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]

Tuesday, November 23, 1999

• 0938

[English]

The Vice-Chair (Mr. Deepak Obhrai (Calgary East, Ref.)): Good morning, everyone. Bill Graham, who normally chairs the meeting, is on a plane and should be here in about 20 or 25 minutes.

Hon. Diane Marleau (Sudbury, Lib.): I was wondering whether something had happened.

The Vice-Chair (Mr. Deepak Obhrai): Madame Beaumier is not here, so I have the privilege of being in the chair today.

We have exciting witnesses in front of us here, so we'll do what we normally do. The witnesses will introduce themselves and do their presentations, and after that, we'll go to our usual questions and answers.

Gentlemen, you can introduce yourselves. According to the list we have here, Paul starts. Paul, will you be making the presentation?

Mr. Paul Kovacs (Senior Vice-President, Policy Development, Insurance Bureau of Canada): Mr. Quenneville will speak for our group.

The Vice-Chair (Mr. Deepak Obhrai): All right.

[Translation]

Mr. Jules R. Quenneville (President and Chief Executive Officer, Guarantee Company of North America, Insurance Bureau of Canada): My name is Jules Quenneville and I'm from Guarantee in Montreal.

• 0940

[English]

Good morning. We appreciate the opportunity to present our views to the committee today on behalf of Canada's insurers.

I am Jules Quenneville, president and CEO of the Guarantee Company of North America. We've been serving Canadians since 1872, and we are a member of the International Credit Insurance Association. I am also the chairman of the credit insurance committee of the Insurance Bureau of Canada.

With me today is Bob Labelle, senior vice-president and chief agent of Euler American Credit Indemnity Canada, based in Montreal. The Euler Group is the largest supplier of credit insurance around the world and the largest supplier of domestic credit insurance in Canada. The Euler Group is also a member of the ICIA.

Also with me is Paul Kovacs, senior vice-president of the Insurance Bureau of Canada.

IBC is the voice of private insurers in Canada. Companies that belong to the trade association provide more than 95% of the insurance sold in Canada.

I have some brief introductory remarks, and then we will be pleased to discuss any questions any members of the committee may have.

Canadian insurers believe the federal government should establish a new partnership, where the Export Development Corporation and private financial institutions begin working together to better serve the needs of exporters. Canadian public policy in this area lags behind improvements that have been introduced in other OECD countries. We should bring our policies in line with international best practices. The result will be increased exports, more jobs, better jobs, and rising prosperity for Canadians.

The Export Development Corporation was established in 1944 to provide financial assistance to Canadian exporters. Around the world, the banking and credit insurance industries at that time were not offering several services needed by exporters, so public agencies stepped in to fill this gap. Eventually, dozens of banks, insurers and reinsurers entered these lending and credit insurance markets with an array of attractive products, lower prices, and other improvements that were of value to exporters.

The public agencies in all of the OECD countries, with the exception of Canada, transformed themselves several times to complement the growing skills evident in the private sector. For example, all of the agencies, other than EDC, eventually exited the short-term export credit insurance market, apart from servicing some high-risk transactions.

As insurers in all of the other OECD countries largely assumed responsibility for the provision of short-term export credit insurance, the various government agencies were able to target other areas where they could assist exporters. In particular, a great deal of energy has focused on the medium- and longer-term financial needs in many export transactions.

I understand that last week the representatives from Bombardier appeared before this committee seeking increased support of this nature. We agree that EDC should direct its resources away from short-term projects and increasingly toward longer-term projects.

Lending and insurance are highly capital-intensive businesses. EDC and the other government agencies around the world each hold many hundreds of millions of dollars on behalf of taxpayers. The other agencies continuously redirect these scarce public funds, so they support exporters by complementing the skills available in the private sector. EDC is alone in that it still has almost all of its resources tied up in providing services that banks and insurers have been supplying for many years in other countries.

In recent years, EDC has pursued its mandate to support exporters in a way that is different from the other OECD agencies. The result is that Canada stands apart. Financial institutions have largely been crowded out of the market of supporting Canadian exporters with the products banks and insurers supply to exporters in all of the other OECD countries. It is important that EDC continues to support Canada's export community. But the international evidence demonstrates that this is most effective when public resources are used to complement the skills of the private sector.

The recent report of the expert panel reviewing EDC's operations, the Gowlings report, provided advice on a broad range of activities by the agencies. The Gowlings report did not directly address the primary concern of Canada's insurers—our advice that EDC should largely exit the business of providing short-term export credit insurance. Nevertheless, the team's advice on other issues was encouraging, if the intention was that it would also be applied to export credit insurance.

In particular, the first recommendation of the Gowlings report is to consider new institutional arrangements, which would bring the structure of Canadian official export credit support more in line with the practices of other OECD countries, including consideration of a more distinct separation of EDC's consensus in market-based activities. Real action here would address most of the fair competition concerns critics have raised in Canada and abroad.

• 0945

We suggest that EDC could have one company that competes with insurers, paying taxes, complying with insurance regulations, and so on; another company that competes with banks, which would similarly operate on a commercial basis; and a third company that supports the federal government's non-market activities, such as medium- and longer-term export credit insurance.

Alternatively, EDC could commit to considering the provision of credit insurance only in markets not covered by private insurers. Canada is the only remaining nation that has not changed the role of its government agency in the provision of short-term credit insurance. We are out of step with trading partners in the United States, Germany, France, Britain, and elsewhere. EDC should, however, remain the lead provider of export credit insurance, where the agency is clearly acting as an instrument of public policy. This is most evident in those circumstances when the full term of the financial arrangement extends over a period of more than 12 months.

The federal Minister of Finance, Paul Martin, has stated that if government does not need to run something it shouldn't, and in the future it won't. This should apply to EDC.

Around the world, governments have largely exited the short-term credit insurance business, because under conditions of fair competition, government agencies could not match the low prices and quality service of private insurers. It's now time for the federal government to bring Canadian credit insurance policy in line with our major trading partners, as the best approach to helping exports.

Those are the prepared comments I wanted to read into the argument here. I would like to add some other points.

I think one of the major facts is that insurers and reinsurers are increasingly willing to take on this kind of business, especially in large groups around the world. For example, the Guarantee Company of North America is a surety company as its main line of business. It's been known for that. It was a pioneer company in North America. We were the first company to issue bonds in North America, back before Canada was a country. We've survived over all those years as a company.

We do reasonably well in the marketplace, and we are involved in guarantee bonding. We're not involved in credit insurance as a product right now from inside our company, but we would like to be. We have investigated it many times, and we haven't been able to come to grips with the fact that we couldn't arrive at the kind of relationships that would be required to carry on the business.

Those determinants, by and large, are now largely removed. There are many reinsurers now on the market that would be prepared to support Canadian industry in carrying out this kind of product. There are other primary insurers around the world in this product line, which are forming large international groups that allow these primary carriers to cooperate with each other and be able to provide the products on a free-market basis around the world. It isn't a perfect system yet. They haven't covered every country in the world yet, but neither have the export credit agencies of the various governments around the world.

The point is that the private sector is increasingly willing to underwrite these risks. That wasn't the case back in 1944 or 1945, but it is today. Canada is changing and the economy is changing. We're becoming more able to do these kinds of things, because there are more players willing to step forward and help Canadian companies do these things.

The other point is that the governments of many other countries have sought to reduce their range of activities, and by that I mean putting less of the public purse's assets against the risks that really should be assumed by other mechanisms. It's not just other companies or other organizations, it's mechanisms.

When an insurance company takes a risk, it intermediates the risk. It takes the risk, takes a view of the risk, and charges a price. It then divides that risk among all the arrangements it has made with other insurers and reinsurers, so the risk is dissipated across a very large market. An intermediation takes place.

When a government agency takes the risk, they often put the risk against the assets on their balance sheet, without that intermediation process. That process, in itself, winds up putting the public assets of Canada against these contingencies that, by and large, are not always easily quantified. So when crises happen in various parts of the world, they can have a dramatic impact on the balance sheet of the export credit agency, which has basically put up our credit rating, as Canadians, against their operations.

• 0950

I think we have a duty to avoid unnecessary exposure. When we have public assets and assets to work with, we have a duty to try to determine how we can avoid putting all assets against unnecessary risks.

That's basically the end of my comments.

The Vice-Chair (Mr. Deepak Obhrai): Thank you, Mr. Quenneville.

It's been our past practice to allow all the witnesses to give their presentations before we go to questions and answers, so I'll call now on SNC-Lavalin to do their presentation. Jacques.

[Translation]

Mr. Jacques Lamarre (President and Chief Executive Officer, SNC-Lavalin Inc.): I'm pleased to be here today to represent SNC- Lavalin Inc.. I would like to thank the committee for giving us time to express our views on a subject as important as the legislation concerning the operations of the Export Development Corporation of Canada.

First, let me say a few words about SNC-Lavalin before getting to the crux of the matter.

SNC-Lavalin is one of the largest engineering firms in the world. We provide services in the industrial, transport, power, infrastructure and building sectors. The company's sales totalled $1.5 billion last year. Sixty percent of the company's sales were made abroad.

Not only do we have a significant number of employees, but in addition, and this is one very important aspect of SNC-Lavalin, we've purchased approximately 3 billion dollars' worth of goods and services within Canada which we exported on the international market in the past three years. As a result of this procurement activity, I can estimate that we have helped maintain over 30,000 jobs in Canada, directly or somewhat indirectly.

Financing is a key element of our international operations. In the U.S. market, this component may be somewhat less important, but on the rest of the international market, it is almost as important as the technical aspect.

This element is part of the competition process. It cannot be isolated or distinguished clearly enough to say whether financing is more important than the technical aspect, but these two elements combined form an essential component.

It is therefore essential to be extremely careful as to how we treat the Export Development Corporation because this could help or hinder very significantly the volume of exports, especially those to countries other than the U.S.A..

Another essential aspect that I would like to highlight in my initial comments is that the EDC must maintain a fair balance in its loans portfolio between developed countries and financing to emerging countries.

There is no doubt that it is sometimes easier for the EDC to take a step in the United States than in a developing country, even if the needs for products and infrastructure in the developing countries are huge. For the EDC as for everyone else, it is much easier to take on a risk in the American market than in any other foreign territory.

It is therefore necessary to strike a balance in the operations carried out through the EDC. This is essential for Canada's economy, because it will reduce our dependency on the American market. Therefore, this is an aspect that you should bear in mind when you draft your conclusions. If we want to reduce Canada's dependence on the American market, the EDC must be obliged to follow rules that force it to maintain a certain percentage of its loans portfolio in developing countries or in countries other than the United States.

• 0955

[English]

Therefore, while I agree with the direction of many of the recommendations of the Gowlings report, I do not believe the refocusing of some of these activities should be done by way of changing the law. I am of the opinion that there are sufficient safeguards in place, such as the EDC board of directors, on which several government departments are represented. The regulations, the reporting line to the Minister for International Trade, and the Auditor General's review would ensure policy-makers and the Canadian taxpayers that EDC is following the spirit and intent of the EDC Act.

Changing the law and maintaining all these reporting rules will be a double and unproductive investment.

[Translation]

I would now like to comment more specifically on various aspects of the Gowlings report, namely those that we have some difficulty with.

[English]

Recommendation 14 calls for the creation of a special program through Canada accounts to provide guarantees to banks for consensus loans. Resources at EDC have already started to analyse transaction and country risk.

The creation of a separate program whereby risk analysis and management would be duplicated is quite risky. We are strong believers that the one-stop shop approach would best serve the interests of Canadian exporters.

We recommend that EDC be encouraged to improve the characteristics of its current guarantee program under its own corporate account and be required to allocate a certain percentage of its annual lending volume to guarantees on terms competitive with other export credit agencies.

Another subject I would like to talk about—and I know it is a sensitive one—is related to the environment and sustainable development. The thing we have to be careful of is this. We are in a competitive world. If someone were to go to the World Bank, the World Bank would negotiate a loan, and they are not in a competitive environment. But when you have four, five, six, or seven people competing to get a job, and if you come with very strict rules, the people will get lost in the system. We will get lost in the bureaucracy; it will be a catastrophe.

It's not because we're not strong believers in the environment. No engineer of SNC-Lavalin will ever produce a job that doesn't meet the ISO criteria for environment. If over and above that there is regulation and there are all kinds of assessments that need to be done by the public, all kinds of things, it will kill our competitive chance to get any kind of project. That's why we have to be very careful. It's not because we're not very strong on the environment. We are very strong, but we are against a process that in fact will kill the intent and will kill any chance we have to sell a job.

For me, if I were to ask any engineer at SNC-Lavalin to design a project that doesn't meet all the environmental criteria, nobody would do it. On the other hand, if we have a process that will kill our chances to get a job, we will all be at home doing nothing. For me, that's something we have to understand. The environment is part of our life; we don't do anything that does not fully respect the environment.

We have to be very careful of the process we will impose on EDC. Already they have a framework, and it's a framework that has some flexibility. For me, that's something that is already in advance of many other countries in the world. For the time being, we should not ask for anything more.

Again, I know human rights are very sensitive, and again it will be to ask all the business people in Canada, do you have a code of conduct? Normally, if we don't like a restaurant we don't go back. If we ask all businesses everywhere to have a code of conduct, again from our point of view, the process will kill it. It's not the intent. For us, at the same time as we make a trade, we export our values. We believe in our values, but at the same time the process could kill the intent.

Is the bell ringing because I'm too long?

[Translation]

No?

An hon. member: No, that just announces that the House has started sitting.

Mr. Jacques Lamarre: Very well. It's not because of me.

Do I still have 10 minutes?

[English]

The Vice-Chair (Mr. Deepak Obhrai): You're fine.

Mr. Jacques Lamarre: Okay.

• 1000

The last point I would like to make is on the small and medium-sized exporter. In the Gowlings report, they say because someone is small or medium—I don't know if we are small or medium; I don't know where we stand in that regard—we have to be very careful. They say we don't need a legal opinion. The people won't need to be responsible for collecting their money. EDC will be responsible for collecting the money. The banks will have to provide trade finance to help the small and medium firms, and the Canadian banks will have to have sufficient expertise and will need to be trained by EDC. Already they don't have sufficient people to provide all the services they should provide.

In my opinion, we have to be very careful. Already people like us retain a lot of small and medium enterprises, and maybe that's a very good mechanism. We take care of all the aspects of international financing. But it's very dangerous to open that door. If you don't have a legal opinion, if people are not responsible for collecting their money....

It's something that EDC should be very careful of, because all of a sudden you will have the same committee asking how come we have such a large number of accounts that are not collected, because to collect the money in the international market is a most difficult thing. The technical aspect is fun; to collect the money is a hell of a job. If we don't have people like us to go to our client and to get the money...otherwise it would be so much fun to deliver and not worry about the payment. And that's something we have to be very careful about in those recommendations, that EDC doesn't take on its shoulders something that would be impossible to meet.

In conclusion, there are three components: Minimize the changes to the act. Do not add restrictions that will create impediments to trade and distract EDC from its preliminary proposal of directly or indirectly supporting Canadian exports. EDC should have a more balanced lending portfolio. We are of the view that they are not lending enough in an emerging market. The third one is that we would like EDC to be able to provide a competitive bank loan guarantee program to help us leverage commercial financing where needed.

Thank you very much.

The Vice-Chair (Mr. Deepak Obhrai): Thank you, sir.

Next, from the Canadian Financial Insurance Brokers, we have Mr. Clive Aston.

Mr. Clive Aston (President, Canadian Financial Insurance Brokers Ltd.): Thank you very much, Mr. Chairman.

I want to open with an apology, really. I've been down with pneumonia and my written presentation has only been just received, so I am advised by the clerk it's available afterward.

I've been a specialist credit insurance broker for approximately 20 years, longer than anyone else here in Canada. I have a doctorate in economics from the London School of Economics. You can tell from my funny accent I used to work at Lloyd's of London. I was an executive vice-president of a Lloyd's broker for about 10 years, specializing in credit insurance. I've been the assistant director of trade at the International Chamber of Commerce in Paris—and I still can't speak French—and today I run what's probably the largest independent specialist credit insurance brokerage here in Canada.

I turn over somewhere around $5 million a year. My clients range from small companies—actually smaller than myself, embarrassingly—the pay perhaps a low four-figure premium up to some fairly large corporate household names and Canadian financial institutions.

Let me immediately say that any comments I make today are purely mine. They're personal comments. They don't necessarily reflect those of my clients. This is all I do for a living, nothing other than credit insurance. I live this stuff all the time.

Here in Canada, I have five potential markets I can go to: EDC, which of course you all know; ACI, the American Credit Indemnity; Gerling Global of Germany, which is a new entrant into credit insurance here in Canada; the American International Group, which is one of the largest, if not the largest, composite insurance companies in North America; and the Continental Group of the United States, which in Canada writes under the name of CNA.

We also have my old shop of Lloyd's of London, which does have an international trade credit facility that's available. Very embarrassingly, it's extremely hard to sell Lloyd's of London security here in Canada. They had some fairly well publicized problems a few years ago, and I still have a hard time selling it.

Secondly, there is a five-hour time delay between the market there and clients over here, and quite frankly, they don't have the infrastructure to be able to bring clients in Canada the service that I think they need and deserve.

• 1005

We also have what I referred to as non-admitted carriers operating here in Canada. Those are insurance companies that aren't licensed to operate here directly, but they do so on the back of writing North American policies. You may have an American client who has a Canadian subsidiary or a European head office company as a Canadian subsidiary, and the policy is written on the back of that. There are issues involved for me as a broker in dealing with a company like that. Suffice it to say, I won't deal with them, so they're denied to me.

I also have some fairly large entities that I can deal with, such as the World Bank Multilateral Investment Guarantee Agency, depending on what the risk is and what the requirement of the client is.

I deal in three distinct types of products: domestic credit; export credit and politic risk, which I tend to consider as a single one; and kidnap or ransom insurance, which I don't suggest as a topic we discuss today.

There are other companies that operate with a similar product, such as Accord Business Factors, by providing a factoring operation. Most of the major financial institutions will margin receivables, which are a similar type of entity.

Of the private sector markets that I can go to, American Credit Indemnity, ACI, is the dominant company here in Canada. I don't know what the exact percentage would be, but it's certainly the largest private-market company that I have here. It enjoys a virtual monopoly in writing short-term domestic credit in Canada.

The American International Group, AIG, is a fairly new entrant into Canada. It's been here for half a dozen years. It has two underwriters, but most of the claims work is certainly done in the States and the administration is done in the States.

Gerling Global equally is a new entrant. They've been here for two years. They sustained some major losses in their first year, but they have responded admirably, are still in operation and are still writing. Again, they have a small staff. There are only two people as underwriters, with backup.

And then there is CNA, the Continental group that only operates in Canada via a very small agency force. All of the policy work is actually done out of the States. There is no direct Canadian involvement.

When a client considers credit insurance, there are a number of different reasons for why they may consider it, but I won't get into them today. There are two areas in particular that tend to be the ones that I think are the most important. For today's purposes, I will assume that the solvency of each company is the same. From my point of view, they are. I have no security issues with any of the companies that I deal with. The two major elements really are cost and the service that comes behind it, particularly the claims handling.

My market, the credit insurance market, like most financial markets, has what we can euphemistically refer to as market rates. The political risk market, for example, is fairly well codified. You can actually get copies of the market rates through some specialist trade magazines such as International Trade Finance out of London, England. You'll find that, by and large, generically, political risk underwriters are charging a spread of rates for a particular country's risk. It's quite well defined.

We have the same thing, by and large. It's a market-driven rate in domestic credit insurance and export credit. It's not as codified and it's certainly not written down, but there is more or less a market rate. You'll find that, by and large, all of my underwriters will write within that market rate.

I've heard it suggested that EDC enjoys particular advantages over the private market because it's funded on the Bank of Canada, on the back of the government; it doesn't have to buy reinsurance treaties; and it has a number of other benefits that give it an unfair advantage over the private market. I've never heard it defined as to what that unfair advantage translates into, but we presume it to be cheaper pricing for the clients. I'm afraid that's patently untrue in my experience as a broker. EDC is always in the market range—if I can use that expression—although frankly it's always on the high side. It tends to be one of the more expensive markets that I can go to.

Currently, over the last few months, I would say the market that has been charging far less than market rates is ACI. I've had examples recently in the food sector, for example. Food in Canada is usually written between, say, 12 and 15 basis points. I've had an example recently in which EDC came to a client with a 15-basis-point rate. ACI came to the same client with a 2.5-basis-point rate. That's a considerable spread.

• 1010

Computer companies in Canada are usually charged about 30 basis points. My client was offered a policy by EDC at 33 BPs, and ACI came in at 15. So I think any suggestion that EDC enjoys an unfair advantage isn't put forward into a formal term sheet, into a quote—at least, not in a way that I can certainly see.

The other area that clients need to concern themselves with is service. I don't think the adage “You get what you pay for” has ever been more true than in my sector. If you have a wild variation in rates, it tends to be more symptomatic of bad underwriting than anything more professional than that, in my opinion.

Service is the single most important thing a client needs. If you submit a request for a credit limit, you need to know you're going to have a fairly quick turnaround, particularly in some sectors like computers, in which, for the two peak periods of the year, you may virtually have a client on the phone who wants to buy a product from you immediately.

Most of my companies are now fairly automated, as you can imagine. I've found the turnaround times to be fairly consistent, although EDC's turnaround time is far superior to anyone else's. If the automated system can't automatically approve a credit limit, that request is defaulted to a human underwriter, who will then look at it separately and come back with an informed decision. In my opinion, ACI doesn't appear to do that. You get a computer printout of a comment that I find hard to understand—and I've done this for nineteen years. Very frequently, I don't understand the logic behind it.

The other important area, of course, is claims handling. Let's face it, the reason you buy an insurance product in the first place is to get some protection and to get compensated for any losses you sustain, assuming you have been in compliance with your policy conditions.

ACI's claims handling service of late has been severely letting them down, in my opinion. Anything handled by ACI's Canadian operation has just been sterling. Anything handled by ACI's Baltimore operation has been deplorable. It's been far less than satisfactory. Claims handling in particular has been an area that I think is costing them market share. I've had clients of mine move to other underwriters simply because of ACI's claims handling problems. And I've certainly had clients who self-insure, which makes it even worse for me as a broker, of course.

EDC's claims handling has been second to none. I have had a major claim denied by EDC. Quite frankly, however, that was justified because my client wasn't in compliance with the policy conditions at the date of the claim.

That's probably a good place for me to really come to a conclusion, but I do have a request that I would like to put forward to the committee as well. One of the problems I have as a broker is that frequently the capacities that I need on a particular credit aren't available from the private market.

As the dominant market force here in Canada, ACI tends to be the one accessed by most clients to get the limits they need. It's currently very hard, if not impossible, to get limits written on certain clients in the consumer electronics sector, for example. Now, it's for justifiable reasons. I'm not suggesting that we throw away the standard underwriting criteria and start doing ridiculous things. Very frequently, EDC will have the availability. Because of the restrictive nature of its act, though, I can't go to EDC for a domestic-only insurance placement. I can only take a client to EDC if the client has the requisite export quotient as well.

In the case where my client can't get the capacity needed, why can't I go to EDC as a market of last resort, again subject to EDC's appetite for that particular risk? The private market would then have the first bite of the cherry, as it were. If they wanted to take the risk, they could certainly do it. If they didn't want it for whatever reason, give me the ability to insure or to allow that client the protection needed to enable it to grow, by taking it to what is currently the most superior market that I can bring to my clients.

Thank you.

The Vice-Chair (Mr. Deepak Obhrai): Thank you.

We now have Chairman Mark Perna, from the Canadian Factors Association.

Mr. Michael Teeter (Director, Industry-Government Relations Group; Canadian Factors Association): We have copies of our presentation available as well, and we'll leave them with you.

The Vice-Chair (Mr. Deepak Obhrai): All right, thank you.

Mr. Mark Perna (President, Accord Business Credit; Chairman, Canadian Factors Association): My name is Mark Perna. Aside from being the chairman of the Canadian Factors Association, I am also the president of Accord Business Credit, which is Canada's oldest and largest Canadian-owned factoring company. As a matter of interest, nearly all factoring companies in Canada are Canadian-owned and -operated.

• 1015

I know some of you are probably saying to yourselves, I know what a credit insurer does, but what does a factoring company do? Well, many small and medium-sized factoring companies in Canada actually purchase accounts receivable for cash. The larger factoring companies in Canada specialize in guaranteeing that the customers of their clients will pay their bills. In short, they guarantee the accounts receivable of their clientele in much the same way as EDC and private credit insurers deal with their clients. The main difference is that the factorer will usually ledger and collect the accounts receivable as well.

In 1993 the government permitted EDC for the first time to offer domestic credit insurance to exporters under certain guidelines. The government never consulted with the factoring industry on this issue at the time. However, the insurance industry did have input, and they vociferously objected to the incursion on their domestic business.

It is important to remember that whatever comments may follow, our quarrel is not with the EDC itself, but with their recent ability to sell domestic credit insurance products to exporters in competition with private sector credit insurers and factorers. I can tell you from my own personal experience that EDC's management and staff are experienced professionals, and they have continually improved their efficiency over the last number of years. Coupled with some unique advantages afforded to them as a federal crown corporation, they are a formidable competitor and dominant player in the marketplace.

I do not plan on doing an exhaustive critique on chapter 5 of the Gowlings report, entitled “Domestic Credit Insurance“. While our association does not agree with Gowlings' conclusions on the domestic credit issue, most of the material presented was well balanced. However, I would like to highlight what we feel are a few of the major shortcomings.

First, it must be recognized that those entities cited in the report supporting EDC's involvement in domestic credit insurance have an inherent conflict of interest. Considering the possibility that EDC may have an unfair advantage over the private sector, why should exporters care? They want the best deal possible for their companies, period. If it comes at the expense of the private sector, so what? Ditto for the presentation of the specialist credit insurance broker who had “high praise for EDC's domestic credit insurance product”. High praise indeed, and if that highly regarded product comes as a result of an unfair advantage, so what? The broker is compensated directly by EDC.

One area where the report's credibility is badly stretched is its speculation that EDC's entry into domestic credit may have actually helped the credit insurance industry to grow, as it may have “increased awareness in Canada of the benefits of credit insurance”.

To an active participant in the industry, this comment borders on absurdity. The main reason credit insurance has grown in Canada over the last five years is because of the trend toward globalization in the insurance industry. Worldwide insurance conglomerates have come to dominate the global credit insurance landscape, making it relatively easy for them to offer insurance services in developed countries such as Canada.

Secondly, many of these global companies offer credit insurance along with other forms of business insurance. Parenthetically, this is one reason you do not usually see purely Canadian-based credit insurers in the market. Size matters, and global companies and alliances have become the dominant trend. As pointed out before, the factoring industry is mostly Canadian based, and in contrast to the insurance situation, there has not been one new entrant into the service factoring field since 1994, when EDC began to offer domestic credit insurance.

One area where we agree with the Gowlings report is their conclusion that the really small exporters are underserved in their ability to secure domestic insurance and factoring services due to minimum fee requirements. We would define small exporters as those companies that have annual total domestic and export sales less than $1 million.

• 1020

One solution that could have been implemented back in 1993 would be to provide inducements to private sector insurers and factorers to service small exporters in the same way as governments provide loan assistance programs via banks for small business. Instead, the government embarked on a maverick plan to have EDC provide domestic credit insurance and compete with the private sector providers.

The problem with maverick plans is that sometimes you just don't know what the negative ramifications will be. While EDC's involvement in domestic insurance has given the smallest exporters some assistance, on the middle- and large-sized exporters this new domestic credit policy has managed to kick the collective groins of the credit insurers and factorers along the way.

As a case in point, while our association, and in particular my company, has managed to lose some significant business to EDC since their domestic insurance product has been introduced, a situation that occurred exactly one year ago topped the list as our worst-case scenario. One of our ten largest clients, Parasuco Jeans of Montreal, was dealing with us on their domestic receivables only. About half their business was exports, but that was being handled separately by a U.S.-based factoring company.

While looking for alternatives to handling their export receivables, our clients started to look at EDC's services and discovered that they could have their domestic receivables insured as well. This client of seven years terminated their relationship with us, and we were not even handling the export component of their business, only the domestic piece.

Their customers with us were retail clothing stores in places like Robson Street in Vancouver, St. Catherine Street in Montreal, Yonge Street in Toronto, and Bank Street in Ottawa. What does EDC's insuring these stores have to do with facilitating export sales? I asked myself that question many times as I watched that client walk out the door taking $96,000 in annual fees with them.

I can tell you, as chief executive of my company, losing that client was painful. The whole experience was an embarrassment to Accord Business Credit and EDC as well. I know that EDC didn't want to be seen as taking a large and purely domestic piece of business away from us, but that is what happened. Unfortunately that is not the end of this story, as there was another big loser in this transaction.

Assuming our lost revenue to be incremental, about $36,000 in annual corporate income taxes vanished along with our client. Unlike factors and insurers, EDC doesn't pay income tax. Does this whole situation make any sense? Or, as the comedian Jackie Mason so often intones, can someone explain this to me? As I said, you just don't know what the downside is going to be with maverick solutions that infringe on the private sector.

Allow me to shift our perspective a bit. There's a worldwide group of factoring companies, 150-member strong, called Factors Chain International, headquartered in Amsterdam. Through state-of-the-art data links and a standardized contract, they allow us, as a Canadian member, to offer factoring services worldwide, sometimes in competition with EDC and other insurers.

I am an elected member of the nine-person executive committee of Factors Chain International. The people on that executive committee are some of the most talented people in the world when it comes to credit risk management and procedures. I can tell you unequivocally that my colleagues on that committee are astounded that Canada—a G-7 country, no less—has an export credit agency that engages in domestic credit insurance in any form.

This is unique on the world stage, and for the wrong reasons. Canada has come to be considered as somewhat of an embarrassment internationally in our industry. It also acts as a strong deterrent to new service factoring companies setting up shop in Canada, which hasn't happened since this policy has been in effect.

Is less competition and less choice in the best interests of the predominantly Canadian SME customer base that our industry serves? I don't think so. At face value, the issue at hand doesn't seem all that difficult to tackle. Out of all the issues brought forth in the review of the Export Development Act, this may be the most clear-cut and, as the Gowlings report itself cites, the most controversial.

• 1025

I'm reminded of a current radio commercial, one that says “What we need here is a large, heaping helping of common sense.” It is within your power to end the domestic credit experiment launched in 1993. Let's get the private sector service providers back on track doing what we do best without unnecessary government sanctions and interference. What we don't need is a continuation of a domestic experiment for another five or ten years. What does insuring Hudson's Bay, Sears Canada, and Canadian Tire have to do with promoting exports anyway?

Our association respectfully calls upon you to take action now. Thank you.

The Chair (Mr. Bill Graham (Toronto Centre—Rosedale, Lib.)): Thank you very much, Mr. Perna.

That's it for the witnesses, then, as I understand it. We'll go to a period of questions.

Mr. Ex-Chairman.

Mr. Deepak Obhrai: Thank you. Actually, I like being back here so I can question you. I didn't know if I could question from there, so this gives me that opportunity. I'm happy to be back in my chair.

Thank you for your very interesting presentation. I can understand the concerns you have raised in reference to EDC, but what I would like all of you to answer is this: is it necessary to have EDC as a public corporation?

With most of your businesses, if EDC were not a public corporation, with some of the niches that you have indicated EDC is very good at.... Agreed, EDC is very good at some of those things, and nobody is asking for EDC's dismantling of what it has gained over the years, the experience and the niches. Many of you have dwelled on that. But from all the presentations I have heard, you are saying take this away from EDC or get EDC to do this. Would it serve Canada better if EDC were not a public corporation?

Mr. Jacques Lamarre: I would like to have the first shot at it.

It would be a catastrophe. This is the second time I have come before this type of committee. The last time I came, I said we should allow the banks to come together, because on the world market we have nobody with us. Nobody is coming with us; we are all there alone and surviving alone. The only people with us are EDC, because they have some kind of big balance sheet with the Canadian government, and they can come with us.

For sure, by coming with us they get involved in all kinds of things, and they have a temptation to come on the domestic market because they say if the international operation is so big, maybe they could get a bit of the small, and it is very difficult for them to exist. But on the world market, if we don't find any banks, we don't find anybody, and we are there making all those kinds of deals—when I say the world market, I would exclude the U.S. market—that is a big problem for exporters like us. We are alone to assess those risks. If we want to take an insurance in Libya, in fact if we want to take any kind of thing anywhere, in any country that is not the U.S., we are alone.

That would be a catastrophe. Otherwise, we would have to change everything. Let's create a big bank. Let's permit the merging of the banks and have a great big financial institute with a lot of financing; otherwise it will be a catastrophe. If you want to access markets, because it's a risky operation, you need to be able to have that kind of balance sheet that permits you to take that kind of risk.

As much as I understand the problem of the insurance people in the domestic market, on the other side, if we want to penetrate the world market, we need to have an institution such as EDC with a strong balance sheet...as the Canadian government.

• 1030

The Chair: Mr. Kovacs was going to add to that.

Mr. Paul Kovacs: EDC is into a wide variety of different businesses right now. We find it helpful to try to identify those areas that are often very much public policy, longer-term types of transactions: a lot of the big engineering projects around the world and some other projects that extend over a long period of time.

It is true, in our view, that in today's market many of the banks and many of the insurance companies have more difficulty handling these long, multi-year types of projects. Having a public agency play that role can be very helpful.

Our sense today, though, is that the majority of EDC's resources are currently focused on issues where the private sector can handle it very, very well—and probably better than EDC, if it were not getting tax advantages from the public and a variety of other factors. So if EDC's business helping exporters deal with.... We often draw a line between contracts that are concluded within a year and those contracts that are over a longer period time—the export community is just doing a transaction, and it's all done in a short period of time. If EDC is currently competing with private companies in that area right now, they should not be doing it on the current basis where they have all kinds of public advantage. Instead, they could change the way they're structured, as other countries have done, so they can compete fairly on the short-term products.

It's only in these specialized areas where it's multi-year, long term, that companies that are trying to come from Canada as a base to succeed in these world markets need a company operating like EDC is doing. And other countries have chosen to do the same thing in these long-term lending and insurance markets.

Mr. Clive Aston: May I comment on that point? There are two issues I'd like to raise.

First, I'd caution against being mesmerized by what other countries have done. What may be germane to one particular jurisdiction is not necessarily transferable to another. Just because England has done one thing or France has done something else doesn't mean necessarily that we should do the same thing or that we could even do the same thing here in Canada. So I caution against that.

Secondly, in terms of the term that could be available for potential contracts, I can place policies out to twenty years with the Multilateral Investment Guarantee Agency. I can do five years very easily to Lloyd's of London. Potentially I can go out to eight and half to ten years for some of the American insurance companies I deal with for political risk insurances. EDC has a similar tenor that's available, potentially. EDC does occasionally cooperate with the private sector for medium and long-term on reinsurances.

I have a situation in front of me currently where we're looking to reinsure with the private sector for a short-term credit risk, as well. The capacity isn't available, by and large, with the private sector, so we're looking to do what in my previous world at Lloyd's was referred to as a slip policy—that EDC will do the first layer and the private sector will come in excessive to that first layer. That's great cooperation, exactly what a private company would want here in Canada. And that's currently available.

The Chair: I can understand what you're saying and what the Insurance Bureau is also saying. The problem is that if we start taking things out of other areas we will probably make EDC less efficient as a corporation to operate. But that doesn't answer my question. I've been with your president on trips to Africa, and I've heard him say that. And congratulations to your company for a job well done. But it doesn't answer my question.

Is EDC, if it's not a public corporation under government, and some of those public responsibilities can be transferred to other departments.... I mean, it's not going to be killed, as you want to say, but if EDC is removed as a public corporation and let go, would that not open up markets, private sector and everybody else, to expand and help Canadian exporters from all aspects? Is the EDC, by being there, curtailing the expansion of the private sector opening all this market as we go into globalization? So would that serve Canada well if EDC was there, but not as a public corporation?

• 1035

Mr. Jacques Lamarre: The only answer I could give to your question is, why can we not interest the banks in coming with us? Why is nobody interested right now? Why is that so? For me, if you could answer that question, you could answer the other one.

But right now the private sector is not interested in that type of business. What they are talking about is domestic business and also arranging some kind of collateral with other international financial institutions. But they are not interested in that type of risk. What they are interested in is the domestic market.

I could give you a long answer as to why the government has to be there, but the best answer to that is to say that no private financing institutions are in this market right now. So I cannot give any other answer. We could spend 10 weeks analysing why the banks don't like that kind of risk. If you go to see a Canadian bank, they will never take that risk. Why is that so? I don't know. In fact it could be a very long answer. But they don't want to take that kind of risk.

For us, after that, if we want to stick with the U.S., maybe EDC can become a private enterprise. But if you want to move out a little bit and have diversion in your exports, in fact the only way is to have EDC, because right now nobody else is interested.

Mr. Robert J. Labelle (Senior Vice-President, Chief Agent, Euler American Credit Indemnity Canada; Insurance Bureau of Canada): I think what has happened in the G-7 countries, excluding the U.S., is that they have more or less privatized the EDCs of the world.

But there's still a component that does take care of the situations Mr. Lamarre is talking about on the financing side, the longer terms and all that. It's really split into two operations.

There is the credit insurance, which should be handled by the private sector. That will promote more and more activity, because then all of the market's components will come into play, whether it be through brokers, agencies, or different components.

Then you have the financing on the other side. When exporters need additional support or special support on long terms or special contracts or special equipment that needs to be sold, this is handled by that same corporation but on behalf of the needs of the exporters. It is supported by the local government.

Therefore, you have private enterprise doing what private enterprise should be doing, and when it gets to the point where it isn't in the best interests of the private sector or there are risks that are not normally handled through that, there's a component that does take care of that. So it does both of them at the same time, actually.

Mr. Clive Aston: Because I'm a broker, I'm used to speaking.

Your question seems to imply that EDC is a barrier to entry for other insurance companies wanting to come into this particular field. I'd suggest that's not correct at all. The barrier to entry into either domestic credit insurance or export credit is an information base, a database. It's the administrative expense of getting up and running in the first place. There's a finite pool of expertise available here in Canada, but let's presume that we can poach more people from EDC and then privatize them, rather than the entity itself.

It's important to be able to provide clients with the studied knowledge they need so that they know that a particular limit has been put in place and that there is a buyer in Turkey—let's stay with the example of Turkey for a minute—that will be solvent until the end of this particular contract. It's the single most important thing an export credit or a domestic credit insurance policy brings to a client. Because of the structure of that policy, a client will always bear some risk themselves. There's usually a deductible, and there's certainly co-insurance.

So if you have a major contract, a client could be bearing, say, 10% co-insurance, which could be $1 million plus, plus a deductible on top of that. If they have credit approval in place and therefore they feel that buyer is creditworthy, they'll go ahead and ship. If the information is faulty, if the information wasn't as professionally acquired as it could have been or should have been, if it was done on a more cursory basis, that client has incurred a loss by doing what the credit insurance policy allowed them to do.

My major concern on any suggestion of privatization, besides what I mentioned earlier about not necessarily trying to extrapolate from one jurisdiction to another, is whether a privatized entity would be as efficient as it currently is. My answer to that is emphatically no.

• 1040

One of the major things again, in my opinion, that EDC brings to the market is that by being a crown corporation, it's able to handle claims a lot more expeditiously and a lot more professionally than my private market equivalents can do. I have examples where the claims individuals have jumped onto the next plane and flown to wherever to try to work out that particular claim situation before it actually became a claim, and they thereby saved the client his co-insurance and his deductible. They can work with the commercial attaché in that particular country. They can use potential CIDA money and other government programs as another encouragement for that country to ensure that the deal is paid out and doesn't result in a claim. We can't do that in the private market. Now, if you take that away from EDC, I think you're going to find that clients are going to suffer as a result.

The Chair: We're well over the time on this one. I'm sure this is a theme that's going to come back through the questions.

I'm going to go to Mr. Marceau.

[Translation]

Mr. Marceau.

Mr. Richard Marceau (Charlesbourg, BQ): Thank you, Mr. Chairman. Mr. Quenneville, in the summary of the document that you tabled with us, you approvingly quote a statement attributed to Paul Martin:

“If it's not necessary for the government to do something, it should not do it. And in the future it will not do it.” The same should be true of the EDC.

I'd like to hear your comment on that quote in more detail, especially after Mr. Lamarre's comments, according to which one of the reasons why the EDC is important and should continue to exist without any major changes in the Act is the fact that the private sector could never make commitments in many different sectors or different countries.

Doesn't this go against what Mr. Martin said, confirming the statement made by Mr. Obhrai to the effect that it is not necessary to maintain the EDC as is because even if changes were made to it, the private sector would not get involved in certain countries or certain sectors?

Mr. Jules Quenneville: I will answer in English because it's easier for me. There are many technical terms here.

[English]

We have here a situation where the Export Development Corporation is privy to certain of the information that has evolved over the years, because they have been in the business in Canada since the end of the Second World War. Private Canadian companies have not been involved in this product line. The knowledge base has largely been concentrated in private companies in Europe and in ECAs in European countries, where ECAs were gradually phased out.

I can give you my own experience. I became the president of the Guarantee Company of North America in the fall of 1994. One of the things I found out was that we are a member of this International Credit Insurance Association. I had never been to a meeting, so I said, okay, I'll go and see what that's all about. Then I found out that we were really a member of an overall association that's divided into two sides: a guarantee side, which is the business we do, the surety business; and this credit insurance business, which I really didn't know very much about. I started finding out more and more about it.

Today I'm a member of the management committee of that organization, and I do attend their credit insurance discussions. I can tell you that 90% of the credit insurance in the world is placed in Europe. But as the world is globalizing and as opportunities are becoming available, we as Canadians are being left in the back seat, because we have not had the experience private enterprise has had in order to be able to get into this business.

Every time it's evaluated, you're going to have to compete with the government. How are you going to do that? It's easier for my colleague here from ACI to do this, or for Trade Indemnity, his predecessor company, because his Canadian operation is incremental to an already large international organization. He already has an organization in Baltimore or somewhere else in the world, so his installation in Canada is only incremental to that. If I were to try to do what he does, I'd have to create it from scratch here in Canada.

• 1045

The message I'm trying to convey is that we're prepared to do this. Back five years ago, we would probably not have been able to raise the support in the world to be able to enter into these kinds of product lines, but today we are able to. There is reinsurance available, there are people willing to step forward and allow Canadian companies to start to get into this product line.

One of the things that the International Credit Insurance Association has done in the past year is set up an international institute to try to promulgate education of underwriters around the world, which again is something that has never existed. If you wanted to learn how to write credit insurance, you had to work for a European company, learn how to do the forms, learn how to do all the different types of things that were going on. Then if you were lucky, I suppose, you had a relationship with the Export Development Corporation as a broker maybe, so you learned how the Export Development Corporation did it. Maybe you had experience somewhere else in the world so you could play the market in other companies that had incremental operations here. There's only a handful of brokers in our country today who are doing this kind of business.

There are now globalized brokers who want to transfer this knowledge into our country, who want to create this marketplace and bring these products, and they are going to be looking for organizations to be able to write the product. If we have to evaluate whether we should write the product or not against competing with a government organization, I don't need to tell you I don't have to do the math for very long before it's going to come up, for all the reasons we've set out in our earlier paper, that there won't be any competitive level playing field.

So the responsibility I think we have is to determine what level playing field we can create in a transitional way so that we can develop some sort of partnership with our ECA in order that this ECA gradually withdraws from the market and the private sector comes in.

[Translation]

Mr. Richard Marceau: Yes, Mr. Aston.

[English]

Mr. Clive Aston: There are a couple of issues around that. Perhaps the committee needs to be reminded that the majority of underwriters we have in Canada specializing in this sector are ex-EDC. There is certainly no problem in bringing an underwriter over from Europe, as Trade Indemnity have done in the past. The major issue is local knowledge. You can't just transfer a product in from 4,000 miles away without having a fairly in-depth local knowledge here, and that is the greatest impediment.

Equally, perhaps we need to be reminded that the European market has perhaps a 40% penetration rate for our product versus somewhere between 7% and maybe 10% here in Canada. And it's served quite well by perhaps six underwriters, and no more than that, so there isn't a need for twenty underwriters in Canada.

[Translation]

Mr. Richard Marceau: Thank you.

Mr. Lamarre, you're the only one who referred to human rights in your presentation. I would like to know how you think the EDC could take human rights into account. Let me give you a very concrete example.

It was brought to my attention that the EDC provided financing of $18 million, I believe, for a $400 million dam building project in Columbia. Because of this dam, certain Aboriginal nations would completely lose the territory they have been occupying for hundreds of years. This Aboriginal nation contacted me and asked me the following question: How can a Crown Corporation, a public and government-owned corporation, lend money to a private sector company that makes us lose our ancestral land without the Government of Canada or the EDC conducting a very concrete assessment of this problem?

You are often involved in very large-scale development projects. In your opinion, what should the EDC do to ensure that such a situation does not occur?

Mr. Jacques Lamarre: As I told you earlier, on the fundamental question, I am in complete agreement with human rights and respect for the individual.

What makes me nervous is always the process. We have to be careful. When we export products, we are also exporting our values. We meet these people, because we have to meet them, and we have to talk to them. We spend long evenings and long days with them. They get to know us and start to understand our values.

• 1050

In our discussions with them, we tell them that it will not be possible to displace people without reorganizing them. For the good of society as a whole, a dam must be built and take up some territory, but nevertheless these people must be better organized than they were before.

In the course of these negotiations, we come as we are. I would say that this export of our values is extremely important and that this cannot be done exclusively through commercial trade. It's the best way to do it. If we had a process that prevents us from being flexible and competitive, we could no longer export our values and that would be even worse.

Why force people who want to start taking into account this type of consideration? The very fact of conducting trade leads to the export of values. That may be the most important phenomenon. When somebody wants to buy a Mercedes, are we to tell him that he should buy a Volkswagen instead? The whole issue of value judgment is involved in this and that is very, very delicate.

If you start deciding what and how people should buy, then you will have to become the bosses of the world. Everything will have to be managed and organized. Let us assume someone wants to buy a particular type of car. Is it up to us to tell him that he needs another type of car? We have to be very careful. Let us imagine that a part of a population of the country does not like a particular project and would rather have it done in another way...

There are always conflicts in society and eventually compromises are made. In the long run, when people do business with us, they see how it has been possible to settle such conflicts here in Canada because we have the same type of conflicts that are settled through a similar process.

If you impose an obligation, it is as if you are setting yourself up as some type of dictator. I do not see this as the appropriate mechanism. What we need are other mechanisms to achieve the same results. In the business world the mere fact of trading is the best way to export our values.

Mr. Richard Marceau: Generally speaking, I agree. If the country is a democracy, it would be possible to reach some type of compromise. You probably are more familiar than I am with developing countries, which are not always very democratic. Sometimes governments may force through projects in spite of a strong opposition on the part of certain elements of the population.

I return then to my question. I agree that when we trade, we also export certain values. But what do we do when one of our values is not respected? If that is the case, then no matter what the local population may think or no matter what its needs may be, will we disregard these concerns and still go ahead, even if it means pushing them into a small parcel of land?

In other words, should EDC at least ask whether certain people have been consulted and what their comments have been on a particular local development project in order to ensure that certain basic democratic practices are respected?

Mr. Jacques Lamarre: At the present time all these precautions are taken. No one wants to be involved in bad projects. All these things are done because a corporation such as ours works with engineers or professionals who want to be sure that the project actually respects their own values.

But later on, when people go back and want to play the role of an arbiter, when someone expresses frustration about a particular project, it is very difficult for EDC to say that he should have gone about it differently. In such a case, the Corporation would no longer enjoy the client's respect. In my opinion, we cannot go any farther than that. We must simply be conscious of the fact that we do have values and in our discussions with these people, we find ourselves exporting our values at one point.

As I see it, if we give them specific instructions, we won't sell them our product and we will merely stay home. No one will want to buy our product because the people will say that we do not respect them as a society and that we do not think they are able to look after themselves. So we can just sit at home and twiddle our thumbs.

In my view it's an extremely sensitive point. When I visit these different countries, including Muslim countries, I explain to people who I am and I am not ashamed to let them know what our values are. As a matter of fact, they drink in our words. They need this breath of fresh air because if they do not have this fresh air from time to time, they die.

• 1055

When we meet them, they ask us questions about how things take place in Canada. We explain it to them. There are times when they are so eager to listen to us that it is quite extraordinary.

But if we were to impose artificial constraints, we would set a boundary and that would be a calamity. You should see how we speak to these people face to face to tell them that we disagree on certain points. They accept that and they accept our points of view because we have not come to impose anything on them. We have simply come to tell them what we think. In my mind, it is extremely important to remain at that level.

Basically, I entirely agree. Regarding procedures, I want to remain extremely cautious.

The Chair: Before finishing, I would like to add, as a follow up to your idea, that procedure, if I understand you correctly, Mr. Lamarre,... Is a problem of great concern to us.

Some situations are clear. During apartheid, the sale of machine guns to South African police was banned. If the EDC had wished to fund such sales, it would not have been allowed to do so. That was Canadian policy. But let us compare this to another rather more complicated case, like building a dam, as was mentioned the other day, and regarding which there are divergent opinions in the client country, whereas some banks are on board, etc...

You mentioned procedure. Should the EDC have a clear and transparent process for reviewing these issues? Or are you among those who believe that policy should be left up to the Canadian government and inasmuch as it has not imposed any obstruction, that the EDC can fund whatever it wants? Policy if left up to the government.

Mr. Jacques Lamarre: I am certainly a believer in free trade. I believe that trade is the best way to help those populations. It is also the best way to keep them in touch with us. It is essential to bring them this breath of fresh air. With an excessively strict process, we cannot make any sales. We must remain flexible and competitive. Concurrently, we can bring them a breath of fresh air.

I have travelled to those countries for the past 30 years and I believe that we have had an incredible impact on the process by telling them how we live and how our people are treated.

One of the best examples is the one mentioned by Mrs. Lalonde, namely the search for some form of sovereignty for Quebec. We spoke about this openly. I spoke about it in Turkey. This is very important for those people. And even when we are not discussing values, I do not like to step in and impose constraints on them. We, ourselves, would not like to have constraints imposed on us. These are very sensitive matters. I would prefer to trust our exporters and the EDC. I am convinced that the EDC people are highly responsible.

The Chair: Thank you.

Mr. Patry.

Mr. Bernard Patry (Pierrefonds—Dollard, Lib.): I am addressing this to Mr. Quenneville from the Insurance Bureau of Canada, because I want to carry on with this discussion. In your presentation, you made several statements that I would like to have clarified.

First, I understand very well the essentials of IBC's position regarding unfair competition by the EDC. I have no problem in understanding that.

On the other hand, on page 1 of your summary, you state that the other OEDC countries have withdrawn from short-term export- credit insurance but not from the medium and long term.

On page 2, in the first paragraph, you state that the EDC “are not skilled in addressing the needs of the domestic credit insurance market, and their experience serving exporters has been of no assistance in this area”.

If I understand your position, you are saying that the EDC should entirely withdraw from the Canadian credit-insurance market, but only from short-term export-credit insurance and not from the medium or long term.

Why aren't the IBC and the other insurance companies present on the medium and long-term market?

I will put my three questions to you because afterwards, I will have to go to the House. Here is the second question. If the EDC is not qualified for the Canadian credit insurance market, how do we explain its meteoric rise and the very great satisfaction of its clients, who are even ready to pay an added premium to do business with it?

• 1100

My third question may not be within the mandate of the IBC. The Gowlings report states that the Auditor General of Canada should be replaced by a private auditor. I would like to know your opinion about this.

Mr. Robert Labelle: Regarding the middle and long term, generally speaking, private enterprise has great difficulties evaluating and accepting middle or long-term risks. As Mr. Lamarre said, these sectors often require funds that are much closer to credit insurance. This is the difference between the short term, namely the transactions with a time line of less than 12 months, and the longer term, which means anything with a time line of 3, 5, 10, 15, or 20 years. This sector deals above all with large projects. We think you should let private enterprise deal with this. Euler produces more than a billion dollars' worth of credit insurance worldwide. We have companies in almost every country, especially in Europe and America. We have offices in Mexico and in Asia. Private enterprise, with the aid of groups, can deal with the short-term market, but medium and long-term markets are much more difficult because of their attendant factors.

[English]

Mr. Jules Quenneville: I would like to add to that. Investment transactions, which we haven't discussed very much, are a medium- to long-term form of credit insurance, where the ECA is making an investment in the project or in the build, own and transfer type situation, which Mr. Lamarre is probably involved with quite frequently. But this role is the kind of thing that has not moved easily into the private sector market elsewhere in the world. I think where we are as Canadians is in a catch-up situation. We need to catch up. I don't think we want to transplant what exists somewhere else here.

What we want to do is understand why we are where we are. Why we are where we're at is because we've allowed a monopolistic situation to exist for a long period of time and consequently we need to catch up. We need to say, okay, we take the view that the short-term business, whether it be domestic or whether it be international.... I think that distinction is gradually disappearing. I don't think credit insurance today is evaluated in the same way as it was 10 years ago. Today we would tend to think more about the division between short-term business and medium- and long-term business than we would about domestic and international. If you look at it and say, if all you're going to do is allow domestic insurance to be done in the private sector, by telling the EDC they shouldn't do that any more, how much domestic insurance is there anyway?

The business to be had, or the business that should be cultivated over time, is the short-term business. Then there should be some means by which business that is not meeting the acceptable criteria, or let's call it consensus business, what I said in the paper is consensus business.... In other words, there is business there that needs some sort of reasoning behind why it should be done, which is because it's in the best interest of our trade policies or in the best interest of our country. That business should have a way of being done. That can be left inside the ECA.

The ECA doesn't have to disappear. It's a relationship that needs to grow in terms of insurance and reinsurance and who handles the client and who handles the risk. So a partnership should evolve. I think that's the way we see it.

The third question...I don't know if we did the second question.

The Chair: It's the second question. The third question was Auditor General.

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[Translation]

Mr. Robert Labelle: It dealt with client satisfaction. No doubt, EDC's clients are satisfied, as in the private sector, the clients are, generally, satisfied, otherwise no progress could be made. We certainly have not come here to say that the EDC is a dysfunctional organization, because that is absolutely not so.

Mr. Bernard Patry: You said that it was incompetent.

Mr. Robert Labelle: Well, it is incompetent in some sectors, especially short-term insurance.

Mr. Bernard Patry: Do you have an opinion on the Gowlings report concerning the Auditor General?

[English]

Mr. Jules Quenneville: I didn't study that part of it.

Mr. Bernard Patry: I just wanted your opinion.

[Translation]

Mr. Robert Labelle: Well, I will tell you what I think of it. If the EDC was audited by an independent auditor in the same way as we are, we could make comparisons. We could tell whether the EDC is working properly and if its results compare with those of private enterprise. That's what we could do, if we wanted to clarify the figures and operations of the EDC a little. This is my opinion.

Mr. Bernard Patry: Thank you.

[English]

The Chair: Madame Marleau.

Ms. Diane Marleau: First of all, I'm going to say that I agree with Paul Martin's statement when he said governments shouldn't be doing something that the private sector can do and can do well. I agree with that.

The problem is that oftentimes the private sector doesn't do it if there's risk and if it can't make money at it. And when you're dealing with small business, by and large the private sector isn't interested. I've had many experiences with the Federal Business Development Bank. At one point we believed that the Federal Business Development Bank should insure risk with banks so that the banks would make riskier loans. I hate to tell you, but it didn't work very well. They weren't interested in that.

So how can we as a government...? We're politicians. We respond to the people who call us and who tell us, “We want to do business, but we don't have any help and we can't get it. The private sector won't look at us.” Therefore the government moves in of course, because what we want is for business to flourish.

What you've said is an unfortunate occurrence. But tell me, how can we promote what you do and yet serve those businesses that really need the help to, one, sell their products overseas, or wherever, and to grow? Inevitably we're going to get the calls saying, “We don't have any place to go.”

So I would suggest that we do have to develop a partnership. If it's that good a market, the Export Development Corporation will be happy to leave it to the private sector. This is because I'm told—and maybe I'm wrong—that they are on the high end of it, much like the Federal Business Development Bank is on the high end of it.

So while it may compete somewhat, if the business is lucrative, why isn't the private sector in there already at a bit of a lower rate?

Mr. Mark Perna: Can I respond to the question? I think there needs to be some clarification on some points of information.

About one-half of EDC's function is a finance function. The other half is an insurance function. I think most of the people on the panel today are here really looking at the insurance side of things.

I think we would concede that on the finance side, yes, there are difficulties. There are difficulties; and in fact when the question came up before about EDC being, for lack of a better term, privatized.... There would be large problems there, especially on that finance side. I think EDC really fills a very valuable role for Canada in that area.

On the insurance side, we see things a bit differently. And just as a matter of perspective, I'd like everyone to think of this, because when we talk about EDC perhaps having an unfair advantage and being a powerful company, this is what we mean.

EDC has approximately a little over 700 employees. Let's say half of them are working on the insurance side and the other half are on the lending, or financing, side of the business. That would leave approximately 350 employees devoted to credit insurance, whether it's short term, medium term or long term. There are not 350 employees in Canada in all the credit insurance business and the factoring business put together, and when we ask that there be great care taken when EDC is given extra powers, this is why: it is a very large corporation and it can have great effects upon us.

• 1110

Also, I will say this. Our association has also cooperated with EDC on the export front to combine the services of factors and the talents of the Export Development Corporation in its insurance granting.

But I think that everyone needs to bear in mind the relative size here. It's a very large organization that we must compete against. Do things like domestic credit insurance and being involved in short-term insurance have a bearing on what happens with us? You bet. It has a bearing in a very big way in the marketplace.

Mr. Michael Teeter: If I may, Mr Chairman...? I think the dilemma for government is how you foster cooperation rather than competition. What you really want to do is to try to lever the resources of the private sector to get more bang for your buck, not less.

What you're hearing today, I think, is that these people feel like they're competitors of rather than cooperators with government. There are all sorts of practical ways to look at cooperation, and they're doing them today. You have joint programs with EDC, and we have one. At one time, the Business Development Bank did the approach of three or more rejections; in other words, if you went to the private sector, were rejected, and had three letters of rejection, then you could go to the Federal Business Development Bank for loans.

I'm not suggesting that's the way to go, but I don't think enough creative juices have been put into the issue of how we work together, how we get the leverage from the private sector that really is essential. Why aren't the banks here? I hope you're asking that question, because that's a fundamental policy issue for you guys. Where are the banks?

Ms. Diane Marleau: That's why we're having this review and asking you how can we do things better.

Mr. Michael Teeter: I know, but we're here complaining, right?

The issue should be.... We want the banks to be here. We want to cooperate. We don't want to compete, and right now we're competing, not cooperating. That's the dilemma.

Ms. Diane Marleau: It's a very big dilemma. I don't think there's an easy answer to it. As I said to you, having been at different levels and seeing what happens.... On the one hand, there are complaints that you're competing, but on the other hand, for the businesses out there, there are needs that aren't met unless there is an agency such as this to do it. We'll keep working at it.

Mr. Clive Aston: If I may answer your questions as to why the banks aren't here, in a previous life I used to be assistant general manager for insurance for CIBC and was tasked with designing the banks overall insurance strategy, so I do apologize.

In answer to your question, one of the recommendations that I put forward to Mr. Fullerton and to cabinet was that CIBC get into underwriting short-term domestic credit—I have an axe to grind. It came back that, unashamedly, there wasn't enough money in it for them to do it. It very straightforward, a commercial decision. There wasn't enough return on the capital that they would be required to employ versus the returns that they could get from doing mortgage life, creditor life, etc. There's your answer. It's very simple.

Mr. Michael Teeter: Well, the dilemma for government, in my mind, is how you make the returns sufficient such that they want to be in the game. That's the issue for government.

Mr. Jules Quenneville: I would like to draw a parallel. If you were to set up an ECA today, would your objective be to help small enterprise?

Ms. Diane Marleau: Both.

Mr. Jules Quenneville: It would be both?

Ms. Diane Marleau: It has to be both. It has to be for those large enterprises that need our help to be really big internationally—

Mr. Jules Quenneville: Okay, now let me ask you another question which would be okay—

Ms. Diane Marleau: —and I think as a country we need to do that. But we also need to help those smaller ones grow and have access too.

Mr. Jules Quenneville: But you wouldn't want to give credit to bad credit risks, even if you're an ECA.

Ms. Diane Marleau: Well, the private sector wants to make money at any cost, and the more money it can make, the better. Oftentimes a small corporation is very hesitant to go into that business because the risk is just a bit more than they feel they should take. Now, that being said, that corporation may make money if somebody gives it a bit of help to get started.

That's what you see across the country. That's the challenge.

• 1115

What we as a government try to do, then, is to fill the void, to try to help our small companies become large, become successful internationally, as well as the large ones who continue to be successful, and who, by the way, started as very small corporations and grew.

Mr. Jules Quenneville: I think that's what happens, for example, in the guarantee side of our business where we issue surety bonds. We have a multitude of small contractors and we issue bonds to these contractors. We still, though, have a responsibility—for example, in dealing with public works—to make sure that we pre-qualify those contractors, that we're not dealing with people so small that we're always going to have a constant flow of claims.

But we also have to provide a market for large corporations, so we have—

Ms. Diane Marleau: But my experience has always been that when you deal with government it's always more expensive than dealing with the private sector. Therefore, if that's the case, why isn't the private sector doing well in those areas where you say you're competing with the Export Development Corporation?

Mr. Jules Quenneville: I think it's because they had a leg up for 30 years, which we basically have not enjoyed. So it's a situation where, every time you come along to try to evaluate it and you ask if you are willing to compete with the Export Development Corporation, the answer comes back, “Well, I don't see how I can.”

The Chair: But is it the leg up or is it the cost of capital?

Mr. Jules Quenneville: No. It's—

The Chair: I think there are two factors in the cost of capital that would be relevant. One would be not paying taxes. Therefore, their retained earnings would be significantly more than anybody else's retained earnings. You would only be able to keep 64% of your retained earnings. They keep 100%, so on the one hand, they get a lot more retained earnings.

On the other hand, if they're getting access to government finance capital at a rate that is lower than you have to pay for your capital, that also, but I can't figure out from listening yet...I haven't got it straight in my mind as to whether you're saying they have the advantage because they've been around longer and have more employees and more expertise or because they have cheaper capital.

A voice: It's a combination.

Mr. Jules Quenneville: It's both. I think it was said earlier that the database, for example, in order to do this kind of business, is very important. Well, that database was seriously important 20 years ago. Twenty years ago, if you didn't have a database you couldn't generate a database; there were no opportunities to generate the database. We're not in that situation any longer. We're in a much more computerized world. We have data provision agencies. we have all kinds of ways of getting a database. So that impediment is removed.

We had an almost non-existent credit insurance market in North America. It was thought of as a European product in a European market. Ninety percent of the credit insurance that's in the world today is sold in Europe. Well, that's changing. As that changes, the opportunities open up. If those opportunities are to be capitalized on, there needs to be a level playing field so that private enterprise can seize on those opportunities on a fair basis, as would your export credit agency.

Now we're not saying to let the export credit agency go away. We're saying to redefine its role in such a way that it takes on a responsibility in each of the three areas we've outlined in order that their capital—which is our capital—is used in such a way, to its most efficient means. That means vacating not short-term domestic business but pretty much all short-term business. That's the way we see it.

Ms. Diane Marleau: We thought—

The Chair: Wait a minute. We're way over time here.

Ms. Diane Marleau: —we wouldn't get all complaints from the small businesses, but I'm not sure we wouldn't get complaints.

The Chair: Mr. Obhrai has been waiting patiently, so we'll go to him.

Mr. Deepak Obhrai: Let's go back onto the same debate here. I'm still not satisfied with this thing. I can understand the answers you've given me. You are all players in the export market. With globalization coming and everything, markets are moving. EDC is basically—if I look at its report here—concentrated 73% in Ontario and Quebec, forgetting the rest of the country exists. As you know, out in the rest of the country, as well, things are moving in export markets and everything.

So EDC is just a small little player out there, I would say, as globalization takes a bigger and bigger role.

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Aside from the arguments you gave that there is a need because there are no other players right now in the market and they've had a thirty-year head start and that it's a great time to change, would it serve Canada well to go back into the whole thing, to the point that Madam Marleau brought up? How do we get the private sector involved in this thing? I would probably venture to say that in the due course of time, EDC will just remain a small player in the market. How do we open it up to becoming a bigger player?

I'm questioning whether it would be great to have EDC let loose with the same mandate while opening it up with rapid development taking place. The private sector will fill the niche. How are you going to address the globalization that is taking place rapidly within export markets that are developing all over the world?

Mr. Paul Kovacs: It's my sense that with EDC operating like it does, it has crowded the banks and the insurance companies out of supporting the export community. It's the only corporation in Canada that's trying to serve the export community, it is not paying taxes, and it is not filing with regulators and explaining what it is doing, as all the other companies have to do.

Mr. Deepak Obhrai: So it's a barrier to opening up the market for other things. Is that what you mean?

Mr. Paul Kovacs: There's no question that a long list of companies have said they are doing this business and are interested in doing this business, but they aren't doing it in Canada right now—at least, not on the scale they'd like to—because of the rules that EDC is operating under. Under rules by which EDC would pay tax, would file with regulators, and would follow the other rules that everybody else has to follow, you would have a lot of companies coming into the market. They would compete to serve the market. They would compete to help exporters. That's exactly what other countries do, and the outcome was not for small business to be disrupted or for exporters to be disrupted, it was to improve service.

Mr. Deepak Obhrai: So if EDC were let loose, then probably it would have to follow many of the regulations that the private industries do. That would open up a level playing field, opening up a wider market for other companies to come in.

I know what Mr. Lamarre would like, but there are some areas—and I agree with Mr. Lamarre—that the private sector would never fill. Those are the areas Mr. Lamarre is concerned about, and I would probably venture to ask if we really need a corporation like EDC to have that small niche area left, or whether it should be left to other areas in the government to address that small section that you're looking for.

Mr. Jacques Lamarre: If I may, your question is a very good one, but it's not easy to answer. I did appreciate the distinction made by Mr. Perna. In fact we have the financing side, the insurance side, and EDC. I would say that people like us buy as much private insurance as we're buying from EDC, and normally they are very competitive. We have a good relationship.

There are still some products that are not available in the medium and long term, and for some countries. We were trying to buy some things from Algeria and there wasn't anything available in the insurance market, but we were able to get it with EDC.

For the time being, on the insurance side, I must say that I'm quite happy with what the insurers are doing. They are doing a better job than the banks, and they are coming onto the market with something valuable. They are doing a very good job, and we appreciate very much what they are doing, but it would be a bit too early to ask EDC to quit that market. That's my opinion. The insurers are not there yet in the medium and long term, and in some countries they are not there. It would be something very dangerous to make that kind of decision.

If you come at the financing side, in Canada we are small. Our biggest bank is maybe number 50, 60 or 100 in the world. We are so small that if we don't have something like EDC on the financing side, we are done. In fact we are done for the world market. In fact we will be a small player. We'll make more and more trades, but not much more.

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Mr. Deepak Obhrai: Is EDC that big that it makes a major impact?

Mr. Jacques Lamarre: Yes, because it has the balance sheet of the Canadian government. It is the kind of group that could take that kind of risk.

I was asking the Royal Bank why they don't take that type of risk. Other banks in the world, the big ones, were ready to take it because it was one portion of a big portfolio. But for Royal Bank, the Bank of Montreal, and the rest of the six big Canadian banks, none of them want to take any of that risk. Some other bankers were willing to take some part of it because it was not financeable under EDC, because it was a local content. It just goes to show that our banks are too small. They're way too small. If we don't have EDC, it will be a catastrophe on the financing side.

On the insurance side right now, it's true that we can go to the private market for what EDC is supplying. The insurance people are doing a better job. I would say a lot of our programs are with the private market, and we're quite happy with the services. Again, though, right now would be too early. Maybe they won't agree with me, but that's my opinion. At least, I am proud of what they are doing. They are doing a hell of a job, and they show interest. They're going into other markets and are doing all kinds of things. They are offering all kinds of packages. They are becoming more and more efficient and very cost-effective, and we're quite happy with what they are doing.

[Translation]

The Chair: Mrs. Lalonde.

Mrs. Francine Lalonde (Mercier, BQ): At last!

The Chair: Excuse me.

Mrs. Francine Lalonde: I am the very soul of patience. I will try to address a slightly different sector. In my mind, I am convinced that the EDC must stay.

What I found most interesting in your intervention, Mr. Lamarre, is your emphasis on the importance of decreasing Canada's dependence on the American market. The Gowlings report repeats certain criticisms made about the EDC, which might have cold feet regarding certain markets.

As we are about to make recommendations to the EDC, what would you recommend for facilitating this aid to exports in foreign countries?

I heard your statements regarding the recommendation in the report, which states that for the specific purpose of preparing for the WTO negotiations, we had to discard the one-stop model. I thought I understood that you would prefer that we come back to the one-stop model.

Nor do you agree with some of the recommendations for small and medium-sized enterprise.

Mr. Jacques Lamarre: Regarding the first part, we must be very careful: I am strongly in favour of the American market.

Mrs. Francine Lalonde: Yes, I understand.

Mr. Jacques Lamarre: However, we recommend that development in other countries should be fostered. During a presentation by the EDC, its officials showed me a chart where the whole world was blacked out, except the United States. When I looked at the chart, I clearly saw that there was a problem. I admit that the Asian crisis was going on at the time. At a certain point, even they got cold feet. I told them that they should think of their future and that other countries would surely be promising.

We wanted to undertake a project in Algeria, a resource-rich country in resources which has always kept its commitments. We worked very hard to convince them that we should stay in Algeria, and we succeeded in getting the EDC to agree to make some modest investments there.

EDC officials would rather travel to Washington than to Algeria. Even if distance seems to be an obstacle, investments in such a country could prove very substantial. If we want to diversify our investments, we must be ready to make this added effort.

I think that currently, the EDC has a tendency to lose sight of its original mission and its concern with having a balanced portfolio.

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It would be difficult for me to give you the percentage that should be invested in developed countries and the percentage that should be invested in developing countries, where the skills of the EDC would be extremely important. This would be an extremely important element to include in your recommendations. I would like to think about a percentage and a formula and try to send you a note about that. This would be a very important aspect. You've asked an excellent question, but I do not have a specific answer. Regarding the principle of this, the committee should absolutely make recommendations.

The Chair: Please send that to the committee.

Mr. Jacques Lamarre: Very well. Excuse me.

Mrs. Francine Lalonde: That is what I had understood.

The Chair: I place my full trust in Mrs. Lalonde. I am sure that she wants everyone to share all this information.

Mr. Jacques Lamarre: Excuse me.

The Chair: And don't only recommend countries where you are doing business.

Mr. Jacques Lamarre: No, no.

The Chair: You must be absolutely neutral.

Mr. Jacques Lamarre: Currently, we are operating in 100 countries.

The Chair: So, you won't be tempted.

Mr. Jacques Lamarre: No.

Regarding recommendation 14, it has been said that there were very scarce resources for risk analysis. I wouldn't want the banks to go to another government department to ask it to develop the same kind of expertise. This expertise must absolutely remain with the EDC with a one-stop window. In recommendation 14, it was said that banks could have a parallel organization with that of the EDC. Resources are already very scarce. Sometimes the EDC is invited to some country with us, but it does not have the qualified resources. In my mind, duplicating these functions would be an error.

As much as I agree that the EDC should take a part of its portfolio to provide guarantees for banks to arouse their interest in the international market, as insurance has done, and to ensure that at least they be less fearful of those countries, I am equally opposed to creating another group of experts, because resources are very difficult to find and train. I would rather have a one-stop window, but the EDC should have to provide the banks with guarantees so they can become competitive in entering the international market.

Third, reference was made to small and medium-sized businesses. We have to be careful not to play any tricks on SMBs. I sometimes see small companies arriving on the international market and I ask them what they're doing there. They have to start one way or another. When small businesses get into this market, they end up blowing a wad of money. We must be careful not to push these small businesses too hard towards the international market because it is a special world. You have to be careful and not imagine that the international market is an easy one, with the exception of the United States and certain countries that are nearby.

Sometimes we need up to eight years to negotiate a contract. When small businesses show up, they have signed their first memoranda and they are already starting to spend increasing amounts of money. I tell them to be very careful. I give them advice so they won't be taken for a ride. It is important not to create too many illusions for small businesses. If we offer guarantee programs, for example, small business will benefit from them and the EDC will be in a bad situation. It will never be able to recover its accounts. So we have to show a certain amount of prudence.

There are companies like ours that do not produce anything, but whenever we make a sale, a whole range of small companies follow in our wake and are slowly developed. They start getting stronger and start to expand in this kind of setting. So we have to be careful and not assume that the international market means automatic success. It is a very competitive world and you have to be cautions.

Mrs. Francine Lalonde: Are you talking about some kind of networking between large corporations and SMBs?

Mr. Jacques Lamarre: That is something that we do quite naturally and that should be done to a greater extent. At the present time, we network a great deal. For all our projects we bring in a huge number of suppliers.

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I was once in Algeria with Canam Manac, which is by no means a small firm. The guy told me that he'd never go alone to Algeria from now on but would come with us as a sub-contractor. Since that time, we've been bringing them with us and things have been going very well. When someone shows up alone in this particular environment, he soon finds out that it's a rather special world.

I have a note here on the number of suppliers. For us it is an excellent way of proceeding. Let's encourage businesses like ours to take on more and more projects and small businesses will follow.

Mrs. Francine Lalonde: I think that is what we are doing in our jurisdiction.

Mr. Jacques Lamarre: And we should keep on doing it, but we have to be careful. It was said that EDC would be providing lines of credit to small businesses. I'm telling you to be very careful because it will end up costing you a lot.

Mrs. Francine Lalonde: I find your remarks rather surprising. When we work in our constituencies, we hear constant invitations to SMBs to get involved in export. Export is touted as the future, the assurance of growth and prosperity. I can understand your point but I am surprised. I don't think I'm the only one.

Mr. Jacques Lamarre: You should invite me to talk to them, because they must choose their countries very carefully.

Mrs. Francine Lalonde: They have to be careful.

Mr. Jacques Lamarre: Very careful. I know more companies that went bankrupt in the international market than the domestic one.

Mr. Robert Labelle: Companies like Lavalin and Bombardier acquire a huge amount of expertise in exports, but for an SMB it is difficult to put up the necessary funding and human resources. Very often the don't have a great deal of human resources and other requirements. Often you are not doing them a favour. There may be an acceptable level of risk, but are they really in a position to see their way through without finding themselves in a situation where there are all sorts of disputes, etc.? In the long run, credit insurance does not settle anything. If the goods are not delivered in accordance with the standards of the country involved, people refuse to pay and there are disputes. There are all sorts of things that can happen and the SMB will find itself in a fix. Whether it be with a private company or EDC, the same phenomenon occurs. That is the danger lying in wait for an SMB that overextends its reach because it is "in" to export. The SMB must first of all have a good grasp of North American markets before putting the whole company at risk.

The Chair: Yes, but the risk would be different for them in China and Italy, for example.

Mr. Robert Labelle: Of course. That's obvious.

The Chair: Every market has to be analyzed. You are probably talking about developing countries, because you have a great deal of experience there, Mr. Lamarre.

Mr. Robert Labelle: Not necessarily. Even in countries like Italy, people have to be aware of regulations and statutes. But the risks are obviously not the same.

Mr. Jacques Lamarre: You have to be careful, because the exchange rate can constitute a risk as well. For example, you set yourself up to sell a product in Brazil. But if you don't establish an exchange contract, and the currency drops 40%, you're in trouble. But you need certain skills to establish an exchange contract. There is a whole structure there. I'm not saying you should do this, you just have to be careful.

An hon. member: [Editor's note: Inaudible]

Mr. Jacques Lamarre: Yes, of course.

[English]

The Chair: Maybe we can wrap up with a couple of questions from the chair.

Mr. Aston, you seem to be in favour of EDC having more flexibility. That's what you say in your report.

Mr. Clive Aston: I do.

The Chair: Are you suggesting specifically more powers to EDC than it presently has?

Mr. Clive Aston: Not more powers but an easing of the current restriction that I face in using it.

The Chair: What restriction?

Mr. Clive Aston: Primarily the export requirement. As I said, perhaps one idea of moving forward would be to allow EDC to cooperate more easily with the private market in doing what we used to do at Lloyd's all the time through something called a “slip” policy. It enabled the private market to take whatever participation and particular risk they wanted.

When capacity is fully utilized, let me go to EDC if they still have the appetite and they still have the capacity available.

The Chair: Okay, but that's certainly not what Mr. Perna is telling us, which is that they now have gotten right into the domestic market, virtually. So the line's pretty blurred already.

I don't understand what concrete suggestion you're making there.

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Mr. Clive Aston: I have an example right now of what frequently will happen. A Canadian exporter wants a $17 million credit limit on a particular buyer from Mexico. EDC doesn't want to take that high a level of risk on a single buyer. Neither, I'd suggest, would any of the private market carriers.

We have a standard reinsurance arrangement, called “facultative” reinsurance, where underwriters can cooperate on one particular risk. This would be a great example where we could potentially do it. Let EDC take the limit they want, let me take it out to the private market, and let's see what we can get in the private market.

The Chair: What's to stop you from doing that now?

Mr. Clive Aston: The requirement from EDC that we have to insure the entire portfolio. We also have an export versus a domestic issue. In this particular case, it's a single buyer.

The Chair: But that's not a legislative impediment, that's just EDC policy.

Mr. Clive Aston: No, it's internal; absolutely correct.

The Chair: Okay. I see what you mean. We can call that to their attention, then. You're not suggesting any legislative things. As somebody said, how do we foster cooperation, not competition? That's obviously what we should be looking for.

I want to come back to a very good point you made, Mr. Quenneville, that ties in with Mr. Lamarre's point. He's saying, look, the private sector is not there doing it, you see? Well, the private sector is not in there doing it because of the barriers to entry. We can't get in. It's like the chicken and the egg; you're going around and around.

If this committee were to recommend certain things that eased your entry, we couldn't do it at the expense of Canadian exporters who found that, when they went there to get it, you weren't providing it. It was too complicated, too expensive, too far away, etc.

One of the witnesses said a lot of the business is done in Europe. I happen to know of Canadian exporters who go to, say, German federal government financial...and get it from them because they can't even get it from EDC. So we've heard that as well. Lots of people may go to non-Canadian institutions to get export insurance or financial assistance.

What is this wonderful way in which you somehow could create a world in which you're going to come in, they're going to ease out, and the Canadian exporter is not going to be left holding the bag?

Mr. Jules Quenneville: I think the point made was that the risk should be intermediated. By that I mean a portion of the risk is maintained here in our company, and we would have reinsurance facilities. Those reinsurance facilities would provide expertise as well as connections to other places in the world.

The Chair: And reinsurance facilities are available in short-term insurance, if I understand your position—

Mr. Jules Quenneville: They are, yes.

The Chair: —not medium- and long-term. Okay.

Mr. Jules Quenneville: These are relationships that can be negotiated and put in place and that are available today where people have made commitments—

The Chair: What would be the short term, five years?

Mr. Jules Quenneville: No, a short-term credit risk is basically less than one year of risk. Of course, that's other than Mr. Lamarre's issues, which tend to be longer. He's really dealing in medium- and long-term business. We're saying, no, we should try to separate what our ECA is doing into short-term and medium- and long-term business. By doing that, we then should improve our position within the OECD and with the World Trade Organization in evaluating how much government subsidy, or whatever it is we're doing, winds up in the final negotiation of the trade that's going on.

The Chair: Right. I hear you.

Mr. Jules Quenneville: You know, the break-even point to evaluate medium- and long-term business is much longer than if you said, well, I'm going to have an ECA that's dealing in that area. It doesn't have to break even on a twelve-month basis. It can break even on a much longer basis.

Then you will have used your capital, the capital that's now in the Export Development Corporation, for the objectives that I think it should be used for, and you've allowed the private market to come in and do the business, with its capital, that it's capable of doing. To facilitate that, there can be reinsurance arrangements made between even the Export Development Corporation as it exists today and some transition point down the road.

Ms. Diane Marleau: Have you made this type of offer to the Export Development Corporation?

Mr. Jules Quenneville: No, we haven't, because we're of the belief that as long as there is legislative capacity for the Export Development Corporation to compete with us, then other than in very strenuous cases, or cases of hardship, we would not go to the EDC.

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There are reasons for that. Again, there's the evaluation of whether or not you want to compete with government. We see the Export Development Corporation as an agency of the government. We have done transactions with the Export Development Corporation, but we would not today say that as a strategic business objective....

We do not try to expand our business in the direction of the Export Development Corporation's business, but we would. If we have clients who want to work with the Export Development Corporation, then we certainly would do that. That's not an issue.

But I think there are mechanisms within the insurance products that allow those risks to be intermediate. If you charge a premium for a risk, keep 10% of the risk within the Canadian company, and put the rest of the risk somewhere else in the world, then that's what happens in that intermediation process. If the Export Development Corporation is part of the process, there's nothing wrong with that.

The Chair: Interesting.

This is just a technical question. If you were more and more this business, would you look at that as an export of a service? I'm trying to get a handle on what is an export of services and what isn't. This is a totally different discussion for WTO and other purposes, but I can never understand this. From our statistics we know what our exports and our imports of goods are, but services drive you crazy. I mean, you can make an argument that a hotel is actually an export of a service if it takes in foreign exchange, etc.

If you're insuring a foreign contract, is that an export of a service or not?

Mr. Paul Kovacs: If the customer of the product is a Canadian exporter who happens to be selling abroad, my personal definition is that this is not exporting a service. If you're providing engineering consultation and advice, and you're building a road or a factory in another country, that's certainly exporting a service. But to export credit insurance, that would mean the customer would be a foreign company selling to another foreign company and needing insurance for that.

At this point in time, we're just looking to be able to help Canadian exporters, not necessarily other exporters.

The Chair: That's helpful.

Mr. Robert Labelle: But services can be covered on the export side for Canadian companies that would render services to international companies elsewhere.

The Chair: Yes. I was in China recently, and we were talking about opening up the Chinese market to insurance and other exports of services under the WTO. So it's a definitional problem as to what's what in any given circumstance.

That's helpful, actually. I think that's probably a good definition of yours.

Colleagues, there are two petite cuisine issues. We were asked by Mr. Robinson if we would subsidize payment for someone to come up here from the CLC, the Canadian Labour Congress. I'd like to propose a halfway solution.

First, if Mr. Robinson wants it to go through, he needs a motion, and we don't have a quorum here to get a motion through. So we have a problem in terms of a motion. However, I would like to recommend this.

Normally the average witness costs us $1,200. They want $2,500. The CLC is going to bring this person up anyway, so I would say we could just apply the normal policy and pay $1,200 of their fee. The CLC, which isn't the poorest organization in the world, can pay the other $1,200. Why should the Parliament of Canada subsidize the CLC? I don't have any trouble subsidizing them to the tune of a normal witness fee, but I have some trouble with $2,500.

If it's all right with members, then, I'd like to make that suggestion.

Mr. Jacques Lamarre: Well, $1,200 was fine for us.

Voices: Oh, oh!

The Chair: Don't suggest this to Mr. Lamarre. I'm sure, when Mr. Lamarre hears about these enormous....

This is not a witness fee; this is the cost of getting here. I'm sure you'll be dying to come up here every day and lose all your business opportunities.

Voices: Oh, oh!

The Chair: So that's my first recommendation.

The other one, colleagues, is this. You'll recall that various opposition parties have requested that Mr. Marchi appear.

An hon. member: You bet.

The Chair: The problem is, Mr. Marchi, immediately after the WTO hearings, which would have been...you know, possibly we could get him here. It's very difficult, because that's exactly what's going on.

With your permission, then, I would suggest we put it off to February and let him come then.

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I'm making it clear that this is on the condition that he understands, as the government has agreed, that he's coming under sections 110 and 111 of the rules. He's coming as a witness pursuant to section 111, which allows the committee to examine whether the appointee is qualified, or whatever the rule says, to do the job.

Madam Lalonde.

[Translation]

Mrs. Francine Lalonde: I do not believe the committee planned to wait until February to have Mr. Marchi testify before us. Since we do not have quorum at present, I would prefer us to bring this up again at the next regular meeting.

The Chair: We could discuss it at our next meeting. In any case, here is what I suggest. If we agree to this and Mr. Marchi's appearance is postponed, we can still be sure he will appear under the Standing Orders. We will not lose the opportunity to have him as a witness.

[English]

Thank you very much. You've been very helpful witnesses, and we appreciate your testimony very much.

We're adjourned.