FAIT Committee Meeting

STANDING COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE

COMITÉ PERMANENT DES AFFAIRES ÉTRANGÈRES ET DU COMMERCE INTERNATIONAL

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, November 6, 1997

• 0911

[English]

The Chairman (Mr. Bill Graham (Toronto Centre—Rosedale, Lib.)): I call this meeting to order.

We have with us this morning Mr. Ian Gillespie, the newly appointed president of the Export Development Corporation. We are calling Mr. Gillespie pursuant to Standing Orders 110 and 111.

Mr. Gillespie, I understand you have a short statement you'd like to make at the beginning. Since one of the purposes of calling you was to question you about your perception of the mandate of the EDC, with the members' permission, I'd suggest it's a good idea if you start with a fairly short statement. That would be helpful.

Thank you.

Mr. A. Ian Gillespie (President, Export Development Corporation): Thank you very much, Mr. Chairman. I'm delighted to be here this morning to talk about the good news EDC story.

I would like to thank the committee for the opportunity to appear, to introduce myself, and to re-familiarize you with EDC, an organization with which I am most proud to be associated, first as an employee for close to 20 years, and most recently as president and chief executive officer.

[Translation]

Just after my appointment in late August, we took the opportunity to send a package of information on EDC to all parliamentarians, both to introduce me and to encourage members of Parliament to refer their constituents to EDC for help in managing export risks. I hope my remarks today will build on what you may have read recently.

[English]

Mr. Chairman, I'd like to take a moment to tell you a little bit about my education and work experience. As you may have been able to discern from my French,

[Translation]

I'm an anglophone from Toronto.

The Chairman: So am I, and I have the same faults.

[English]

Some hon. members: Oh, oh!

Mr. A. Ian Gillespie: I have a BA in economics from Queen's University and an MBA from the University of Western Ontario. I also have a chartered financial analyst designation. The latter is perhaps the pre-eminent professional certification within the investment banking community.

I spent two years at Wood Gundy before joining EDC in 1978, where I have held positions in insurance, lending, treasury, financial planning, and corporate affairs. I have thus benefited from direct experience in EDC's operations in the back office and in managing EDC's relationship with its shareholder, the Government of Canada. Prior to my appointment as EDC's president and CEO, I was senior vice-president, risk management and corporate performance.

[Translation]

I believe my education and professional experience have provided me with a breadth of experience and knowledge of the EDC's strengths and weaknesses from which to draw on as president and CEO of the EDC. I understand the unique nature of the EDC; while we respond to the public policy imperative of our mandate, we do so in a commercially sound manner.

[English]

As the first president and CEO to be appointed from within EDC, I view my appointment as an endorsement of the company's performance and a solid vote of confidence for the work of all our highly dedicated employees.

• 0915

Let me now turn to EDC's business.

First, I'd like to take a moment to tell you about the nuts and bolts of EDC, specifically who we are and what we do.

EDC's mandate, in short, is to support and develop Canada's export trade and Canada's capacity to engage in such trade as well as to respond to international business opportunities.

In practical terms EDC provides four main services. The first area is export credit insurance, which protects Canadian exporters in the event of non-payment by their buyer. The second is export financing, which is basically loans to foreign buyers of Canadian goods and services. Bonding and guarantees would be our third area of service and foreign investment insurance the fourth.

We serve exporters from all regions of Canada and we can support them in more than 200 countries throughout the world.

By way of illustration, let me use the example of a Winnipeg-based manufacturer of widgets. She may have an order with a buyer in Mexico, Manila, or Milwaukee. She may be concerned about getting paid once the order has been shipped.

With an EDC credits insurance policy she has the peace of mind of knowing that if the buyer defaults, 90% of her loss is covered by EDC.

With respect to financing, if this exporter was a capital goods manufacturer, she might have a buyer in India who is very interested in her products but is looking for financing as part of a total sales package. EDC can assist by offering a loan to the buyer. The money, in effect, never leaves Canada as we pay the Canadian manufacturer upon completion of the terms of the contract. We collect from the Indian buyer the original principal with interest commensurate with the risk.

EDC is a crown corporation that operates as a commercial financial institution. We do not receive parliamentary appropriations. All our administrative expenses are covered by our operating revenues.

We provide no grants or subsidies. Our policy holders pay premiums and our loans to foreign buyers are fully repayable with interest.

By serving the entire spectrum of Canadian exporters, EDC generates the revenues it requires to provide better and more specialized products and services to an increasing number of customers, especially small and medium-sized companies.

In 1996 we reported a net income of $112 million, after provisioning for allowances for loan losses and for claims on insurance.

Our net income for the first six months of 1997 was $66 million. While these are good results they reflect a return on equity that is in keeping with our mandate. We are not a profit maximizer, but an export maximizer.

Being profitable, however, allows EDC to keep growing its capacity to help Canadian exporters.

Let me highlight some of the recent—

The Chairman: Mr. Gillespie, before you go on, our basic rule of thumb here is that we try to keep our witnesses to 10 minutes so there's time for questions.

I notice you're on page 3 of about 10 pages of your statement. It's going to take far too long. We'll file your statement with the record and perhaps you could fly over it a bit and highlight your principal points. It would be helpful for us.

Sorry to interrupt your flow. I know it's difficult, but if you could do that it would be great.

Mr. A. Ian Gillespie: Very good, Mr. Chairman. I'll summarize the salient points in the next seven pages or so.

The area I was about to touch on is the whole EDC initiative with regard to small and medium-sized enterprises.

In short, small business is big business for EDC, with 85% of our customers being small and medium-sized enterprises. That is exceedingly important.

There are one million SMEs in Canada, but only approximately 75,000 SME exporters in Canada. So we need to improve on those statistics. I outline in my remarks a number of ways we are working with private sector financial institutions to increase the amount of support and encourage more SMEs to enter into the exporting field.

I also touch on EDC's risk appetite. The important point there is that we are not only open in some 200 countries in the world but we also do business in more than 130 markets in the world at the present time.

• 0920

While 80% of Canadian exports go to the United States, only about 4% are supported by EDC. However, when you look at other regions of the world you see that EDC's participation in exports to Latin America, to Eastern Europe, to African countries, to the Middle East, to Asia are all over 15% or better of the exports to that part of the world.

In order to maintain our relevance and to continue to push exporters into some of those 200 countries, we monitor very closely our activities with regard to higher-risk markets. It is indeed an initiative to ensure that we take more and more risk on behalf of Canadian exporters; however, all in a financially prudent manner.

The other point is that the net income I talked about is in fact recycled. It grows the capacity for Canadian exporters. Exporters want to get a deal done. They want exports. They don't want a low price and partial support. They want full support at a price that allows us to get the business done and that allows them to get the business done as well. So it's important to put that profitability in context.

I make some remarks with regard to EDC's environmental concerns and the fact that we take very seriously the issues with regard to the environment, to human rights in those areas. It has to be clearly stated that EDC does not make government policy; EDC follows government policy in this regard.

The other aspect is simply to note that EDC is quite different from some of the other export credit agencies in the world that you may be familiar with, such as the U.S. Ex-Im Bank. They rely on appropriations of close to $700 million a year to cover their operating expenses, whereas EDC is clearly financially self-sustaining. That again is something that makes EDC unique and it is exceedingly important to our customers.

In terms of future direction, globalization is most clearly having a dramatic effect on the world and doing business.

Canada now exports more of what it produces than any other major industrial country. The committee needs to understand this. So growth in exports is exceedingly important to Canada's economic prosperity. That's where EDC plays a most important role, and a growing role I might add. In 1990 we supported some $6 billion in Canadian exports; this year we expect to do in excess of $27 billion in Canadian exports.

Mr. Chairman, perhaps I can make two last remarks.

In simple terms EDC's goal is to serve more customers, support more business, and take on more risk on behalf of our customers, all in a financially sound manner.

Lastly, EDC truly is the quintessential, made-in-Canada solution when it comes to finding that unique balance between the private sector disciplines and a strong public policy mandate. We are perhaps too much of a secret weapon at the present time. One of the things that I think we need to do is to become less of a secret and more of a weapon.

The Chairman: Thank you very much, Mr. Gillespie. That's very helpful.

Mr. Mills.

Mr. Bob Mills (Red Deer, Ref.): I certainly want to welcome Mr. Gillespie.

I'd like you to focus on two or three questions.

First of all, you talk about making a profit, and of course that's good news. I wonder if you operate under the same terms of reference. Do you pay rent for your building? Do you pay taxes? Do you operate under the same frame of reference that banks or people do in the private sector?

• 0925

Secondly, I would like to know the status of your outstanding loans. How many have you written off? Do you see any non-performing portfolios that you might have coming along in this year?

Thirdly, and probably the one that most Canadians would hope would be asked, it's great that we are the top of the world in terms of banning land mines, and the potential damage to civilians and so on is certainly a concern, but the potential of a nuclear reactor having a problem, particularly in countries such as Turkey or potentially China, might have more devastating effects on populations than land mines might have.

So I'd like to know the frame of reference for your getting the support for the sale of CANDU reactors, particularly the one that's current today, which is in Turkey, and just exactly the criteria you used, the status, and so on of that particular deal.

The Chairman: May I just interrupt for one moment, Mr. Gillespie?

I suspect that most of the questions that will be asked of you will be along the lines of Mr. Mills', directed more to EDC policy. I just want to remind the members that this is a section 110 hearing, which is supposed to be around your qualifications to do your job. Whether or not it's the policy of the Government of Canada to do certain things that you have to execute doesn't in any way impinge on that.

However, I know the members are very interested in EDC and how it functions, and I'm therefore going to allow the questions, because this is a very good opportunity for us to get to know the EDC better. But I just wanted to remind members that to some extent, that is the nature of this hearing. For other hearings, we just have to bear in mind what we're trying to do; although I quite agree that in this one, it's a good opportunity to get to know Mr. Gillespie and the EDC better.

Mr. Julian Reed (Halton, Lib.): On a point of order, Mr. Chairman, since the terms of reference for this meeting are as you have stated, it might be very interesting to invite Mr. Gillespie back again at some point in order to discuss in detail the Export Development Corporation.

The Chairman: He has a statement here. I'm hoping if we can get both things done this morning, we might be all right.

In terms of the time reference, I think the members know what we're doing. I'd like to use this opportunity to explore the EDC, but I just wanted to remind members there may be other hearings where we don't allow quite as much latitude.

Thank you very much.

Sorry. Go ahead, Mr. Gillespie.

Mr. A. Ian Gillespie: Let me try to tackle, if I might, Mr. Mills' questions.

With regard to the same frame of reference as banks, for example, yes, we certainly pay rent; we also pay grants in lieu of taxes with regard to the municipality we sit in. No, we do not pay income taxes, so that is certainly a material difference between EDC and the Canadian banks, but this goes back to the whole question of EDC's public policy mandate of growing Canadian exports. As you know, one in three jobs relies on it. So to the extent that EDC can help Canadian companies and exports around the world, we are creating economic prosperity for this country. That's really the most important point.

With regard to the status of our loans, we have in the annual report, under the management discussion and analysis piece, a full section on non-performing loans. The situation is indicated in there in some detail. Just to summarize, approximately 15% of our loans are in what we call a non-performing category.

We do provide very extensively for the anticipated problems with regard to our portfolio. So the net income I referred to is after a very healthy provisioning exercise, which obviously the Auditor General has to approve, with regard to our loans portfolio. The situation is an exceedingly healthy one, but yes, like other financial institutions, we do have non-performing assets.

Have we written any off? I think that was another question. There are two aspects, one on sovereign loans and one on commercial loans. With regard to sovereign loans, there are within the Paris Club certain arrangements. These aren't arrangements that EDC makes; these are arrangements to which Canada is a signatory with regard to the Paris Club. They have things such as Naples terms, which may provide very substantial debt relief.

• 0930

EDC doesn't write them off, but because of its international obligations Canada may look at reducing the obligation for certain countries that meet specific criteria.

We are also into the commercial lending business for foreign buyers around the world of Canadian goods and services. There too we will have some adverse experience. Over our 53 years we have certainly written down some commercial loans, but again this is fully provided for in the financial statements you have before you.

As for the Candus, I can only reiterate that EDC is not making government policy. We are following it. EDC's job as a financial institution is to assess the ability of foreign countries to repay the loans made to them. That is our job. That is our core competency. We will make loans only to parties we believe can fully repay with interest the loan that is given to them.

Mr. Bob Mills: Thank you.

[Translation]

The Chairman: Mr. Sauvageau.

Mr. Benoît Sauvageau (Repentigny, BQ): First, I would like to thank you for coming. As we have seen from your presentation and your curriculum vitae, you have all the skills—and so believe we all here—to take on this position. As one page of your presentation dealt with your CV and the rest with the EDC, I think it's legitimate to put questions to you mainly on the EDC.

I have a specific question on a specific country. You spoke about human rights earlier on, saying this was an important criterion that the EDC considered before granting loans or doing anything concrete. I have as evidence documents coming from the Department of Foreign Affairs that are available to everyone on the Internet and that deal with one country in particular, Columbia. I'll quote you some of the things spelled out in these recent documents from Foreign Affairs that also involve the EDC. I'd like your opinion on this.

First of all, in the guide for exporters published by Foreign Affairs, it says that the Columbian economy is one of the most stable and dynamic in Latin America. All the quotes I'm giving you here come from this Foreign Affairs Internet site.

In a second quote, it says that Columbia is one of our most dynamic trade partners in that region. A bit farther on, it says that for a year now Columbia has been witnessing a strong increase in Canadian investment activity. However, always on the same departmental Web site, same government, same country, it says that the beginning of 1997 was marked by uncertainty as the government had suddenly decreed a state of economic urgency in Columbia.

Still in the same document, it says that increased security measures are to be observed for Canadians travelling in Columbia where the situation is continually deteriorating and presents serious risks both for Colombians as well as Canadian travellers.

Further down, it says that Columbia has the reputation of being a violent country where drug trafficking, robbery and assassination are par for the course; those kinds of incidents are rather frequent, in fact. However, by taking certain precautions, the risk can be reduced.

Reading right along, it says that the paramilitary groups and guerrilla have recently intensified their attacks. It is known that Columbia is the country where there are the most teachers in the world who get killed and that four union activists out of ten killed around the world are killed in Columbia.

In the same document, it says that since the USA withdrew Columbia's certification in March 1996 because that country did not comply with American objectives in the war on drugs, the US Export- Import Bank programs have blocked any further loans to Columbia. The EDC is of the opinion that this is an opportunity to grant new loans to support Canadian export programs to Columbia.

• 0935

In the English document, it says "windows of opportunity". Don't you find it a bit paradoxical, in view of the human rights situation, and in view of the fact that the Canadian government mentions a loss of Columbia certification for not respecting the criteria of the anti-drug war, but also the human rights matter, that the EDC sees these things as windows of opportunity for Canadian investors?

[English]

Mr. A. Ian Gillespie: Again, we do not make government policy in this area; we simply follow it. Our assessment is then confined to the ability of the sovereign Colombia itself, perhaps in combination with any commercial borrowers that we may be doing business with there, to honour by their due date any loans we might grant to them or any insurance coverage provided to Canadian companies. That is as far as our mandate extends. So as long as we're working within the government-announced policy, our job is to simply assess the ability of those foreign obligors to repay their debt to EDC or to pay the account receivable a Canadian company might have.

[Translation]

Mr. Benoît Sauvageau: Allow me to voice a slight disagreement because it says not that the Canadian government, but the EDC thinks that this is an opportunity to grant new loans to support Canadian export programs to Columbia. At the very least, to update this guide for our exporters, do you maintain that this is a stable country, that it's a good place, that Columbia, for a year, has been witnessing an increase in Canadian investment activity and that Canada has become one of the main foreign investors in Columbia, especially in the petroleum and telecommunications sectors? Can you conceive that at the very least and as first step we should be publishing fair and true information?

And as a second item—I won't say anything about the Canadian government's policy even though we could discuss that at length— the EDC sees an opportunity there to grant loans as the USA is saying that it's too serious a case and they have decided to withdraw. The EDC finds that this is perfect and gives it windows of opportunity. Don't you think that's a bit of a paradoxical policy?

[English]

Mr. A. Ian Gillespie: With regard to your comment about the U.S., I don't think the issue is whether the U.S. Ex-Im Bank believes that Colombia would not be in a position to repay its foreign debt. That is a political question in the United States.

With regard to EDC, we see it as a market that holds promise for Canadian exporters. It is a growing country, and they are looking to purchase and build infrastructure and grow like any other country in the world. We assess the risks associated with lending to that market, and it's our conclusion they will be able to fully repay any obligations extended to them. That is as far as we can go. In that sense, yes, it's a potentially interesting market for Canadian exporters. Indeed, there are risks. We're in the risk business.

[Translation]

Mr. Benoît Sauvageau: One last question, if you don't mind, which will be hypothetical. If the EDC grants a loan to a business going to Columbia, does it monitor that business to make sure that it doesn't hire guerrilla to kill any nascent union movement within that business? It is known that multinational firms hire guerrilla and cart one or more union sympathizers into the plant in front of the workers and systematically kill them off on site to discourage the others. Does the EDC make sure that, when it grants a loan to a firm that wants to do business in Columbia, the firm shows respect at least for Canadian values on the international market or are you simply content with granting loans and making sure you get paid back?

• 0940

[English]

Mr. A. Ian Gillespie: We are interested in making loans to sustainable businesses in Columbia or elsewhere. We carry out a due diligence with regard to an assessment of the risks in lending to those particular obligors. At the same time, we are a financial institution. There are limits with regard to the due diligence that you can extend in any one situation. Really I don't think I can be any clearer than that.

[Translation]

Mr. Benoît Sauvageau: Thank you, Mr. Chairman.

[English]

The Chairman: Miss Barnes.

Mrs. Sue Barnes (London West, Lib.): Thank you.

I'm going to stick to the purpose of the meeting today. I welcome you. I actually represented up until very recently the University of Western Ontario. My spouse actually graduated from the same business program.

I'm going to get at what I consider an underemphasized area of entrepreneurship and export. It's now being recognized by the government, with our minister of trade taking to Washington an all-women export delegation in the next couple of weeks—first time ever. I really want to get at, in your organization and in the way that you intend to run the EDC, how you are going to do outreach proactively to entrepreneurs who happen to be female. The reason I do this—and there are numerous studies out there—is not because it's solely a gender issue, but because it's a business issue.

I'll just quote one of the stats that most people are familiar with now—the Bank of Montreal study that said approximately one-third of the firms in Canada are now woman-led. These one-third owners, partners, whatever, actually employ about 200,000 more people than the top 100 Canadian businesses. So you have the one-third doing that type of employment stat. Some of these people will be already actively engaged in export, but some of them need encouragement and direction.

I take a look at your internal stats on your representation of women, and I think I see here about 48 positions and about 10—I don't know, with some of these names like Jean or Jean it's hard to tell. I'm looking at about just under 20% representation on your heads. I want to know if the glass ceiling exists in your organization. I look at the stats of the board—and I'll deal with that with other people, in my own government—and it's 2 of 14.

I'm about ready now to get very serious on this issue because I think it's an economic issue for Canada. We're a trading nation, and I think there are a lot of women heads of business out there who maybe are not as in the loop as they should and could be. I think our government organizations have a very proactive role to play. I want to know your personal position on this issue, your understanding of it, and what your agenda inside your organization will be to address it.

Mr. A. Ian Gillespie: Thank you very much indeed for those questions. I made note of most of them.

With regard to the delegation that's going to Washington, there will be two EDC individuals on that particular delegation. Indeed, we are helping to sponsor it, as one of the formal sponsors of that program.

With regard to outreach programs generally, we have not historically differentiated gender with regard to the ownership of our customers. Clearly the experience we will obtain from the upcoming mission to Washington will be very helpful in really understanding the needs of women as they relate to EDC programs and what we need to do to be more specific and more useful in that area.

We do not right now have any formal programs that are gender specific. But as I say, I think if we can see a gap that needs to be filled with regard to supporting the unique needs of those customers, then that is something we will certainly be looking at most seriously.

• 0945

As an organization our female complement is about 50%. It's either side of that number; it's either 49% or 51%.

We are very conscious about our hiring. Every year we have a very large university recruitment program at EDC. We bring out of the universities individuals with a bachelor of commerce, a master of business administration, or whatever. Obviously gender is something we look at very closely, as indeed we do with language, and we look at language not only in terms of French and English. EDC needs to be very cognizant of some of its broader cultural diversity issues. We are an exporter, if you like, and are dealing with many different regions of the world; we therefore need to have a very multilingual complement.

As for the so-called glass ceiling, I think it's fair to say it does not exist at EDC. There is no question with regard to the numbers, the 20%. I think there are some historical reasons for that, but as you look at the number of women we have been bringing into the organization through the university recruitment program and at more experienced levels, I think you will see that number clearly rising over time. There's no question about it. The fact that today women make up 50% of the organization means that number will be going up.

These are certainly areas we're most sensitive to, and I hope when we sit around the table perhaps a year from now we'll be able to get back to those numbers.

Mrs. Sue Barnes: Last fall in my riding I had EDC reps, BDC reps, and our business centre reps help me out with sponsoring a half-day session to invited business entrepreneurs, small and large, in my riding. It was very effective, very well received. I think there has to be increasing outreach not only to large where you're already there but also to the small.

I have, for instance, small business maple syrup producers in my area that are exporting now.

You need to have an aggressive plan in regions. We are the representatives. We are interested in helping organize this. Sometimes we have contacts—people we know, but people you wouldn't be able to put in a room—especially in the cultural communities, because we're very active in them. This is a strength for Canada.

I was actually discouraged by one of my local economic units from doing this thing. They felt I'd be disappointed, that I wouldn't get the players in the room. Well, I got better players in the room than the traditional players who figure they'll do it on their own without having partnerships in the community.

I know you're present at trade shows and you team with Industry Canada, etc., but there is a need for these proactive training sessions in communities, involving not only the business community but also local representation. If you asked, you would find that this type of intervention would be received very well, because this is not a political issue, as in partisan, but an economic issue for our ridings in Canada.

You have a resource in us that I think you're under-using. I'd like your comments on that.

Mr. A. Ian Gillespie: I thank you for that. I think it's a most interesting suggestion. There is no question, as I said in my earlier remarks, that we need to increase the number of SME exporters in this country. We are only 75,000, and there are over one million SMEs.

You might be interested in knowing that in the first nine months of this year we sent out some 46,000 mailings to some 32,000 potential exporters in this country to try to explain what EDC services are and how we can benefit them. We will be sending a further mailing in the fourth quarter. Our response rate is high by usual mailing standards, so we're really quite encouraged by it.

• 0950

The Chairman: Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you.

Thank you for being with us today, Mr. Gillespie. Your background, your time with Wood Gundy, and your education lend themselves well to the whole investment banking sphere. As a business person I have a lot of respect for elements of EDC, and if they were a privately held corporation I would probably consider being a shareholder.

The implications for human rights and the environment are very important. With the decline of the role of a nation state internationally, we depend more and more on engaging private sector players within our economies to act as instruments for Canada internationally to effect changes in human rights, environmental policy, and numerous other areas.

EDC is a crown agency, and thus there is an expectation that you in fact would be more conscious of some of these criteria, not less so. One of the things I believe the Canadian government wants to do is engage private sector players in this ongoing battle to improve the lot of countries individually and for human kind.

You did say there is a criterion relative to human rights and environment, although I thought the answer to Mr. Sauvageau's question was contradictory to that.

Let me ask you a question. Can you give me an example of a deal you turned down because of human rights or environmental criteria?

Mr. A. Ian Gillespie: A deal that we turned down because of human rights? Well, there are several countries in the world we are not in a position to lend to or insure as a consequence of government policy. No doubt the reasons for that have a lot to do with human rights, so we are precluded from participating.

With regard to the environment, I have a couple of comments. We look at this issue very seriously from a number of different perspectives. As a financial institution we ultimately need to look at the feasibility of the project to ensure it makes sense and they will indeed meet their obligations to repay us on the due date. If the project is not feasible, it is not built to the standards or the laws of the host country, or if we feel it is vulnerable to changes in attitude over time, we may wish to either decline our participation or have the project modified in particular ways.

It is clear, however, that Canadian companies are some of the most responsible in the world with regard to the whole environment. Clearly, they are looking to sell the best-in-class technology that will improve the situation in many of these jurisdictions. By supporting companies that have this leading technology, we are also benefiting very directly the situation of some of the countries that we're participating in.

Mr. Scott Brison: When I spoke of the environment, I wasn't speaking of the socioeconomic environment or the ability of a company or an entity to repay; I was speaking of the environment and its impact on the natural environment. This is a global concern.

• 0955

Eighty-five percent of your customers are small and medium-sized enterprises. What percentage of your portfolio in terms of dollar value would that be?

Mr. A. Ian Gillespie: Approximately 20%. Eighty-five percent of our customers are small and medium sized. Of the dollar volume we'll support this year, approximately 20% relates to that.

Mr. Scott Brison: Okay. The U.S. Ex-Im Bank is not self-sufficient. It's interesting that in Canada we have tremendous tolerance for—and it's not necessarily a positive thing—crown corporations that don't make a lot of money. In the U.S. there's less of a tolerance for that sort of thing.

What's the difference in criteria, especially in the U.S.? Why do people tolerate it? Is it an instrument of foreign policy more so than in your organization?

Mr. A. Ian Gillespie: I can't comment on why the U.S. Ex-Im Bank operates the way it does. We think the best model in the world is the EDC model, and it is truly a unique model among other export credit agencies.

If you look at the French experience, the Italian experience, the U.K. experience, and the German experience, their officially supported export credit agencies have historically lost a great deal of money. They may indeed choose to see it as an alternative job creation mechanism. I don't know. We feel the Canadian experience is best. We operate from strength. We are self-sustaining. We do internally generate the resources necessary to increase our capacity. We think that's in the best long-term interests of Canadian exporters.

Mr. Scott Brison: The Ex-Im Bank wouldn't touch the Three Gorges project, and in Canada CIDA was not supportive of the Three Gorges project. In fact the Minister of the Environment of a few years ago was extremely critical of any EDC or CIDA involvement or support of Three Gorges based on environmental and human rights criteria.

Many Canadians feel that within our own borders the project would be egregious, because it would violate both human rights and environmental criteria within Canada. Yet a Canadian crown agency is helping facilitate it in another country.

I guess the challenge is that it doesn't set any example when we are trying to engage private sector players with no direct connection to the government as instruments of positive foreign policy. We have agencies such as CIDA that are pushing in one direction, and then we have agencies such as EDC that are operating with a contradictory agenda.

Give me your perspective on Three Gorges and why we're in but the U.S. Ex-Im Bank and CIDA are not supportive of it.

Mr. A. Ian Gillespie: Again, we are following Canadian government policy in the Three Gorges project.

As for the U.S. Ex-Im Bank, I can only speculate. They have not said no. They have just not said yes at the present time. The French, the Germans, the Japanese, and the Brits are all interested in participating in that particular project, so one might draw certain conclusions about the real U.S. agenda with regard to that project. The Canadian government has looked at it and is supportive of our participation.

Mr. Scott Brison: Given that many of these loans require fairly long lead times and a high degree of uncertainty, when does cabinet become aware of an upcoming request for use of the Canada account? What's typically the timeline or lead time on something like that?

• 1000

Mr. A. Ian Gillespie: Very little today is going in the direction of the Canada account. The Canada account is really only used now for very large projects that clearly would create an imbalance in the EDC portfolio, given our equity base of approximately $1.5 billion.

As soon as we have a potential transaction that might be in Canada's interest but beyond the scope of what EDC could realistically do, given the size and strength of its balance sheet, then we would seek the advice of the government in regard to that.

Mr. Scott Brison: So you're going to the Canada account less and less now.

Mr. A. Ian Gillespie: Yes.

Mr. Scott Brison: Where you previously acted in compliance with Canada's foreign policy in a sense or responded to government policy on a declining rate, you're now not going to the Canada account so you have in fact more latitude to pursue your own organization's agenda in these areas. You don't have to go to the Canada account as much.

Mr. A. Ian Gillespie: We do not have to go to the Canada account clearly as much, but all of EDC is still an instrument of government policy. We're guided by the Export Development Act in that regard and by government policy as it relates to all the other issues that we touched upon.

Mr. Scott Brison: Many of the things you do are very similar to that of a global investment bank, for instance.

We have players in Canada; you mentioned Wood Gundy. Wood Gundy was the seventh largest underwriter in the U.S. last year and certainly a lot of companies in the U.S. and Canada rely on private sector players.

Any public policy agenda for EDC is becoming very unclear or nebulous. Couldn't EDC be a private corporation with its current mandate? In fact, there's probably an argument that there are private corporations out there that are more environmentally conscious in terms of their types of investments because of consumer demand relative to environmental and human rights criteria. Their investments are tied more closely to these types of criteria than yours are.

Mr. A. Ian Gillespie: The issue of privatization is a very interesting one from a number of different perspectives. We think the strength of EDC is in the very large pool of trade finance skills that we have under one roof. Indeed, it has the most sophisticated trade finance skills in Canada under one roof.

We are operating effectively in many different businesses. We're in the lending business. We're in the insurance business. We're in the bonding business. We're in the foreign investment business. We think there's tremendous synergy in meeting the needs of Canadian customers with that broad array of solutions. If you were to ask about privatizing EDC, you have to look, first of all, at what you would gain by that in terms of efficiency arguments.

EDC's administrative costs as a percentage of net revenue comes out at 14%, using the same ratio the banks use in their annual reports. The banks come out at about 60%. Obviously, the banks have a vast network of regional branches and the like; nevertheless I'm not sure the banks could deliver the services as well as EDC for the same cost.

As you probably well know, EDC staff is underpaid, and privatized... it would be much better in the private sector. That's the good news for the employees, but that's the bad news for the customers in the sense that all of a sudden the costs go up and the exporters become less competitive.

We're already working with the private sector to a very high extent. We have relationships with Northstar Trade Finance. We have relationships with the banks in relation to project finance in some of the insurance programs. So there's a great deal of activity with Canadian financial institutions and other international financial institutions.

• 1005

We provide an enormous amount of risk capacity that no single financial institution in their own right would provide, and we also have all of those skills.

If you were to dismember EDC, if that's the concept of privatization, or sell it off and put it into different hands, then you run the risk of trying to find someone who would be interested in operating in 200 countries in the world. Who would be interested in maintaining that rather unique trade-finance skill set?

The goal for Canada is to make sure that we have a competitive advantage for Canadian exporters, not just a level playing field. We need to do that in some areas, but indeed we need to grow the amount of Canadian exports. That's really about creating a competitive advantage. So that's risk capacity, that's expertise, and that's the ability to respond very, very quickly.

So we think that's why EDC is really a truly unique Canadian success story. You have the balance of private sector disciplines, the analytical framework of commercial disciplines, joined together with a very strong public policy mandate. And to change that around, I would argue, is not going to contribute to the kind of growth that we have experienced over the last number of years and the growth that Canadian exporters have been able to participate in.

It can be taken as perhaps a self-serving statement in that regard, but you really have to look at what EDC does and who benefits by our activity. The net income that we create is part of the net income that is recycled into higher-risk capacity, into more and more deals.

One of our important areas of relevance is in some of the higher-risk markets and being able to analyse that. That's not something a traditional, commercial financial institution would be prepared to take on without an enormous amount of government support, and then what's the point of that?

The Chairman: Thank you very much.

Mr. Reed.

Mr. Julian Reed: Thank you very much.

Welcome, Mr. Gillespie. We're pleased to be able to learn something here this morning.

I have a question that relates to the other export development banks around the world that are not self-sustaining. Would you agree that the extent to which those banks have to go to the trough on a regular basis would be considered a direct subsidy to those exporters?

Mr. A. Ian Gillespie: It would be rather difficult to argue that's not the case. Either they can't analyse the risk well enough and therefore they just have too many rotten apples in the portfolio, or they're not pricing the risk properly, which may be more clearly the case. If you're not pricing the risk properly, or underpricing it, then it begs the question of whether or not that is a non-commercial arrangement.

That's why we think it's in the best interests of Canadian exporters that we operate from strength. It is a much more sustainable environment, that is, a much healthier environment, in order to be able to assess the kind of business that you're taking on your book.

Growing the capital allows us to be able to respond much more quickly than some of the other export credit agencies, which, because of that problem you alluded to, have a far more structured environment. This makes it more difficult for them to respond at the margin with the kind of speed, agility, and innovation that EDC can bring. So it's an entirely different model.

The biggest problem we're facing is that some of the other export credit agencies are frankly starting to become rather jealous of EDC in the way it operates and the kind of unique model we do have.

The Chairman: Can I just interrupt for one second, Mr. Reed?

Mr. Julian Reed: Sorry, yes.

The Chairman: Technically, in terms of trade law talk rather than just general perceptions on the subsidy issue, it's really not technically a subsidy unless the rates they offer are significantly out of whack with normal commercial rates. Is that not right?

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It may be a subsidy in some respects, but in terms of a countervailing subsidy, it's only a subsidy if in fact it's a rate that would not be sustainable. Is that not correct?

I appreciate you don't sit on the CITT, so....

Mr. A. Ian Gillespie: No, I don't.

The whole area is a rather interesting debate. Perhaps you may want to do that at another time. It is clearly being recognized within the OECD consensus arrangement that they need to raise the bar in order that they fully price the risks as the risks are in some of these markets. At one time they were clearly underpricing for some of the risks that existed.

A lot of the difficultly they are having is really the legacy of the past. You make a loan for 10 years and you have to live with the implications of that loan. So they're trying to get away from that. Very clearly, that's the whole thrust.

We're in the rather comfortable seat, if I can call it that, of never having had a philosophy of trying to subsidize to win the business. We had to take the business on with regard to the risk that we were taking on, and that has served us very well.

Mr. Julian Reed: Does that risk evaluation determine the level of contingent liability that you write into the scene? Obviously, a small percentage of those loans aren't functioning for you. You write in something. Is that write-in just through the pricing of the risk or is there a liability figure that you put on the books?

Mr. A. Ian Gillespie: If I've understood your question correctly, when we look at individual transactions, we try to assess the risk inherent in a given transaction and we make sure we price it to cover that inherent risk.

In looking at risk there are effectively two elements. One is the probability of default and the other is the severity of the risk associated with that default. In some cases—let me take a hypothetical example here—there could be a 100% probability of default but a zero probability or a zero severity of risk associated with that default. So it may be simply that the borrower has to reschedule its obligations, but you still get the full amount back with interest and post-maturity interest. That is something you can easily support.

The difficult areas are when you make a loan and they can't service it on any basis. You then have to take a haircut, so to speak. Those are the ones that really erode your capital base rather than allow you to grow it. So our pricing is made to ensure that we make enough to cover the risks inherent in the individual transactions. On a portfolio basis, it ensures that we are generating enough to create a surplus that can be used to grow the risk capacity of the organization.

In the event of an unexpected meltdown in the world, to use a rather extreme example, that's where your capital base comes into play, that's where your loan provisions come into play and your insurance provisions come into play as a standby facility. First and foremost, you need to properly assess the individual risks of each transaction.

Mr. Julian Reed: Thank you.

The Chairman: Let's see if I can follow up on Mr. Reed's question. A normal bank, of course, sets up reserves for loans that are F douteux, but largely, obviously, for tax purposes because of having to create a tax. Since you don't pay taxes, do you set up reserves so that you can then calculate your profit properly? I can't go through the accounts here. Do you have a large reserve?

Mr. A. Ian Gillespie: We do. We have a reserve that is now about the same amount as our retained earnings. It's about $1.5 billion in loan reserves.

• 1015

The Chairman: The criteria for setting aside that $1.5 billion...there would be a gradation of total uncollectables and perhaps 50% uncollectables, etc., in your reserve account. Again, that's a history.

Mr. A. Ian Gillespie: It's in the notes there. It's approximately $1.5 billion.

We have to anticipate the unexpected. We're not in the business of underwriting the inevitable failures; we're in the business of taking on loans that we think will work. Clearly, you're not right 100% of the time. We have to set up contingencies. We have to anticipate the unexpected. That's what the loan provisions are there for.

Our philosophy has been very much to be aggressive on the risk front but conservative on the accounting front. That's also in the interests of the shareholder. We have very prudent financial accounting, given the high-risk nature of the business we're in.

The loan provisions you see there, the net income I referred to, are after very substantial risk provisions. These aren't actual losses. These are just for the unexpected, given the dynamic environment we're in.

You only have to look at the situation of Mexico a few years ago, or Thailand and Southeast Asia today, to know that the world can change fairly quickly. EDC needs to be there supporting exporters through all that turmoil. You can only do that if you have properly provisioned for the risks you're taking on, if you have allowed for some of those unexpecteds to perhaps, inevitably, create a problem for you.

The Chairman: Thank you very much.

Mr. Grewal.

Mr. Gurmant Grewal (Surrey Central, Ref.): Thank you, Mr. Chairman.

Mr. Gillespie, I would like to congratulate you on this new position. I went through your profile and CV here. I was extremely impressed with your achievements in the last 20 years—holding important positions with a group of organizations.

I'm also impressed with your qualifications. There are coincidentally only five members in the House who hold MBAs, and I'm one of them. I can understand your point of view.

I'm hopeful that you'll bring profitability and accountability to EDC by trying to improve them both in EDC.

I know that you have already elaborated on the privatization of EDC in response to the question from my colleague. If we look into the last decade, we know that Great Britain and New Zealand have privatized their state-operated export agencies. Canada's trend may perhaps be to privatize many of the public sector organizations, if not immediately now, then in the future. The Export Development Corporation may be one of them.

How can we strengthen the SMEs in Canada in order to cut the red tape and bureaucracy for them to do business abroad? How can we use the synergy at this time working within EDC and how can we later on encourage the SMEs to get independent and more operational in the private sector? What would be your views on that?

Mr. A. Ian Gillespie: If I understand your question correctly, what can EDC do in regards to small and medium-sized enterprises to continue—

Mr. Gurmant Grewal: Yes. For example, at this time, where I'm from in western Canada I don't see that EDC encourages very many small businesses that are capable of exporting. They are not familiar with the status of the EDC office.

What kind of efforts are being done on the promotional side to educate them, to make them aware, or to help them in any way so that SMEs can use these services to strengthen their operations?

Mr. A. Ian Gillespie: I mentioned a little earlier that in the first 9 months of this year EDC had issued some 40,000 letters in the way of a mailing to some 32,000 SMEs in this country, explaining what EDC can do for them.

• 1020

The other important point is not generally known, but I reference it in my remarks: EDC has the largest SME support program of any other federal agency. I think that's not necessarily well understood. Eighty-five percent of our customers are SMEs, and we're looking to grow that number. Through the mailings, the regional offices, and some of our other activities, we are working very closely with Canadian banks in a number of different ways and are trying to grow that number and to get our story out there. We have already grown it quite substantially.

We have also invested very heavily in technology to try to allow us to respond to Canadian export of small and medium-sized enterprises by using 1-800 numbers in order that they can be issued an insurance policy right on the spot, can get credit approvals right on the spot.

During the APEC meetings that have been held during the course of this year—and about a month ago, there was the APEC SME week in Ottawa, as many of you will know—it has been pretty clear that EDC's experience in computerized credit analysis and simplified documentation is viewed as best in class among some of the other APEC ECA institutions.

So we are working with regard to increasing awareness of EDC and its programs. We are using innovative technology credit analysis to ensure that we can respond in a timely basis to get the story out and to get Canadian companies into the export field. Clearly, exporting is no longer an option for small and medium-sized enterprises.

Mr. Gurmant Grewal: The other question is about the Pacific Rim market. There are seven tigers known in the Pacific Rim countries, whose growth rate is double the growth rate of Canada.

The Chairman: Until a month ago.

Mr. Gurmant Grewal: Yes, I guess you are right, but their growth rate after the stock exchange tumble generally would still be double the growth rate of Canada at this time. Maybe two weeks from now, after things have settled down, it could be worse, but we don't believe it will be worse than that.

But there are seven tigers among Pacific Rim countries. If we look at the geographical location of Canada, particularly the western part of Canada, I think we are strategically located in such a way that we can become the eighth tiger in the Pacific Rim. In the future, in the next decades, I think the focus of the world market is going to be the Pacific Rim countries.

What do you think are the three most important things that Canada should do to strengthen its position, particularly western Canada because the immigrants who are coming to Canada are coming to western Canada? B.C. was number one last year, in 1996, for receiving immigrants. Using the resources of immigrants, particularly those from Asian Pacific countries, the culture, language, and those things are the diversities on which we can capitalize to increase or promote trade with those countries.

What are the three most important things you would list for Canada to do to strengthen its position and make British Columbia or western Canada the eighth tiger of Pacific Rim countries? What niche market do you recognize in the world as one that Canada should be focusing on in the next decade?

Mr. A. Ian Gillespie: As I mentioned a little earlier, the interesting thing for us is that back in 1990, EDC supported approximately $6 billion in Canadian exports. This year we'll do $27.5 billion, or perhaps better than that. As we have grown as dramatically as we have, it has become pretty clear that the opportunities for Canadian companies are starting to grow exponentially—far faster than even that rate would suggest.

There is clearly no doubt that there are opportunities in that part of the world. There are opportunities in Latin America, and there are opportunities in eastern Europe or the former eastern Europe. The world over, there are just enormous opportunities. Our role is really to ensure that we can provide the necessary financial services to those exporters, wherever they're interested in going, in order that they can get the business concluded.

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It's not obviously a direct answer to your question, but I think it's necessary to ensure that EDC is a strong and sound institution and that it has the necessary tools, not only the financial resources but also the people resources. It's the people who put these things together. It's necessary to be able to understand the risks, analyse these risks, and find creative solutions. That's what we need in terms of being able to grow Canadian export capacity in this country.

There's no doubt that we're starting to do that. We're starting to get additional companies into the export field. That's ultimately the solution for Canada's economic prosperity: not only jobs, but clearly wealth for this country. It's not necessarily even a regional thing. There's just so much out there, and we just have to commit ourselves to pushing on the pedal as we have been.

The Chairman: On that point, you might have a look at the study the committee did two years ago on small and medium-sized businesses in export. There's a chapter in that study of course on EDC. But there's also a chapter on the role of immigrant entrepreneurs, particularly their ability to reach into markets like those in China and other Asian countries where they have particular cultural, linguistic, and family ties and advantages that other Canadians don't have. I think all of us feel there may be an unexploited talent there.

I know we tried to have a couple of meetings with EDC in Toronto to try to bring in people to enable them to know about the services you offer. Mr. Grewal, you weren't part of that report because you weren't in Parliament, but you might be interested in that report.

Mr. Gurmant Grewal: Sure.

The Chairman: We put quite a bit of emphasis on the point you were making.

Mr. Gurmant Grewal: The reason I asked about western Canada is because 20 years from now, B.C. is going to be the second-largest province in the country, and since we have a high population of immigrants in the province, I think immigrants' resources are underutilized. Canada can capitalize on and use those resources more than what we are doing now.

The other question was about Team Canada. When Team Canada goes abroad, being an export-oriented organization, do you think you have been playing a significant role in that? Or do you intend to play a significant role in that?

The disappointing fact was that in not all countries, but some countries, after the visit of teams or missions like this one, Team Canada, the trade figures went down actually rather than going up, such as in Indonesia and some other countries. I know there could be some other factors related to it, but how can we increase the efficiency of such trade missions abroad? How can things like Team Canada be more effective? Or how should they be planned so that their efficiency goes to a higher level rather than going down?

Mr. A. Ian Gillespie: I'm not sure what the statistics are that you're referring to in terms of going down rather than going up.

Mr. Gurmant Grewal: Indonesia is one of the examples. There are two or three examples. I don't remember which countries in particular. But three months after, if we look at the data, there's an inverse relationship between the Team Canada visit and trade. Instead of being in a direct relationship, they're in an inverse relationship.

Mr. A. Ian Gillespie: Certainly our experience is that those missions have been extremely successful. EDC has always participated in those missions with a number of different people going off. I fully expect to be going on to the Mexico-Brazil-Argentina-Chile mission in January. There are some 400 or 450 companies that may be going on that particular mission. I think they are exceedingly important in raising Canada's profile and identifying export opportunities for Canadian companies.

The Chairman: It's now 10.30 a.m., which was sort of the time set for us to conclude. Both Mr. Sauvageau and Mr. Brison have said they have very short questions to ask. So are you pretty well finished, Mr. Grewal?

Mr. Gurmant Grewal: I have a very brief one.

The Chairman: One quick one. Hopefully we can wrap it all up in five minutes with a short list.

• 1030

Mr. Gurmant Grewal: The other question is about the Export-Import Bank. Does the EDC play the role of intermediary among SMEs or even among the large organizations in arranging the financing from Ex-Im and so on? Or do you arrange the financing or other things from Ex-Im for small and medium-sized entrepreneurs?

Mr. A. Ian Gillespie: Sir, I'm not quite sure I fully understand your question.

Mr. Gurmant Grewal: I'm talking about the roles of EDC, Ex-Im, and SMEs and how these three things work together, because I know that Ex-Im is playing a significant role in arranging so many things and—

Mr. A. Ian Gillespie: Are you talking about the Ex-Im Bank in the United States?

Mr. Gurmant Grewal: Yes.

Mr. A. Ian Gillespie: In regard to?

Mr. Gurmant Grewal: Let me put it like this. Do SMEs have direct access to Ex-Im and other financial institutions for borrowing and financing?

Mr. A. Ian Gillespie: I think for the most part that program is delivered through the banks. They're sort of guarantee-type programs, whereas the EDC program is very direct, right to the SME. Eighty-five percent of the 3,600 customers we have are SMEs that we have a direct relationship with. It is a different structure in the United States.

Mr. Gurmant Grewal: Okay.

The Chairman: Thank you.

Mr. Sauvageau.

[Translation]

Mr. Benoît Sauvageau: It has been suggested that the Canadian government write up a voluntary code of conduct for those firms doing business abroad. The Canadian government has not responded to that request, but some private firms have. I forget their names— maybe the chairman could help me to remember some of them—but I know that, amongst others, Shell Canada was on the list of those who had come up with a voluntary code of conduct that was announced last summer.

The Canadian government answered that it would not make it mandatory for its Crown Corporations to sign on to this voluntary code of conduct. I simply wanted to know your opinion. First of all, have you heard anything about this? Is it serious? There was a press conference. Do you intend to sign on or encourage firms that you help to sign on?

[English]

Mr. A. Ian Gillespie: Thank you for that question. We are fully aware of the particular code that you are referring to and heartily embrace the spirit of the code. We are examining whether we should become a signatory or not. There are some issues with regard to what duty or obligation EDC might take on in relation to some of its customers around the world that have to be looked at quite carefully. We can't be the secret police for Canadian companies working abroad. At best, we are Canada's secret weapon.

It is certainly an area that we embrace, that we endorse, but we have not yet made a decision with regard to whether we will be a full signatory. That's not because we don't accept the terms; rather, it's just the way it is structured. The particular code itself may not fully relate to the way we do business in some of those international markets.

The Chairman: Mr. Sauvageau?

[Translation]

Mr. Benoît Sauvageau: I don't think there's any problem with a Crown Corporation of the Canadian government subscribing to a code of conduct promoting Canadian values in export markets.

The Chairman: Mr. Sauvageau, in his answer he clearly indicated that the Corporation was quite ready to accept responsibility but that if the code made it mandatory to police what its debtors were doing, it would be totally impossible.

Mr. Benoît Sauvageau: In that case, could you apprise the committee of your decision regarding your possible acceptance of this voluntary code of ethics? I don't know whether you have any deadlines or if you're considering making this decision within two, three or six months, but could you let the committee know when that decision has been made? I think that it would be interesting. I thank you.

[English]

Mr. A. Ian Gillespie: The interesting thing is whether the code needs to stay in exactly its present terms of reference or whether it needs to in time adapt to allow more commercial enterprises to subscribe to that as well.

• 1035

So I'm reluctant to give you a specific time within which we might make that decision. Rather it is one of seeing how that code might evolve over time in a way that EDC might ultimately become a signatory to it.

The Chairman: Thank you very much.

Mr. Brison.

Mr. Scott Brison: Thank you again for your indulgence this morning. We appreciate this. I have a brief question, and it follows Mr. Sauvageau's line of reasoning.

On the code of conduct, we have had—and this is a global phenomenon—a significant decline in the role of the nation-state and the ability of individual states to impact human rights policies and environment policies in other countries. We need the corporation to engage private sector players if we are going to have an effective linkage between our human rights and foreign policy and trade policy. I think Canadians, by and large, want that linkage and it has existed historically in Canada.

I think there's a responsibility for EDC, not to go beyond what we're asking private corporations to do but as a crown agency to comply with what we are asking crown corporations to comply with, and that is a code of conduct that will become an effective instrument for our foreign policy agenda internationally. I really believe that without EDC's cooperation or compliance with that, when we have the opportunity to sit down with Matthew Barrett of the Bank of Montreal or David Hennigar of Extendicare, or anyone, we won't have the legitimacy we need.

Mr. A. Ian Gillespie: I appreciate the comment. There's no question that EDC, not only now but in the future, in an increasing way, will have to be seen as a fully responsible organization in all facets. This is obviously an area we're most interested in and we are looking to see what we can do to fulfil our responsibilities in that regard.

The Chairman: Thank you very much.

Mr. Scott Brison: Consumerism has led to significant pressure on companies to fulfil this moral obligation. Even companies like Nike have responded, not because they necessarily wanted to but because of the pressure from consumers. Again, as a crown agency, you have an obligation in a sense to your shareholders, the Government of Canada. We act on the peoples' behalf, who are effectively the shareholders of EDC. So that's a concern we represent here today.

But thank you very much for your indulgence.

Mr. A. Ian Gillespie: Thank you.

The Chairman: Thank you.

Mrs. Barnes.

Mrs. Sue Barnes: Thank you very much, Mr. Chair.

I'm just going to refer to one of the paragraphs on page 7 in your own report where you talk about risks in exporting. The common perception is that the risks are always in developing countries where there are political or other types of instability risks, when in actual fact the 80% of buyer default and insolvency was for exports to the U.S. I want to understand why that market created such a risk and what you can do as an agency to prevent it.

Mr. A. Ian Gillespie: The United States market?

Mrs. Sue Barnes: You have 80% insolvency and default coming from the United States, which is not historically or perception-wise viewed as high risk, yet most Canadians out there would ask why you would trade with Africa, or some of those emergent markets. What are we doing or what can we do to lower the risk in our U.S. transactions?

• 1040

Mr. A. Ian Gillespie: The biggest thing Canadian companies can do is to insure their foreign receivables with EDC or use other aspects of EDC's financial services, whether it's the lending programs or what not.

Indeed, one of the ironies is that all our business is risk business. The $27 billion or $28 billion we do a year is all risk in one way, shape, or form. You're absolutely right that most people have this perception that risk is only in the emerging markets. It is there, but it is also in the developed markets. It's in the most developed market, the United States.

Canadian companies, I think, are somewhat naive from time to time. They get a phone call to ship something to Cleveland, and they don't do any due diligence. They may not even obtain a D & B report. They just ship the $1,000 or $10,000 or whatever it might be the guy said to ship, and lo and behold they don't get paid. They don't get paid for a couple of reasons: the company didn't exist—it's an outright fraud—or he just doesn't want to pay. That's what default refers to. If you don't like it, sue me. It's obviously one of the most litigious societies, and the difficulty is the cost of pursuing a debt is exceedingly high. That's the rude awakening.

It is also very tough business down there and you have to come fully prepared. That's why I think EDC provides very valuable services.

Our struggle, if I can call it that, is to ensure that the pool of risk we take on is managed in a way that the premiums we take in cover those adverse experiences we have. It is a struggle. Some sectors are notoriously poor, and we have to find the tools with technology and the like to ensure we're on top of that portfolio constantly to try to minimize the risks wherever we can. The exporter then enjoys the EDC insurance policy for at least 90% of the risk, so he's virtually fully protected.

It's a very interesting observation and....

Mrs. Sue Barnes: I would suggest to you that one of your challenges might be education of our exporting public.

Mr. A. Ian Gillespie: You're absolutely right.

The Chairman: Absolutely.

Before we wind up, and this comes out of our last report, Mr. Gillespie, one of the things the small and medium-sized businesses told us is that a problem with the U.S. market particularly is that their banks will not treat you as receivables in the same way they treat Canadian receivables, largely because of the risk factors you just mentioned. The bank doesn't know if in fact its knowledge of the local market of Chicago or Dallas is the same as our market, so what's the receivable worth? It does have an effect of reducing their working capital, so their ability to conduct business is very seriously impacted. If there were some way in which the EDC could work with the Canadian banks to set up a system whereby receivables in the U.S. could be treated so that they don't eat into the working capital of the small and medium-sized businesses, this would be an extraordinarily important contribution, it seems to me, to our exporting capacity.

It's 80% of our exports. It's enormous. It was very clear to us when the small and medium-sized businesses came before the committee that their single biggest preoccupation in all these things is a lack of capital. Their single most important thing is lack of capital resources and access to capital, so anything the EDC can do with the banks would be extremely helpful.

I'd like to leave that with you as something you may be considering already.

Mr. A. Ian Gillespie: That, Mr. Chairman, is an exceedingly important point. There are two points I'd like to make.

The first is we do work with the Canadian banks. We do have assignments of our insurance policies to the Canadian banks, so that gives them security with regard to the working capital they provide for foreign receivables.

There is no question that there is uneven treatment from bank to bank, even within banks, branch to branch, with regard to the amount of working capital they will provide with an EDC-insured policy. It gets even worse when you go outside the United States and look at other risks. They will even knock those down to a greater extent, even if there's EDC insurance. They might have a higher level of confidence with EDC in the States than they will somewhere else.

• 1045

For this very reason, we introduced the master accounts receivable guarantee program in 1996—we call it MARG. It's referred to in my notes, and it was clearly aimed at increasing the amount of working capital support that Canadian banks would provide to small and medium-sized enterprises for their foreign receivables. In effect, it was a guarantee to the bank that in the event that a company failed, the bank was fully protected. It wouldn't be a question of whether or not the exporter had fully performed, because the bank was guaranteed—and there are some statistics that we have on that.

In short, as I said in my remarks here, we have not yet achieved the numbers we would like. We think it's a great program. In the early stages of it, we think it is clearly showing that more working capital can be put in the hands of small and medium-sized enterprises when the banks take up this MARG program. The problem seems to be that the banks have so many different products and services that the branch managers are responsible for through their big network that they just frankly don't have the level of awareness or knowledge at all times to be able to say, yes, that's available, let me do that so I will guarantee your 80% against those foreign receivables.

It is a problem, but we're working with the banks to try to find different solutions. Technology may be a solution, but not all the banks are on the same platform.

So I take your point. It's exceedingly important. We've tried to address it through some innovative ways. Clearly, we haven't been fully successful.

The Chairman: On behalf of the members of the committee, I'd like to thank you for coming, Mr. Gillespie. I think the answers to questions have clearly shown that the decision to hire somebody from inside was a good one. You seem to know exactly what the business of the bank is all about, and that's what we wanted to know. We congratulate you on your appointment, we wish you well, and I'm sure we'll have an opportunity to see you again before the committee to discuss the EDC, which is an extremely important part of our mandate, as you know.

Mr. A. Ian Gillespie: Thank you very much. I wish to thank the members of the committee for the opportunity to appear before you.

The Chairman: We're adjourned until Tuesday, November 18.