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PART II:
OBSERVATIONS AND CONCLUSIONS REGARDING THE GOWLINGS REPORT RECOMMENDATIONS

Mandate of the Export Development Corporation (EDC)

Gowlings Report - Chapter 3: Recommendation 1

1. Canada should continue to participate actively in the shaping of changes to international rules and disciplines governing export credits and insurance as these are negotiated in the OECD and the WTO. To facilitate Canada's constructive participation in this context, consideration 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, including consideration of a more distinct separation of EDC's Consensus and its market-based activities.

A 1993 amendment to the Export Development Act constituting EDC (which in 1969 replaced the Export Credits Insurance Corporation, which was created in 19441 gave EDC a broader mandate: "supporting and developing, directly or indirectly, Canada's export trade and Canadian capacity to engage in that trade and to respond to international business opportunities''.2

Under this mandate, EDC has developed many activities to finance, guarantee, and insure Canadian exports. As an Export Credit Agency (ECA) in Canada EDC conducts transactions authorized under the Organization for Economic Co-operation and Development (OECD) Arrangement on Guidelines for Officially Supported Export Credits (the Consensus). ECAs may extend credit to support exports that cannot obtain other forms of commercial financing. EDC also conducts market-based transactions that provide export financing and credit; most EDC activities fall into this category.

As has been noted, the export market is very important to Canada's economy. If the federal government is to ensure that Canadian goods and services can compete, it must also ensure that the export market is regulated and that all parties observe the rules. As the Committee noted several months ago in its report on the World Trade Organization (WTO),3 Canada must participate actively and assume a leadership role in the activities of international forums such as the WTO.

Recommendation 2

The Committee fully endorses Recommendation 1 contained in the Gowlings Report, that Canada must be present and active in the major international forums.

Also according to this recommendation, the Government should consider bringing EDC's activities more into line with those of ECAs in other countries. The Committee wishes to point out that Canada is not like the United States, France, nor Germany. Canada has its own public policy on international trade, and uses the available means - of which EDC is an important one - to implement that policy. The Committee does not believe that it would be appropriate for Canada to copy EDC's role from that of the Export-Import Bank of the United States or any other agency. Canada's economy is not that of the United States, and the Canadian way of doing things need not be the American way.

On the other hand, the Committee agrees with the Gowlings Report that EDC activities under the Consensus should not be confused with its other, market-based activities.4 In conducting transactions under the Consensus, EDC acts as a government agent, and these transactions are subject to the Minister's approval. A clearer distinction between the two types of EDC activities might prevent all of its activities from being scrutinized when the federal government is suspected of using the Canada Account to pay subsidies prohibited under Canada's international obligations.

Still, the Committee does not believe that at present a subsidiary is the best way of making this distinction between the two type of EDC activities. The Government and EDC should address this concern by considering changes to EDC's institutional structures if necessary. Disclosing additional information should also be considered as a way of addressing this concern.

Recommendation 3

The Committee recommends that the Government and EDC attentively address the concern about changes to EDC's institutional structure that would use subsidiaries or other means to distinguish between EDC activities under the Consensus and its other, market-based activities.

Changing EDC's Mandate

Gowlings Report - Chapter 4: Recommendations 2 and 3

2. The ED Act should be amended to restate EDC's mandate as follows:

The Corporation is established for the purposes of supporting and developing Canada's export trade and investment and Canadian capacity to engage in that trade or to respond to international business opportunities.

3. A provision should be added to section 10 of the ED Act to the effect that in carrying out its mandate and exercising its powers the Corporation shall give due regard to the benefits to Canada to be derived therefrom.

The Gowlings Report repeatedly recommends changes to EDC's mandate. For example, it recommends that the wording of the mandate contained in the Act be changed to delete the words "directly or indirectly", and to include explicit references to EDC's trade financing capacity and to economic benefits for Canada resulting from EDC activities.

The Alliance of Manufacturers and Exporters Canada (AMEC) and a number of other witnesses oppose any amendment of the Act that would have the effect of limiting EDC's current powers.5 When AMEC President Alan Curleigh appeared before the Committee, he said, "We differ with a number of [the Gowlings Review Team's] conclusions and policy recommendations because we are less concerned about the development of commercially based services and new lines of business on the part of EDC than we are about maintaining and indeed expanding EDC's risk appetite''. (Submission, AMEC, p. 4)

The Committee is reluctant to support amendments to legislation that confer authority. Any amendment of the wording of EDC's mandate could have undesirable effects. When the courts rule on legislative amendments, they first consider whether Parliament made the amendments because it wanted to change some aspect of the existing situation: they consistently rely on the purposive intent of Parliament.

Concerning the flexibility that should characterize EDC's mandate, Timothy Page, President of the Association of Consulting Engineers of Canada (ACEC), said, "In our view the Export Development Act, as amended in 1993, provides appropriate powers to allow EDC to remain flexible in its operations. We see no need to introduce limitations to its powers or to saddle it with requirements that are inconsistent with normal commercial principles or practices.'' (Submission, ACEC, p. 1) On the same subject, Richard Sloan, Vice-President and General Manager of Structured Finance at Bombardier, said, "EDC must have the flexibility to respond to export financing initiatives from other countries when they introduce a new competitive tool that provides our competitors with a competitive challenge. EDC has a recognized reputation in world markets for providing innovative solutions initiated by its talented staff. Providing a wide mandate to that staff will insure a competitive position for exporters." (Submission, Bombardier Inc., p. 4)

Recommendation 4

The Committee does not support the changes to EDC's mandate recommended in the Gowlings Report, which could have unexpected and undesirable effects. The Committee is persuaded that EDC conducts its activities appropriately and that there is no need at present to amend the wording of its mandate.

The Committee recommends that at present the Government not implement Recommendation 2 of the Gowlings Report, that changes be made to EDC's mandate.

Concerning Recommendation 3 of the Gowlings Report, that EDC should carry out its mandate with explicit reference to resulting economic benefits for Canada, the Committee's first Recommendation already notes that this could be accomplished by adding a clause to section 10 of the Act.

EDC's Activities

The Gowlings Report deals with a number of aspects of EDC activities. As has been noted, the Committee has benefited from the analyses contained in the Gowlings Report in expressing its own opinions on EDC activities.

A. Investment Ceiling

Gowlings Report - Chapter 4: Recommendations 4 and 5

4. The Cdn. $10 million limit should be removed for direct equity investments by EDC in foreign project financings.

5. The 25% limit on EDC's equity participation in an entity should be calculated on a fully diluted basis immediately following completion of the investment and parallel investments by co-sponsors.

In ACEC's brief to the Committee, President Timothy Page stated, ''[T]he financing of international projects has changed dramatically over the past ten years and the $10 million cap on EDC's equity involvement in projects has been too low to be of any real help. Today's marketplace is defined by large infrastructure projects developed, for instance, through public-private partnerships and/or build-operate-transfer delivery mechanisms where the pay back times are long term.'' (Submission, ACEC, p. 3)

Under the Regulations accompanying the Act,6 the amount of equity interest that EDC may acquire in a project may not exceed 25% or $10 million, whichever is less. As the Gowlings Report points out, this investment ceiling is low in comparison with the value of some projects in which EDC could invest.7 On this point, Jacques Lamarre, President of SNC-Lavalin, stated, ''[E]quity investments should not become a major undertaking for EDC and should not detract EDC's attention from its prime mission as a lending agency. I agree with the proposal to increase the current Cdn. $10M limit on the condition that the 25% maximum level of equity participation in any project be reduced to 20%. Furthermore, I would hope that contrary to some international agencies that EDC will not be allowed to demand an equity participation as a prerequisite to participate in the debt financing of a project.'' (Submission, SNC-Lavalin, p. 5)

The Committee, too, considers that this investment ceiling should be raised and that the present percentage limit of 25% should be calculated on a fully diluted basis.8 Instead of repeatedly amending the Regulations in order to increase the investment ceiling for a project, its diluted value, or how the diluted value is calculated, the Government could consider requesting an amendment to the Act so that the Governor in Council or the Minister responsible for applying the Act is authorized to set by order, from time to time, the investment ceiling and the criteria for determining the value to be used in calculating the related percentage.

Recommendation 5

The Committee recommends that the Government address the concern about EDC's investment ceiling for projects and find a more flexible way to update or change the ceiling.

B. Non-Project-Related Investments

Gowlings Report - Chapter 4: Recommendation 6

6. The ED Act should be amended to provide that except for project-related equity investments, EDC be restricted from making equity investments other than through a special purpose subsidiary established in Canada for this purpose and that the mandate and operations of such a subsidiary be set forth in Regulations adopted pursuant to the ED Act. These restrictions would not apply to investments made by EDC in subsidiaries or joint ventures which are themselves financing companies.

Recommendation 6 of the Gowlings Report is that EDC investment other than in projects be made through a subsidiary. These EDC activities appear quite limited. The Gowlings Report notes that financing Canadian businesses may be considered a form of subsidy prohibited under Canada's international obligations. Unfortunately, the Committee does not have enough information to express an opinion on this concern.

Recommendation 6

The Committee recommends that the Government attentively address the concerns raised by the recommendation contained in the Gowlings Report, that EDC investment other than in projects should be made only through a subsidiary.

C. Joint Ventures with Banks

Gowlings Report - Chapter 4: Recommendation 7

7. Section 468 of the Bank Act should be amended to remove from its ambit substantial investments by a bank in an entity in which EDC also holds a substantial investment, as defined in the Bank Act.

Recommendation 7 of the Gowlings Report is that the Bank Act be amended so that banks may invest in joint ventures with EDC. For EDC, these joint ventures would take the form of subsidiaries providing specific financial services such as leasing. At present the Bank Act prohibits banks and from holding large investments in joint ventures; to allow them to do so, section 468 of the Bank Act would have to be amended. The Committee supports this recommendation.

Recommendation 7

The Committee recommends that the Government, and particularly the Minister of Finance, consider the possibility of requesting an amendment to section 468 of the Bank Act so that banks are authorized to invest in joint ventures with EDC.

D. Leasing

Gowlings Report - Chapter 4: Recommendation 8

8. The ED Act should be amended to provide that EDC shall not engage in leasing other than through a subsidiary or joint venture corporation.

Recommendation 8 of the Gowlings Report is that EDC leasing activities be conducted through a subsidiary. At present, EDC leasing activities are practically non-existent, and are subject to the conditions set out in the Regulations. EDC is anxious to keep the flexibility offered by this method of financing.

The Gowlings Report rightly points out that a number of industries (including aeronautics, telecommunications, and oil and gas development) favour this form of financing, and that EDC could develop its activities by taking advantage of the fact that in Canada the need for leasing services does not seem to be adequately met.

Recommendation 8

The Committee considers that EDC should keep all possible flexibility in order to assist Canadian exporters, and that at present there is no need to set up a subsidiary. However, the Committee strongly encourages EDC to consider setting up a joint leasing venture with another financial institution, that could meet its needs.

E. Domestic Financing

Gowlings Report - Chapter 4: Recommendation 9

9. The Regulations under the ED Act should be revised to state more explicitly the types of domestic financing transactions in which EDC may engage and the constraints applicable thereto, and that the right of the Minister to authorize transactions not contemplated by the Regulations be eliminated.

Since the 1993 amendments to the Act, EDC has engaged in domestic financing to support Canadian businesses. It has also been able to finance projects or businesses not directly related to exports if authorized to do so by the Minister of International Trade and the Minister of Finance. Recommendation 9 of the Gowlings Report is that the Regulations be amended to define more clearly the type of domestic financing that EDC may provide and the constraints on that authorization. AMEC and ACEC oppose these amendments, considering that they would give EDC less flexibility.9 In its correspondence with the Committee, the Canadian Bankers Association does not address this point.

The Committee considers that EDC's experience in domestic financing does not justify these amendments at present. The Minister of International Trade and the Minister of Finance should monitor the domestic financing transactions EDC conducts or intends to conduct, and should ensure that they do fall under EDC's mandate of supporting and developing, directly or indirectly, Canada's export trade.

Recommendation 9

The Committee recommends that at present the Government not amend EDC's power to conduct domestic financing, but attentively monitor the transactions that EDC conducts or intends to conduct, and ensure that these transactions fall under EDC's mandate.

F. Contingent Liability Ceiling

Gowlings Report - Chapter 4: Recommendation 10

10. The ED Act should be amended to increase EDC's maximum contingent liability ceiling in subsection 10(3) to a level considered sufficient by EDC and the Department of Finance to avoid any risk of EDC attaining its statutory contingent liability ceiling.

In credit insurance, contingent liability is the total amount that an insurance company would have to pay out if claims were made under all of the policies that it had underwritten. To ensure that insurance that companies remain solvent and can pay out any claims made, there are standards governing the amount of insurance that companies may underwrite. Similarly, as a financing company, EDC may not underwrite risks totalling more than 10 times its authorized capital. Expanded EDC activities have meant that this ceiling may soon be reached; as well, EDC's financial capacity would allow it to assume a higher level of contingent liability.

Recommendation 10

The Committee agrees with Recommendation 10 contained in the Gowlings Report, that the contingent liability ceiling should be raised; it could be raised by changing the amount of the contingent liability ceiling, or by setting the amount on the basis of EDC's financial capacity.

G. Domestic Credit Insurance

Gowlings Report - Chapter 5: Recommendation 11

11. The EDC Regulations relating to the definition of a Canadian exporter for the purpose of eligibility for EDC insurance products should be amended as follows:

• the $5 million in export sales threshold should be removed;
• the current threshold of 15% should be replaced by a sliding scale that requires an increasing proportion of export sales to maintain "exporter" eligibility, along the following lines:

Total Sales -- Required proportion of exports
up to $25 million -- 15%
$25M-$50M -- 25%
$50M-$75M -- 50%
$75M-$100M -- 75%
over $100M -- 90%

• Flexibility should be maintained on both ends of the scale; in particular, EDC should be available on a last-resort basis to companies with at least 10% in export sales if it can be demonstrated that the private sector cannot meet the company's domestic needs.

For several decades, EDC has been offering to Canadian exporters credit insurance on their foreign receivables. A large proportion of EDC's clients have asked it to cover their domestic receivables as well. In response to this demand, EDC obtained in 1993 an amendment to the Export Development Act empowering it to offer domestic credit insurance.

The Gowlings Report looked into a number of factors justifying the attribution of this power to EDC, and the argument that it retains as the most compelling is that the Canadian market for this product is significantly underserved. While there are grounds for the concerns of the private sector, which would like to see EDC withdraw from this sector of activities, it appears that EDC's clients have remained (and intend to remain) loyal to it even if this loyalty entails supplementary costs. The Report adds that "to confine EDC's business only to those portfolios which are not deemed insurable by the private sector would be inconsistent with EDC's mandate to be self-sustaining" (Gowlings Report, p. 54).

When he appeared before the Committee, Clive Aston, President of Canadian Financial Insurance Brokers Ltd, explained that the quality of the service provided by EDC, both in underwriting insurance and in handling claims, justifies this loyalty. The relationship is quite simply mutually beneficial. A number of other witnesses also stressed the quality of the services provided by EDC, referring in particular to its employees' expertise and its rapid decision making.

While the private sector's concerns merit our respectful attention, the Committee does not think that EDC is competing unfairly with it. The private sector has not convincingly demonstrated a desire to penetrate the market. While demanding that the public sector withdraw from this type of activity, the private sector appears to wish to garner the fruits of a harvest that EDC has been cultivating carefully and with great astuteness for a number of years.

With respect to the value and quality of EDC's programs, Gerry Fedchun, President of the Automotive Parts Manufacturers Association, told the Committee that "EDC has a terrific programme to finance tolling built in Canada. They have an innovative financing programme that has allowed the industry to expand its exports and stay competitive." (Submission, APMA, p. 2)

With regard to the new definition of the term "exporter" proposed in the Gowlings Report, the Committee fears that EDC's current clients would no longer be able to benefit from its services if the definition were adopted (Gowlings Report, Recommendation 11).10 The question deserves special attention, and the Committee did not hear evidence that would justify such a change.

Recommendation 11

The Committee recommends that the Government not change the definition of the term "exporter" as suggested by the Gowlings Report, but that it continue to study the suggestion.

H. Promoting EDC Credit Insurance Products in Bank Branches

Gowlings Report - Chapter 5: Recommendation 13

13. EDC should collaborate with Canadian banks to promote the sale of credit insurance products through the Canadian bank branch network. Necessary adjustments should be made to the definition of "credit insurance" under the applicable Bank Act Regulations.

Recommendation 13 of the Gowlings Report is that EDC collaborate with Canadian banks so that the latter would promote the Corporation's credit insurance products via their network of branches. In its submission to the Committee, the Canadian Bankers Association does not deal directly with this possibility. The Committee can only encourage greater collaboration between EDC and the banks. The immediate beneficiaries of such a collaboration would be the small and medium-sized businesses that are taking their first steps into the export market or are planning to do so.

Recommendation 12

The Committee agrees with the Gowlings Report's recommendation concerning the participation of the Canadian bank branch network in the promotion of EDC's credit insurance products, and hopes that the Department of Finance will be able to study the question promptly so that it can request amendments to the Bank Act Regulations if required.

I. Withdrawal of EDC from Domestic Credit Insurance

Gowlings Report - Chapter 5: Recommendation 12

12. EDC should collaborate with Canadian banks on the sale of credit insurance products for the Canadian bank branch network. Necessary adjustments should be made to the definition of "credit insurance" under the applicable Bank Act Regulations for this purpose.

Recommendation 12 of the Gowlings Report is that EDC ultimately withdraw from the short-term credit insurance market after helping to develop private sector capacity in this area. The Gowlings Report explains that short-term credit insurance market penetration is only 7% to 12%. By contrast, in Europe some 40% of receivables are insured.

With only 7% to 12% of the potential short-term insurance credit and factoring market currently covered, it is hard to understand the private sector's persistence in demanding that EDC withdraw from this sector of activity. Private credit insurers and factors could considerably increase their volume of business without taking over EDC clients.

The Committee considers that by operating in this sector, EDC makes insurance products known to exporters and to Canadian business a whole, which can only increase demand for this type of product. The private sector as well as EDC can derive benefit from this. Mark Perna, President of the Canadian Factors Association, dismisses this interpretation: "One area where the Report's credibility is badly stretched, is its speculation that EDC's entry into domestic credit may have actually helped the credit insurance industry to grow, and it may have `increased awareness in Canada of the benefit of credit insurance'. To an active participant in the industry, this comment borders on the absurd." (Submission, Canadian Factors Association, p. 2) He added that market growth is just as likely to be the result of the trend to globalization in the insurance industry. The Gowlings Report observes that it cannot explain the growth that this market experienced between 1994 and 1997 (300% for EDC and 260% for the private sector), but notes that the increase coincides with EDC's entry into the domestic credit insurance market.

The Canadian Factors Association discussed with the Committee the complementarity that could exist between the public and private sectors: "From the point of view of Canadian exporters, both complementarity and competition can be beneficial, as long as private sector services are not excluded from the market. They can actually help to build private sector market capacity and promote higher quality, lower-cost services to exporters." (Submission, Canadian Factors Association, p. 3)

The Committee agrees entirely with the suggestion that EDC should set up, in collaboration with the private sector, a single short-term credit insurance policy for Canadian exporters. But the Committee does not see any pressing reason why EDC should withdraw from the Canadian short-term credit insurance market, given the benefits that this market appears to be the deriving from EDC participation at the present time (Gowlings Reports, Recommendation 12).

Recommendation 13

The Committee is not persuaded that the Canadian economy would be better served if EDC were to withdraw from the field of domestic credit insurance.

Given that one of the goals of Canada's trade policy is to develop capacity and expansion of Canadian enterprises, which includes enterprises active in the financial services sector, the Committee recommends that the issue of EDC's involvement in short-term credit insurance be the subject of further consideration in five years' time; the date scheduled for the next review of the Act, 2008, seems to be too far in the future.

Bank Participation in Medium-Term Financing

Gowlings Report - Chapter 6: Recommendation 14

14. The Government should make a program available to the banks on Canada Account which would provide guarantees for Consensus loans. The cost of establishing and operating this program would be charged to the banks in the form of risk-based Consensus-compliant guarantee fees. The program would only be established if a sufficient number of banks were prepared to subscribe to it.

The Gowlings Report points out that, unlike many foreign ECAs, EDC does not provide a guarantee framework to the private sector (e.g., the banks) for medium-term Consensus loans. Because EDC competes directly with the banks on this type of loan, it would be difficult for the Corporation to offer them a guarantee program. Recommendation 14 of the Report therefore proposes that such a program to be set up and administered by the Government, as long as a sufficient number of banks are prepared to subscribe to it. The costs of establishing and operating the program would be covered by guarantee fees.

Canadian banks are active in this type of loan, but they have chosen to concentrate their activity in the framework of their foreign operations. They can thus benefit from the guarantees offered by ECAs in the countries where they are doing business.

In its submission it sent to the Committee, the Canadian Bankers Association confirmed that the banks have a lively interest in a program of this kind and that the Association supports the recommendation. Their submission adds that EDC should not be authorized to carry out this type of transaction except in cases where there is no private sector involvement.

On this topic, Jacques Lamarre, President of SNC-Lavalin, told the Committee that "Resources at EDC are already scarce to analyse transactions and country risks. The creation of a separate program whereby risk analysis and management would be duplicated is quite risky. We are strong believers that a `one-stop' shop approach will best serve the interest of Canadian exporters." (Submission, SNC-Lavalin, p. 4) The Alliance of Manufacturers and Exporters of Canada voiced the following view: "It is not clear [to the Alliance] under what circumstances a new guarantee system would be preferable either to exporters or to the banks over the current arrangements. The Alliance suggests that a considerable amount of clarification and analysis is still required to assess the costs and benefits of such an arrangement before the government proceeds with full-scale implementation of this recommendation." (Submission, AMEC, p. 8)

EDC opposes the recommendation, and claims that the exporters themselves are opposed to it. It adds that establishing such a program could be extremely expensive for the taxpayer.

The Committee recognizes that establishing a new program could lead to financial losses for the Government, while EDC finances its activities in this sector itself. On the other hand, the Committee cannot ignore the fact that the use of Canadian banks' international resources could increase export sales of Canadian enterprises if such a program were created.

Recommendation 14

The Committee recommends that the Government give careful study to the question of setting up a new medium-term Consensus loan guarantee program that would have the backing of the banks, and to reach a decision based on the best interests of Canadian exporters and the country is a whole.

Increasing Canadian Capacity to Support Exports

Gowlings Report - Chapter 7: Recommendations 15-19

15. The Minister of Finance is proposing to amend the Income Tax Regulations to permit Canadian pension funds to participate in individual loans held by EDC and specified international financial institutions, such as the World Bank and the International Finance Corporation, without having to treat these assets as foreign property and subject to the 20% limit on such holdings. EDC should be strongly encouraged to take advantage of this provision by making the opportunity to participate in its loans available to Canadian pension funds. EDC should emphasize its capacity to arrange deals for broader consortia and reduce the extent to which it relies on its own resources to fund investments. EDC should begin to see itself more as a catalyst for other financial partners, including the banks and pension funds, in order to encourage their participation in international trade and project finance.

16. Consideration should be given to amending the ED Act to permit the sale of subordinated debt and other types of "hybrid" securities.

17. EDC should develop a policy and program to make the full depth of its country and political risk assessment capabilities available in the most timely manner to Canadian private sector financial institutions and to the Office of the Superintendent of Financial Institutions. To the extent feasible, such a program should be operated on a cost-recovery basis.

18. In addition to current representation in Beijing, EDC should proceed with its plans to station representatives in Sao Paulo and Mexico City on a trial basis, subject to review with DFAIT after a specified period of time (e.g., three years) and taking into account the role of the commercial banks.

19. The ED Act should be amended to enable EDC to establish places of business abroad, with the concurrence of the Minister of International Trade. The modalities of such representation (e.g., location of representatives in Canadian missions or in separate offices) should be addressed by EDC and DFAIT, possibly on a case-by-case basis.

The Gowlings Report explains that EDC is a recognized leader in project financing. However, it points out that the Corporation cannot and must not do it all, and that it should act as a catalyst for leveraging other Canadian resources.11

The Committee agrees with this analysis of the situation. EDC's size, resources and mandate all impose limits on it. At the same time, it occupies a privileged position for acting as a project financing intermediary. Its spirit of initiative and innovation must be put to good use in developing new project financing structures that will make possible participation by a greater number of stakeholders.

Recommendation 15

The Committee agrees with Recommendation 15 of the Gowlings Report that the major Canadian pension funds should be authorized to participate in individual loans held by EDC or other international financial institutions such as the World Bank or the International Finance Corporation. Currently, any such investment is considered an investment in foreign property and is subject to the 20% limit. Amendments would have to be made to the Income Tax Act to eliminate this obstacle.

Recommendation 16

The Committee agrees with Recommendation 16 of the Gowlings Report when it proposes the securitization of certain EDC loans. When it finances medium- and long-term projects, EDC should have the option available to it of converting these loans into marketable securities. For this to be possible, the Minister would have to introduce an amendment to EDC's incorporating legislation.

EDC's expertise in risk assessment (for example, country risks, political risks and transaction risks) is widely lauded. On the other hand, the Canadian financial sector does not have access to this information and so finds itself at a disadvantage when competing with foreign financial institutions that do have access to such information through their own country's ECA or from some other source.12

Recommendation 17

The Committee agrees with Recommendation 17 of the Gowlings Report when it recommends that EDC develop a policy and program for sharing risk assessments that could be useful to private-sector Canadian financial institutions and to the Office of the Superintendent of Financial Institutions. The Committee also considers that the implementation of such a program could be done, at least partially, on a cost-recovery basis.

To gain more detailed knowledge of foreign markets and to enable the Canadian economy to benefit from this knowledge, EDC uses the government network of trade commissioners. It recently established a contract officer in the Canadian Embassy in Beijing and it is proposing to station representatives in Sao Paulo and Mexico City. To continue extending its expertise and to assist Canadian businesses further in penetrating foreign markets, EDC would like to establish "stand-alone" offices abroad.

When he appeared before the Committee on April 29, 1999, as part of its consideration of the WTO agenda, Timothy G. Plumptre (Senior Vice-President, Trade Financing and Correspondent Banking, Scotia Bank) had some extremely interesting and instructive comments about the need to securitize international transactions by Canadian exporters. In his view, agreements on freer trade may well remain pious hopes, as long as exporters cannot sell their products and services abroad with complete confidence. The mechanisms that guarantee Canadian exporters that they will be paid or their sales abroad are thus absolutely essential. Through their international networks, Canadian banks are already working with Canadian exporters on international markets, but there are risks that the banks are not ready to assume.

According to Mr. Plumptre, the ECAs, as agents of their governments' trade policy, must round out the capacity of the private sector by assuming certain risks. A number of ECAs play this role, like the Eximbank in the United States. EDC, which is expected to make a profit, has a tendency to be too cautious in the risks that it undertakes. He also added that EDC should be less nervous about high-risk markets. If it is not to be continually outpaced by the ECAs in other countries, which are very active in these markets, EDC should increase its international visibility and be more aggressive.

At the same time, EDC's plans for foreign expansion should not make it forget that its primary raison d'être is its availability to Canadian exporters. It should seriously consider the criticisms about its lack of visibility in a number of Canadian regions and on the excessive concentration of its decision-making power in Ottawa. In addition, more frequent contact with the managers of "remote" branches of Canadian banks that could be identified as serving exporters or potential exporters could have a beneficial effect on EDC visibility and help it to promote awareness of its services.

Recommendation 18

The Committee endorses the Gowlings Report's recommendations on strengthening its international presence. EDC should proceed with its plan to station representatives in Mexico City and Sao Paulo. An amendment should be made to the Export Development Act so that EDC can establish offices abroad with the approval of the Minister, on terms and conditions established by the latter.

Supporting Services to Small- and Medium-Sized Enterprises (SMEs)

Gowlings Report - Chapter 8: Recommendations 20-27

20. In the case of transactions involving SME exporters, EDC should dispense with the requirement for a legal opinion as to the legality, validity and enforceability of the commercial obligations of the foreign buyer/borrower. EDC should rely on documentary evidence of the legal existence of the foreign buyer/borrower without the need for independent verification from the borrower's lawyer.

21. EDC should continue to constantly monitor and streamline the way it serves SMEs, and continue to improve and enhance the products and services it provides to them. EDC should address specific concerns and problems relating to SMEs, such as product liability insurance, with specific targeted solutions.

22. Given the growing importance of the service sector and the high-quality employment it generates, EDC should increase its efforts to provide financing against service-sector work in progress, particularly in specific transactions involving SME firms. This will require a rethinking on EDC's part as to how it approaches commercial risk in these situations, and a willingness to accept the track-record and reputation of the service firm as a proxy for the financial value of its uncompleted work.

23. EDC should continue to develop vehicles for working more closely with the commercial banks to enhance the support they provide to SMEs, such as the approach reflected in the NORTHSTAR "model."

24. EDC should also consider initiatives to improve coordination of its service offerings with those of the commercial banks, including:

• providing information about its services through bank branches;
• providing training to a significant number of bank staff in trade finance and the use of its risk management and finance products;
• promoting the sale of its insurance products through bank branches; and
• sharing risk information with banks.

25. EDC should expand its efforts to increase the visibility of its services in the regions through:

• the decentralization of decisions on smaller transactions to its regional offices and the strengthening of these offices; and
• intensifying EDC/BDC cooperation, with a view to providing clients of either institution with an integrated approach to government services to small business.

26. The government should assess the extent of progress made in integrating the delivery of programs from the point of view of the small- and medium-sized business exporter approximately three years from the date of this Report.

27. EDC and Agriculture and Agri-Food Canada should make a concerted effort to mobilize the non-grain portion of the Agri-Food Credit Facility Program without further delay in order to provide financial support for exports from Canada's non-grain agriculture sector equivalent to that available to foreign competitors.

The Gowlings Report points out that SMEs - defined as businesses with annual revenues up to $25 million - account for about 97% of Canada's 75,000 exporters, and 87% of EDC's over 4,000 customers. The number of SME customers served by EDC and the volume of SME export sales supported by EDC have more than doubled since 1993. The Committee also appreciates the efforts that EDC has been making to enhance SME-targetted programs along lines which were recommended in its June 1996 Report, Canadian SMEs in the World Economy: Developing Effective Business-Government Partnership for International Success, through such initiatives as: the Emerging Exporters Team and SME Financial Services Team; the Master Accounts Receivable Guarantee Program (MARG); the Northstar Trade Finance and ExportEase joint ventures; the streamlining of loan procedures and simplified note purchases; the sponsorship of a new SME-directed "Roadmap to Exporting" publication; and so on.

Most of EDC's existing SME customers seem satisfied, and almost three-quarters of respondents surveyed by Environics for the review could not think of anything that EDC should do to improve its services. At the same time, the Gowlings Report cites a 1996 survey conducted by the Canadian Federation of Independent Business showing that many small companies had never heard of EDC, and that even among "heavy exporters", less than 10% had ever used its services. (p. 95) According to one witness strongly supportive of EDC's role, Richard L'Abbé, President of Med-Eng Systems Inc.: "Though we are a recognized aggressive exporter, we have not had a visit of an EDC representative in years, nor do they solicit our opinions on new products we feel they could offer." (Submission, November 30, 1999) In regard to issues of visibility and accessibility, the Report also identified problems in EDC's working relationships with the banks resulting in lack of coordination and considerable SME frustrations. It argued that: "EDC must more vigorously promote its SME exporter support services within the banking networks through seminars, meetings and training sessions across Canada". (p. 94)

The Canadian Bankers Association, in its 25 November letter to Minister Pettigrew, acknowledged that "the needs of SME exporters are still not adequately addressed", and suggested changes to several EDC programs "to make them more accessible to SMEs and, thus, more widely used." But the CBA was more reticent about employing their members cross-Canada network, stating that: "actually promoting the sale of EDC's insurance products through bank branches would seem inconsistent with present government policy which prevents the banks from selling insurance from private sector companies." (p. 3)

In general, there was broad business support for the Gowlings recommendations. Several witnesses addressed additional measures that EDC could undertake to increase its support to SMEs. For example, Mr. L'Abbé suggested "mentoring" services as "an ideal role for EDC", and also pressed the issue of greater local access through the banks. Timothy Page, President of the Association of Consulting Engineers of Canada, submitted his members' view that "EDC is uncompetitive for deals involving sums under $2 million . . .[and] that this issue may require a set aside envelope for projects of this size." They also called for EDC services to SMEs to be "clearly defined in documentation easily accessible to the public". (Submission, November 18, 1999, p. 4-5) Jason Myers, Senior Vice-President of the Alliance of Manufacturers and Exporters Canada (AMEC), reinforced the message of enhancing EDC's risk appetite in support of SMEs. However, AMEC expressed a caveat in regard to Recommendation 20 on alleviating foreign legal requirements, suggesting this should "reflect the size of the transaction involved, rather than the size of the company undertaking the transaction." (Submission, November 18, 1999, p. 5) Jacques Lamarre of Groupe SNC-Lavalin, also urged EDC to be "very careful" in this regard based on his experience of the risks that can often befall small companies in foreign markets. (Evidence, Meeting No. 11, November 23, 1999)

EDC indicated to the Committee in its detailed comments that it was supportive or open-minded in regard to almost all of the Gowlings SME recommendations. It disagreed on only one specific point in Recommendation 25 on decentralizing decisions on smaller transactions to its regional offices. EDC maintains that service needs can be met through its efforts to improve regional representation, to implement new operational techniques, and to use electronic media for things such as on-line applications.

Recommendation 19

The Committee strongly endorses the Gowlings Report's recommendations and urges EDC to increase its efforts to provide accessible services to all potential SME exporters in all parts of Canada, paying particular attention to improving cooperation with other financial institutions and to developing the export-readiness and capability of SMEs.

Improving Transparency, Public Disclosure and Accountability

Gowlings Report - Chapter 9: Recommendation 28

28. EDC should be required to post, on a regular basis, specific information regarding transactions it has supported. Such information might include, for example, the name of the borrower, country, name of exporter, amount and type of financial support, term, and a brief description of the goods, services or project involved. Transactions should be posted within 60 days of signing. Any financial support under a certain threshold or information that raised commercial confidentiality concerns for the Canadian exporter would be exempt from this regime.

The Gowlings Report concedes that "public disclosure obligations are almost non-existent under current legislation". (p. 100) The Export Development Act is silent on the issue, and EDC is exempt from the provisions of the Access to Information Act (AIA). As a federal government agency, EDC is also exempt from disclosure requirements under provincial securities legislation which apply to publicly-traded companies including banks.

The message from the business community, which was also heard repeatedly by the Committee, is either to keep the status quo in this regard or to be extremely guarded about any additional release of information beyond that of a general nature. For example, the AMEC submission expressed particular concern about Recommendation 28's requirement that EDC "post on a regular basis specific information regarding the transactions that it has supported", explaining that: "The line between what is market sensitive and what is not is not always clear. We would strongly object to any requirement for public disclosure of confidential or market-sensitive information. We are also concerned that more stringent disclosure provisions than those required by other financial institutions or export financing agencies would erode client confidence in EDC as a commercially oriented agency". (Submission, November 18, 1999, p. 9)

NGO submissions put forward a very different view, focusing on issues of public confidence and calling for more extensive disclosure provisions than Gowlings recommends, from the project proposal stage onwards, as well as on making EDC subject to the AIA. They suggested that competitiveness concerns were exaggerated, given available safeguards to protect commercial confidences, and the fact that U.S. export credit agencies are fully subject to access to information laws. The Policy Paper of the EDC Working Group argued that: "EDC should be disclosing enough information so that the public can evaluate whether the minimum standards set out in legislation and/or the policies of EDC are being met, and whether projects are harming the communities in which they operate." (Race to the Top, p. 10)

Put in this way, it is hard to disagree with the intent of disclosure; the problem is to determine what is "enough", but also not "too much", while proceeding in way that is practical, reasonable, and appropriate in regard to EDC's specific circumstances. In assessing the proposals for legislating substantially greater disclosure, the Gowlings Report attempts to strike a judicious balance among opposing perspectives. The Committee agrees that it achieves some degree of success. The Report observes that "the absence of opportunity for public scrutiny has created suspicion among certain civil society groups who view it as denying full accountability to the taxpayer. . . The best way to resist calls by non-governmental organizations for greater Government control over its operations may be for EDC to voluntarily lend itself to a greater level of public scrutiny." (p.101) Moreover, numerous problems of compliance with the AIA, as recently underscored by Information Commissioner John Reid (and indeed referred to in the EDC Working Group's policy paper), would seem to make that a questionable route of first resort.13 The probable result might be to frustrate NGOs in their quest almost as much as it would certainly vex, and perhaps impose an unreasonable burden on, EDC and its clients.

Maxime Faille of the Gowlings review team, gave the Committee a helpful explanation of how they arrived at their compromise position:

. . . 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. But it does have a specific provision within its legislation that basically in our view means that it doesn't have to disclose anything that's of particular value or relevance to most people. So we didn't think that was a terribly useful model; that it basically has all of the disadvantages of the Access to Information Act without really the advantages of creating greater transparency. So the model we proposed was . . . to require EDC or encourage EDC to develop a transparency model, a disclosure model that would be useful and relevant . . . Obviously this has to be balanced with issues of commercial confidentiality.

But on the whole we felt that a lot of information that we would be seeking is information that is ultimately available publicly through a variety of pieces of legislation and through certain disclosure requirements that do exist in the private sector, through securities legislation, etc. So we didn't feel that our recommendation would disclose sensitive commercial information that would hamper Canadian export competitiveness, but nevertheless it would create a greater sense of confidence among the public in EDC's activities. (Evidence, Meeting No. 7, November 4, 1999)

EDC's response to Recommendation 28 has been to support a limited disclosure of business information on a mandatory and measurable basis, but not to the extent of divulging detailed transactional information against the strong reservations of its clients. EDC appears to have recognized the demand for greater disclosure, and is promising to bring in a disclosure framework next year. Its submission of November 30, 1999 to the Committee elaborated as follows:

The disclosure framework that we are in the process of developing will find a uniquely Canadian solution to this complex issue. We believe two guiding principles should underpin the development of this framework:

D Information on EDC's services, programs and activities shall be provided to the public

D EDC cannot infringe upon the rights of others by unilaterally disclosing information that may affect our customers' interests

We expect to be in a position to report on this work in the early part of 2000.

In short, we appreciate and agree with the diagnosis emerging from the Review, but not necessarily with the prescription, which does not reflect a judicious balance that sufficiently protects the commercial interests of Canadian businesses. (Submission, "EDC Works", EDC, November 30, 1999, p. 5)

The Committee welcomes EDC's voluntary initiative. But one point that we would make in response to the above is that, in the case of a public corporation, however commercial its mandate, a "judicious balance" must also sufficiently protect the public's interests and guard against any potential damage to Canada's international reputation. Furthermore, if increased public confidence is to be achieved, we believe it would be in EDC's interest, at an appropriate time, to submit its disclosure framework in a suitable draft form for public consultation and comment prior to it being finalized as corporate policy. Subsequently, EDC should also be open to commissioning an independent review of the framework's performance after a trial period of several years.

There is another matter related more broadly to public information and accountability concerns, and leading into the debate over environmental and human rights impacts, which receives rather short shrift in the Gowlings Report - that is the issue of some sort of public appeals process which could in fact alert EDC to some potential problems and help to find constructive solutions in problematic cases. The Report claims that: "the introduction of a petition process would be impractical as this might unduly fetter EDC's ability to make timely decisions and would adversely affect the competitiveness of Canadian exporters." (Gowlings Report, p. 100) The Committee agrees that onerous legislative requirements as called for by some NGOs would not be appropriate. However, as Gail Whiteman of the North-South Institute emphasized to the Committee in her testimony on November 16, 1999, when the issue of the Colombia dam project was first raised, there needs to be some better mechanism in place to accommodate and mitigate legitimate public concerns. The form of that channel would be open to debate, but one suggestion might be for EDC to be proactive and to designate a position within its organization of "public information and appeals ombudsman".

This is an area in which international experience is still evolving.14 As part of improving transparency and accountability - a commitment which EDC has already accepted - we believe the idea deserves further exploration by EDC in consultation with all stakeholders, aiming both to enhance public confidence and to foster a better business environment that is in Canada's long-term interest.

Recommendation 20

The Committee endorses the principle of improving mandatory disclosure of information that is relevant to public accountability along the lines recommended by the Gowlings Report, to that extent that all concerns which are necessary to protect commercial confidences can be met. As an operational next step, the Committee recommends that EDC submit its forthcoming disclosure framework for public consultation and comment prior to its finalization as corporate policy, and thereafter commission an independent review of its performance following a trial period of several years. In addition, the Committee urges EDC to explore the feasibility of establishing a post of ombudsman within its organization to handle accountability and framework compliance matters related to public access to information and appeals.

Contributing to Environmentally Sustainable Development

Gowlings Report - Chapter 9: Recommendations 29-33

29. Canada should encourage the early development of an international consensus on environmental guidelines and procedures for export credit agencies. In the meantime, EDC should adopt a substantively and methodologically clear and transparent environmental framework.

30. EDC should submit its environmental framework to a process of public comment and ensure that the resulting policy receives wide acceptance among Canadian exporters and non-governmental organizations.

31. The ED Act should be amended: 1) to introduce a general requirement that EDC establish environmental review procedures consistent with the Corporation's commercial objectives; and 2) to empower the EDC Board to grant or withhold financing support after taking into account the beneficial and/or adverse environmental effects of a project or transaction.

32. EDC should develop and release a policy on public disclosure of environmental assessments which respects the requirements of commercial confidentiality and the commercial viability of projects. Ideally, such disclosure should be done, at the latest, concurrently with final approval of decisions by the Board. Clients should be encouraged, on a voluntary basis, to disclose their impact assessments in advance of Board approval and to invite public comments with a view to identifying and mitigating potential problems.

33. EDC should develop programs and processes which ensure that Canada's growing environmental export industry is competitive internationally, in the context of incentive measures being taken by other ECAs.

Current legislation governing EDC activities is clearly behind the times in terms of acknowledging principles of environmentally sustainable development which are widely recognized within the United Nations system, by the international financial institutions, and increasingly as well within the World Trade Organization (WTO) context.15 As Dr. Mats Karlsson, the World Bank's Vice-President for External Affairs and UN Relations told the Committee, the Bank has learned the hard way that it needed to strengthen its preventive systems as regards accounting for environmental impacts -

. . . so that we don't end up in situations when we're very far down the road in preparations of a project having perhaps not been transparent and then getting all the critique from outside, when we're already in a situation where we've invested a lot and where the political cost of backtracking is high. . . . all of this comes together to demanding of us, I think, a better judgment early on in the preparation. (Evidence, Meeting No. 10, November 18, 1999)

The Gowlings Report points out that: "The ED Act is silent on the subject of environment and sustainable development. EDC by virtue of its status as a Crown corporation, is not considered bound by federal environmental legislation." (p. 105) As noted in the submission from the NGO Working Group on EDC, this exemption from requirements under the Canadian Environmental Assessment Act is currently being litigated with respect to the case of EDC support for the Three Gorges dam project in China16; for the time being, however, EDC has a comparatively free hand with respect to developing and implementing its corporate policies in this area. There could even be some benefit in that regard, since as the Gowlings Report states: "It is entirely open to EDC to decline to support projects or transactions in another country for any reason whatsoever, including not being satisfied that environmental issues are adequately addressed." (Gowlings Report, p. 105)

While private-sector witnesses who commented on the subject tended to support EDC's current approach and expressed reservations about adding further legislative prescriptions to EDC's mandate, the much more detailed NGO submissions called for extensive legal measures based on a critique of EDC's practices and a continued skepticism about its intentions.

For its part, EDC appears to have given the matter considerable attention since the review process began, a fact which the Committee welcomes in itself. Indeed EDC has gone on record as expressing strong agreement with much of the thrust of the Gowlings recommendations, although it remains decidedly cool towards several suggested amendments to the ED Act regarding requirements for establishing formal environmental review procedures and conducting formal consultations. EDC also strongly opposes a mandatory disclosure requirement in regard to environmental impact assessments which it has not commissioned; however, it did indicate that it could "encourage disclosure by the project sponsor as a `best' business practice." (Annex 2 to Letter of EDC President Ian Gillespie to the Committee Chair, November 17, 1999, p. 7)

EDC submissions made the following points to the Committee:

• EDC agrees that all ECAs should strengthen their environmental assessment and mitigation policies and practices; indeed it will continue to take a leadership role in trying to build multilateral agreement within the OECD Consensus framework. In May 1999 EDC also joined Canada's major banks in signing the UN Environment Program's "Statement by Financial Institutions on the Environment and Sustainable Development."
• EDC has introduced its own public "Environmental Review Framework" (ERF) - one of only two ECAs to have done so. Following approval by EDC's Board, the ERF has been in place since April 1999, is posted on EDC's Website and is open to ongoing public comment.
• EDC insists that its framework does take into account the best practices of other lenders, host countries, and World Bank (WB) experience, having regard to the competitive conditions under which Canadian companies must operate. EDC states that it "strives to incorporate the highest, most appropriate environmental standards when assessing support for a given project, and this often does include WB standards, but not exclusively WB standards." (EDC Works, submission of 30 November, p. 6)
• EDC says it has consulted with NGOs in developing its ERF, and that it has incorporated certain elements based on that input -

". . . we modified our thinking to explicitly include socio-economic impacts within the framework. In practical terms this means taking into account the impact of a project on local populations. It means consulting with those affected on the ground, including local NGOs. It means seeking steps to mitigate environmental impacts. And it means evaluating and monitoring, with other lenders and governments, to ensure that human rights are respected in host countries." (Submission, November 30, 1999, p. 5.)

NGO spokespersons nevertheless remained unconvinced and concurred with the Gowlings Report's assessment that "EDC's environmental framework appears to lack substantive and methodological clarity." (p. 105) Gail Whiteman of the North-South Institute contended that: "While EDC conducted consultations on issues to be included in a framework, there have been no public consultations on the actual framework. It was not launched in draft form but rather presented de facto. It is important to note that this procedure contravenes international practice on the development of environmental review standards whereby agencies typically post a draft framework on the Internet for 60-90 days for public comments." (Letter to the Chair, with attachments, November 9, 1999) She also testified that: "Taking the perspective of corporate responsibility . . . EDC is lagging behind the private sector in this area. They are nowhere near as advanced as the private sector is in environmental management." (Evidence, Meeting No. 8, November 16, 1999)

The submission of the West Coast Environmental Law Association (WCELA) made the point that, while EDC is voluntarily taking some steps forward, amendments to governing legislation will significantly increase the likelihood that it "will pay more attention to the environmental consequences of decisions when they are required by law both to consider those consequences in advance, and to subject their decisions to public scrutiny." (Submission, November 16, 1999, p. 7) Concern was also expressed that EDC was not covered by the 1995 amendments to the Auditor General Act which, in creating the office of the Commissioner of Environment and Sustainable Development, obligate federal departments and agencies to prepare sustainable development strategies and to report on their progress in implementing these strategies. It was also pointed out that other ECAs and private-sector oriented international lending bodies do have explicit requirements in place which direct them to deny support to proposed project activities on environmental grounds, including those which might contravene a country's obligations under relevant international environmental agreements.

In regard to establishing such criteria and to publicly disclosing environmental assessments as a normal part of the project approval process, the Gowlings Report came to the conclusions that it is usually "in corporate best interests to be able to demonstrate environmentally-sensitive practices", and that commercial proprietary and confidentiality issues should not present a serious obstacle since: "Project proponents could simply be required by EDC to agree to the disclosure of their environmental assessments as a condition to obtaining EDC support." The Report noted that: "Representatives of the Canadian mining industry, for example, indicated they believe public disclosure is essential to an environmental assessment process, and the publication of environmental assessments should not be problematic." (Gowlings Report, p. 112)

Indeed the idea of a more transparent adherence to government-established public policy guidelines appeared to receive some support from Canadian business during the Committee's hearings. Speaking on behalf of the Alliance of Manufacturers & Exporters Canada, William Neil, Director of Government Relations-International of Nortel Networks, expressed the point as follows:

I don't think it's inappropriate for you basically to put down guidelines to EDC that say that the following projects if they are involved in these sorts of activities [abusing the environment or human rights in violation of international norms] will not be supported by Canadian taxpayers. We [the Government] expect you as the Board and the administrative functions of EDC not to be engaged in these activities, and if we find out you are you will cease immediately. At the same time, you could place an onus on Canadian firms to make sure that they don't engage in those things at all, and if they know that they have to reveal it as part of a financing package. . . . drawing lines in the sand that are consistent with the way Canadians view the world doesn't strike me as inappropriate guidelines to give to EDC. (Evidence, Meeting No. 10, November 18, 1999)

More positively, an area in which there should be some common ground emerging among EDC, its business clients, and NGOs, is making greater use of EDC's resources to support competitive export capabilities among Canada's growing environmental industries. As WCELA's Linda Nowlan put it: "Canada has been a very good leader worldwide in forging environmental agreements, and helping other nations take a lead evironmentally. Unfortunately our reputation in that area has been flagging in recent years. Let's stop exporting problems and start exporting solutions." (Evidence, Meeting No. 8, November 16, 1999) EDC argues that it is already moving ahead in that regard, having launched an environmental exports initiative which aims to support upwards of $1 billion annually by 2002 in foreign sales of Canadian environmental technologies and services.

Recommendation 21

The Committee accepts that EDC's environmentally-related plans are a good start but agrees with the Gowlings review that they are insufficient in themselves. At the end of Part I of this Report, we suggested a general amendment to Section 10 of the Export Development Act which would add language requiring EDC to give due regard to "the commitments and obligations undertaken by Canada under international agreements". In our view, this would include internationally-affirmed principles of sustainable development and obligations under multilateral environmental agreements. If there is any doubt on that point, wording to this effect could be added to Section 2 (Interpretation) of the Act. We also see merit in adding language elsewhere in the Act which would impart statutory weight to EDC's environmental review framework and establish some basis of environmental criteria on which to determine the eligibility of project proposals for EDC support.

While EDC may see such measures as "redundant", in light of the perceived weaknesses in its present Environmental Review Framework, we believe that EDC could further enhance its public credibility by conducting a formal consultation with stakeholders on the framework's performance after its first year of operation (i.e., in the spring of 2000). Thereafter, we also believe that independent public oversight - reporting to Parliament at regular intervals on EDC's performance in respect of the implementation of its Environmental Review Framework - would be enhanced by adding a provision to the Auditor General Act establishing the Office of the Commissioner of Environment and Sustainable Development as the Government's designated agent for that purpose.

In regard to disclosure and accountability issues, the Committee takes the view that disclosure of environmental impact assessments which allows sufficient time for preventive action - i.e., identification and mitigation of potential problems as early as possible in the course of the proposal approval process and the project cycle - should be the operating rule, subject only to any commercial confidentiality and viability requirements that the Government deems essential. In addressing this matter in its forthcoming public disclosure framework, we would urge EDC to carefully consider all of the arguments and relevant international experience. Finally, as we suggested in the previous section, EDC should explore the option of creating an ombudsman post within its organization to respond directly and in a timely fashion to public inquiries and appeals regarding sustainable development impacts.

Enhancing Respect for Internationally-Recognized Human Rights

Gowlings Report - Chapter 9: Recommendations 34-35

34. As a matter of practice, EDC should consult with DFAIT in advance to ensure that EDC's planned country activities abroad do not conflict with Canada's foreign policy on human rights. DFAIT should establish a process to formulate human rights guidelines and disseminate information on a timely basis.

35. EDC should implement a policy whereby when applying for EDC financial or insurance services, Canadian exporters are asked to indicate on a voluntary basis whether they have adopted their own codes of conduct that ensure respect for human rights, ethical business conduct and fair labour standards in their international activities.

As mentioned in Part I, EDC has recently adopted a "Code of Business Ethics" which affirms that: "EDC values human rights and promotes the protection of internationally recognized human rights, consistent with the policies of the government of Canada." Furthermore, in its submissions to the Committee, EDC has said that it will promote its Code as a guide to business practice and will urge the adoption of similar codes by its private-sector partners on a voluntary basis. EDC has also welcomed the Gowlings review proposals which call on the Canadian Government, through the Department of Foreign Affairs and International Trade (DFAIT), to provide it with clearer and more formal advance country-level guidelines which could be applied to foreign market risk assessment and project approvals processes in the future.

The Gowlings Report observes that: "At present, no formal link exists between the human rights policies of the Canadian government and EDC ... Nor is there a body of international practice in this regard. While some superficial similarities exist between environment and human rights concerns, the former is much more advanced in terms of international consensus." (p. 114) The Report argues that the possibility for EDC decisions to be at odds with the government's human rights policies should be eliminated, but that beyond that, the application of existing legislation (such as the Export and Import Permits Act) should be sufficient without imposing a further prohibited country-level list on EDC. The review team also rejected imposing project-specific legal human rights conditions, arguing that such "conditionality is not realistic at this time as EDC is not a last resort for financing and it is unlikely that such contractual obligations would be accepted by exporters." (p. 116) Indeed, the Alliance of Manufacturers & Exporters Canada was opposed to a policy even of requesting prospective EDC clients to indicate on a voluntary basis whether they have implemented codes of conduct.17 EDC was more positive but disagreed with imposing any across-the-board requirement in regard to voluntary codes, arguing that this could penalize SMEs which are the least likely to have such a code in place.

The Committee is sensitive to concerns that imposing onerous prescriptive conditionalities could be unworkable - with process defeating purpose, in the cautionary words of SNC-Lavalin executive Jacques Lamarre (Evidence, Meeting No. 11, November 23, 1999) - as well as adversely affecting Canada's export competitiveness. However, if EDC and its private-sector clients mean what they say - that implementing voluntary codes of conduct is in fact "an element of good business practice" - it is hard to see why or how some formal acknowledgement and encouragement of that practice should "erode" commercial confidence. Such a position seems to us to be a contradiction in terms. Moreover, as we have expressed before, EDC is still a government agency, and one which carries Canada's reputation with it abroad. EDC therefore has a responsibility to maintain the confidence of its Canadian public shareholder and its externally affected stakeholders, as well as that of its existing commercial customers and business partners.

The NGO Policy Paper submitted to the Committee by the EDC Working Group contained a very detailed review of relevant human rights and human development issues, citing extensively from statements of government policy by Minister of Foreign Affairs Lloyd Axworthy, as well as from previous reports of this Committee and of the Standing Senate Committee on Foreign Affairs. Drawing from this analysis, most of the NGO proposals for formal human rights assessments and for the application of human rights criteria to project decision processes, have the worthy aim to ensure that no EDC financing is associated with activities which deny people's fundamental human rights - rights which Canada and most other countries have sworn to uphold through United Nations and other international conventions, and often under their own domestic constitutions.18 Appearing before the Committee's roundtable on Colombia on December 2, 1999, the Inter-Church Committee on Human Rights in Latin America recommended in its submission that, inter alia:

Where a project cannot be conducted in a fashion that does not contribute to repressive capacity or human rights-violating activity, EDC support should not be extended. Likewise, where a project may contribute to unacceptable environmental, social or cultural consequences (i.e., lead to violations under the UN Covenant on Economic, Social and Cultural Rights, as well as international environmental treaties) EDC support should not be extended. (Submission, "Hearing the Cry", Inter-Church Committee on Human Rights in Latin America, December 2, 1999, p. 15)

The Committee has listened, but does have real concerns about the feasibility of some of the lengthening list of prescriptive, often expansive, and sometimes subjective, normative criteria with which EDC could find itself to be overburdened if all of this well-intentioned advice were followed. As we indicated in Part I, the tests of practicality, necessity, and reasonable burden on EDC's commercial public-policy mandate must also be applied. We are also somewhat concerned at what appears to be a rather uncritical use, as inspirational "models", of various legislative requirements drawn from U.S. government statutes and agency practices. We tend to share the view of the Gowlings Report that: "Obviously, it is neither appropriate nor desirable simply to replicate the U.S. system in Canada." (p. 111)

As a particular case in point, take the issue brought up in several NGO submissions of legislating in respect of international compliance with core labour standards. The United States has had for some years provisions in its domestic trade legislation to enforce "worker rights" conditionality. However, the implementation of a unilateralist and legalistic approach which entails the extraterritorial application of U.S. law has proved to be problematic. It has also been severely criticized, on human rights grounds, by some of the world's leading scholars of the multilateral human rights system.19 The Committee in previous reports has firmly endorsed the principle of incorporating key labour rights - in particular, a new ILO convention prohibiting child labour exploitation - into trade accords on a multilateral basis that would actively seek out developing-country support.20 In our June 1999 Report on the future WTO agenda, the Committee urged closer WTO-ILO cooperation and working with other like-minded countries on "building support for the June 1998 ILO Declaration on Fundamental Principles and Rights at Work through all appropriate means and forums".21 As has been recognized by the U.S.-based International Labor Rights Fund22 and other advocates, in the wake of the breakdown of negotiations at the Seattle Ministerial Conference and the continued opposition of many developing countries to a formal trade-labour link, creative thinking is called for on all sides in order to bridge the gaps and to make concrete progress in terms of both international agreements and complementary domestic legislative measures.

The lesson to be drawn from the experience to date with international labour rights compliance is to proceed carefully on the basis of a constructive, multilateral and long-term approach. This remains a very complicated area of work in progress, with few certainties as a guide and as yet little multilateral consensus on important details. So while EDC and DFAIT should of course be open to making progressive improvements in Canada's domestic policy framework, the Committee understands that in doing so they will have to proceed with due care and diligence in weighing all aspects of the question.

Recommendation 22

The Committee supports the general thrust of the Gowlings Report's recommendations. Our earlier suggestion to add a Section 10 provision to the Export Development Act enjoining EDC to give due regard to "the commitments and obligations undertaken by Canada under international agreements" would also extend to United Nations human rights instruments, the ILO's 1998 Declaration on Fundamental Principles and Rights at Work, and other multilateral human rights accords to which Canada is a signatory. Similarly, our suggestion that EDC explore the establishment of an ombudsman post would obviously extend to the handling of public information and appeals related to relevant human rights conditions and to the manner in which their impact (in country risk and project-specific terms) is assessed by EDC in its countries of operation.

In regard to ethical business conduct requirements, the Committee sees merit in writing into the Act a general affirmation to the effect that EDC shall endeavour to promote its better business standards wherever possible. However, we believe that the detailed application should be left to evolve through an ongoing elaboration of its Code of Business Ethics, Environmental Review Framework, and future public disclosure framework, learning from implementation experience through periodic public evaluations conducted in collaboration with DFAIT.

Institutional Matters and Corporate Governance

Gowlings Report - Chapter 10: Recommendations 36-39

36. In recognition of its commercial orientation, the fact that it competes with the private sector, is financially self-sufficient and earns a return, EDC should be removed from Part I of Schedule III to the Financial Administration Act and added to Part II of that Schedule. Contemporaneously with this shift, the Auditor General of Canada should be replaced as auditor of EDC by a private sector auditor.

37. A representative of Industry Canada should be appointed to EDC's Board of Directors.

38. A nominating committee should be established by the EDC Board to recommend the appointment of directors to the Board prior to their formal appointment by the Minister.

• The nominating committee should establish criteria for selecting candidates for appointment to the Board.
• New EDC Board members should continue to be appointed by the Minister, but only after having been recommended by EDC's Board of Directors.
• The nominating committee should periodically assess the contribution of individual members of the EDC Board.

39. The ED Act should be amended to provide that notwithstanding section 105(5) of the Financial Administration Act, the President and CEO of EDC shall be appointed by the board of directors of the Corporation, which shall also fix his/her remuneration in accordance with guidelines established by the government for the remuneration of heads of government agencies.

The Gowlings Report argues that, consistent with EDC's commercial evolution, and as it appears to fulfill all of the criteria, the Corporation should move from being a Part I to a Part II corporation under Section 3 of the Financial Administration Act (FAA). EDC strongly agrees with this shift, which was also welcomed by the Committee's private-sector witnesses, and was not directly opposed by any witness. The Report goes on to say (though not in any recommendation) that, in line with such a move, "it would be appropriate for the Department of Finance to review EDC's status under the Income Tax Act." (p. 121)

The Committee agrees with this part of Recommendation 36. But we do not follow the rest of the Gowlings logic that the Office of the Auditor General of Canada (OAG) should then be replaced as EDC's auditor by a private auditor (even if we were to accept that this might bring a fresh perspective to bear on EDC's commercial operations, while retaining the requirement for a special examination of EDC by the OAG every five years along with other FAA controls). Not only was there no support for dropping the OAG as EDC's auditor from either EDC or witnesses generally, but the Committee received a detailed opinion from the Auditor General of Canada outlining some persuasive reasons why his office should be retained as EDC's auditor. (See Appendix 2, Letter of Auditor General of Canada to Chair of Committee, November 16, 1999.) Moreover, such a move would make no sense in light of our earlier suggestion to expand the scope of the OAG's mandate in relation to EDC through adding a requirement that the implementation of its Environmental Review Framework be reviewed by the Office of the Commissioner of Environment and Sustainable Development.

As to the remaining Gowlings recommendations on EDC corporate governance, the Committee shares the open-minded and supportive stance of EDC and other witnesses. We take note of the position of the Alliance of Manufacturers & Exporters Canada that certain matters are best left to the discretion of EDC's Board in line with best practices. EDC has also indicated its strong feeling that the size of the Board not be increased and that the present balance between private- and public-sector directors be maintained.

Finally, although not considered by the Gowlings recommendations, EDC has indicated to the Committee a few areas where it will be seeking "fine-tuning" changes to the Export Development Act with the aim of: enhancing the Corporation's identity and bilingual image; facilitating its representation in key overseas markets; streamlining the administration of the Canada Account; modernizing and strengthening EDC's corporate governance model consistent with evolving commercial best practices.

Recommendation 23

The Committee welcomes the general direction of the Gowlings Report's proposals in regard to administrative and corporate governance matters, as well as EDC's own initiatives in this area. However, we take issue with the recommendation to drop the Auditor General of Canada as EDC's auditor subsequent to any change in its status as a Crown corporation under Schedule 3 of the Financial Administration Act. Indeed we have suggested that the scope of the AG's Office ought to be expanded in relation to EDC's mandate to include monitoring by the Commissioner of Environment and Sustainable Development of EDC's performance in implementing its Environmental Review Framework.

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1 Export Credits Insurance Act, SC 1944-45, chapter 39.

2 Export Development Corporation Act, RSC 1985, chapter E-10, section 10.

3 House of Commons Standing Committee on Foreign Affairs and International Trade, Canada and the Future of the World Trade Organization: Advancing a Millennium Agenda in the Public Interest, Ottawa, June 1999.

4 Bombardier supports this separation of EDC activities: Submission, p. 2.

5 Submission, AMEC, p. 4.

6 Export Development Corporation Exercise of Certain Powers Regulations, SOR/94-410.

7 ACEC and Bombardier both supported raising this ceiling.

8 Gowlings Report, Recommendations 4 and 5.

9 Submissions, AMEC, p. 6; ACEC, p. 2.

10 The Association of Consulting Engineers and the Alliance of Manufacturers and Exporters Canada oppose the change.

11 Gowlings Report, p. 72-73.

12 Gowlings Report, p. 77.

13 The Office of the Information Commissioner of Canada's latest review of the Department of Foreign Affairs and International Trade's compliance with the Access to Information Act records an unacceptable "F" performance grade in meeting response deadlines, though it also finds that DFAIT generally "applies the exemption provisions of the act professionally and with restraint." (Department of Foreign Affairs & International Trade Report Card on Compliance with Response Deadlines Under the Access to Information Act, March 1999, p. 5.)

14 Just recently, the two private-sector oriented bodies within the World Bank Group - the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) - have established an "Office of the Compliance Advisor Ombudsman" as an independent post reporting directly to the World Bank President, with a mandate to enhance the environmental and social outcomes of the projects in which the IFC and MIGA play a role.

15 Cf. United Nations Environment Program, Global Environment Outlook Report, GEO-2000, September 1999; Hakan Nordström and Scott Vaughan, Trade and Environment, World Trade Organization Secretariat, Special Studies 4, Geneva, October 1999. The Committee also takes note of the 26 November 1999 announcement by Canada's International Trade Minister Pierre Pettigrew and Environment Minister David Anderson that the Government of Canada will conduct a detailed review of the environmental impact of the next round of WTO negotiations as these proceed.

16 See Race to the Top, p. 29, note 84.

17 As AMEC explained its reasoning: "While the Alliance has encouraged companies to adopt and implement such codes of conduct as an element of good business practice, we object to such a policy on the part of EDC as it would likely be seen by exporters as a precondition for obtaining EDC service and erode confidence in EDC's commercial orientation." (Submission, November 18, 1999, p. 9)

18 Cf. Race to the Top, p. 12-25 and passim.

19 Notably included among these is Professor Philip Alston, who has presided over the United Nations Committee which oversees countries' compliance with the International Covenant on Economic, Social and Cultural Rights. Cf. Alston, "Labor Rights Provisions in US Trade Law: `Aggrressive Unilateralism'?, Human Rights Quarterly, Vol. 15, 1993, p. 1-35.

20 See House of Commons Standing Committee on Foreign Affairs and International Trade, Ending Child Labour Exploitation - A Canadian Agenda for Action on Global Challenges, Ottawa, February 1997, especially Recommendation 10.

21 Standing Committee on Foreign Affairs and International Trade, Canada and the Future of the World Trade Organization: Advancing a Millennium Agenda in the Public Interest, Ottawa, June 1999, Recommendation 39.

22 See "ILRF says labor working party would not help developing countries", Inside US Trade, 10 December 1999.