It would be nice to know just what kind of impact government programs and services are having on Canadian business’s ability to operate internationally, but there’s no way to measure it. Ottawa’s focus is so fuzzy that it merely tracks the number of companies that participate in missions and trade fairs but does not assess how many become viable exporters.106 A 1992 internal government evaluation could only conclude that weak vetting procedures had helped to “subsidize more than stimulate exports” while tending to “reward failure over success.”107 A recent survey of ten thousand exporting companies listed in the government’s database, WIN-EXPORT, revealed that 4,790 — almost half of them— no longer existed.
The 1992 report made a series of recommendations, including reorganizing the many government services and activities into a one-stop shop, which companies could access through an account manager, as would occur in a bank. Ottawa has yet to implement the idea, but Australia did and within three years it nearly tripled the number of its exporting firms. In 2004, Austrade was named the world’s top government trade promotion agency for its efforts to bring new exporters to market.
The Australians’ highly targeted efforts were in full force at the 2005 Aichi World Expo in Japan. The government, working through its department of foreign affairs and trade, used the premiere technology fair as a platform to showcase Australian high-tech prowess in five strategic areas, including the automotive industry, biotechnology and environmental services. It then secured corporate sponsorship from companies like Toyota and mining giant Rio Tinto and followed up with a series of missions for Australian companies that coincided with business seminars and networking meetings at Australia’s Aichi pavilion.
In contrast, Canada’s effort was organized by Heritage Canada. The highlight was a big-screen image of the aurora borealis while the theme— Wisdom of Diversity — rambled on about the “values and principles that promote and protect our environmental and cultural diversity.” There were no corporate sponsors except for Manulife, the insurance company, and no visible trade or business links.
In the government’s defence, Canadian companies too often rely on public servants when it comes to the business of breaking into international markets, says Howard Balloch, Canada’s former ambassador to China. “I believe the embassy should be supportive, and I also believe doing business is up to businesspeople,” he says.
The aimless missions and tequila-doused trade fairs are symptoms of a larger problem, admits Bob Armstrong, former president of the Canadian Association of Importers and Exporters — one in which Canadian companies are all too complicit. “The trouble with Canada is that we all wait for the government to do it for us,” he says. “We’ve allowed the government to drive the bus on trade instead of questioning what they do and why.”
SEE NO E VIL
At the offices of one of the few private companies to offer trade-financing services in Canada, a dozen clocks display time zones from Rio to Dubai while two eight-foot-high Chinese stone statues stand guard in the lobby. On the wall, a sepia-hued map charts the three transoceanic voyages of the great British naval explorer Captain James Cook. But perhaps the most telling memento of all is the three ceramic monkeys squatting on a table in the entrance. Across the top of the figures reads the familiar adage “See no evil, hear no evil, speak no evil,” a fitting metaphor for the 800-pound gorilla that weighs heavily over Canada’s trade-finance industry and has arguably affected the nation’s ability to export more than all the fruitless trade missions and policy procrastinations combined.
Export Development Canada (EDC) is an obscure Crown corporation that is as little understood by its government minders as it is by the general public. But from its bunker-like Ottawa headquarters, its powerful reach is felt across the country. Under the cloak of confidentiality and minimal oversight, it has gradually secured an almost uncontested monopoly over funding for companies that want to export. Originally established to bridge gaps in private-sector trade finance, the agency has metastasized into a zealously protected and impregnable fiefdom. As one observer familiar with the agency summed up: “We’ve created a monster.”
EDC is unique among government-backed export credit agencies in that it competes directly against and, some say, actively discourages bank-backed trade financing. Whereas agencies from Finland to Australia and the United States either prohibit competition with banks or have abandoned areas already serviced by the private sector, EDC is moving in the opposite direction. It is muscling in on syndication deals, preferring to get involved in lucrative lending and insurance rather than just provide export credit guarantees. It even has overseas offices, with agents knocking on the doors of foreign firms in a bid to drum up business for Canadian goods.
Eric Siegel, the corporation’s recently appointed president and chief executive officer, denies crowding out the banks, arguing that the risky and expensive business is not attractive to them. “The banks are not interested in doing lending,” he says. “They could get in if they wanted, it’s not a finite pie.” It’s an assertion Scotiabank chief executive Rick Waugh denies: “We’d love to do medium-term export financing, but how can we compete? EDC takes the business,” he says. “We’re in the business of lending. Why wouldn’t we want to do it?”
The banks find it almost impossible to compete against EDC , which can easily undercut them by offering lower rates. It can do so because it doesn’t pay taxes and can borrow money cheaply because it enjoys the same sovereign risk rating as the government of Canada. Most importantly, EDC , unlike its counterparts in other countries, is loath to provide the guarantees the banks need to backstop riskier, long-term international loans. “Why should we take all the risk if the deal goes bad, while the banks have none of the exposure?” says Siegel, with barely concealed antipathy.
Contrary to its foreign counterparts, EDC believes that by buying down foreign risk, it is giving the banks a “free ride” when it could be cashing in on the lucrative loans itself. The agency is preoccupied with its bottom line because of what insiders describe as an overwhelming need to be “self-sustaining.” That it relies on its own balance sheet instead of government funding is held up as an ideal that does not cost taxpayers a cent. But the result is an often contradictory tug between commercial operations and public policy that has turned the banks into adversaries instead of allies and diverted EDC from its real mission, say industry experts and former high-ranking EDC employees (many of whom preferred to speak off the record).
“They got a little bit deluded about the fact that being self-sustaining became the end. It became the justification,” explains a former edcer. “It’s an inward-looking organization that looks after itself first. It’s not there to do Canadian trade policy. It’s there to look after EDC .” Says Glen Bays, director of trade finance for td Securities: “They lost sight of their mandate. We view EDC unfortunately as competition. As a Crown corporation it should be filling the gaps, not competing head on with the private sector, doing everything it can to earn money.” Adds another veteran trade finance banker, “ EDC interests are not necessarily Canada’s interests anymore.”
Not every banker agrees. In 2005, EDC announced a new program to provide guarantees in co-operation with the banks. Few banks have participated, arguing EDC is still trying to control competition by dictating what fees they can charge, but Scotiabank has managed to do one structured finance deal under the program. Richard McCorkindale, the bank’s director of international corporate and commercial banking – structured finance, says he doesn’t have a problem sharing the risk and covering the 15 per cent of the deal that EDC won’t backstop with export guarantees. (Unlike other export credit agencies that will cover 100 per cent of a structured loan with guarantees, EDC will cover only 85 per cent.) “Some banks want 100 per cent coverage, but if you are not willing to do even 15 per cent, then what are you bringing to the table?” he says.
Overwhelmingly, however, the reaction to EDC is palpably negative, and not just among banke
rs. In an ironic twist, the agency charged with promoting Canadian exports has blocked Canadian lawyers from acting as counsel on multilateral projects involving the Crown corporation. EDC has argued that retaining Canadian lawyers would set it apart from other multilateral lenders and export credit agencies that normally work with international law firms in New York and London. “The bottom line is, they want the cachet of being in New York as opposed to Toronto,” says a Canadian lawyer. “They literally take steps to prevent Canadians from participating in international transactions. That is our export support agency— talk about confidence in your country.”
The agency’s reputation for being arrogant and even antagonistic with those it deals with is exacerbated by the fact that while it runs like a private enterprise, it is not beholden to any shareholders. Other than being subject to periodic parliamentary reviews, EDC operations are rubberstamp affairs. The members of its board of directors are political appointees whose grasp of the agency is dubious, say insiders. According to one senior edcer, the last trade minister to actually understand its convoluted machinations was Roy MacLaren, whose cabinet term ended in 1996. “They are masters of obfuscation and selective disclosure,” said a one-time EDC officer. “They don’t answer to anyone.”
Its transactions closed to public scrutiny and exempted from access-to-information requests,* EDC does not even have an ombudsman, despite repeated Parliamentary recommendations.† Whenever it must (under political pressure) finance a deal that supersedes its conservative risk profile, it dips into something called the Canada Account, an off-balance-sheet fund controlled by cabinet. “Frankly, it always surprised me the auditor general lets that slide by,” says a political insider familiar with the agency. “The minister responsible just says, ‘By the way, chaps, we’re going to give Bombardier $100 zillion,’ and everyone looks at the window and says, ‘Next item.’”
But while everyone was looking the other way, EDC ’s unfettered monopoly has left Canada in the peculiar position of being a heavily trade-reliant country without any banks to take exporters international. Despite a strong, profitable financial system, the banks are either unwilling or no longer capable of providing long-term trade financing or syndicating structured trade projects. “The banks no longer have the expertise or the motivation,” says one banker, while those that do have the means are busy financing exporters in other countries.
TD now has export finance operations in Baltimore, Houston and New York, and in 2004 it was named “Bank of the Year” by the Export Import Bank, the U.S. government export credit agency. That year it led the league tables with the highest number of approved transactions of any Ex-Im lender. “We now have more resources south of the border than there are in Canada, and we’re a Canadian bank,” says Bays.
According to one banker’s calculations, banks providing loans to American exporters backed by Ex-Im guarantees earn a 35 per cent return, compared with the 14 per cent return they would make financing a Canadian exporter without an EDC guarantee. td’s Bays says this is not only more profitable for the banks, but cheaper for Canadian companies, which is why he encourages the exporters that can to source their export financing south of the border. “Canada is losing its exporting to the States because it can’t provide competitive financing,” he says.
Perhaps that’s why, when CIBC sold its $800 million structured export finance business to the Standard Chartered Bank in 2000, there was not a single Canadian loan on its books. “Try standing at the corner of Bay and King [the heart of Toronto’s financial district] — there is not a trade finance banker to be found,” says an industry expert and former edcer. “Nobody cares anymore, or they’ve set up operations in New York. Tell me, how’s that good for Canada?”
As a result, the banks are all but absent from the highly profitable business of international project financing that undergirds big, multilateral infrastructure projects. In the rare instance that a Canadian bank is involved, the project sponsors will specifically ask that Canadian suppliers not participate for fear of becoming entangled with EDC . Such is the case with a us$300 million port facility that Scotiabank financed in the Dominican Republic. There is no Canadian content, say those familiar with the deal, because the port’s U.S. builder had used Canadian suppliers in the past and was fed up with EDC . (Scotiabank’s syndicated loan was guarantee by the French government’s export credit agency.)
“Very often a sophisticated buyer will say it doesn’t want a Canadian bank involved because it knows the bank will want to maximize Canadian suppliers, which means it’ll have to deal with EDC ,” said a banker. “On occasion, banks have had to agree not to have Canadian suppliers.”
In fact, the banks don’t make a habit of promoting Canadian exports in any of their international transactions, say industry insiders. “Unofficially the banks know that once they start speaking about a Canadian supplier they are doing themselves out of a deal,” says one banker. And Canadian banks aren’t the only ones. With EDC preferring to direct lend (instead of provide export guarantees), foreign banks are also reluctant to back clients who want to procure Canadian goods. “My guess is that deals are being lost and Canadian companies don’t even know it,” said a former EDCer.
They definitely lost out in Kuwait. The Canadians helped put out hundreds of oil fires that decimated the country following the 1990 invasion by Iraq and were in line to participate in its multi-billion-dollar reconstruction. EDC offered a us$500 million line of credit to the Kuwaiti government to buy Canadian goods and services, but the Kuwaitis, looking to rehabilitate their sovereign risk rating, wanted to work with the commercial banks. EDC refused to budge, say observers, and as a result, the loan was largely ignored, essentially shutting Canada out of the lucrative reconstruction.
EDC insiders say the agency is so insistent on lending in order to boost its bottom line that it has done syndicated loans that had no Canadian content, from financing leveraged buy-outs of Bermuda-based satellite companies to the sale of Russian potash to Brazil, Mexican-made subway cars to Colombia and British-assembled telecommunications components to Algeria. EDC ’s Siegel admits: “There is a small percentage of [deals with no Canadian content], but we try to mitigate it by the quality of the deal.”
While EDC effectively finances other countries’ exports, Canadian companies are short-changed. Not only is the agency “too slow, too expensive and too difficult to deal with,” say clients, but its aversion to risk and focus on investment-grade investments has shut out precisely the kind of companies that government export agencies are designed to support. And although the EDC is constantly criticized for lending billions to Bombardier, it is not prepared to take nearly the kind of risk that the company needs to compete in the heavily subsidized and risky aerospace industry.
Instead, its largest client is the forestry industry, which traditionally makes up nearly 20 per cent of EDC funding. The agency provides the forestry firms with short-term credit insurance, a service normally provided by big international private insurers like Euler Hermes ACI, which have been unable to break into the Canadian market. Given that half of EDC financing is directed at the United States, we can assume the agency is spending a huge chunk of its resources insuring softwood lumber exports to the Americans. Why multi-billion-dollar forestry firms need to use EDC instead of being serviced by private insurers remains unclear.
Meanwhile, smaller companies with new technologies or those that are looking to get into less secure markets — like China— are being bypassed. “The hardest part of being a small company is access to capital — it is the fuel,” says Chris Lee, chief financial officer of Vancouver-based Nicer Canada Corp. The telecommunications company has had funding requests turned down by a number of government agencies and EDC has never responded to its overtures. “There seems to be a lack of empathy towards an entrepreneurial group that has worked very hard and succeeded or had a degree of success,” says Lee. “There needs to be some range of acceptable risk for lending to young entrepreneur
ial Canadian companies.” *
The irony is compounded by the fact that while many companies are desperate for funding, both EDC and Canadian banks are awash in cash. EDC declared a $1.2 billion profit in 2004 and is sitting on another $3 billion in provisions— funds put aside in case of loan defaults or insurance losses. The agency has obviously succeeded in being self-sustaining, say observers, but who is it helping? It’s certainly not helping the Canadian financial sector support Canadian companies abroad: the leading private-sector provider of trade financing to Canadian companies is London-based HSBC .
With the banks out of the picture, how does a single Crown corporation, run by government bureaucrats with no private-sector experience, meet and anticipate the needs of all of Canada’s companies? The short answer is, not very well. According to a survey done by the Canadian Federation of Independent Business, 85 per cent of respondents had never used EDC ’s services. In another poll cited by the federation, at least 20 per cent of business owners had never even heard of the Crown agency.
According to some estimates, EDC , with its preponderance of heavy hitting clients, reaches less than 5 per cent of small to medium-sized enterprises.
“So don’t be surprised if Canadian business can’t get out there and compete,” says one former EDC staffer. “What tools do they have to help them?”
* Chile signed a free-trade agreement with China—the first between China and a South American nation—in August 2006.
† There were officially two Team Canada missions, but Chrétien went to China a total of six times.
* Two agreements, with Oman and Costa Rica, have yet to be implemented.
* Under the Federal Accountability Act proposed by the Stephen Harper government in 2006, EDC would be included under the jurisdiction of the Access to Information Act.
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