are not satisfied that this would be the case. Therefore, after careful consideration, we did not recommend that EDC withdraw.

However, we have recommended that EDC encourage further development of domestic institutional capacity. Once adequate domestic Canadian capacity has been created, the corporation should withdraw on terms that do not undermine the convenience of current arrangements to SMEs.

Based on our consultations, there appears to be consensus that EDC should provide additional disclosure of information in some areas. This is the area of transparency and accountability. It's also recognized, however, by us and by EDC's clients that release of information cannot override the rights of exporters to protect commercially confidential information and that disclosure should not adversely affect exporters' competitiveness.

We recommend, therefore, that EDC adopt a policy of releasing certain specific information on a regular basis. For example, it could release the name of borrower, country of support, name of exporter, amount and type of transaction.

[Translation]

In the time remaining, I would like to briefly summarize our report's main recommendations. These recommendations are listed in their entirety in the last chapter, Chapter 12, of our report.

Firstly, with respect to EDC's mandate, we contend that EDC's mandate should be restated in the legislation to more accurately reflect its current operations and strategic direction.

We also contend that EDC should not be constrained in its evolution toward a more commercial orientation.

In conjunction with this change, EDC should shift to a private sector auditor in lieu of the Auditor General of Canada, and some changes should be made in terms of EDC's place in the Financial Administration Act.

In keeping with EDC's commercial evolution, non-traditional powers such as non-project equity investment and leasing should be undertaken, in our opinion, in subsidiaries that operates solely on a commercial basis.

• 0950

EDC's market development initiative in the field of domestic credit insurance should not be discontinued until the domestic private sector is sufficiently developed. EDC should intensify its efforts to achieve this objective and eventually, make the necessary preparations to withdraw from this market.

[English]

A number of initiatives should be undertaken by EDC to develop Canadian capacity to finance trade and investment. These include fine-tuning its cooperative programs with the banks that are currently under-utilized in order to make them more attractive and to be taken up by the banks, sharing country risk assessments, greater use of assessment management, and securitization to leverage its balance sheet and diversify risk, distributing products and services through the bank's branch networks, and having direct representation in foreign markets where business volumes warrant.

Recognizing that EDC competes with domestic financial institutions, a guarantee framework for bank medium- and long-term finance could not be provided effectively by EDC unless it were to withdraw from direct lending, which we do not recommend. This is why we are inclined to recommend that the government establish a separate guarantee framework that would be accessible by the Canadian banks on a cost-recovery basis.

EDC is nonetheless a government institution, and Canadians expect that it meet higher standards of public accountability and transparency as well as environmental and human rights than currently apply. We have recommended a number of standards we believe would be appropriate in these areas.

In closing, I would like to say that EDC's growth since its mandate and powers were expanded in 1993 clearly demonstrate that the corporation is responding to the needs of its clients. Customer satisfaction ratings, as I'm sure you heard from EDC, as well as the results of our focus group research and the survey conducted by the review, as well as anecdotal evidence we received during the consultations we held across Canada, all indicate there's a strong sense of satisfaction with EDC's performance on the part of those who are knowledgeable about the corporation.

The members of our review team and I would be happy to answer any questions you may have.

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

Mr. Morrison.

Mr. Lee Morrison (Cypress Hills—Grasslands, Ref.): Thank you, Madam Chairman.

Welcome, gentlemen. Thank you for taking the time to talk to us today. I wonder if you could elaborate a little more on your proposal, which I gather to be a kind of hybrid situation, with the FCC continuing to operate as a government entity but with portions of it being hived off and carried by the private sector. I think I understand that correctly. Is this what you're saying, in essence?

Mr. Guy David: We're not putting it quite that way, Mr. Morrison. We're saying that certain of EDC's activities, in particular activities that would be pursued under the equity power and the leasing powers that were granted in 1993, could be conducted on a purely commercial basis, but we believe the support of EDC is necessary. So we're recommending that these be conducted in subsidiaries that would benefit from EDC's risk-management capabilities, its project identification and project management capabilities, as well as EDC's capital, which would be put into these entities. But the entities themselves would operate on a commercial, which we take to be a taxable, basis as well as on a profit-making basis. Eventually these entities could, once developed, potentially be privatized, but our recommendations don't go that far.

Mr. Lee Morrison: I noticed that. It seems you're heading in a direction I find appealing, but you don't take that final leap into privatization.

Could you tell us what other countries do, among our trading partners and competitors? Which ones among the major trading countries do continue to have a state-funded agency or a state-supported insurance agency and which ones leave it entirely to the banking and insurance sectors?

• 0955

Mr. Guy David: I'm going to ask Mr. Shannon to respond to that one.

Mr. Gerald E. Shannon (Chair of Stakeholder Consultations, Review Team, Gowling, Strathy and Henderson): Thank you, Guy.

Most continue to have a capacity for government involvement in export financing and insurance. In some cases they do run split jurisdictions whereby there will be a government agency taking on certain delivery responsibilities, and in other cases it would be a bank. But I don't know of too many cases where there is no implicit government direct involvement in the business of providing both financing and insurance.

It's a question really of degree—how much is involved—and it's also a question of style. EDC would be involved more in direct lending, as opposed to agencies like Ex-Im in the United States, which would be more involved in giving guarantees. But in each case we looked at, according to my recollection, there is a distinct ongoing government role reflected in the provisioning of export financing.

Mr. Lee Morrison: Aside from guarantees, which I would perceive to be a very legitimate government intervention, in the countries where they have actual participation by state agencies, do those agencies by and large restrict themselves to the really high-risk ventures and leave the lower-risk ventures to the private sector, or what is the situation there?

Mr. Gerald Shannon: I wouldn't characterize it that way. Personally, I think that, as one very distinguished person pointed out to us—Malcolm Stephens of the British CIGA—there is no one system that typifies the way you should operate an export financing or export insurance operation. Each one best and uniquely expresses your own national characteristics.

So I don't think you can take a German print and say this is the one model that could be used, or the French, or for that matter the American model. Rather, in each case, responsiveness to the needs of the exporting community, the shortcomings of the banking system, or the strength of the banking system of an individual country would indicate how the export of the goods and services would be financed. I don't know that I can go beyond that.

Mr. Guy David: I'll just add one point to that. There are differences; in fact, there are no two systems alike. But what we have found in Canada is that EDC's direct lending has resulted in the development of a very high level of expertise—transaction expertise, project structuring expertise, and management of these projects by EDC—and we feel that direct lending capability has been key in developing and bringing EDC to the forefront of these institutions around the world, whereas what an institution occupying a lender-of-last-resort function typically guarantees is not front and centre in the deals, and they do not develop that level of expertise.

Now, one would say in Canada that we have five or six big banks that could develop this. In fact, the Canadian market is probably small enough that this expertise would be quite diffuse among five or six banks. The opportunities would be limited, and perhaps there would be too much fragmentation if that were to happen. So we have come down on the position that the expertise within EDC is something that's essential for Canada to preserve.

Mr. Lee Morrison: One more question?

The Vice-Chair (Ms. Colleen Beaumier): Thank you. No. Next round.

Madame Lalonde, please.

[Translation]

Ms. Francine Lalonde (Mercier , BQ): Good morning.

Mr. David, gentlemen, I appreciate the scope of this review. I'd like you to explain your first recommendation to me further. You mentioned, and rightfully so, the importance of the next round of multilateral negotiations which will soon get under way in Seattle and note the following:

... it is likely that the subsidy/countervail negotiations will again focus on export financing issues.

Therefore, the negotiations will focus on EDC's core operations.

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You also say that Canada must be well prepared to deal with this issue. You go on to make the following recommendation:

To facilitate Canada's constructive participation in this context, considerations should be given to new institutional arrangements which would bring the structure of Canadian official export credit support more in line with the practices of other OECD countries...

Could you elaborate further on this initial recommendation, which is quite broad, and in particular on the challenges you feel the upcoming negotiations will present?

Mr. Guy David: Basically, we view EDC's role as a purely commercial and competitive one. It also provides credit along with government support, in accordance with OECD consensus rules. These operations are governed by two regimes, namely the OECD regime and the WTO regime.

It is our opinion that the World Trade Organization will eventually take over the management of all of these issues. When that happens, clearly there will be pressure from the international community to adopt a regime that is more similar to regimes in Europe and even the United States. The German system is said to be somewhat similar to the Canadian one.

In our recommendations, we note that some operations should be carried out through subsidiaries and that EDC should perhaps be restructured, in terms of the support it receives from the government. Its operations should be more readily identifiable than they now are.

Ms. Francine Lalonde: Identifiable?

Mr. Guy David: I'm talking about EDC's commercial operations.

[English]

Gerry, did you want to add anything?

Mr. Gerald Shannon: Could I just add one point, Madam Chair?

The last round of trade negotiations marked the first time when subsidies proved to be susceptible to some definition. We did succeed in creating a subsidy countervailing duty measures agreement that enables us to decide what is and what is not an allowable subvention. In that context, for the first time—to my recollection, at least—we did manage to get at the issue of how to deal with export financing in terms of international disciplines applying to the WTO on subsidy practices.

I would assume—and this is one of the reasons behind this recommendation—that we will again be looking at the subsidy countervailing measures duty agreement in the WTO negotiations this time around. As I said before, though, the last time was the first time it was looked at. This time there will be refinement, or at least attempts will be made to refine it against the background of experience that has been gained since 1994, when the last agreement was signed. Some of the cases that have been through the dispute settlement process will be part of the jurisprudence looked at by negotiators in deciding the next evolutionary step to be taken, in terms of how international law can be applied through the dispute settlement processes of the WTO.

That is what really lies behind the need to ensure that all the elements that are part of the policy-making process in Canada—government, at least; certainly the departments of Foreign Affairs and International Trade, Finance, Industry Canada; and the EDC as a principal player in this context, of course—have to be conscious of the state of negotiations and be prepared to make sure the outcome is conducive to advancing Canadian interests in this process.

• 1005

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

Madame Augustine.

Ms. Jean Augustine (Etobicoke—Lakeshore, Lib.): Thank you, Madam Chair.

Thank you for the presentation, and also for what is a very readable review document.

As we go forward in this process, it seems to me that from the focus groups and the individuals you interviewed, you came away with a really good sense of satisfaction. That's what I'm reading in this. Throughout the report, one can sense that the business community and all those who have some vested interest in this are satisfied with the operation.

You went on to make a whole series of statements that sometimes I felt were at odds with some of the satisfactory comments you made here. I therefore want to ask about the whole issue of transparency and accountability, and whether you're asking if we should be amending the act as we review this, making it subject to Canada's access to information legislation.

You also mentioned the whole business of transparency around environmental frameworks. Again, are you asking us whether we should bring that into line with Canada's environmental assessment act? You came close to that without fully saying so. I'm just wondering if that was the direction is which these recommendations were heading.

Lastly, if you could go back to page 6 of the material from which you read, you talked about a number of initiatives. I was just curious about banks that are currently underutilized. If you could, for my information, please explain a little about where the avenues are within our present system, where you see some underutilization, and where you see EDC having an impact, or having some partnership, some collaboration, or some way in which they could share a whole series of things you mentioned here, such as country risk assessments, etc.

Mr. Guy David: If I may, I would ask my colleague Maxime Faille to deal with your first question on access to information versus the disclosure regime that we recommend, and also to deal with the environmental framework. I'll then ask Mr. McRoberts to deal with the underutilization of EDC's programs by the banks.

Mr. Maxime Faille (Lawyer, Project Assistant, Review Team, Gowling, Strathy and Henderson): Thank you.

We certainly struggled with the issue of transparency. I think a theme that runs through the report is balancing EDC's commercial orientation and role, which has been in many ways an engine of its success. With the reality that it is a crown corporation, it's a public institution that has to be responsive not only to the business community, but to the public broadly.

There were a number of individuals who did suggest that EDC ought to be made subject to access to information. On the other hand, of course, a number of exporters were very concerned that such a move would both hamper EDC's commercial orientation in terms of the administrative burden and so on that it would place on EDC, and, more importantly, that it would run the risk of having sensitive commercial information disclosed.

We did look at various models. One of the models is the Business Development Bank of Canada, which is subject to the Access to Information Act. However, it does have a specific provision within its legislation that basically, in our view, means it doesn't have to disclose anything of particular interest or relevance to most people. We didn't think this was a terribly useful model in that it basically has all the disadvantages of the Access to Information Act without really having the advantages of creating greater transparency.

• 1010

The model we propose is not to subject EDC to the Access to Information Act, but nevertheless to require EDC or to encourage EDC to develop a transparency model, a disclosure model that would be useful and relevant. It would effectively require EDC to disclose the relevant information as to the kinds of business it is conducting and so on.

Obviously, this has to be balanced with issues of commercial confidentiality, but we felt that, on the whole, a lot of the information we would be seeking is information that is ultimately available publicly through a variety of other pieces of legislation and through certain disclosure requirements that do exist in the private sector through securities legislation, etc. We didn't feel our recommendations would disclose sensitive commercial information that could hamper Canadian exports' competitiveness, but that they would nevertheless create a greater sense of confidence among the public in EDC's activities.

Just to deal with the issue of environmental assessment, again we looked at the various models that are there. As you know, the Canadian Environmental Assessment Act does not apply to EDC. EDC has conducted its own environmental framework review, which operated to some extent in parallel to our own review of the legislation. Ultimately, however, we were able to gain the information on what EDC was planning on doing, and we assessed that. I think we came to slightly different conclusions as to the kind of model that EDC should be developing, and we felt that more of an objective rather than subjective model ought to be adopted.

As we emphasized in the report, we're obviously not environmental scientists, so we can't identify exactly what the appropriate model should be. We do feel it should be one that is objective, though, and one that can be benchmarked against the practices that are out there in the international community.

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

Mr. Stan McRoberts (Research Economist, Review Team, Gowling, Strathy and Henderson): Shall I deal with the last part? The question was why the Canadian banks appear not to be as fully active in the trade finance business as one might hope.

We travelled to six of seven of Canada's major cities and we found this theme throughout the consultations. In due course, when we spoke to the banks, they did not take issue with the observation that they are less active in some of these activities than one might expect, particularly for a country that's as dependent on trade as Canada is.

I should point out that one has to distinguish here between the various forms of trade finance, because it is not true that the Canadian banks do nothing in this area. The banks are active in short-term trade finance. Receivables, for example, would be up to 90 days, or perhaps even a year, because the risk elements associated with those are a lot less worrisome to a lending institution than are longer-term credits, particularly the medium- and long-term ones. Medium-term credits are, of course, those that are used to finance machinery and equipment sales, to do project financing, and that sort of thing.

You ask why we should be concerned about the fact that the Canadian banks are not so active given that EDC is obviously doing a fine job for much, if not all, of its clientele group. The answer is that there are really three or four things that the Canadian banks can bring to the table that EDC cannot fully compensate for.

The first point is obviously financial capacity. EDC is not constrained overall, but when it goes into particular markets, it obviously has risk limits. To the extent that there are other players that can participate in financing transactions, one can embellish the capacity in those particular locations.

The second point is the branch network the Canadian banks have. EDC has a limited capacity in Canada, certainly in the smaller communities. Having said that, the mere fact that you have a branch network does not mean those branches will be active participants in this business. In fact, it would require substantial efforts by the Canadian banks to more fully utilize those assets. Nevertheless they're there.

• 1015

When it comes to the international aspects of their business, some of the Canadian banks certainly do have modest representation internationally. EDC would like to get into that; in fact, I think we encourage them in that area. But it would be hard for EDC to duplicate the existing capacity that the Canadian banks have. If the Canadian banks could be encouraged to play more actively, presumably their existing international representation would also be embellished.

In terms of why the Canadian banks aren't participating, let me just say a word. This is a little bit difficult to get at, and there are various views on this. One is simply that the Canadian banks are risk-averse, that they'd be just as happy to leave EDC to do this because this is a fairly risky business.

The point the banks made to us—I think all of them said this—was that the way in which Canada supports commercial lending in this business is different from the way other countries do it. We were alluding to this earlier when we noted that most other countries have a guarantee agency that operates through the commercial lenders. In our case, we have EDC combining both activities. There is an arrangement available for Canadian banks, but it's under the consensus rules that allow for 100% of 85% of a project cost to be financed by official credit support. However, we modify that in Canada's case—or EDC modifies it—to limit the amount of support available to between 65% and 75% of the 85% eligibility. Is that clear? There are a lot of numbers there.

In essence, our support for the Canadian banks is less generous than what's available in other countries, according to the Canadian banks.

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

Mr. Morrison.

Mr. Lee Morrison: Thank you, Madam Chair.

Gentlemen, you do make fairly compelling arguments for the continued existence of the EDC. We can't get along without it because, especially based on what Mr. McRoberts has said, I gather the banks are not willing or able to fill the void.

In your report you do state that:

If EDC is able to stand on its own feet then it should, provided that there are no compelling public policy reasons for continued government ownership and control.

I really don't see what these compelling public policy reasons for continued control are. I've listened to your presentation and I'm willing to be convinced, but why can't this thing do its job just as well as a private entity as it can as a government entity?

Mr. Guy David: The answer to that is that an important portion of EDC's business is government-supported business, not business that can be carried on in a purely commercial basis. So there is no doubt that if we're going to continue to cover the market the way we cover it now, there is a need for a government-supported institution in that market. The issue then becomes the extent to which you constrain your existing institution, EDC, and reduce its scope of activity down to merely those areas that cannot be done on a purely commercial footing. Some countries have taken this approach. In the results, we received a lot of anecdotal evidence that this was a very costly approach to take.

Secondly, you ended up with an institution that did not have the range of capabilities and expertise that you have with an institution such as the EDC, which operates in the commercial, viable sector, as well as in the non-commercial, less viable sector.

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Mr. Gerald Shannon: If I may say so, if you jumped into privatizing EDC, it's also not clear whether...first of all, obviously EDC's costs would rise because it would be borrowing internationally on its own account. But one has to ask oneself about what would happen to those small businesses, for example. EDC spends a great deal of time making effective use of existing programs to advance the interests of small businesses in getting into the export market, not just in North America but on a global basis.

If you asked small business people, I think the response you'd get would be very strongly supportive of EDC's role, just because it is there with various programs that are more amenable to small business than those one of the larger banks would be prepared to undertake.

So I suspect if you're looking for compelling reasons, that's one of the public policy roles you'd look at before you decided to jump totally onto the bandwagon of privatization.

Mr. Lee Morrison: Thank you.

[Translation]

The Vice-Chair (Ms. Colleen Beaumier): Mr. Patry.

Mr. Bernard Patry (Pierrefonds—Dollard, Lib.): Thank you, sirs, for coming here this morning. First of all, I'd like to comment on an item on page 5 of your submission having to do with credit insurance.

As you so aptly put it, EDC is performing very well. It has many customers, the vast majority of whom are small businesses. Why do small customers turn to EDC? Very often, it's because of the credit insurance the Corporation provides, along with its capacity to deal with matters quickly. The Corporation's team works very quickly and often provides an answer in less than 72 hours, as everyone well knows. It runs a tight ship. EDC knows the global market well. It can easily assess risk by country and by type of equipment that is being marketed. Much of EDC's revenues are derived from this credit insurance.

You note on page 5 of your submission that foreign-owned credit insurers and domestically-owned factors have objected about unfair competition. Great. Later, you state the following:

... we have recommended that EDC encourage further development of domestic institutional capacity. Once adequate capacity has been created, the Corporation should then withdraw...

I'd simply like to explain something to you. As far as I'm concerned, it's not up to EDC to tell private sector firms what to do. They must decide for themselves whether they want to expand. Why do SMEs seek assistance from EDC? Because they receive something in return.

Enough said by way of introductory remarks. I would now like to focus on a question that my colleague asked regarding banks. You state the following on the previous page:

... we have recommended that the government create a guarantee facility to support greater participation by the banks in officially supported transactions...

I have some concerns about this recommendation and my question will focus on this point. What will happen when the day comes that banks are given a support mechanism? Banks will start issuing loans to all kinds of companies because they will have a blank check from the Government of Canada. I really don't understand your attitude and your recommendation in this regard. If banks are given a blank check, they will issue loans to everyone. Will they continue to carefully scrutinize applications they receive from their customers and to assess the risk they face in certain countries and the equipment that will be sold? That's my first question.

As for my second question, you stated in your opening remarks that you would prefer to have operations audited by a private sector auditor rather than by the Auditor General of Canada. Are you saying that the Auditor General of Canada is not doing a good job? That's a very straightforward question. Thank you.

[English]

The Vice-Chair (Ms. Colleen Beaumier): And a good one.

[Translation]

Mr. David.

Mr. Guy David: I'll answer your second question first because the answer is much more succinct.

We have issued a series of recommendations aimed at ensuring that EDC is moved from Part I to Part II of Schedule III of the Financial Administration Act. This recommendation recognizes EDC's evolution towards a more commercial orientation. Among other things, these changes would ensure that EDC could hire its own auditor, in this case, a private sector auditor.

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We're not saying that the Auditor General is not doing a good job. In fact, for three of the last five years, EDC has received the Auditor General's Award, which tells us that the AG has nothing more to teach the Corporation. EDC has met all of the AG's expectations. An audit by a private sector auditor who also audits other major financial institutions could bring other useful perspectives to EDC. That is the gist of the recommendation.

Your first question concerned the risk associated with the recommendation that a guarantee facility be created. We are recommending that the banks themselves financially support this initiative. The risks would be assumed by the guarantee facility, but would be shared by all participating banks, who would pay a sort of premium. It would be somewhat like an insurance scheme. Therefore, ultimately, the banks would be the ones assuming the risk.

Moreover, the facility itself, either directly or working with EDC, would have a role to play in assessing risk before issuing a guarantee. We don't see this as something akin to a blank check. It simply a mechanism whereby the kind of guarantee currently available from EDC could be provided, but more in keeping with procedures found in other countries.

[English]

The Vice-Chair (Ms. Colleen Beaumier): I was wondering if you had an auditing company in mind, one you could recommend.

Mr. Guy David: No, but I'll repeat or amplify my earlier statement. We feel that EDC has done a super job among Canadian crown corporations. The fact that it has won the Auditor General's award three years out of five indicates that it is fully compliant and really doesn't have much more to learn from the Auditor General.

We feel that audit firms that specialize in the audit of large financial institutions might add something more to the audit of EDC, to the internal systems, controls, and disciplines of EDC, which the Auditor General maybe doesn't bring. The financial institutions audited by the Auditor General are the BDC and the EDC. I believe those are the only two. There might be something to be gained from a private sector auditor. Any one of the big companies would have very specialized staff in regard to the audit of financial institutions. In fact, they do audit the Bank of Canada, for example.

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

Mr. Rocheleau.

[Translation]

Mr. Yves Rocheleau (Trois-Rivières, BQ): Mr. David, I'd like to focus for a moment on the question of transparency and confidentiality. When EDC officials appeared before the committee this week, they were questioned about this and they seemed somewhat uncomfortable. At least that's the feeling I had. When asked if they could provide the committee with a breakdown of EDC operations by province, they began by saying that they couldn't understand why we were asking them questions about this. They use the word “transparency”, but they tell us that this information is confidential.

During the course of discussions, we found out that Nortel was a major EDC partner. As a rule, such information would be confidential, whereas the Canadian and Quebec public might well expect to be told that EDC has had a hand in Nortel's success. That's what happens in Quebec. I'd like to understand EDC's corporate culture. Unless I'm mistaken or we're dealing with a different level of intervention, in Quebec, when the Caisse de dépôt is involved with a partner, that information is public knowledge. For example, when the Société générale de financement, which is on par with EDC, acquires a manufacturing firm as a partner, that information is public knowledge. Why is EDC behaving in this manner? I don't know whether you can provide some explanations, but from an outsider's perspective, EDC's behaviour does appear very odd.

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Mr. Guy David: That's an interesting question. I agree that analogies can certainly be drawn between the involvement of the Caisse de dépôt or the Ontario teachers pension fund, for example, and the support provided by EDC.

However, the difference lies with pension funds, which are invested on financial markets. Disclosure of information concerning such funds is required under securities legislation which imposes the same requirements on everyone, whereas traditionally, information about the financial assistance provided by a bank or financial institution which does not operate on financial markets but instead issues loans, is confidential. The difference lies in the way our financial markets operate.

This being said, we are recommending the release of specific information on a more regular basis. We believe that information about many major transactions could be disclosed more systematically and that Canadian companies would accept this as the price to pay for EDC's financial support.

We believe, however, that an exception should be made when there is a risk of disclosing information about the market or the Canadian firm's customer that is currently confidential. For example, we wouldn't want to reveal the name of a buyer in China found by a small Montreal manufacturing firm because such disclosure could attract competitors. However, except for similar cases, we believe that information should be systematically released.

Mr. Yves Rocheleau: The information released could be limited to the name of the firm that received financial support from EDC and the amount of assistance received. I agree that confidentiality is an important consideration, but I don't think we need to go overboard. In my opinion, it would be reasonable to disclose that a small Montreal firm received support from EDC. Wouldn't you agree?

Mr. Guy David: That's precisely what we're recommending. Australia has adopted this approach. While there are some exceptions, the Australian counterpart to EDC posts on its website the list of companies that its supports, the amount and type of transaction and the country to which the exports are destined. We feel that EDC could systematically post similar information on its website every 45 or 60 days, within a reasonable amount of time following the actual transaction, for example, within 60 or 90 days.

Mr. Yves Rocheleau: Thank you.

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

Mr. Patry.

Mr. Bernard Patry: I have a question on an entirely different subject. When Mr. Gillespie appeared before the committee, we asked him a number of questions about human rights and the environment.

In your very comprehensive review, have you identified cases where EDC-funded projects carried out in other countries have had an adverse effect on the environment, or are you satisfied with the environmental assessments carried out by EDC?

Mr. Maxime Faille: We approached the subject from a rather theoretical perspective and attempted to find out if the system in place was adequate, rather than do a case-by-case review and identify specific incidents. According to our information, there is no hard evidence that EDC may have funded a project that adversely impacted the environment or infringed upon human rights.

Some individuals have voiced certain concerns, although it's obviously not easy to check this out, precisely because information regard EDC funding of projects generally remains confidential.

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Of course, certain NGOs have claimed that EDC-supported projects have harmed the environment. I won't say that we didn't delve into this matter. However, we did examine the issue from a more theoretical standpoint and we did look at whether the system in place was adequate. Accordingly, we have put forward a number of recommendations, although there is no evidence that EDC acted irresponsibly on international markets. Thank you.

[English]

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

Mr. Morrison.

Mr. Lee Morrison: I have one final question, gentlemen. In your presentation this morning, you state:

EDC's important market development initiative in the field of domestic credit insurance should not be discontinued until the domestic private sector is sufficiently developed.

Isn't that contradictory to what the private sector people have been telling us, that is, that they are quite upset by the competition of the EDC in the domestic field? If they don't have the capacity, surely they wouldn't be complaining. What is your response to that?

Mr. Guy David: Based on the evidence we gathered in the course of the review, it's clear that EDC has developed the domestic credit insurance market. Before EDC intervened in the Canadian market, the market was sadly underserviced.

I don't have the exact figures in front of me, but this is a huge potential market if you compare Canada's level of credit insurance to that which you find in Europe, for example, or elsewhere. It's a huge market. Since EDC has entered that market, you find both EDC's volume and the private sector volume increasing tremendously every year. It is an extremely high rate of increase, which points to the fact that but for EDC being in the market, perhaps the private sector would be happy not to serve the market—these are the international companies.

The other thing we note on this is that there is no Canadian credit insurance capability in the market. There are no Canadian-owned or Canadian-controlled companies like, say, bank-owned companies or Canadian insurance companies. The credit insurance market is served by foreign companies mainly managed out of Europe and the U.S. Therefore, the country's risk decisions are made on a global worldwide basis and not on a Canadian basis. So that too is of concern to us.

We believe the market is big enough for EDC as well as for the foreign private sector, and we believe there is a lot of room for a Canadian company, a Canadian-based company, to develop in that market.

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

[Translation]

Ms. Picard.

Ms. Pauline Picard (Drummond, BQ): I'd like to turn the floor over to Ms. Lalonde.

Ms. Francine Lalonde: Thank you. I'm scheduled to give a speech in the House.

My first question concerns recommendation 9 in which you propose that the right of the Minister to authorize transactions not contemplated by the regulations on domestic financing be eliminated.

For my second question, I'd like to refer to a letter that I received recently and that is signed by the Director General of Development and Peace. It concerns a project funded in part—I don't know to what extent—by EDC involving the construction of a dam in Columbia. This project resulted in the murder of several people, in the displacement of native populations and so forth. Development and Peace has taken up the defence of the native populations. While five minutes isn't enough time to recount the whole story, I can tell you that some rather dramatic events have taken place.

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Perhaps you have received this letter. No? Then I will send you a copy because mention is made of EDC. I'd like to read you an excerpt from this letter:

The strategy currently being employed is obvious: if the natives flee or if any resistance on their part can be quelled, then the dam can be filled. Compensation costs would thus be low and control could be acquired over their lands.

I said that some people had been assassinated. The letter continues:

The Export Development Corporation, an agency of the Government of Canada, is obviously not involved in any plots. However, acting on behalf of Canadian commercial interests, it has played a major role in bringing this project to fruition.

The government is currently undertaking a review of the Export Development Act and re-examining how the Corporation fulfills its mandate. Pursuant to that mandate, EDC must take into account the government's overall priorities, particularly as regards environmental protection and respect for human rights.

In our view, it is important to know how EDC is fulfilling this part of its mandate in the matter of Urra 1. Canada's role in this particular project has raised many questions. We will confine ourselves to asking five questions deemed most basic:

1. Initially, did EDC take into consideration the fact—and this was no secret—that the project could cause an escalation in violence and lead to the unfair treatment of the region's native populations?

2. Did EDC take into consideration the concerns and objections raised and analyses done by the region's natives about the project's impact on the environment and on people's way of life?

3. Did EDC consult with native communities to hear their views on the social and environmental repercussions of the dam?

4. Did EDC discuss the specific context...

The letter concludes on the following note:

Since EDC is an important business partner in this venture, its actions could have wide-ranging repercussions.

The Director General also says that “EDC should institute a mechanism to ensure transparency so that before any funding is committed, the human rights situation in the country in question is properly evaluated.”

You've made a recommendation, but the Director General contends that a mechanism which would ensure transparency is warranted. This would be in addition to your recommendation.

Mr. Maxime Faille: Obviously, we're not aware of this particular case. To my knowledge, it hasn't been brought to our attention. I think this is a question for EDC to address.

Our firm is indeed recommending that a mechanism be adopted to do environmental assessments of projects. In accordance with the World Bank model, this mechanism would address the issue of displaced persons. We also recommend that there be public disclosure on environmental assessments within a specific time frame so that the public and interested parties can comment on these environmental reviews.

That is the thrust of our recommendations. Of course, a balance needs to be struck between allowing Canadian exporters the opportunity to compete on world markets and ensuring that Canada upholds its commitments where the environment and human rights are concerned. I believe our recommendations are mindful of this balance, but we're not aware of the particular case you spoke of since it was not brought to our attention.

Ms. Francine Lalonde: Thank you.

Mr. Guy David: To quickly answer your first question, without contradicting what's been said about domestic financing, the current regulations accompanying the legislation stipulate, albeit rather subjectively, the types of domestic financing in which EDC may engage. Furthermore, the regulations state that either the Minister of Finance or the Minister of International Trade, or both, may authorize transactions not contemplated in the regulations.

Our position is that only in exceptional cases should EDC engage in domestic financing, since the domestic market is fairly well served by Canadian banks. Moreover, these exceptional cases should be spelled out clearly in the regulations. We think it's going a little too far to state that the minister may authorize transactions in cases that are exceptions to exceptions. We would like the regulations to be explicit, that is to state that EDC may engage in one specific type of financing, and that's all. EDC and the banks could then get together and discuss whether or not these regulations are too narrow, and some kind of compromise could be worked out.

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[English]

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

I believe everyone's had an opportunity to express their concerns.

I would like to echo Ms. Augustine's compliments on the report. It is very readable.

All right, we have time for a short one, Madame Picard.

[Translation]

Ms. Pauline Picard: I'd like you to clarify something you said. You stated that a number of initiatives have been undertaken by EDC to further develop Canadian capacity to finance international trade and investment, but that these initiatives have been underutilized. Do you know why that is? Why have these initiatives not been utilized to further develop our capacity to finance international trade? If EDC moves to a more commercial orientation, what would become of its public role in the long term and how would it manage not to compete unduly with private sector companies supplying the same services?

Mr. Guy David: To answer your question, I have to say that there is a slight difference between the English and French versions of my submission. I'll have to check that. I think there's an error in the report.

Ms. Pauline Picard: Naturally, I'm concerned about this.

Mr. Guy David: Admittedly, a number of initiatives have been undertaken, but I believe the submission states that a number of initiatives should be undertaken by EDC. These new initiatives are, I believe, listed on page 6 of my notes. These initiatives could and should be undertaken. As for those initiatives that have already been taken, we have noted that these are underutilized, particularly by the banks. Therefore, they don't go far enough.

Ms. Pauline Picard: If EDC shifts to a more commercial orientation, does it not run the risk of competing with firms that finance international trade?

Mr. Guy David: Of course it does, and we acknowledge this risk. However, we also maintain that EDC's evolution toward a more commercial orientation should not be restrained. We acknowledge that such an evolution is taking place and that EDC has a commercial orientation. For example, we state that some activities could be undertaken by subsidiaries which, to all intents and purposes, would operate on a commercial basis. In so doing, we're admitting that these companies would be placed on an equal footing. When it comes to disclosing financial support, the environment and other areas, we recognize that EDC should continue to be subject to the same regime that applies to public institutions, not to the private sector.

Ms. Pauline Picard: I'm a little sceptical. Very clear, transparent mechanisms will need to be implemented if EDC is to shift to a new orientation with respect to international trade and everything else you talked about earlier, that is the banks. I'm not fully convinced or perhaps I haven't fully understood this issue. It's all rather complicated, in my opinion. When a new structure is adopted and a new orientation taken, it always leads to administrative chaos. Therefore, we need a mechanism that contains clear rules. I realize that you are making a number of recommendations, but as I see it, in the French version, the wording is not specific enough to prevent administrative chaos, total confusion and a loss of corporate focus by EDC.

• 1050

[English]

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

I think I'd better explain to you why we don't have too many members at committee today. Today there's an opposition motion by the NDP expressing a discontentment with....

The late Shaughnessy Cohen used to have an expression: “Banks are bad. Trade is bad.” A number of our committee members who would like to have been here very much are there, defending our trade position, and I think they've missed a very interesting meeting.

We thank you very much for being here.

I'm going to suspend the meeting for five minutes before we hear from our next crew.

• 1051

• 1102

The Vice-Chair (Ms. Colleen Beaumier): Colleagues, we are now going to hear from Louise Charron Fortin, director general, trade commissioner service, planning and policy. She's accompanied by Robert Shaw-Wood, deputy director, export finance division, and Richard Lecoq, director of the division.

Madam, the floor is yours.

Ms. Louise Charron Fortin (Director General, Trade Commissioner Service, Planning and Policy, Department of Foreign Affairs and International Trade): Merci, Madam Chairman, and members of the committee.

As Madam Chairman has indicated, my name is Louise Charron Fortin. I am currently director general of the trade commissioner service at the planning and policy bureau of the Department of Foreign Affairs and International Trade. I was formerly the director of export financing and oversaw the review of the Export Development Act and the production of this report.

With me today are Monsieur Richard Lecoq, currently director of the export financing division, and Robert Shaw-Wood, deputy director.

I am pleased to have the opportunity to be here today and to speak to you on the various elements of the review. As a career trade official and former ambassador working abroad on challenging commercial terrain, I can personally attest to the difference competitive trade financing can mean in closing a difficult transaction for a small company; in opening a new market against fierce large-scale international competition; in encouraging strategic investments; and in compensating for political and other risks.

A little over 18 months ago, DFAIT, in close consultation with the Department of Finance, began a process that was to result in the report on a review of the Export Development Act. This report was tabled by the then Minister for International Trade, Sergio Marchi, on July 21.

The Export Development Act defines the mandate and business lines of the Export Development Corporation. In 1993, when the act was last amended, EDC was granted expanded powers to directly and indirectly assist exporters, most notably in the areas of domestic insurance and equity investments in domestic companies and foreign projects.

At that time it was decided by Parliament that a review of the act would be undertaken five years after coming into force. Section 25 of the 1993 act also states that the report must be reviewed by committees of both the House and Senate or a joint committee of both houses.

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This morning I would like to address our approach to this review process and our objectives and operating principles in launching it. I will also discuss the broader context from our perspective, which is EDC's place in the government's international business strategy, and comment on some of the major themes presented in the report.

It is our hope that we will benefit from the collective wisdom of this committee to ensure that the outcome of this exercise is both forward looking and acceptable to stakeholders and interested parties. While the requirement for a review is stipulated in the Export Development Act, I should point out that there are no guidelines in place on what form a review of this nature should take. For example, it could have been narrowly focused and rather bureaucratic. Minister Marchi, as Minister for International Trade, however, determined that the cornerstone of this review would be an open and wide-ranging consultative process. In order to ensure a transparent, arm's-length, and fulsome review, DFAIT, through Public Works and Government Services Canada, issued a call for proposals to provide expert support to undertake this assignment and prepare a report for our minister.

As you are aware, the law firm of Gowling, Strathy, and Henderson, better known as Gowling, was the successful bidder among the three firms that competed for the contract. We requested that Gowling, following a broad consultative process involving exporters and other stakeholders, provide us with written analysis and recommendations on two major issues.

First, we needed an assessment of the extent to which the 1993 amendments to the Export Development Act had provided EDC with the flexibility to develop competitive financial instruments required to support the current and emerging requirements of Canadian business, especially SMEs. What was of particular concern to us was the effect of EDC's expanded powers in the areas of leasing, equity, domestic finance, and domestic insurance.

Second, we required that the consultant provide advice on what changes in the act might be necessary to help keep the Canadian trade-financing system in the forefront of international competition. In particular, we wanted to know how our export financing system compares with that of our major competitors, taking into account trends and private market capacity.

The launch of the review was widely publicized through press releases, extensive mailings, electronic mailings, newspaper advertisements, and through international trade and investment publications. Over 40 briefs were received and two rounds of stakeholder consultations were held in five cities across Canada.

I wish to reiterate that from the start it was of paramount importance that the reviewers operate at arm's length. We also insisted that anyone who wanted to appear before the review team be given an opportunity to do so. This has ensured that the report reflects a diversity of perspectives.

In our view, the reviewers have conducted a credible examination. Many have commented that this is the most comprehensive review of Canada's export financing system that has ever been undertaken. The 39 recommendations contained in the Gowling report clearly reflect the breadth and depth of the discussion.

Now I would like to turn my attention to the role of EDC within the context of the government's overall international business development strategy.

Our international business strategy reflects the thinking and priorities of DFAIT and 21 other departments and agencies, including EDC, which together form the virtual export promotion agency called Team Canada Inc. Recognizing the importance of trade and investment to Canada's prosperity, the government has set the four goals for this strategy: make Canada the world's best trading nation by enhancing our international trade competitiveness; make Canada the location of choice for investing in North America; create jobs by encouraging innovation and R and D by SMEs and multinational enterprises; and exercise leadership in global trade liberalization.

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As you are aware, EDC's mandate is to help Canadian companies be more competitive in a rapidly evolving global economy by providing world-class insurance and financing products and solutions. EDC becomes a crucial instrument in the government's achievement of all four goals. It should be noted that EDC now has over 5,000 customers, has supported almost $38 billion in business last year, and scores consistently high marks in client satisfaction surveys. In the view of many, they are indeed living up to their central corporate objective, which is to create and deliver capacity and opportunities in support of Canadian companies pursuing international business.

Within the context of this corporate mandate statement, and consistent with our international business development strategy, EDC has focused their attention on three specific objectives.

First, EDC has committed to increase the number of export-ready SMEs and improve their access to financing. SMEs represent almost 90% of its customer base, and EDC corporate name recognition initiatives are underway to increase SME awareness of their products and services. There is still work to do, however, given that there are a total of 75,000 Canadian exporting companies, most of which are SMEs. EDC has also established SME financial services teams, which have developed new programs with commercial banks. These teams collaborate extensively with the department's own SME export promotion division to reach more SMEs.

EDC is also working closely with other Team Canada Inc. participants, particularly the Canadian Commercial Corporation, the Business Development Bank of Canada, and the Farm Credit Corporation. As a group these corporations are known as the Council of Crown Financial Institutions, and they cooperate to provide a more seamless delivery of services to SME clients.

Second, EDC is assisting more companies to diversify into a wider range of international business markets, and in particular supporting exporters in developing markets. Last year EDC assisted Canadian exporters and investors doing business in 200 countries, 130 of which are considered emerging markets. The corporation has adopted specific strategies, such as the creation of emerging market business teams, to ensure this remains a focus of the corporate plan. EDC's business in high-risk markets is currently running at about $9 billion per year, which provides a tangible example of how the corporation has helped diversify Canadian exports away from the U.S. market.

Thirdly, EDC is dedicated to building stronger partnerships with other intermediaries in the private and public sectors to derive maximum benefit from available resources. One way this can be accomplished would be for EDC to expand its loan syndication activities with Canadian and foreign banks in arranging project loans to the benefit of exporters and investors. The corporation has also launched some new initiatives to partner with private sector insurers and has in place a number of products to involve Canadian banks more closely with export support.

A major challenge for EDC will be to make these latter ventures work effectively. The banks have vast domestic and international networks, and we believe our exporters should be able to take full advantage of them. Canadian banks seldom provide medium- to long-term export financing for Canadian exporters because EDC does that directly. On the other hand, U.S. and British banks do provide such financing to their exporters, but under government guarantees. We anticipate that as our commercial bank branch networks are more actively engaged in export support with the assistance of EDC, the number of SMEs taking advantage of our export support program will increase. The report also concludes that EDC needs to do more to develop the capacity of the Canadian financial sector to provide support to exporters.

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The issue of partnership with the private sector, and in particular with Canada's financial community, is in fact one of the major themes in the Gowling report, and we are very pleased that it has been addressed.

In general, we agree with the report's conclusion that EDC has done an effective job in supporting our international business objectives and those of Canada's exporters. It is an organization that is changing as it faces the challenge of adjusting to new international dynamics, and we support this orientation. The report does not recommend any radical change in direction for the corporation. It does deal with a number of contentious issues, such as the role of human rights and environmental considerations in EDC's approval process for loans and insurance and a policy of greater disclosure about EDC operations. All these issues are very important to our department. At the same time, we need to keep in mind exporter needs when facing international competition.

We also accept the logic of the recommendation that the corporation continue to operate in a commercial fashion and subject to commercial disciplines, since this allows them to operate in a self-sustaining manner. This commercial orientation makes EDC unique among export credit agencies. However, it is important for us that this commercial orientation be balanced with a due regard for the public policy aspects of their mandate. This would include their role in carrying out our international business strategy, which, as I mentioned earlier, would include attention to such issues as support for SMEs and for companies in higher-risk markets that would not be attractive to private sector financial institutions. It is also important for us that EDC continue to respect our international trade obligations at the OECD and the World Trade Organization.

By way of conclusion, let me say that the department is looking forward to receiving your views on the report. These views will provide guidance to the government in its consideration of the recommendations made in this report, along with the comments of other interested groups from whom you will be hearing.

Exports are vital to the economic well-being of Canadians. We are more reliant on trade than any other OECD country. Our continued success in exporting will depend in large part on a vibrant and durable system of export finance and insurance support in Canada.

Thank you for your time and interest.

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

We'll begin with the questioning now.

Mr. Rocheleau.

[Translation]

Mr. Yves Rocheleau: First off, I want to express my utter dismay over the fact that the committee failed to insist that the department provide us with copies of its presentation. I don't know if this is indicative of the committee's mindset, since I'm new here, or of the culture of the federal Department of Foreign Affairs, but in both cases, I think it explains a little better the image marketed abroad as far as Quebec is concerned, or is indicative of how Quebec is ignored abroad, as we saw in the documents circulated this summer which proved to be highly informative.

[English]

The Vice-Chair (Ms. Colleen Beaumier): Excuse me, Mr. Rocheleau, there is no English document presented either, so those of us who are anglophones are at the same disadvantage you are.

Ms. Jean Augustine: We are all in the same boat.

[Translation]

Mr. Yves Rocheleau: I'm not sure whether treating parliamentarians in such a cavalier manner is a reflection of the committee's culture or of the department's culture. It's already tough for us because things move so quickly and this doesn't help us fulfil our obligations toward our constituents.

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I have two questions for the witness, the first one having to do with recommendation 9 of the Gowling report where it is suggested that the discretionary power of the Minister, as we call it in Quebec, to authorize a transaction, even one not contemplated in the regulations, be eliminated. I'd like to know whether the Minister of Foreign Affairs in fact has the authority to exercise this right and how often he has done so?

My second question concerns a comment contained on page 26 of the report. Allow me to read the last few lines of text to you.

For example, the concept of “Canadian benefits”, which has been a basic consideration in EDC's provision of credit, is difficult to reconcile with financial strategies to support the globalization of Canada's most successful firms. Some will argue that support for foreign investment by Canadian firms is support for the export of jobs. On the other hand, without support for the expansion of Canadian firms in locations that minimize costs or expedite access to foreign markets, their growth will be truncated, optimum scale will not be achieved, and they will be vulnerable to competitors.

Practically speaking, does this mean that locally established Canadian firms which, for entirely rational business reasons, want to relocate to the United States, Malaysia, Peru and somewhere else, that is firms wanting to leave Canada to further their growth, could receive support from EDC to relocate in order to be more profitable, with the help of Canadian and Quebec taxpayer dollars?

Ms. Louise Charron Fortin: Thank you very much for your question. I'll answer in French, because language is a top concern.

Mr. Yves Rocheleau: I'm pleased to hear that.

Ms. Louise Charron Fortin: I must apologize for the confusion surrounding the matter of the report. We did indeed submit a report. I'm not sure what's happened to it, but unfortunately, it was written in English. We thought arrangements would be made here to have it translated. Therefore, again I apologize.

I will start to answer your question and I invite my colleagues to jump in with additional information, if they wish to do so.

According to the existing regulations, EDC must obtain the minister's authorization before supplying domestic financing for export purposes. When these regulations were drafted in 1993, I assume the objective was to give the minister some control over the Corporation's activities.

We are reviewing all of the Gowling report's recommendations and obviously, it will be up to the Minister to decide whether or not to relinquish this authority.

Personally, we feel the Corporation should remain accountable to some degree to the Minister, as far as this area is concerned.

Mr. Yves Rocheleau: As I understand it, in situations that were never contemplated but in which the Corporation should intervene in the public interest, the Minister may intervene, as is the case in Quebec where, pursuant to section 7 of the legislation respecting the Société générale de financement, the Minister of Industry and Commerce may intervene in the public interest when situations not contemplated arise. As I understand it, that's possible, but what I'd like to know is how often the Minister in fact exercises this prerogative, because the Quebec minister rarely does. How often does this happen at the federal level?

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Ms. Louise Charron Fortin: I was alluding to the regulations or to situations where EDC must obtain the minister's authorization.

Mr. Yves Rocheleau: Or invite him to exercise his discretionary power.

Ms. Louise Charron Fortin: Precisely, and the request can come quite unexpectedly.

Mr. Yves Rocheleau: Practically speaking, how often are such requests made?

[English]

The Vice-Chair (Ms. Colleen Beaumier): The time is up. I think we'll go to Madam Augustine.

Yes, I think there was a response that indicated that it wasn't at their discretion to give you exactly what you were looking for.

Madam Augustine.

Ms. Jean Augustine: Thank you, Madam Chair. I want to thank the presenters for coming before us today and say that I'm pleased with the process of consultation. I'm pleased we're doing this. The report is really a good one, so I think your collaboration in your choice of a firm to do this work was a good one. A readable document presented to us is always much appreciated.

I will go back to a couple of questions that I asked, the first to EDC. I was told that really they were not policy making; they were working within government policy. I would imagine that maybe you are the ones who might answer this.

I'll preface my remarks by saying that EDC does business in over 200 countries. It is stated in all the documentation. One hundred and thirty of those are emerging markets. They are high-risk markets. Their role is, as it states there, to help Canadian businesses to crack higher-risk, high-potential emerging markets.

There is a pamphlet that was given to us that says “Business without Borders”. I want to ask, in this business without borders and doing business in 200 countries, looking at the code of business ethics of the EDC, how that lines up with some of the international dynamics and the concerns we have around environment, labour laws, human rights, etc. Maybe this is where I would ask, how do you see your policy exemplified in the work of EDC? That's my first question.

The other, which has some connection with this, is that EDC states quite clearly that they want to continue to attract and retain the brightest and the best people. I want to ask how you see the brightest and the best exemplified in regard to the inclusion of women, minority racial groups, and others who represent the faces, especially the faces in urban Canada, in terms of EDC's personnel.

The Vice-Chair (Ms. Colleen Beaumier): I would remind you, Mrs. Augustine, that we're at five minutes.

Ms. Jean Augustine: All right. Basically I think there's a connection, Madam Chair, between my first and second questions.

The Vice-Chair (Ms. Colleen Beaumier): Yes, okay. Thank you.

Madam Louise Charron Fortin.

Ms. Louise Charron Fortin: You have indeed raised a number of policy issues dealing mainly with environment and human rights, if I understand it.

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On human rights, EDC has been seeking advice and follows the directions it gets from the department, because the department is responsible for the development of policy vis-à-vis a number of countries. I think you are all aware that if a country is deemed to violate human rights, there will be action undertaken in the department to manifest its mécontentement to that country. You've seen examples, I think, in recent days. So in this case, it's incumbent upon the department to provide EDC with that guidance.

On environment, there are many dimensions to this question. Indeed the department has been encouraging EDC to incorporate into its process environmental measures, environmental frameworks, to ensure that projects do address environmental concerns. Again, that is done in a twofold manner. First, EDC has for the longest while applied project risk standards and performed risk assessment on projects that include the factor of environment. More recently, EDC has put in place a framework. I believe the framework has been discussed by prior witnesses.

The other encouragement—in fact it is more than encouragement, it's work in tandem—is that we, with EDC, have been exercising—and modesty will not strangle me here—leadership in international fora to ensure that multilaterally consentient guidelines and frameworks are put in place. I am referring here to the OECD and the consensus forum.

I must say that we have one or two concerns about applying, at this stage, too stringent prescriptive measures on EDC and on the assessment process, and they are commercial concerns. As I just mentioned, there are no multilateral guidelines in place right now. Reference has been made to what's in place at the World Bank, but they're not being applied by our competitors, at least not holus-bolus. Most of the export financing agencies will at the very least ensure that countries apply their local codes or standards. We would take care at this stage to not apply extreme or very severe standards on EDC while we are very actively negotiating this international standard. That's where our policy implication comes from.

On the question of recruitment of the best and the brightest, I am disappointed that I'm not working over there. I guess I haven't been recruited. Indeed, EDC has set a very high standard as far as the technical and skill abilities of its staff. It's a very complex domain. In terms of their actual performance, especially in categories that you have mentioned, I do not have the information with me at this stage.

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The Vice-Chair (Ms. Colleen Beaumier): I think what Madame Augustine would like to know is whether there is any official policy for quotas in hiring.

Ms. Jean Augustine: Not quotas.

The Vice-Chair (Ms. Colleen Beaumier): No, but....

Ms. Louise Charron Fortin: The question for specifics would have to be directed to EDC, but I can affirm here that they do apply the rules of all government departments and institutions. They're a crown corporation, so they have to apply those rules.

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

Madame Picard.

[Translation]

Ms. Pauline Picard: Do you feel that EDC should take on a higher risk portfolio? When we compare EDC to other export development agencies, we see that it is the only one to assume a low level of risk, which restricts its involvement in projects, particularly in the poorest or in developing countries where the risk is much greater. In the various documents that I have read, I've noted that EDC's participation in these countries is limited because of the higher risks involved.

My second question ties in with Ms. Augustine's comments. I tend to think in a very orderly way and I hope your answer will enlighten me.

When a Canadian firm looks to EDC for financial support in order to do business in a country where, for example, carpets are woven by children forced to live as virtual slaves, what steps are taken? What rules does EDC follow to ensure compliance with policies respecting human rights or the rights of children?

I've heard and read that despite honourable intentions and claims of compliance, business is still being conducted in these countries. Sometimes, a small recommendation is made to the firm wanting to do business in the country where child labour is still prevalent, but are sanctions of any kind imposed? Earlier, you stated that measures needed to be taken and that you were trying to address certain concerns. You then proceeded to say that sanctions could be warranted and that there had been movement lately on this front. That's the first I've heard of this. What in fact is the policy respecting human rights that applies to Canadian firms wishing to do business or to export to various countries? Are concrete measures taken to ensure compliance with this policy? Are sanctions imposed? Are these firms denied financing or are they in fact encouraged to go forward? Are they told that these countries have poor human rights records?

Ms. Louise Charron Fortin: If I've understood correctly, your first question concerned EDC's capacity to assume more risk in certain markets.

Ms. Pauline Picard: I merely said that since EDC apparently could not count on government funding, it did not assume a great deal of risk. Is that true?

Ms. Louise Charron Fortin: First of all, you're correct in saying that EDC assumes the costs of its operations. In this respect, it is independent of the Canadian government. However, there is a system in place which allows it to manage and minimize risk in terms of its participation in foreign projects. There are means and systems in place for provisioning and for protecting its investments. As Mr. Gillespie mentioned to you, a provisioning system of $2.5 billion enables EDC to cushion its activities abroad and provides it with considerable room to maneuver. EDC also has its capital base of approximately $1.7 billion to draw on, which gives it an overall cushion of $4 billion.

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I'd also like to mention that EDC already conducts 25 per cent of its business in high-risk markets.

More recently, it has also developed a very sophisticated risk assessment system to help it manage risk more strategically and with an eye to the long term.

[English]

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

Mr. Patry, please.

[Translation]

Mr. Bernard Patry: I have a question on a totally different subject, namely EDC's role vis-à-vis the WTO.

The millennium round of talks is scheduled to get under way very shortly in Seattle and these negotiations will have a major impact on Canada, given its status as an exporting nation and especially given that WTO decisions cannot be appealed. These negotiations are rather sensitive, because they will very likely result in a certain loss of sovereignty for member countries, including Canada.

EDC's role seems much more to be one of satisfying the needs of SMEs. Customers are very satisfied with the Corporation's performance. Mr. Gillespie reported on this to us. The Insurance Bureau of Canada has, however, voiced some reservations. In its opinion, Canada is no longer meeting its international obligations toward the WTO and the OECD and could, in the not-too-distant future, face some commercial challenges from its partners. It seems that France, England, the United States and Germany have put in place very special mechanisms and that EDC could possibly be the target of legal action because it does not pay taxes and is not subject to Canadian insurance regulations.

Given these facts, do you really believe that the EDC act needs to be amended in so far as our commitments to the WTO are concerned?

Ms. Louise Charron Fortin: Let me give you some background information on the WTO. Recently, in the case of an appeal relating to the aeronautics sector, the WTO found that with respect to its corporate accounts, EDC was fulfilling its obligations.

At issue was the Canada Account. According to one decision, Canada was offering prohibited subsidies. Let me clarify one thing at this time. As part of our defence, and I use the term “our” in the royal sense, we made a strategic decision not to provide detailed information about the transaction in question, first of all because the plaintiff had not made a prima facie case and had failed to make or present substantive arguments. Secondly, if we had decided to provide this information, the confidential nature of these transactions and files would have been compromised. Therefore, our actions would have been prejudicial. It was because no information was provided that the panel ruled that we failed to meet our obligations.

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As far as the Canada Account is concerned, transactions made were in compliance with the consensus rules, but no evidence was presented, for the reasons I've just explained.

EDC's corporate account is subject to and in compliance with WTO requirements, as the recent case proved.

You raised a number of other points having to do with taxes, dividends and so forth. The matter has been raised in this forum. If we were to implement the recommendation calling for EDC to be moved to Part II of Schedule III of the act, such a move would in fact clarify EDC's commercial nature, but this isn't essential in order for it to comply with WTO requirements and rules.

Mr. Bernard Patry: Thank you.

Ms. Louise Charron Fortin: Thank you.

[English]

The Vice-Chair (Ms. Colleen Beaumier): You used the word “competitors” earlier. I'd like a clarification of what you consider competitors. Are we talking about banks or insurance companies? That opens up another whole avenue of whether government should be competing with the private sector.

Ms. Louise Charron Fortin: Thank you. When I used the expression “competitors”, if I remember well, it was in the context of talking about corporate competition, competing exporters to Canadian companies, not competing with EDC. I was talking about the competition out there with our Canadian companies.

The Vice-Chair (Ms. Colleen Beaumier): Okay, thank you.

Mr. Rocheleau.

[Translation]

Mr. Yves Rocheleau: I'd like to come back to the second question I asked earlier.

Based on the passage I read to you from page 26, are we to assume then that it is standard procedure for EDC to financially support a locally-based domestic firm which, with a view to increasing its profitability, wants to relocate to another country? Can this firm expect to receive Canadian taxpayer dollars to relocate, a move that would result in job losses in Canada?

Ms. Louise Charron Fortin: I believe, and the previous witness will probably be able to confirm it, that this is indeed, upon analysis, the thrust of the Gowling report recommendation.

The aim of the legislation and amendments enacted in 1993 was first and foremost to give EDC the capacity to invest in projects abroad as a participant, so as to open doors for Canadian firms and exporters seeking to market their products and services.

I will have to inquire further into this matter. Mention is made of joint shareholders in project financing.

Mr. Yves Rocheleau: EDC would be helping...

Ms. Louise Charron Fortin: Yes, that's the idea, because EDC's involvement at this level would create business opportunities.

Mr. Yves Rocheleau: And you see nothing wrong with this?

Ms. Louise Charron Fortin: Look, it's not my place to pass judgement, but if...

Mr. Yves Rocheleau: And the department sees nothing wrong with this?

Ms. Louise Charron Fortin: If the substantive argument being advanced is that this kind of financing helps create jobs in Canada because these goods and services are manufactured in Canada, then EDC will likely weigh this fact when the time comes to make a decision.

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Mr. Yves Rocheleau: I'm not passing judgement, but I'm wondering if this means that a firm might even be encouraged to relocate if, corporately speaking, this was deemed good for business. At issue are Canadian interests. Supposing a firm relocated to Malaysia. Fine, we'll have gained a toehold in markets in Malaysia and the Philippines, the company will pay its employees much lower wages and shareholders will be happy. However, will Canadian taxpayers be contributing in some way to the loss of 25, 100 or 200 jobs or, on the contrary, will you refuse to...? That's the gist of my question.

Ms. Louise Charron Fortin: I was referring to an investment, for example, in an infrastructure project abroad. For example, a Canadian firm teams up to work on an electrical generating plant in Africa.

Would you care to add to that, Richard?

Mr. Richard Lecoq (Director, Export Finance Division, Department of Foreign Affairs and International Trade): No.

Mr. Yves Rocheleau: Some contend that supporting investment abroad by Canadian firms is tantamount to supporting the export of jobs. That's where a number of questions arise. Is this kind of action justified? I'm talking about the report, and not necessarily about your policy.

Ms. Louise Charron Fortin: I understand.

[English]

The Vice-Chair (Ms. Colleen Beaumier): This is one of the things that is brought up in the recommendation. Generally we support the policy of disclosure, because I know a number of us.... I had problems in my own constituency, where the word was that EDC had lent the money, and the end result was the creation of two or three thousand jobs somewhere else, while there were big layoffs in Canada.

So until we have disclosure—and this is the point we're trying to make—until we have a policy of disclosure, Canadians really can't be sure of what kinds of projects their money is funding.

Ms. Louise Charron Fortin: That's a good point, and we do support a level of disclosure. In fact the corporation must be in a situation where it can demonstrate that ultimately the transaction or the investment they have made is to the benefit of Canada. The benefit may not be in the immediate creation of employment; it could be in the development of research and development in Canada. There are many ways of calculating how this participation has impacted on the Canadian economy at large.

The Vice-Chair (Ms. Colleen Beaumier): Well, yes, it may not be job creation, but it certainly shouldn't be supporting layoffs or the ending of employment in Canada. Until we can get some sort of disclosure, we have no accountability.

I'm sorry; I've taken up part of your time. Did you have more to add to that?

Ms. Louise Charron Fortin: If this hypothetical transaction involved the loss of positions, it would weigh very much in the analysis and equation in trying to determine if this is of benefit to the Canadian economy.

The Vice-Chair (Ms. Colleen Beaumier): That would be a tough one to figure out.

Madame Augustine.

Ms. Jean Augustine: Madam Chair, I have an article that's in some of the documentation that was given to us, and I keep tossing it back and forth. It's a little bit troublesome, but I'll ask you if you can, in 10 sentences or less, to respond to or rebut this statement in the article:

...Canada is the only nation that has not yet [reformed its credit agency]; we are out of step with our trading partners in the United States, Germany, France, Britain....

I'm sure you know where this article came from. It's right in the documentation we have. Is this so? Could you make a few comments about that statement, that we are out of step with our trading partners?

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Mr. Richard Lecoq: I will be provocative here in saying yes, the EDC is very different from our competitors, and we want it that way. We want the EDC to be competitive. When in other countries, their ECA is the organization of last resort, in our case, EDC's role is to be competitive and to be self-sustainable in their operation. That's why it doesn't cost the taxpayers any money, and I think the department supports that. So in that sense, yes, they are different from others, and we want them to be different from others.

Ms. Jean Augustine: Somehow I got the notion that “out of step” meant something a little different.

Mr. Richard Lecoq: I don't know.

Mr. Robert Shaw-Wood (Deputy Director, Export Finance Division, Department of Foreign Affairs and International Trade): I think the specific reference you're making is to the submission by the Insurance Bureau, and that's in relation to the other export credit agencies that have moved out of domestic insurance and privatized that side of their business.

EDC, I guess, depending on your perspective, could be considered out of step with that move, but the situation here has been different historically. We did not have much of a local base of credit insurance, so EDC moved into that and occupied that ground. Now, as the private sector is emerging as a force in its own right, there is the necessity to be considering partnerships in other associations. So we are sort of behind the Europeans and some other agencies, which already have developed domestic insurance providers.

Ms. Jean Augustine: I think the writers were from the Insurance Bureau.

The Vice-Chair (Ms. Colleen Beaumier): Thank you.

We thank you for appearing today. We're not necessarily an easy group to have to face, even if our questions aren't all that tough.

Ms. Jean Augustine: I thought my questions were tough.

The Vice-Chair (Ms. Colleen Beaumier): Well, mine aren't. I'm speaking for myself now, both in questions and in indication of attitude.

We thank you very much for appearing today.

The meeting is adjourned.