FAIT Committee Meeting

STANDING COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE

COMITÉ PERMANENT DES AFFAIRES ÉTRANGÈRES ET DU COMMERCE INTERNATIONAL

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, November 18, 1999

• 0935

[English]

The Vice-Chair (Ms. Colleen Beaumier (Brampton West—Mississauga, Lib.)): I think many of you have appeared before a committee before and you know the drill. I assume everyone has a presentation, so we'll start with the Canadian Chamber of Commerce, and Mr. Keyes.

Mr. Robert J. Keyes (Senior Vice-President, Canadian Centre for International Business, Canadian Chamber of Commerce): Thank you, Madam Chair, and good morning. I'm pleased to be here this morning to address the role and mandate of the EDC on behalf of the Canadian Chamber of Commerce, and to look at some of the issues that were raised by the Gowling, Strathy and Henderson review.

The issues that you've been covering in this committee as a result of this review are numerous, of course, and I don't intend to cover the waterfront, especially given your time constraints. I'd like to focus on three items. First of all, I'll mention a few thoughts considering the environment in which EDC works.

I'd like to be able to say that most Canadians widely recognize that Canada depends heavily on its exports, that it's the most trade-dependent nation of the G-7, and that over 40% of our GDP is generated for exports. As I read some of the commentary coming out in preparation for the WTO, however, I'm not sure this fact is as widely appreciated as it should be.

There's another aspect of international involvement that is also not as widely recognized or appreciated as it should be, and that's investment. With recent numbers showing that the balance of Canadian foreign investment abroad now exceeds foreign investment in Canada, this outreach of Canadian investment and what it is doing to bring home benefits to this country is not widely appreciated either.

In short, trade and investment are essential components of the Canadian economy. We can't get away from that basic fact. To ensure that this happens and that Canadians do in fact succeed abroad, there has to be trade and investment in an internationalized world economy. That requires financing, insurance, underwriting, and backstopping. Export credit agencies like the EDC play a vital bridging role that lends these companies the support needed to break into foreign and high-risk markets, and to remain viable players. In no small measure, EDC has been a vital partner in helping Canadian companies perform these roles.

This is the environment in which this review is conducted. This is the environment in which EDC works, and we mustn't forget that we are looking at institutions and functions that are closely linked to the overseas success of Canadian businesses.

Let me turn to three topics. The first is EDC's role on environmental issues. One of the recommendations of the review is that EDC develop an environmental framework that can be open to public comment and approval, and that it is clear and transparent.

As members of this committee know well, there is a linkage between trade and investment and such issues as environmental protection, human rights and labour. The challenge is to find the right balance. Our view at the chamber has consistently been, and remains, that in trade terms there are specialized agreements and fora that are charged with the responsibility to deal with these issues and that have the expertise to do so. It's not the role of a trade agreement or an investment agreement to be the primary gatekeeper on these topics.

Similarly, then, in the case of EDC, the review noted that they have developed an internal environmental review framework that was put in place after public involvement. However, the review also seemed to suggest that the framework be submitted to further public comment. I think the key question that we have to focus on is what would be acceptable given the wide variance of views amongst businesses and non-governmental organizations on this issue. If the expectation is that EDC should in essence become a “regulator” in its own right, I'd suggest that this expectation is going to be difficult to meet and indeed inappropriate.

By no means should EDC's assessments ignore environmental issues. To their credit, EDC has become far more active and aware of the implications of these issues. They are sensitive, but there are limits as to what they can do and should be expected to do. No matter how objective the criteria might try to be, there inevitably are subjective judgments required. Choosing to finance or not finance projects based on such criteria can put the financing process onto a slippery slope and move EDC away from its core commercial basis and into complex analyses for which there may not be reliable data or for which EDC is not equipped.

There's also the issue of EDC's role versus the role of regulators in the countries where projects may be financed. Which standards and rules are to be applied? There are things like timing, monitoring and so on. I think the key point is that these issues are complex, and it's very simplistic to think that making EDC into the judge and jury is the answer. It's a question of finding the right balance without hampering the efficiency with which EDC carries out its activities.

• 0940

Let me move on to the second issue, confidentiality and public disclosure. The review recommended that EDC be required to post, on a regular basis, specific information on the transactions it has supported. As a federal organization, EDC must be prepared for a certain level of transparency. Likewise, its customers have to be prepared to accept a certain level of scrutiny and disclosure. But EDC has a business to run, and companies, like individuals, do not negotiate their private actions in public. In some cases, full disclosure of business activities can lead to vulnerability and the loss of a competitive edge.

As with the environmental issue, I think the question here is finding the right balance. Some posting of basic information—wherever and however that would be done is not clear to me—can be understood, and it may be necessary. However, it has to take into account a customer's commercial interests, accountability, and performance assessment.

Such disclosure should also be benchmarked to normal commercial practices. Clearly, it would be unacceptable to force a company's business intentions to be made known publicly in advance while EDC is considering financing. This would put a company in a disadvantaged position vis-à-vis its competitors. Moreover, it might turn companies away from otherwise feasible international projects.

EDC currently makes available information that does not compromise the commercial confidentiality of its clients and partners. This is how it should remain. Automatically disclosing individual transactional information may be acceptable, but the questions are how far it should go, when it should happen, and what should be released. Disclosure must not compromise market position and must not have commercial impacts. It won't be the same for every business, so the notion of a standard template or requirement would have to be approached with great care.

There have been suggestions that the Ex-Im Bank approach be followed, but there are fundamental differences between EDC and Ex-Im Bank. EDC is an institution of choice, whereas the Ex-Im Bank is more of an institution of last resort and is used when other avenues of financing are not available. It thus has leverage over its customers, so I don't think Ex-Im Bank is an appropriate model.

My final point stresses the need to keep EDC operating on a commercial basis. The corporation has a solid reputation in its field, as a purveyor of top-notch financial risk information and as a facilitator in export credit financing and insurance. It's a commercially viable, self-sustaining operation that provides essential information and support for Canadian exporters and investors in foreign markets. The corporation's services assist to build trade and investment capacity in Canada, and facilitate the partnering that Canadian companies need. EDC is a global leader among export credit agencies. It's innovative, cost-efficient and effective.

Can there be improvements to what it does? Yes, of course, and continuous improvement should be everybody's objective. Yet in order to fulfil this capacity-building role, EDC must not be required to reorient its business towards non-commercial issues that it cannot resolve. EDC compliments the dynamism of Canada's exporting sector, much of which is SMEs.

Madam Chair, as you and your colleagues proceed with this review and make recommendations for the future, please do not lose sight of the fact that EDC is an important partner for Canadian business interests abroad, interests that are vital to the economic health of this country. It helps our exporters and our investors to be flexible and competitive.

Thank you.

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

Mr. Myers.

Mr. Jayson Myers (Senior Vice-President and Chief Economist, Alliance of Manufacturers and Exporters Canada): Thank you, Madam Chair. I'd like to have the chairman of the alliance, Al Curleigh, begin our remarks.

Mr. Alan Curleigh (Executive Vice-President, Klöckner Stadler Hurter Limited; Chair, Alliance of Manufacturers and Exporters Canada): Thank you, Madam Chair. On behalf of the alliance, we certainly appreciate the opportunity to come in today to speak to this committee with regard to the Export Development Act review, a very important issue to us.

Perhaps I could just take a second to outline for you the alliance and who we are. We are the Alliance of Manufacturers and Exporters Canada. We represent over 3,500 companies within Canada. Our interest, of course, is in industry and trade. We have offices across Canada to service our membership in each province.

To give you a bit of a perspective of our membership and what we represent, over 75% of the industrial production in Canada is within our membership. As we all know, 45% of the GDP is represented by exports from Canada, 65% of the goods produced by industry are exported, and one in every three jobs in Canada is directly or indirectly related to exports. You will find a lot of this information in the brief that was presented to you today.

• 0945

I would like to give you an overview of what we do in the alliance, and it's best done introducing my colleagues. Dr. Myers is the senior vice-president here in Ottawa with the alliance, and our chief economist. Bill Neil is with Nortel Networks as director of government relations. Mr. David Hylton is director of special projects with Kvaerner Chemetics from British Columbia, a technology company. Mr. Buzz Grant is the vice-president of finance for MDS AeroSupport, and he represents both the technology group as well as what we would classify as SMEs, small and medium-sized enterprises.

Our membership within the alliance is made up of both large corporations and small. In terms of numbers, SMEs represent the larger amount of our members.

We certainly take into account very seriously the issues and concerns derived from our group. Our issues are brought forward from the bottom up through a series of committee-level discussions. They are developed through committees that are specially assigned to tasks, such as our export finance and insurance committee, which Mr. Neil is the chairman of presently. Of course the predominant issue in this committee is the issue of EDC and the Export Development Act review.

Perhaps I could give you a perspective also wearing my other hat. I'm the executive vice-president of a company called KSH in Montreal. We're engineering contractors involved with the turnkey supply and design of industrial plants around the world. Our business is all over the world. Whether it be in Iran, Southeast Asia, South America, or Pakistan, we are there.

I say very loudly here today, the market out there is changing rapidly. In order for exporting companies to be able to compete in this market, we have to be dynamic and we have to be competitive. The demands are larger. The contractual commitments we have to take on are more extensive than ever before. We must absorb additional risks to be able to win and compete with other companies from other countries around the world.

Of course one of the tools that is absolutely important for us to be able to compete and win for Canada internationally is export financing and credit insurance, as we call it. This is supplied to us through the Export Development Corporation. Frankly speaking, it is an integral part of our selling process internationally.

We are competing with all the other OECD countries with companies in these countries. They all have their ECAs, export credit agencies. We have ours. Let's be clear in our view: EDC is what I would classify as a Canadian-made solution to who we are. We aren't the same as companies in Europe. We aren't the same as companies in the United States. Our market aspects and priorities are different. For example, we don't have this huge trading-house system they have in Europe to support SMEs. We have to support SMEs the best way we can.

We demand from an EDC strong support, flexibility, and innovation in order for us to understand what the market is saying and to bring forward a solution to what the market demands. That's why we recognize this review as important.

Companies in our group undertake five-year programs and even shorter programs of review. Who are we? What do we do? Which market should we be in? Do we have the right tools to address this market condition? So we welcome the fact that the Export Development Act is being reviewed and EDC is looking again at itself to say, do we have the tools to support the exporters to do their business?

• 0950

Before I pass the microphone over to Dr. Myers, I'd like to say if you compare what we're talking about with EDC to NGOs and, for example, the World Bank, just to be clear, we view an EDC as support for our export endeavours. We're out there finding the work. Financing is an integral part of that work, whereas, for example with the World Bank, the World Bank would find the project, and the World Bank would then come out for tenders to companies like ours or others. They have already selected the project. In our case, we are the ones out there selecting the project. So you can't compare the World Bank or NGOs to EDC, apples to apples. The function and responsibility are much different.

I do have my colleagues standing by, and we are looking forward to receiving questions from you, as I understand there will be after the panel has finished. I'd like now to turn this over to Dr. Myers. Thank you.

Mr. Jayson Myers: Thanks, Alan.

Let me take you very quickly through the structure of our report to this committee. It touches on all of the recommendations that have been made by the Gowling review team, a very comprehensive set of consultations that have gone on, with a number of very interesting recommendations. I'm certainly not going to go recommendation by recommendation, but I'll just say our overall view here is to echo what Al has just said.

The risk is so high today. The last five years in international markets have shown how difficult it is to do business internationally; how difficult it is for some sectors, especially the small companies and larger capital projects in infrastructure, which Canada can be so proud of; and how difficult the financing is today in international markets.

We see EDC not only as a crucial institution here on the domestic side based in Canada, but as a crucial player internationally and one that is facing tremendous competition itself from other international financing organizations or export credit organizations. We see the key public sector role of EDC as taking on a higher level of risk than private financial institutions are able to take on. That's extremely important. That's the advantage EDC provides to Canadians in general, not just to Canadian business.

Our responses to the recommendations are before you. They're contained in our report. We've looked at three or four things.

One, what's necessary to maintain EDC's current capabilities? A number of recommendations are framed to that end. The relaxation of the maximum contingent liability ceiling for sure is a very important part of that.

The second set of criteria we've applied are, what are the recommendations we support that would enhance risk appetite? We've mentioned a number of those, and we support the recommendations where, in our opinion, it would lead to an enhancement of EDC's appetite for risk.

There's a second area in here. Al referred to the essential role of EDC in designing, in a very flexible way, innovative financial solutions for Canada's exporters and for investors from Canada internationally. That flexibility has to be retained.

A number of changes are recommended by the review team—the removal of reference to direct and indirect support, for example, or any restrictions being placed on EDC's capability to make equity investments or carry out leasing activities—that in our opinion would restrict the flexibility EDC currently has.

In looking at the Export Development Act as it currently is, this is something that's working extremely well, a framework that gives EDC flexibility to work within right now. We shouldn't see any other limitations placed on EDC's activities. We certainly encourage EDC to act in a way that can leverage other financial resources, not to make that mandatory—let the market work—but certainly we encourage EDC to continue to do that.

My final comments are with respect to environment, human rights, and the issue of transparency, which I'll turn over to Al again.

It is important that we note that EDC has an environmental framework in place. It works well. The Canadian companies are responsible in that sense. It's important to note that EDC is an agency that's accountable to the government. In fact a number of government officials sit on the board of EDC. The way EDC operates takes into consideration environmental risks and human rights efforts around the world, and that's important. That's a part of good risk management, and it's already being done in EDC.

• 0955

The issue of transparency is a big concern to us, as it is to the chamber as well. For our members, I don't think it would be fair for anyone to disclose information that would put them in an uncompetitive position, or that would disclose information that's market sensitive or confidential from a business point of view.

With those remarks—and I realize you're under time pressure and we've taken up too much time—let me conclude that we'd certainly be very pleased to answer an questions.

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

Was Mr. Neil going to speak?

A witness: No.

The Vice-Chair (Ms. Colleen Beaumier): Thank you. Mr. Sloan from Bombardier.

Mr. Richard Sloan (Vice-President and General Manager, Structured Finance, Bombardier): Yes, good morning, Madam Chair.

This is my first time before the committee, so I've not been through the drill before, to use your expression. I welcome the opportunity to address you this morning.

Before I get into my written statement I'd like to remark that we, my colleague Réjean Bourque and I, have been in the front lines trying to do transactions against our competitors from abroad, and one of the real comfort zones that we've found is EDC standing by our side in these instances. So you'll see as we go through our remarks that we've been very pleased with EDC's response to our demands, and you'll see that we are calling for increased flexibility and capacity to continue their mandate.

As I say, good morning, and thank you for providing Bombardier the opportunity to address this committee. I'll stress the importance of exports to Bombardier and our continued employment growth here in Canada.

Ninety percent of Bombardier's revenues come from sales outside of Canada. Of late, practically all of our of our aerospace sales are comprised of exports from our plants in Montreal-Dorval, and Toronto-Downsview. Our employment in aerospace is 17,000 here in Canada. Likewise, 97% of our rail cars are delivered from Canadian plants in Thunder Bay, Kingston and La Pocatière. Our employment in Canada related to rail car production is 2,600. Therefore, we have almost 20,000 people employed in these two major businesses.

You must realize that there are many thousands more workers who are employed west to east by companies in our supply chains. EDC has played an important role in the success of Bombardier in these businesses. Like Bombardier, Canada is very dependent on exports for its continued economic growth. It now accounts for 43% of GDP, and that percentage is growing. To continue the growth of Canada and Bombardier, we look forward to EDC's strong leadership.

EDC's leadership comes from promoting exports. We believe it has to expand its current mandate by improving its financial services products and by offering new financial services products, as demanded by exporters. We see EDC's unique role here in Canada when compared to other export credit agencies as a key to its continued development.

I'll make a couple of remarks on the recommendations in the Gowling report.

In regard to their recommendation one, we support the active participation by EDC in shaping the changes to international rules governing export credits and insurance as negotiated in the OECD and WTO. We believe in the EDC “market model”. That's important, the market model. And we encourage EDC to promote the same with these international organizations.

Additionally, we support the notion that consideration be given for a more distinct separation of consensus activities and market-based activities, as we see in Germany with Hermes and KfW. This separation would promote a true market view of transactions and lead to a wider acceptance of EDC's role in world markets, much like we see with KfW.

Recommendation four concerned the equity mandate that EDC was given. We support the recommendation that the $10 million limit be reviewed for direct investments.

We find most of our transportation finance projects require equity capital. These projects range in size, typically, from $150 million Canadian to $600 million and more. EDC's participation at the $10 million level does not help the exporter in these circumstances. We would like to see a larger equity commitment from EDC such that it can promote leadership within the deal and within the equity group.

• 1000

EDC's participation can help Canadian exporters if it is done on an active leadership basis rather than on a passive basis. This leadership role will only come with greater equity commitment. In addition, we believe EDC's exit strategy should be longer than its current four-year mandate.

On recommendation five, we support the proposal by the Minister of Finance to amend the income tax regulations to permit Canadian funds to participate in individual loans held by EDC and other specified international financial institutions without having to treat these assets as foreign property and subject to the 20% limit. EDC should be encouraged to take advantage of this provision and sell participations in its loan portfolio.

This would open project financing capacity for exporters' projects, and it would also open the world of aircraft finance to funds that typically cannot afford the time and money necessary to hire and retain staff to originate these loans. This additionally would open significant and much-needed capacity for EDC to continue its funding activities and allow our customers a relatively seamless availability of loans utilizing the same underwriting criteria, loan documentation and the like. Additionally, pension funds that benefit from this activity may eventually provide exporters additional capacity without going through EDC.

Now I'll address other matters not specifically in the recommendations. To further comment on the 1993 legislation broadening the mandate of EDC, the new opportunities bestowed on EDC—for example, equity investments, leasing products, and special purpose companies—have provided Canadian exporters with a powerful competitive tool. This market-based model has succeeded for Canadian exporters, and a further broadening of the mandate will provide even more capacity to our export programs.

EDC must have the flexibility to respond to export financing initiatives from other countries when they introduce a new competitive tool that provides our competitors a competitive advantage. EDC has a recognized reputation in world markets for providing innovative solutions initiated by its talented staff. Providing a wider mandate to that staff will ensure a competitive position.

EDC's strength comes from its mandate to support and develop, directly and indirectly, export trade. EDC takes the time necessary to understand exporters' needs and exporters' products. This is an important point.

I'll read that sentence again: EDC takes the time necessary to understand, because of their unique mandate, our needs and our products. For Bombardier they have an unmatched expertise in our products that permit them to assist our customers with competitive financing while maintaining the appropriate risk-reward relationship.

I'll repeat that again: They have the ability to assist our customers with competitive financing while maintaining the appropriate risk-reward relationship. That expertise coupled, with EDC's skills in understanding and managing country risk, has clearly differentiated them from bankers, who don't always take the time to work on small transactions in foreign countries. This is truly EDC's added value.

In closing, let me again thank the members of this committee for providing Bombardier the opportunity to submit our comments. Generally we thought the report was well done. Because of the time restrictions here today, we have chosen only to comment on those topics that we believe are most relevant to Bombardier and other exporters like us.

Thank you, Madam Chair.

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

Now we're going to hear from the Association of Consulting Engineers of Canada, Mr. Timothy Page.

[Translation]

Mr. Timothy Page (President, Association of Consulting Engineers of Canada): Thank you, Madam Chair and good morning to the committee members.

ACEC is the national business association representing the interests of consulting engineers in Canada with 600 members that collectively employ a total of 41,000 people throughout the country and generate more than $5 billion in annual revenues.

[English]

Canada is well known worldwide for its engineering excellence in transportation and communication systems, power and energy facilities, water and municipal waste systems, and for our provision of environmental and agricultural services.

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[Translation]

Canada currently ranks fourth in the world in international revenues generated by consulting engineers. It is a very lucrative industry.

[English]

Our message here today is a simple one. EDC was created to assist exporters to be successful in the international marketplace. It was created to respond to a gap in the market for insurance and financing for international projects. It was created to help in creating greater Canadian export financing capacity.

[Translation]

Our members are of the view that it does a good job in fulfilling the purpose for which it was created.

[English]

It is for that reason that ACEC strongly supports the existence of EDC, congratulates it on its highly relevant role in the marketplace, applauds the quality and range of its services and products, and encourages the federal government, through this review process, to retain EDC's flexibility to serve Canadian exporters in the future. We see no need to introduce limitations to its powers or to saddle it with requirements that are inconsistent with normal commercial principles and practices. EDC must retain its flexibility if it is going to help the business community to maintain its competitive edge in established and developing export markets.

Given, as my colleagues have suggested, the limitations of time and the beeping in my ears, I'd like to focus on two.... I'm assuming everybody else has the same thing.

The Vice-Chair (Ms. Colleen Beaumier): You get used to it after a while. It's easy to ignore.

Mr. Timothy Page: It's like teenagers.

There are two specific areas we'd like to touch on. First, we believe that the insurance services being offered by EDC are good services. They're offered at competitive rates, by knowledgeable and competent staff, and they have helped firms to negotiate additional credit from the banks. We encourage a one-stop-shop approach, and we encourage the coordination with Canadian banks, provided that the terms, price, conditions, and risk appetite do not become less favourable to exporters in the process.

On the finance side, our industry has been less active in that field with EDC than on the insurance side. There are a couple of reasons for that. As has been mentioned by Al Curleigh, today's marketplace is changing and has changed rapidly. Large infrastructure projects are being developed through public-private partnerships and/or build and operate transfer delivery mechanisms, where the payback times are long-term. In this marketplace, the client-owner is looking for turnkey solutions, very often involving multi-billion-dollar investments. Increasingly, these turnkey delivery mechanisms are also showing up in much smaller projects.

To be a successful proponent in this marketplace, Canadian consulting engineers have to be able to come to the table with more than just the technical and management expertise they are already well known for around the world. They must also be able to come with financing. This challenge requires particular attention by the federal government. And we are pleased to see in the Gowling report a recommendation that the equity cap be raised to facilitate greater industry involvement.

We also wanted to touch briefly on bridge financing. We believe that the reality for consulting engineering firms is well described in the Gowling report's brief in the section dealing with EDC in the service sector. Our industry's assets, broadly speaking, consist of human resources, reputation, and work in progress. That nature of our service industry has made it difficult on occasion for EDC to find the right financing instruments to support us. Smaller niche market players, like the larger firms, are proving to be extremely competitive and competent from a technical and management standpoint. But many consulting engineering firms believe they're not able to reach their full market potential because traditional financing instruments are not relevant to our business.

For instance, consulting engineering firms are normally paid after completion of a predetermined stage of a project, or at the end of the contract after acceptance by the buyer. Their work in progress has not been financed because lenders consider the risk of non-acceptance by the owner too high. When payment delays occur, a firm presently has two options: either continue to wait, or call in its insurance policy. From our standpoint, neither option is acceptable.

For these reasons, we support recommendation 22 in the Gowling report, which invites EDC to increase its effort to provide financing against service work in progress and accept a firm's reputation and track record as proxy for the financial value of its work.

• 1010

I wanted to comment on two final points, if I might, Madam Chair. One is on risk appetite. We encourage EDC to raise their appetite for risk in riskier markets and riskier transactions. We understand the commercial principles under which EDC operates and its need to demonstrate viability. However, it is in the riskier markets and transactions—i.e., many of those in the developing world—where our industry is the most active. It is in these markets, arguably, that downstream benefits over the long term may be their most attractive for Canada. In other words, today's risky markets can become the opportunity markets of tomorrow.

Finally, we wanted to touch on the matter of the pre-pipeline role that EDC can play. Considerable time and resources are required to bring a project from initial identification through conception to proposal stage. In today's turnkey environment, these costs can be prohibitive for Canadian companies.

We invite EDC to help at the pre-proposal stage by identifying and evaluating international projects where Canadians could win the business. It's for that reason that we support the creation of a direct EDC presence in foreign markets, identified by Team Canada's trade priority markets.

Our overall message to you, in conclusion, Madam Chair, is that EDC is doing good work, the right work, and must be able to maintain the flexibility in order to continue to change with the market as it changes and as our members respond to that change as well.

Thank you for your time.

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

These bells are getting a little more distracting. I think we all thought originally it was for quorum. However—

A voice: Parliament hasn't started yet.

The Vice-Chair (Ms. Colleen Beaumier): The whip has asked that all government members come to the House. I'm in your hands. I really apologize for this.

Mr. Lee Morrison (Cypress Hills—Grasslands, Ref.): It's not right for us to go over just for a quorum call.

A voice: There, it's stopped.

The Vice-Chair (Ms. Colleen Beaumier): We're going to proceed. I'm sorry for the interruption. I've never heard a double bell for quorum before. We will proceed as though everything is just fine.

Mr. Morrison, let's begin.

Mr. Lee Morrison: Thank you, Madam Chairman.

I have one very brief comment and question for Mr. Page. You did make reference to insurance payments for work in progress. I'm sure you're aware of the recent incident with a Canadian contractor in Africa where it was an electrical distribution installation. The contractor actually failed to deliver, and quite an uproar developed over this. He was midway through the project, or should have been, and naturally wasn't getting any money coming in because he hadn't performed. In your view, do you think the taxpayer in Canada should be potentially put on the hook for this sort of thing? I mean, not all Canadian businesses are as good as yours.

Mr. Timothy Page: Thank you for the question.

As a representative of the service industry, we don't have a lot of collateral to take to the bank when we go and look for financial support. Our strength is in the grey matter that's between our ears. There's a great investment being made by the industry in very preliminary stages of project work, and therefore there's a direct investment both in terms of time and in cash by our industry. So you're tying up your cashflow and your working capital, and if there's no help from the government or an institution at that stage of a project, we're concerned the downstream benefits that could evolve from the work we're doing upfront would be limited.

• 1015

Mr. Lee Morrison: I'm a consulting engineer myself, or was, so I understand where you're coming from. But I still have this problem with the taxpayer being the party put on the line, rather than a private agency. I don't wish to belabour the point, but this is something that has to be taken into consideration.

I have something I'd like to address with Mr. Sloan. The nature of Bombardier's business is such that you really will not be involved very often in high-risk ventures, in the sense that you won't get paid. I mean, you do not do business with customers of dubious credit rating, with the size of operation you run. Moreover, Bombardier is a pretty muscular organization.

I guess my question to you is similar to the one to Mr. Page: why should we, the Canadian taxpayers, be responsible for financing that I'm sure Bombardier, with its connections and strength, could get from private banking interests and private insurance interests? Why does EDC fit into your picture at all? Why do we need to raise this $10 million limit? I don't understand why Bombardier is even here, to be quite honest with you.

Mr. Richard Sloan: We're here because we were invited, and I thank you for the invitation.

I'll address the first question relating to the quality of our credits. We deal with start-up airlines, among other things, that have, in their infancy, no balance sheets or credit ratings. They have licences, expertise, and the ability to create businesses. The airplanes are obviously the revenue generators; that's what makes them tick.

The regional aircraft business is very competitive. We focus on taking the time to find people who are expanding entrepreneurs and have business models we believe in, which we look at and analyse. Often that's the ticket to entry into a new market with a new customer, who eventually may buy any number of airplanes.

Both of us have worked on transactions with customers of, I don't want to call them dubious quality, but they weren't the best credits in the world. We've put deals together with EDC. We've had the assets as their primary security, and in a couple of cases we've changed airlines from two- or three-plane operators to twenty-plane operators. That added incremental sales we wouldn't have seen before. That's an important element.

We can't engage in finding financing at any point, just because we're a big company. We have to go to a firm, like EDC, that has the expertise and knowledge about our aircraft, that understands regional aircraft businesses, and can analyse them on an asset basis—on the basis of how they will get paid—and come to the same conclusion we came to when we decided to sell this person an airplane.

We've sold over 350 of these airplanes, and we have a big backlog. I can assure you that a lot of those were one- and two-plane deals initially that eventually turned into pretty good pieces of business for the company and the country.

On the equity side, with respect to our mass transit business, somebody here mentioned the public-private partnerships that are now taking place. Governments all over the world, especially in Southeast Asia, and in Europe, especially in the U.K., have entered into a mode of trying to privatize the mass transit system. They are trying to privatize even greenfield systems—systems that will be built from the ground up. Those systems typically require some equity contribution by the sponsors, the sponsor suppliers, and the consortium itself.

• 1020

In a situation like that, we believe EDC, with its knowledge, reputation and expertise, can bring some capital to the business and ensure that our bid and the bids of our fellow Canadian exporters will be taken seriously by these clients. It's not the fact that Bombardier is so big and we have a good balance sheet that makes us competitive. We just don't have the capacity to finance everything we build; our business is not financing.

The Vice-Chair (Ms. Colleen Beaumier): Okay, we have to watch the time. We do it in five minute rounds. I should have explained the entire drill to you.

Mr. Rocheleau.

[Translation]

Mr. Yves Rocheleau (Trois-Rivières, BQ): Madam Chair, do you think we'll have time to see our witnesses again after the vote or will we stop at that point?

[English]

The Vice-Chair (Ms. Colleen Beaumier): The vote is at 10.40 a.m. and we have the—

An hon. member: We have time.

The Vice-Chair (Ms. Colleen Beaumier): Well, yes.

[Translation]

Mr. Yves Rocheleau: I won't take any risk. I intended to put this as my second question but will do it differently now. This question is for the representatives of the Bombardier corporation.

You know that the Canada account, rather than Bombardier as such, was the subject of comment in the Gowling report, which I don't intend to pass any judgment on, but which I was expecting you to refer to. If it is not confidential, since confidentiality is the rule when we discuss matters with EDC representatives, I'd like to know what you think of this issue relating to the Canada account, Bombardier and Embraer.

Mr. Réjean Bourque (Director of Funding and Treasurer, Bombardier): I will answer Mr. Rocheleau that the transactions relating to the Bombardier aeronautical centres and which were explicitly referred to were in total compliance with the rules set out by the OECD and subject to the rules of consensus. Thus they were in full compliance with the rules governing the functioning of EDC.

They were treated as part of the Canada account for reasons of risk associated with the countries. One of these transactions took place in an African country in transition, a country that is now treated differently. So they were basically transactions that complied with the rules of consensus.

I don't know whether than answers your question.

Mr. Yves Rocheleau: Let's broaden the discussion. Certain witnesses referred to confidentiality in connection with the transparency of EDC operations. The more I learn, the more annoyed I am by the lack of EDC transparency, first of all because we are talking about public money, hence a requirement for transparency, and also because among the main EDC partners we find a company like Nortel, for example. I'm surprised and proud at the same time to see that the government is so closely linked with Nortel, a corporation of some weight. I'm wondering why public money is used to support Nortel. If this is done, then the least we can do is congratulate the Canadian taxpayers.

It is less encouraging to find out that Placer Dome, another big Canadian player, is investing in the Philippines with the help of EDC and literally polluting all of the surrounding countryside. Fishermen are no longer able to fish the way they once did because the ecosystem has been completely destroyed, all of this in great secrecy.

Just how far can one go when using public money? After all, there are enough banks using private capital and engaging in private business. When public money is used, there is a price to be paid. I find the situation deplorable and I'd like an explanation justifying this kind of confidentiality when such projects are undertaken with public funds.

• 1025

[English]

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

Mr. Alan Curleigh: I'd like to respond and then turn it over to Mr. Hylton.

Transparency is an issue in this review, but just from the exporter's perspective, you have to appreciate that a financing structure that perhaps goes along with what I'm trying to export is in support of my export. If I'm putting in a competitive bid for an industrial plant to a country, part of that bid will be a financing structure. They aren't independent; they're part and parcel of the same project.

I would definitely keep my bid confidential. It's my business and I wouldn't want my competition to know what I was doing; I wouldn't want our client to spread it out.

[Translation]

Mr. Yves Rocheleau: I'm thinking of a detail that I would rather not give. According to what we've been told, the Americans are far more advanced and much more open in this respect, as well as the World Bank. When it lends to private investors, it opens up the books rather than closing them, as Canada does, apparently.

[English]

Mr. Alan Curleigh: Perhaps Mr. Hylton can respond.

Mr. David Hylton (Director, Special Projects, Kvaerner Chemetics; Alliance of Manufacturers and Exporters Canada): Thank you, Al.

An opinion has been put forward in the Gowling report that, provided information about a specific transaction is done after the contract is signed, a Canadian exporter should not be concerned, because they have the deal.

Our company bids against our international competitors. When a tender comes out, everyone knows the size of the plant, the capacity of the plant, and what special requirements the client might have. Unfortunately, if the price at which we won that job becomes public, our competitors can very easily figure out what price we might bid for a larger-size plant, at such and such capacity. So the alliance has been very concerned about allowing commercially confidential information out in the public domain. I think the alliance agrees that with public funding there is certainly an obligation to go some distance to reflect the desires of those who want to have more detail about what EDC is doing.

We've discussed within the alliance ways that might happen. For example, perhaps every six months a report might come out about the dollars provided, and the countries and the exporters may support it. It could be done by industry or in their annual report—more detail could be given. But we're very concerned about commercially confidential information being made public in Canada, where it is not made public in other countries. As Mr. Curleigh said, we are competing all the time. If you win one contract, that doesn't mean you will win the next one.

I hope that helps you understand our position.

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

Ms. Bulte.

Ms. Sarmite Bulte (Parkdale—High Park, Lib.): Thank you very much, gentlemen, for joining us today.

I wonder if I could get comments from all of you on some of the statements that appeared in an article in the National Post this morning by Patricia Adams. She quotes Jeffrey Garten, the dean of the Yale School of Management, in the Economist magazine. He argues that government should get out of the credit business altogether, and the marketplace has been corrupted by the presence of government. So I wonder if you could comment on that.

She also talks about how EDC, as a crown corporation, operates unfairly in the private sector. Perhaps you could provide the committee with examples of how your operations would have been different without the help of EDC.

Last but not least, Mr. Page, I'm sorry you skipped the part of your presentation on the small and medium-size enterprises. Perhaps you could just highlight that, because one of the complaints I've heard from small and medium enterprises is that it's not tailored enough to them.

Thank you, Madam Chair.

Mr. Alan Curleigh: I'd like to have Mr. Grant address this, as it pertains to the small and medium-size enterprises.

• 1030

Mr. Buzz Grant (Vice-President, Finance, MDS AeroSupport Corporation; Alliance of Manufacturers and Exporters Canada): Generally SMEs are quite happy with the service and the support provided to them by EDC. One way of look at SMEs, or small and medium-size enterprises, is that they are akin to babes that require support, nurturing, and all the help they can get in order to grow their businesses. Therefore SMEs are always looking for more support, more nurturing, and more attention.

But at the same time they're very happy with what EDC has done and how it has progressed in the last number of years with strategic alliances with organizations such as North Star Trade Finance, which caters just to small and medium-size enterprises.

So it's in a way a little bit of a double-edged sword. They're very needy, but they're happy with what they see and with what EDC is doing to fulfil their needs.

Mr. Alan Curleigh: Perhaps I could add to that quickly. You asked for a particular case in point. Let's look at Southeast Asia and the meltdown three years ago. It's slowly building up. We, in particular my company, have done major work in, for example, Indonesia, where we have a complement of commercial banks and ECAs all working in unison. When the meltdown started, the first people to retreat were the commercial banks. They make a credit decision overnight, regardless of what happens.

Thank goodness we had our colleagues with ECAs from Germany, Finland, Sweden, and Canada, who take a longer-term approach. They can see the end of the day. With the senior lenders being ECAs, they were able to really hold the day and convince all the lenders to stay with it. I can now report to you that this project is nine-tenths complete, and it will be onstream; it will be producing revenue. But if we'd left it to strictly the commercial banks, I'm afraid it would have been abandoned. That's not a criticism exactly, but that's how banks operate.

The reason we appreciate ECAs—and it's written all through publications—is that the ECAs are there to look at the economic and political risks of a situation, and they're there to give us a backstop as exporters. It's very important. That's a case in point where it proved itself.

The Vice-Chair (Ms. Colleen Beaumier): I noticed in your presentation you said you don't want anything released that's market-sensitive. However, the one thing we all tend to forget here is that the main shareholder in the EDC is the Canadian taxpayer. I as a Canadian taxpayer do not want to feel—and I'm using an extreme example—that EDC is going to guarantee money on small arms sales or exports.

Where do you draw the line there? How do you determine? Everything could be market-sensitive. That's my comment.

Mr. Alan Curleigh: Mr. Neil, would you like to address this question?

Mr. William Neil (Director, Government Relations - International, Nortel Networks; Alliance of Manufacturers and Exporters Canada): The question on the table really is how much disclosure can be tolerated inside the confines of an internationally competitive business, and what would be the role of EDC that might be different from any other export credit agency's?

Again I come back to the fact that EDC is a unique creation in public policies in other countries, so it does have to play a different role.

The disclosure of competitive information, just by definition, can only be after the fact. Until the deal is signed, there's really no deal. You're always in negotiations until the deal is signed. So in some sense you're only going to know after the fact.

Before the fact, you do establish guidelines with respect to the environment and with respect to human rights. The EDC, through its board, through the minister responsible for Parliament, through the Minister for International Trade, and through its various government interdepartmental committees, has to put these filters in place and judge these deals as they go along. The board of EDC will not approve a deal it feels is contrary to the wishes of Parliament.

• 1035

And to pick up on a piece of what you said before, it is true that Nortel is a very large company, but we have very many suppliers in Canada. We have over 7,500 suppliers, the majority of which are small and medium-size firms. For the most part, we're their anchor account. Our success internationally enables them to grow their business, even though they're not in the direct line of the export they supply to us. So support for large companies that are successful—and Bombardier has many suppliers as well.... These are the small firms that do depend on our success abroad.

Just to pick up on another thing you said before, if you want to know what EDC brings to the table, again I would push you back to where we were five years ago. There's been a change in size of EDC since then and a tremendous growth in exports, which they facilitated. So if you want to have a sense of where EDC could be should you try to take them out of the game, if you just look over your shoulder back five or ten years ago and put yourself where your colleagues were five years ago, then you'll get a sense of what an EDC would look like. Then ask, is that what the public policy role for an export finance agency should be?

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

Mr. Timothy Page: I just want to add that your question is well placed. Where do you place that line? If you place it too far, then the folks EDC is set up to serve won't come any more. If they don't come any more, you'll see the trade numbers go down, and you're creating a problem for yourself, both at home and with international competitive companies. Do you want to do that? From folks around this table, the answer is clearly no.

Nobody yet spoke to your question about Patricia Adams. EDC was created to fill a gap in the market. It's filling that gap in the market, and I'm surprised she doesn't understand that.

Voices: Oh, oh!

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

Mr. Robert Keyes: On your question on where we draw the line, I tried to say there's an issue of balance here to try to find that mean. It's not easy to draw that line in the sand, and we're all struggling with that. I don't think you've heard anybody here say there should be an iron curtain, but there has to be some way to recognize these commercial sensitivities, because this is a company's lifeline, and they're competing in a big, vicious world, and we don't want to undermine that.

On Madame Bulte's question on SMEs, just about two years ago the APEC SME meeting was held here in Ottawa. Issues of financing were a major part of that. This morning I dug out some of the recommendations SMEs had to all the APEC members about what their export credit agency should be doing. I'm quite happy to leave that with you. There were issues of innovation, financing, packaging, and information help, and EDC has heard some of those messages and has been reacting. Look at what they've been trying to do to help that part of the exporting community. They do have their receivers on, and they are reacting.

I'm happy to leave this with you. Thank you.

The Vice-Chair (Ms. Colleen Beaumier): Monsieur Rocheleau.

[Translation]

Mr. Yves Rocheleau: When we talk about drawing the line, how far should we go? For example, if we found out that a Canadian company in Asia or in Africa is using child labour, something that is internationally condemned, with the support of EDC, would that strike you as something to be condemned? Would we be entitled to obtain this kind of information? How far does confidentiality go when public funds are at stake?

[English]

Mr. Alan Curleigh: Perhaps I could address that question.

We as exporters, and in my case capital project exporters, are very cognizant of this issue. For example, I would love to see what my Japanese competitors are doing on the Internet. Of course that's not available. Their information flow of how they support their projects is totally confidential. My competition from Europe is confidential.

If you turn this over to the side of child labour, human rights, and issues like this, we all have a strong concern over those issues. We of course take our lead from the government on the country in question, and perhaps on the sector in question.

• 1040

With regard to specifics, we can't address that. I don't know of situations where companies knowingly would say they support child labour. It doesn't happen, in my view.

Mr. William Neil: I think that's a very good question, and as part of a group of people who find themselves responding to constituents on these issues all the time, it does place you in an awkward spot.

I don't think it's inappropriate for you to put down guidelines to EDC that say that the following projects, if they are involved in these sorts of activities, will not be supported by Canadian taxpayers. We expect the board and the administrative functions of EDC not to be engaged in these activities, and if we find out you are, you will cease immediately. At the same time, you could place an onus on Canadian firms to make sure they don't engage in those things at all, and if they know that, they have to reveal it as part of the financing package.

This sort of drawing lines in the sand that are consistent with the way Canadians view the world doesn't strike me as inappropriate guidelines to give to EDC.

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

Dr. Patry.

[Translation]

Mr. Bernard Patry (Pierrefonds—Dollard, Lib.): Thank you, Madam Chair.

[English]

I first have a question for the alliance, and after that a question and a comment

[Translation]

for the Association of Consulting Engineers of Canada.

[English]

My question for the alliance—I'm going to put them all together—is regarding the resolution, recommendation 36. I don't understand the fact that you agree with the Gowling report, which asks for replacement of the Auditor General by a private one, because it seems to be in conflict with your international commercial obligations. We're taxpayers; it always comes back to the taxpayers. I don't know why you'd like to change it.

Now, about l'Association des ingénieurs, you say you do not support the second half of recommendation 11, which sets out a scale for the determination of the proportion of export revenue required by a firm to qualify as an exporter.

My comment for Mr. Page is this. On the last page of your brief, you talk about civil society. I totally disagree that “ACEC is aware of the pressure on EDC with respect to the environment, human rights and information disclosure”. We talked a lot about this in this committee. You're talking about the fact that the “...foreign credit agencies are not subject has the potential to diminish its competitiveness and therefore its usefulness to exporters”. It seems that you really don't care about environment, human rights, and information disclosure, if I read it properly. For me that's totally inappropriate.

I'm just going to let you know that on the American side, all projects, before they get an investment, need to get an assessment for the environment. Just to let you know, yesterday we had the Minister of Foreign Affairs and International Trade in front of the committee, and he stated there will be some guidelines for Canadian exporters about this. We fully agree with that. But I disagree with this.

Mr. Timothy Page: Perhaps, Madam Chair, I could respond to that last comment. The business of consulting engineers is run by professional engineers. Professional engineers have a public responsibility to protect the public's health and safety. That is their number one responsibility as registered professional engineers. They operate under a voluntary code of conduct, a voluntary code of ethics.

Our members are very active internationally. They're very involved with local communities in improving the local environment for local communities internationally. We're very sensitive, as an industry, to our contribution to improving the environment and improving, as a consequence, the human welfare of people, particularly in the developing world.

My point in that brief was that EDC as a commercial institution should not be saddled with or face more strenuous or more onerous requirements than other commercial lending agencies. It is not to say that they have no responsibility in this respect, and it's certainly not to say that our industry has no responsibility. As you well know, EDC has created an environmental framework, which I think came into effect in April of this year. I think we should allow that framework to see its way through, and see how it's working.

Mr. Bernard Patry: What about the question regarding recommendation 11?

• 1045

Mr. Timothy Page: As a non-technician on these points, please permit me the possibility of major errors, not just minor.

The Gowling report creates a scale by which firms, based on their size, would or would not be eligible to receive domestic credit insurance. It's our view that if you hold up our membership and certain Canadian businesses against that scale, some of our members who were up to now eligible for credit insurance would no longer be eligible for credit insurance. We see certain illogic in that.

Mr. Bernard Patry: I agree with you.

What about the first question regarding the Auditor General?

Mr. Jayson Myers: With respect to the Auditor General, the review team recommended that the Auditor General be replaced by a private auditor. Our position is that it should be up to the board of EDC to decide whether it wants to replace the Auditor General. I think as a crown corporation, the EDC has been well served by the Auditor General. Our position is that if there is a change, it should be up to the EDC board. But if we're being well served by the Auditor General, I don't see what benefit a change would bring.

Mr. Bernard Patry: Okay. That's fine, thank you.

The Vice-Chair (Ms. Sarmite Bulte): Madame Marleau.

Ms. Diane Marleau (Sudbury, Lib.): Unfortunately, our colleague from the Reform Party has left, because by and large what is forgotten by most people when they hear your presentation is that all of the moneys create jobs here in Canada. This has added to the wealth of Canadians. We mustn't forget that fact; there are many other things going on.

There is one thing that Bombardier said—and I'm not sure if I agree or disagree—and that is that EDC should be allowed to have a larger equity commitment in projects and a longer time in which to phase out of them. While I understand your side of it, how that might facilitate some things for large corporations who are doing business outside, I worry that it would take too much of the working capital of EDC and would leave very little for smaller projects, for smaller businesses. I'm not sure that should be the proper role of a government-funded agency.

That being said, perhaps you can give me some examples of what is happening with other agencies such as ours, or similar ones, in their investment in projects where you're competing. Perhaps that would make me understand why it would be important for this to happen.

Mr. Richard Sloan: Thank you for the question. The order of competition is not driven specifically just by the amount of equity you put into a deal. On the transport side, we compete with soft loans coming in from foreign governments that are 40-year loans with virtually no repayment.

We don't have a basket here in Canada to support the kinds of money that we see coming from European competitors. Looking at an equity, which is a position in a deal that eventually will be remunerative, you would not go into the deal unless you thought you would have a return on your investment, you would have an exit strategy, and some day that ownership position would be marketable.

So what we're talking about is looking at transactions that have commercial viability, that have a reasonable return—criteria to be established—from which EDC would benefit. But more importantly, I think when a firm such as EDC brings that kind of capital to the table, it pulls along with it other people, because they see the commitment and they understand EDC's appetite for risk and its analytical bias. Frankly, by putting money into the transaction, there becomes a sort of imprimatur on the deal that says, not that this deal is blessed, but that it has passed through a fine-tooth comb. It's been well filtered and it looks therefore like a sound investment.

Ms. Diane Marleau: I'll just add on, though, that that in itself in the end means that Canada can't compete with a lot of the moneys out there. We just don't have that kind of cash; we're not big enough. So where does this end? I see your logic, but on the other hand, there just isn't enough money here if the other countries want to put it in and want the deal. So it won't help you any more.

• 1050

Mr. Richard Sloan: The next deal that you lose is painful, and we can—

Ms. Diane Marleau: I just feel that it's almost one-upmanship. I've seen a lot of things going on on the international front, and frankly, a lot of times, if we start playing that game, there's no end to it. All the money will go into that, and everyone ups their ante. So I'm reluctant to start in that, while I understand your need for it.

Mr. Richard Sloan: I think we, as Canadians, have a unique position in the world. We're a very small country with a deeply talented workforce, and the only way to get that workforce into the world—I don't mean literally “in the world”; I mean for the exports—is to have an outfit such as EDC to promote itself.

As I say, Réjean and I have been in any number of deals where just having EDC there has presented a sense of comfort for the transaction itself. I understand. We compete against....

You have to go.

The Vice-Chair (Ms. Colleen Beaumier): Yes, I'm sorry. We know what this double bell means.

Ms. Diane Marleau: It's either we go, or we go into an election.

The Vice-Chair (Ms. Colleen Beaumier): Yes.

Ms. Diane Marleau: And we don't really want to go into an election, so we're going to go.

The Vice-Chair (Ms. Colleen Beaumier): We'll suspend the meeting.

I'll ask members to come back at 11.30 a.m., because we have a presentation from the World Bank at that time. So we will reconvene at 11:30 a.m.

• 1052

• 1139

The Acting Chair (Ms. Sarmite Bulte): Ladies and gentlemen, I'd like to bring the meeting to order.

We're delighted to have you here with us today, Mr. Karlsson. We'd like to congratulate you on your recent appointment. I understand this is your first visit to Canada in your new capacity. Welcome.

I'm going to ask that you begin with a statement, and then we can open it up to questions.

Mr. Mats Karlsson (Vice-President, External Affairs, UN Relations, World Bank): Thank you very much. Coming to Parliament is something that's close to my heart. I worked for three years inside my country's parliament, attached to the foreign affairs committee, so I know how important it is to address parliamentarians.

I don't want to make a long introduction. I gather you follow these issues closely and I would like to engage in a dialogue with you. But let me just say that I think this point in time is a quite exciting time.

• 1140

Maybe everybody always feels they are on the verge of historical change, I don't know. But the way we come together between governments and international institutions and, for that matter, increasingly in our time and age, the civil society to mobilize coalitions for change, as was the theme in Jim Wolfensohn's annual meeting speech just two months ago, is extremely important.

I think so much has changed in world politics—in east-west relations, of course, with the Cold War over, but also increasingly north-south relations, where even though groupings exist still in international organizations there is much more common understanding on what needs to be done. There is today a much deeper common ground in getting international institutions or whole coalitions to have an impact.

I think the World Bank's role over the years has always been an important one. But from being an institution that perhaps during a period of time focused on investing in infrastructure and structural adjustment, it is now trying to be a much more trusted partner to the borrowing countries, with one focus, namely eradicating poverty. And we know so much more now about what it takes to eradicate poverty.

We are preparing for next year's World Development Report, which I mention because it's one of our best vehicles in trying to shape perceptions and an understanding of the nature of our activity and the situation in the world. Every tenth year, the bank has focused on this core objective, namely, poverty eradication. It's not just a cold report that comes out at a point in time, but we're trying to do it in a modern, participatory way.

One of the run-up activities to this report was to ask people what poverty really means. In the traditional bank way, we engaged with NGOs and asked 60,000 people in 60 countries what poverty really means. The answers we got are quite striking; they reach far beyond the simple view of poverty as being deprived of education, or health, or income.

The message that comes back is the whole situation of security: not just security in relationship to conflict but security against violence in the home, violence in the community; the social security systems, the risk of losing everything as a result of an economic crisis, as a result of being struck by ill health; the immediate human security, that human security that I know Canada has been a champion of in international debates—that is clearly there—opportunity, creating open market systems that are underpinned by public institutions, that secure the good functioning of the market; fighting corruption, which is opportunity, but also empowerment, allowing people to sense, understand, recognize their potential, and organize around it and express it.

I think the modern way of viewing poverty will have these three concepts—security, opportunity, and empowerment—as fundamental inroads, not just traditionally viewing things as infrastructure, education, and health and so on. We will end up doing the very same things, hopefully in a better way, but the basic understanding of how societies change and how poor people can take responsibility for their own lives is fundamental in the way we want to reform our work.

At this point in time we hope to change the way the bank works and is able to deliver on this. We believe strongly we need to link up with the other international institutions, not least the United Nations system, which is undergoing constant reform, and of course all our bilateral partners, in coalitions for change. None of us can succeed on our own, and we're therefore very dependent on backing from our shareholders, from the debate in these countries around where we're going.

• 1145

So we're very sensitive to discussions in our shareholder countries, and I guess my role in the World Bank is to be on the interface of the debates—in my case in particular, with the industrialized countries, and therefore I'm happy to pay a visit to Canada so early on. In fact, it is my first trip outside the bank in my new role, and I do that with great interest, since Canada always has been on the forefront, a strong multilateralist supporter, championing strong international reform and looking at the insides of our institutions and giving us a reality check.

Maybe I'll stop here and we can discuss. Thank you very much.

The Acting Chair (Ms. Sarmite Bulte): Thank you very much, Mr. Karlsson.

Dr. Martin.

[Translation]

Mr. Keith Martin (Esquimalt—Juan de Fuca, Ref.): Thank you, Madam Chair.

[English]

Dr. Karlsson, thank you and your team for coming up and discussing what the bank has been doing. It's a very important issue for us, given the moneys we've put in. We have a number of questions for you.

My big interest is actually conflict prevention, and I know the bank has had a huge focus in post-conflict reconstruction. But given the fact that since 1980—and correct me if I'm wrong—the moneys you spend for post-conflict reconstruction have increased 800%, a huge amount of money, I have a series of questions.

I wondered, first, what role the bank sees in using the bank as an economic lever for conflict prevention.

The second thing is how the bank is actually trying to reconcile that—you mentioned in your comment that your primary focus is the eradication of poverty—in the context of the political debate upon which you function. Even though your charter forbids you to look at the political implications of what you're dealing with, one can't ignore that. I bring up, of course, the Tibet issue, and I would appreciate it if you could give us an update on that also.

I'd also like to know if you could educate us on what's being done to integrate the IMF, World Bank and UN activities, if you could give us an update on that. As a donor nation—and I'm sure you get this question from all your donor nations—how can we increase accountability, the bank being accountable to the donor nations? We have a lot of questions as to where moneys are going and whether the moneys are spent wisely, and I bring up the two examples of Uganda and Cambodia as examples of where moneys and activities by the bank made matters worse after their structural adjustment programs and activities in the context of those nations.

So if you could answer those questions, I would appreciate it.

Mr. Mats Karlsson: You're quite right that the bank has become much more involved in those conflict situations, the reason being, of course, that there have been more conflicts to take care of. The end of the Cold War didn't bring an end to conflicts, unfortunately, and most of the conflicts we see today are of course internal to countries. The bank has, in a way, been forced to deal with this, and we've tried to set up...because it didn't come naturally to the bank, if you look to the past, trying to stay out of political conflict. But being partners to countries, we cannot disregard what's happening, and we've been asked by the international community to be involved in critical places, like in the Balkans, or in Central Africa, or in Sierra Leone, or most recently in East Timor.

• 1150

We've tried to do a lot of internal analysis. I wouldn't claim but that we've done more than the first generation of analysis of what a bank's role can be, because as you know, the bank can only lend to sovereign institutions, and the available resources for activities with grant money is very limited for the bank.

But we have quite some analytical capacity, and we know we will be called in the end to work when the political solution is there, so we're trying to get in as early as possible.

Analytically, we've been working with the UNHCR and the UNDP in bridging the gap, as we call it—that is, the gap between humanitarian assistance and long-term development corporations. It's been a year's work, and we think we're getting somewhere in understanding the need.

But we can't do this alone. We very much need the member states, the bilateral contributors, to expand their ability to have not just humanitarian assistance, or not just the long-term mechanisms that exist, but to have more instruments in place to deal with this complicated post-conflict situation.

So you're right, we're devoting a lot of energy to this. We'll see if we can put in place structures that are more appropriate.

We've had two visits from Kofi Annan at the World Bank within the past two months. For the first time ever, he addressed World Bank staff inside the bank. He gave us one piece of advice directed not just at the World Bank but also at the world community at large. The advice was that we should be much better at doing conflict assessment of whatever we do. For instance, if we do an education project or an infrastructure project, we should look at it through the eyes of conflict impact so that at least we do no harm. More importantly, of course, we should try to use whatever we do as a way of reducing internal conflict.

The results coming back to the United Nations and elsewhere show that internal inequities in countries, or horizontal inequities between different ethnic and income groups and so on, are a key factor to conflict. When you then engage economically, you should help to reduce these inequities.

The simple message, then, was that you should do a conflict analysis of whatever you do early on. I don't think it's something that has been widely done, and it's something we're trying to do.

The Tibet issue is an example of an impact on precisely that kind of relationship. It could have been prevented if we'd had better analysis in place. Now we have the inspection panel. The bank has an independent.... The bank board can revert to a special inspection panel. That one has been visiting the areas and has come back. They're doing their analysis and will come out with a report, I hope before the year's end.

Mr. Keith Martin: Are they obligated to still pursue the course of the loans? The loans that are in arrears right now are...?

Mr. Mats Karlsson: Held back. So nothing is happening before the inspection.

Mr. Keith Martin: But they can stop it, depending on what the report says.

Mr. Mats Karlsson: Yes.

Mr. Keith Martin: Thank you.

Mr. Mats Karlsson: You asked about the relationship between the bank and the UN system. I think we're making a lot of progress here. It's all dependent, of course, on how the UN succeeds with its own reforms.

Mark Malloch Brown, my predecessor, now leads the UNDP in very major reform. That is going to be decisive, because the UNDP and the UN development group are our most important partners, I would say, in most country situations.

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Fortunately, in countries themselves, the bank system and the UN system.... The UN system already has in place the so-called UNDAFs, or development assistance frameworks, and common programming. In some places there's even a common UN house. They have become a much more able partner in the country strategy preparations.

So the bank is, in practice, working quite closely with the UN system in many country situations. From the bottom up, we're moving ahead, but we need to bring our consultations more closely to each other at the top level. We're preparing with the UNDP a consultation in terms of governance and anti-corruption. The public institutions are key to so much. So we're working on high-level consultation between us to better understand our roles in this strategic field.

Many things like this are going on constantly. Never before have the UN and the bank been so resolved about sorting out differences and finding constructive ways to work together.

Again, Kofi Annan was twice at the bank, and came to work with some of us on the UN system just recently. The bank is opening a new office in Geneva to work with the World Trade Organization and the UNHCR post-conflict human rights commission to recognize the importance of the Geneva situation in the UN. So I think we're pushing the front in many ways in terms of working with the United Nations.

I didn't quite follow you on how the bank has exacerbated the situation in Uganda and Cambodia.

Mr. Keith Martin: I think probably others would want to ask some questions. It would be very disrespectful not to give them that chance.

The Acting Chair (Ms. Sarmite Bulte): Thank you, Mr. Martin.

[Translation]

Mr. Rocheleau.

Mr. Yves Rocheleau: Good morning, Mr. Karlsson. In your presentation you said that the fundamental aim of the World Bank was the elimination of poverty.

I'd be interested in knowing whether you agree with my personal interpretation of events. We find ourselves in a context where quite the opposite is taking place. In my opinion, poverty on this planet is only increasing. We are starting to see a systematic decline in the importance and size of the middle class. The gap between the rich and the poor is constantly growing. Social programs, wherever they exist, are being cut back and underfunded, particularly in the field of health. A wave of privatization is taking place, not a mere coincidence, that might leave the impression that it is an independent phenomenon in each of the countries where it happens. But when we observe what is taking place at the global level, we realize that it is systematic.

All of this to say that we live in a period characterized by neo-liberalism where wealth is concentrated, where businesses and decision-making centres are becoming increasingly concentrated as well. These decision-making centres are private and, in my opinion, threaten the authority of sovereign countries.

I'd like to know first of all whether you agree with my analysis. The consequences of this global situation can be seen everywhere, even in developed countries. For example, in Europe there are approximately 40 million unemployed; in the United States, the bastion of capitalism and world wealth, there are 40 million poor and homeless; here in Canada, in one of the best countries in the world, we saw a rather violent demonstration by the homeless only yesterday. There is a profound malaise in society. I'd like to know whether you agree with this interpretation of events.

In order to deal with the situation, rather than use public money from sovereign states to finance international organizations, would it not be preferable to obtain it directly from the holders of wealth through some type of Tobin tax, for example? Such a tax would apply directly to those who possess wealth rather than the taxpaying population. We know that those who possess wealth do not pay income tax. They keep their money away from the tax man in tax havens.

There must be some way for us to bring about a change in this system. One way of doing so, the only one I have heard of, and I'd be interested in knowing your opinion on this as an expert on the international scene, one that seems to be well structured and not at all utopic if there is a well-defined political will to make use of it, would be a Tobin tax or its equivalent. According to Le Monde diplomatique, that I read regularly, this tax would bring in approximately $350 billion U.S. a year, and such money could be managed by the U.N., the World Bank or any other organization with a mandate to eradicate poverty on this planet, and it could be done in a systematic way through this contribution made by the wealthy.

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Mr. Mats Karlsson: Do forgive me if I answer in English. I feel far more at ease and express myself more precisely in English.

[English]

I think the bank has learned a lot over the past ten years. The simplicity with which the bank would say, ten years ago, “Do one, two, three, four, and five and poverty will be reduced” is a thing of the past. The bank knows well that not just free markets and privatization will reduce poverty. You have to have a more holistic approach to care for social investment and structural reform, by which I mean caring for the public or public-private institutions. In our own societies in the north, we all know those are necessary to underpin a functioning, stable market.

We also know that in our own society—and by “own” I also mean my own in Europe—things don't come easily. We also have inequities, and they cannot be resolved simply by market economic measures.

So the analytical understanding is there that even growth is not enough. We depend on the quality of the growth and the poverty profile of it.

The bank's ambition now is to put this analytical understanding into practice. Therefore, the bank's president, Jim Wolfensohn, presented in January of this year something that responded to the demand of very many countries—including, I think, Canada—to improve the way it works.

The decision by the bank was to work with a comprehensive development framework, or CDF, as it's come to be known. We're now piloting it in 13 countries over 18-month periods. The fact is, however, reality moves even faster than our pilots, so in many other countries outside of these 13 they're developing these mechanisms.

The issue there is to look at the macroeconomic needs, market economic needs, the social needs, and the structural needs. As well, it's to look at all the partners—the bank system, the UN system, the bilaterals, the NGOs, and the private sector—in a matrix to see how the whole of the outside partners' activities with a country can square with that country's ambition and internal political process and deliver a greater effect in terms of poverty reduction.

We've clearly set the targets that we want to be judged by. Our impact on how poor people fare, on how child and maternal morbidity rates are reduced, on how primary school education is increased—those are some of the so-called seven international development goals.

We're gearing up our statistical systems in the bank to really guide us so that in the field we can make an effort. On this basis the impact will be much greater, hopefully, and we'll be able to mobilize the resources of the private sector in both the developing countries and the north to help in this process. But the key here is the comprehensive attitude at better-quality partnership with the country and a focus on the poor.

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I hope this goes some way to answering your question.

[Translation]

Mr. Yves Rocheleau: Do you have any opinion on the Tobin tax?

[English]

Mr. Mats Karlsson: Yes, I think there is a very serious issue. The Tobin tax raises two kinds of issues. First is the need to mobilize money for the international system, and second is that the Tobin tax came from the concerns raised by very volatile capital movements. There are two different issues there.

I'll take them separately, beginning with the volatility of capital movements. After the crisis in Southeast Asia, everybody knows this is a real issue, not an imagined one. I think also the mainstream economic understanding today gives a lot of legitimacy to political action by countries to, for example, tax the inflow of short-term capital so that it acts as a break on the fast movement inside—coming into the country, not leaving the country. This is the experience of Chile and others, even Malaysia. I think that understanding is moving into the mainstream economic experience, because I don't think we're anywhere close to a consensus that the Tobin tax is the response to volatility of capital. Anyway, it's not for the bank to institute that. That's much more for the international monetary authorities like the IMF.

The other issue of whether one can somehow develop the automatic mobilization of resources for the international system has of course been a long-standing one. I believe it was even in the Pearson commission report from ages ago, that kind of thinking. Much has not materialized, but it remains on the agenda. And as we know that the system of cooperation between the global institutions and the demand for much stronger global public policy need to be financed, I think the issue will remain on the agenda.

From the bank's point of view, we have to deal with the immediate things—mobilizing the financing that is needed to deliver on the HIPC, on the debt relief, which was agreed now at the annual meetings. That in itself is a task big enough. We barely scraped through at Washington, but we haven't yet seen all the money promised there come in. We've also had the challenge of seeing all the pledges to IDA 12 being delivered with the American Congress, just after a lot of debate more or less came through, but not quite, on their promises to IDA.

So we can see that the international system, the UN system, suffers a great deal from not mobilizing enough development cooperation. I was very happy to hear that your Prime Minister, on his visit to Africa, signalled an increase in development cooperation. I think the international system, the way it has come through in reforming itself, is a much better place now to deliver efficient development cooperation, and we need to turn around the precipitous fall in overall development cooperation from 0.33% of OECD levels to 0.21% as it is today. With most economies in the north now in pretty good fiscal shape, I think we should look to our long-term interests and mobilize stronger support.

The Acting Chair (Ms. Sarmite Bulte): Thank you, Mr. Karlsson.

Madame Marleau.

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Ms. Diane Marleau: The U.S. issue is a very difficult one, because as time goes by and more and more of the action that needs to be taken moves to the global level, less and less are we able to get the cooperation of the United States. That is a very serious challenge that we all face as developed nations working in the developing world.

There are two issues I want to talk to you about, and one of them is an issue that is near and dear to my heart, and I know it's near and dear to Mr. Wolfensohn's heart. That is the gap between the humanitarian assistance phase and the actual development phase, and whether there has been more work done on that. I know there has been some, and perhaps you could elaborate on that.

As well, there is the environment. We're now reviewing our Export Development Corporation, and the example has come up at different times of how the World Bank has environmental norms and of how they impose them. Perhaps you could tell us how you do that and how successful it is. It's fine to have norms, but do you have success as well doing it with the projects you finance?

Mr. Mats Karlsson: On the first issue, the gap or link—coherence—between humanitarian aid and long-term development cooperation, I had a meeting three weeks ago with Sadako Ogata and Mark Malloch Brown to consider how we could come back to this process and move it forward.

I think in principle there has been a lot of debate during the past year and more on where to take humanitarian assistance, linking it up with conflict resolution, the culture of peace, the culture of prevention. We've been involved so much in dealing with conflicts in the Security Council, but somehow for foreign ministries and aid organizations it is still difficult to get the cultural prevention to permeate our action. It's the same case with the bank. The bank has not always been comfortable with being close to politically conflictual situations. We have to learn how to work with them, so there is a culture change that needs to take place in the bank as well.

The operational conclusion with my discussion with Sadako Ogata and Mark Malloch Brown, Sadako Ogata of course being, as you know, the High Commissioner for Refugees, was that we would go beyond the general discussion on issues and look at several country situations and see if we can—we're already involved in many specific country situations—look at it from a systemic point of view: what are the systemic lessons that we could learn or push in a specific situation? Tomorrow, when I get back to Washington, my first meeting is actually with our post-conflict unit to decide on the next step in this.

Ms. Diane Marleau: You know, of course, what I'm talking about. At times the humanitarian aspect is very good, but it will be with one particular population, and the population around that is not getting anything. That creates a conflict in and of itself. But UNHCR really can't intervene there. The World Bank is unable to. Even our bilateral programs have difficulty intervening. That's the challenge.

We were working on something in Burundi, and I think that is still ongoing. How do you develop the civil society in there to work with them and encourage the government to keep making progress? That's a very serious challenge. In many cases the humanitarian aspect is left and the people are plunged into absolute, total poverty because there's nothing in the interim. Perhaps we need another body. We need somebody who can do it. I don't know who. It's not an easy answer; it's a very difficult challenge.

Mr. Mats Karlsson: I couldn't agree with you more about the challenge. The response, I think, is rather than have new institutions, have better coalitions. The bilateral organizations play a tremendous role, because they often have a greater political leeway and they have more instruments at hand. We should develop our own instruments, I think, to be able to act. Of course the NGOs are extremely important. So the cross-institutional trust is very important to build in order to have.... But the issue is there, it's not resolved, and I agree with you.

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On the environmental challenges and how we deal with them, one of my first meetings when I came new to the bank was with Ian Johnson, who is the vice-president for environmental affairs at the bank, and we had a long discussion on how to deal with problematic investments, investments that are perceived or criticized as being harmful to the environment.

It perhaps won't convince many when I claim that the bank's internal processes are very far developed. When you sit for hours at length going through specific projects, and see 20 or 30 people responding to Jim Wolfensohn's or somebody else's questions: “Well, have you thought about that? Have you thought about this? This is what the NGOs are claiming”, it's quite impressive. In fact internally, administratively, it's quite a costly process of doing these checks. It may still not be enough, but the processes are there.

What I'd like—and this is what I took up with Ian Johnson early on—is to see our preventive system be much stronger, so that we don't end up in situations where we're very far down the road in preparations for a project, having perhaps not been transparent, and then we get all the critique from outside when we're already in a situation where we've invested a lot and where the political cost of backtracking is high. So prevention is where I'd like to see us have a better system.

There are checks and balances on our environmental standards, but in today's world, we should do the same on conflict or social effect: how is it affecting, generally, the institutional development of a country? Together, all of this comes to demanding of us better judgment early on in the preparation.

I hope to bring also what is called the external affairs, but what in effect in many situations is getting the real debate out there into the bank system, for us to have much better dialogue in the countries, to help the regional vice-presidents of the bank engage in much better dialogue. They see this. I see internally a greater demand for those kinds of services regularly in their day-to-day work. That's a direction we should be going in.

The Acting Chair (Ms. Sarmite Bulte): Thank you. If I may, Mr. Karlsson, I have a quick question before we end.

As you know, we're on the eve of the launch of the new WTO negotiations in Seattle. I was wondering if you could tell us what the World Bank is doing to assist the lesser-developed countries in WTO negotiations and how you see they will be considered at the next round.

Mr. Mats Karlsson: Thank you. It's a very important question.

Ms. Wilson is sharing a document called Agriculture and the WTO 2000 Negotiations: Economic Analysis of Issues and Options for Developing Countries. We'll share it with you when the meeting is over. It is precisely the kind of analysis that is one of the bank's strong sides. We have a role to play in revealing what are the poverty interests as we enter the next round, which we hope will be known as—and really deliver on—a development round.

When the bank had its twice-annual meeting of the development committee, just ahead of the annual meetings in September, we had Mike Moore participating, together with Juan Somavía, the new director of the ILO. That was quite a show of the international organizations wanting to go into this in a coherent way, helping the process to move ahead in the interest of poverty reduction.

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As we speak, we are trying to use the instruments at hand, in particular analytical capacity, to reveal the issues, thereby making it easier for member states to see what is at stake, so that the ultimate outcome can be a coherent one in terms of reducing poverty.

The Acting Chair (Ms. Sarmite Bulte): Thank you very much, Mr. Karlsson.

That completes this session, ladies and gentlemen.

Again, Mr. Karlsson, we're delighted that you chose Canada for your first visit in your new position. Thank you very much for coming.

Thank you, colleagues, for coming.

The meeting is adjourned.