FAIT Committee Meeting

STANDING COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE

COMITÉ PERMANENT DES AFFAIRES ÉTRANGÈRES ET DU COMMERCE INTERNATIONAL

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 30, 1999

• 0914

[Translation]

The Acting Chair (Mr. Bernard Patry (Pierrefonds—Dollard, Lib.)): Good morning, ladies and gentlemen. Welcome to the Standing Committee on Foreign Affairs and International Trade. You have all received the agenda for this morning. I will be chairing this meeting until the arrival of our Vice-Chair, Ms. Colleen Beaumier, who is on her way.

• 0915

This morning we will have a round table. The participants are: from Nortel Networks Corporation, Mr. John Roth, Vice-Chairman and CEO; from the Aerospace Industries Association of Canada, Mr. Peter Smith and Mr. Peter Boag;

[English]

from the Automotive Parts Manufacturers' Association of Canada, Mr. Gerry Fedchun; and from Med-Eng Systems Inc., Mr. Richard L'Abbé, president.

[Translation]

Each of you has ten minutes to make their presentation, and there will then be a question and answer period.

Mr. John Roth.

[English]

Mr. John Roth (President and Chief Executive Officer, Nortel Networks): Thank you very much, Mr. Chairman.

I would like to present this orally today. I do not have a written submission, but I would like to start by giving an overview of Nortel Networks' activities, our presence here in Canada, and the role that EDC plays in helping us to succeed around the world.

You may not be aware of it, but Nortel this year will probably finish with revenues in excess of $30 billion Canadian. Most of that is exported from Canada. The Canadian market for Nortel represents less than $2 billion in revenue, so virtually $30 billion that Nortel sells this year will in fact be sold outside of Canada. The U.S. is our largest market, bringing about 55% to 56% of our revenues. Europe now has grown to account for about 20% of our sales. The rest is divided up between Asia-Pacific and Latin America.

We employ roughly 70,000 people worldwide, and roughly a third of these people are located in Canada. Despite the fact that only 7% of our revenue is in Canada, we employ fully one-third of our workforce here. You can see that this is directly related to our ability to export from Canada.

The largest concentration of our employment is here in Ottawa, with over 13,000 people and growing. Other notable locations are Calgary, where we have around 2,300 people; Brampton-Toronto, which is at 3,500 people; and Montreal, where we have currently 4,300 people, but we'll probably grow to in excess of 6,000 people next year.

Nortel is a technology company. Our investment in research and development is extremely large. About 13% to 14% of our sales dollars are invested in research and development. The bulk of that is done here in Canada, here in Ottawa in fact. This year, we'll invest about $2.5 billion Canadian in our research and development efforts here in Canada. This is roughly about one-half of the R and D money that we spend globally.

Earlier this month, we announced some major expansions, and you'll probably see a few additional ones come up next year here in Canada. We're going to invest $400 million in our output of fibre optic capacities, creating a further additional 2,300 jobs—850 in Ottawa and 1,450 in Montreal. As I mentioned earlier, that will bring our population in Montreal close to the 6,000 level.

Our growth in Canada is directly correlated to our ability to succeed internationally. Roughly four out of every five jobs that we have in Canada depend on our ability to export. This is very important to us, and obviously very important to the members of the committee.

Of what we make in Canada, 85% is in fact exported from the country. We are one of Canada's largest exporters. Last year we exported about $6 billion from our facilities to customers in over 150 countries. This year, while the year isn't done yet, our level of exports will be around $8 billion.

Also, I might say we've created a very large base of suppliers to Nortel here in Canada. We have in fact created a number of small and medium-sized corporations by spinning out some of our own activities where we cannot focus on them as well as we should. We've sold these to people like Seimac and other corporations, which in themselves have become very viable Canadian-based corporations. We are major purchasers of the output of companies like JDS Uniphase, which I think is in the press quite a bit. We have a wide variety of suppliers that are small and medium-sized corporations that in fact supply us with componentry that we in turn export as part of our systems. So there is a very significant multiplier effect here in Canada.

Our focus is in two areas: wireless technology and the Internet. These two events in telecommunications are fueling huge changes around the world. This is creating great opportunities for corporations like Nortel to establish strong business bases around the world and increase our export potential.

• 0920

The Internet is a phenomenon that we have never seen before. Just to give you an idea of how rapidly this industry is growing, the telephone industry took 75 years before it reached 50 million customers; radio took 30 years reach to reach 50 million users; television took only 13 years; and cellular telephony took 12 years. The Web reached 50 million users in just four years, and reached 100 million in just six years. That gives you an idea of the pace this is moving at.

This is a part of the industry that Nortel has positioned itself to serve, and the company is doing quite well. Quite honestly, I think this is an area where there's an opportunity for Canada in general. Canada continues to be strong in the field of telecommunications—not just Nortel, but many companies. The country's schooling and education systems are very strong in these disciplines.

Quite honestly, I want Canada to become very strong in the Internet economy. I think this is a great opportunity for the Canadian industry in general. At the same time, I might then talk a little about the role that EDC plays in all of this.

As these new industries are being created in our field, another change is taking place. Telephone networks at one time were built by governments and by countries, either through regulated telephone companies or directly by the governments themselves through a publicly owned or government-owned telephone business. With the pace we've seen in the industry, it is no longer possible for governments to finance this, so governments have in fact now privatized these carriers. They have opened it up to many corporations to come in to build these systems through corporate investments, so many entrepreneurs now are acquiring licences, are building networks, and are accelerating the rate of deployment of telephone networks for the Internet and for wireless around the world. This has increased the pace of development of communications networks worldwide.

Financing for these systems becomes absolutely key. In many cases these corporations will turn to Nortel and and ask us to supply the equipment while financing the equipment at the same time. It's very similar to buying a car, when you may get financing from Ford or from General Motors to buy your automobile. The same kind of thing happens with Nortel. This past year, we probably have financed around $3 billion to $3.5 billion of our customers' purchases from Nortel.

Now, Nortel is not a bank. We take the note when we have confidence in the business case that the customer presents. In fact our board of directors approves these financings. But not being a bank, we then turn to the banking industry to buy these notes from us. We typically hold these notes for six to nine months, but we then look to someone who in fact is a bank to buy the notes from us. This is an area in which EDC has been absolutely stellar in its ability to understand the business cases and to make good, sound financial decisions about which investments are sound and which ones are perhaps not so good.

We work very closely with EDC as these financings that we've made start to move along, and EDC at some point helps us to buy these notes and move them to the financial industry. It's just one of the partners we deal with. We work with many banks around the world, but I think EDC certainly is an asset to Canada in its ability to understand our industry and to make wise and shrewd investment decisions as to when the time is appropriate. This has tremendously helped the growth of Nortel worldwide, and our export capability. These investments are made in many countries, including some in South America and Europe, and they're even made in the United States. In the newer technologies, this is building these new networks.

I might add that these are the networks that are going to grow more rapidly. The older networks have in fact grown, and they're stagnating in some cases. The new networks are taking market share from the established ones.

So these are the roles. What I've seen in EDC is that it has made the investment to understand our industry extremely well. If you're going to make these kinds of financial decisions, it's very important that you understand what you're investing in. The expertise that has been assembled by the EDC organization is probably one of the best in the world in terms of understanding the segments that it works in. This is important to make wise and shrewd financial decisions about the risks they're taking on.

I would say we have dealt with companies around the world. Nortel works out of many different countries, so we're familiar with financial institutions run by other countries, and certainly I would say EDC stacks up very well compared to the organizations it competes with in other countries.

• 0925

Financing is probably going to become even more important in the future as our industry continues to move in the direction that we foresee. The continued support from the EDC is important to the success of corporations like Nortel, and to the telecom sector in general.

Really, those are my comments, and I'm open to questions at this point.

The Acting Chair (Mr. Bernard Patry): Thank you very much, Mr. Roth.

What we are going to do this morning is ask every one of you to make your presentation. After that, we'll go for a period of questions.

I'll now ask Mr. Peter Smith, from the Aerospace Industries Association of Canada, to talk to us.

Mr. Peter R. Smith (President and Chief Executive Officer, Aerospace Industries Association of Canada): Good morning, ladies and gentlemen. Thank you for the opportunity to appear today to provide comments on the review of the Export Development Act and the operations of the Export Development Corporation. I am accompanied today by my colleague Peter Boag, who is vice-president of AIAC.

The Aerospace Industries Association of Canada represents the interests of 250 advanced technology companies in every region of this country. Collectively, they employ more than 73,000 Canadians in high-quality, high-paying jobs. The aerospace sector in Canada is a $16-billion-a-year industry, primarily driven by exports. Indeed, export sales account for more the 75% of Canadian aerospace output today.

With a cumulative trade surplus of more than $25 billion over the past decade, aerospace is indisputably one of Canada's most successful advanced technology exporters. This success has been achieved in an intensely competitive global market for aerospace goods and services, where the degree, structure and terms of financing packages are key competitive discriminators. On a daily basis, Canadian firms compete and win against the best from the United States, Europe, South America, and Asia. In this context, the export sales financing support of EDC is clearly a crucial component of global competitiveness for Canadian aerospace firms.

In the three-year period of 1996 to 1998, EDC supported more than $4 billion in Canadian aerospace sales. In the first ten months of this year, EDC supported more than $1.7 billion in aerospace transactions. Each of the past four years has seen significant growth in the total value of EDC-supported aerospace sales.

EDC has a unique and important mandate. It is the sole Canadian financial institution with an exclusive mandate to support and develop Canadian export trade and Canadian capacity for engaging in trade. While EDC provides its financing and risk management services on a commercial basis—an approach that we support—it is not driven by the need to maximize return on investment and thus to skim only the cream of financial services and businesses. This is the fundamental difference between EDC and private sector banks and financial institutions, a difference recognized and supported in the EDA review conducted by Gowlings.

The Gowlings report clearly articulates and endorses the unique and important role that EDC plays in supporting Canadian trade. Moreover, it validates the expanded mandate and powers given to EDC in 1993, with which we strongly agree. In our submission to the Gowlings review, we identified eight specific ways in which EDC could build further on its track record of innovation and excellence: one, developing a greater tolerance for risk; two, assuming a leadership role in project finance; three, playing the role of long leader underwriter; four, stretching terms to better align with the asset life; five, expanding its equity participation mandate; six, establishing more flexible leasing vehicles; seven, adding flexibility to its guarantee facility; and eight, streamlining its decision-making process.

The common denominators in all of these are flexibility and capacity. Sustaining and expanding both the flexibility with which EDC can support Canadian trade and EDC's capacity to do so are critical to our competitiveness in a global economy. Globalization and technological change are creating huge opportunities for Canada, but global competition is intensifying. We need to continually strengthen our competitive position.

Many of the recommendations contained in the Gowlings report directly address in a positive way the issues of flexibility and capacity. For example, we support and urge your endorsement of the recommendations to remove the $10-million limit for equity participation; to increase EDC's contingent liability limit; to take advantage of proposed income tax regulations that will permit pension funds to participate in EDC loans; to expand EDC representation abroad; and to enhance services to SMEs.

• 0930

However, other recommendations would or could unnecessarily constrain EDC. For example, we disagree with the Gowlings recommendation to remove the reference to direct and indirect support in EDC's mandate as articulated in the Export Development Act. It is impossible to anticipate how export financing concepts may evolve in the next few years and what tools competitor nations' export credit agencies may provide. Restricting EDC's activities to specific business powers spelled out in the Export Development Act takes away EDC's current flexibility to respond with innovative solutions to prevent competitors gaining advantage.

Similarly, we see no value in restricting the way in which EDC could carry out leasing activities.

As well, constraining EDC with requirements that are inconsistent with normal commercial practices and principles will hurt Canadian exporters and cost Canadian jobs. One of EDC's key strengths is that it operates on a commercial basis. Imposing additional burdens inconsistent with this orientation would threaten client confidence and satisfaction—hallmarks of EDC's success to date.

Take for example the issues of accountability and transparency. Without question, EDC as an agency of the federal government must at some level be accountable to the Canadian public. However, the need for accountability must be balanced with the need to protect client privacy and Canadian competitiveness. Clearly EDC's public disclosure practices must respect the principles of commercial confidentiality and protect the disclosure of information that would compromise a Canadian firm's competitive edge, both before and after a deal.

We urge you therefore to carefully consider the impact on Canadian trade prospects and Canadian jobs of the Gowlings recommendations or other advice that would limit EDC's power and flexibility, impose conditions inconsistent with normal commercial practices, and otherwise constrain EDC's ability to respond to exporters' needs with the innovative solutions demanded by the marketplace today.

I want to thank you again for the opportunity to appear before you today. I and my colleague Peter Boag would be more than pleased to answer any questions you may have during these deliberations.

Thank you.

The Acting Chair (Mr. Bernard Patry): Thank you very much, Mr. Smith.

Now we'll go to the Automotive Parts Manufacturers' Association and its president, Mr. Gerry Fedchun.

Mr. Gerry Fedchun (President, Automotive Parts Manufacturers' Association): Thank you very much.

Thank you for allowing me to appear today before the committee.

In 1998 our industry produced almost $27 billion worth of goods and services, and of that we exported $16 billion. For 1999, which is a record year, we are headed for $30 billion, with fully two-thirds being exported.

Automotive as a whole is Canada's leading manufacturing export, with auto parts being a significant portion of that total. The automotive industry in Canada employs one in seven Canadians, while the auto parts industry itself employs 106,000. This is significantly more than the auto assemblers. An auto parts worker is well paid, with wages averaging about 20% above the average industrial wage.

These are rather dry statistics, but they do indicate the vital importance of the auto parts industry to the Canadian economy. And behind those rather dry statistics are the men and women who work in our industry and the families they support at a comfortable standard of living.

Our industry has managed to grow significantly since the end of the last recession, when we were standing at about $13 billion in sales. In the face of a very tough globally competitive environment, this has not been easy.

Our industry in fact is relatively young, having really only become a significant industry since the Auto Pact of 1965. Back in 1965 our total industry sales were only $500 million. But we have kept our world competitiveness by being entrepreneurial, innovative, and progressive. I like to sum it up by saying we have a very agile industry in Canada.

Our customer base, the original equipment manufacturers, or OEMs, of the world—General Motors, Ford, DaimlerChrysler, Honda, Toyota, Nissan, Renault, Volkswagen, and a few others—are rapidly globalizing their automotive production and requesting their supply base, our industry, to go with them. When that request is made, there is only the choice on how to go. The alternative of not doing so would mean an eventual withering away of your business, because the OEMs have stated that they are reducing their supplier base and are asking their preferred suppliers to supply them around the world.

• 0935

These two aspects of exports and globalization are where EDC has been of significant benefit to our industry.

EDC has a terrific program for financing tooling built in Canada. They have an innovative financing program that has allowed the industry to expand its exports and stay competitive. And when our companies have to globalize, EDC has the programs to finance the necessary expansion. This helps our industry to be competitive and helps the managerial and research and development employment stay in Canada.

EDC's financing in the auto parts industry has jumped from $50 million in 1995 to $800 million this year, and the number of companies financed has gone from 15 to 95, with fully two-thirds of those being SMEs. EDC financing has been vital to the success of the SMEs.

Ours is a continuous improvement industry where the only constant is change, but change only when it leads to something better, faster, or more cost-competitive.

The EDC tooling program, which is now so successful, was not even a glimmer in either EDC's eye or our industry's eye when EDC received its mandate in 1993, but since EDC had the flexibility, it was able to create the program when the demand became clear.

None of us has a crystal ball. Gee, if I did, I could retire tomorrow. And we do live in a swiftly changing industry. So we the customers want EDC to retain maximum flexibility to meet our unanticipated needs.

In the interim report, a recommendation for more public disclosure was raised. I have to say this is anathema to financing. Vital commercial and competitively valuable information could be disclosed, resulting in the borrower suffering in the marketplace. That is, the competitor finds out the information and uses it, and it didn't cost them a penny to receive it.

We believe financing information should be protected the same as income tax information. The only information that should be disclosed is statistical totals, and even then it is necessary to be vigilant so that there are enough players within that total that the companies involved will not be identified by inference. If there's any necessity for various kinds of disclosure, that can be done, as under the Income Tax Act, by auditors who are sworn to secrecy.

EDC's financing program is a great program that results in increased exports from Canada, healthier Canadian companies, and more jobs in Canada. Our industry is very interested in the program continuing for the niche it fills and the benefit it bestows on the Canadian economy. We also look forward to new programs that meet the ever-changing demands of this very dynamic industry.

I'm prepared to take questions later on.

The Acting Chair (Mr. Bernard Patry): Thank you very much, Mr. Fedchun.

[Translation]

We will now hear Mr. Richard L'Abbé, President of Med-Eng Systems.

Mr. L'Abbé, please.

Mr. Richard L'Abbé (President, Med-Eng Systems): Thank you, Mr. Chairman. Ladies and gentlemen, members of the committee, thank you for inviting me to speak before you this morning.

[English]

This is one of the most humbling experiences for me obviously, sitting at a table of very distinguished gentlemen. I more or less represent SMEs in this morning's discussion, and I'd like to share with you a story about how SMEs start and how EDC and other government services have allowed us to grow.

We began in 1981 with two and a half employees—I was the half employee—in a 200-square-foot facility, which is just a little bigger than the booth located behind you. We began exporting in 1982.

If I look at this group of distinguished gentlemen, all of these businesses have a lot of things going for them. They have a lot of resources available to them. Well, when you're two and a half employees, you don't have these resources.

• 0940

So we are the classic example of how government has assisted a business in growing. We've had phenomenal support from both the provincial and federal governments.

Today Med-Eng has sold its products to over 120 countries and territories around the world, we are considered one of Canada's most aggressive SMEs, and 98% of our business is export-oriented. We are growing this year by 90%; next year we project growing between 50% and 60%. So it's a very dynamic company. In our plan, within the next 10 years we'd like to reach Nortel, but that's going to be a bit of a challenge.

In comparison to most Canadian companies, we're significantly different. Why? Because we have never really considered that the U.S. market is an export market. We consider it a domestic market. That wasn't always the case, because there were a lot of trade barriers that we had to blast through, so to speak, to be able to reach the markets.

Obviously the challenge of trying to sell your product all around the globe is quite significant. We have used very effectively EDC's export credit insurance. That has allowed us as a small business to increase our lines of credit with our commercial lenders.

SMEs have a lot of challenges that larger corporations have, but we have a lot less resource base to work with. In your handout there's a list of challenges that starting an SME can present. Most of us are underfunded with limited resources, limited business experience skills, little or no strategic planning, and the list goes on.

A typical challenge for SMEs is that most of them have limited knowledge of exporting, and they have very limited support from the Canadian banking community. There's a funny story that says if you owe the bank $50,000, you worry, and if you owe them $1 million, they worry. Well, that's very much the case for SMEs.

We have tremendous advantages here in Canada, because as an SME, we have R and D tax credits that a lot of European countries and countries in the Pacific Rim do not have. We have phenomenal support from the Department of Foreign Affairs and International Trade through their commercial departments, we have the Canadian Commercial Corporation, and we have EDC. Also, we have a Canadian passport, which is a great help in a lot of markets.

Notwithstanding, let me throw some statistics around. SMEs such as ours have to realize that the top 200 exporters in Canada are responsible for 65% of our export dollars; 80% of our exports come from the agrifood, auto, and forestry industries; and in the agrifood industry, 80% of our exports come from three exporters. So as SMEs, we understand that we're little fish. However, SMEs account for about 80% of new job creations in Canada. So we are a very important sector to our economy.

It's not surprising that 15% of EDC's business has been directed as of late to small business. It's not by design, but it just follows the proportion of our exports.

There are a lot of areas where EDC can improve on its services to SMEs. It's perhaps not in their mandate to do so, but SMEs can grow, as Med-Eng Systems has demonstrated. But a lot of us need mentoring, and when you get into the export market, it's not obvious where to go to get mentoring. Wouldn't it be nice to have a big brother to take you by the hand? You often pick up the phone and call up people at companies such as John's, and they're very receptive and will give you a lot of advice, but they're a large business. They don't quite understand what the requirements of SMEs are.

So wouldn't it be nice if we could pick up the phone and call up our colleagues at EDC, and they could go beyond where they're going now? Now, they direct us to a couple of phone numbers or contacts, but wouldn't it be nice if they had experienced people who could allow us to learn from their mistakes, instead of making them ourselves?

• 0945

Another thing SMEs really need are simple, flexible, and efficient bureaucracies. This is one of my pet peeves here in Canada. Why are we 98% export oriented? It's because it's so difficult to deal with the Canadian federal government that we'd rather sell abroad than try to deal with PWGSC. I apologize for throwing that in.

Let's get back to EDC for a minute. EDC has a very important role to play in our success as exporters. They should market their products through banks more aggressively. They seem to be the best-kept secret in Canada for a lot of SMEs. They have to be a lot more visible. They could do things like offer seminars across the country. They do that already, but they could offer seminars where they invite prospective exporters, bring successful SMEs and large businesses to these seminars, and get everybody excited about how we could move forward. EDC should expand its mandate to promote exports in general as aggressively as they can.

The aspect of disclosure is something that is particularly frightening for us, because we have to battle so hard to gain market share in the various countries around the world. There's a lot of information available now on the Internet and so on, but if we work so hard and disclose a lot of information to a corporation like EDC and they are allowed or forced to turn around and disclose this information to all of our competition, it will be very disheartening for us.

In our handout we point out a couple of things that are important to us. I think SMEs have a very important role to play in the growth of Canada and the economic health of the country. EDC is front and centre in our ability to do so.

Thank you very much, Mr. Chair.

[Translation]

The Acting Chair (Mr. Bernard Patry): Thank you very much, Mr. L'Abbé. We will now go to the members' questions.

Ms. Lalonde, please.

Ms. Francine Lalonde (Mercier, BQ): First I must point out that there has only been one presentation written in French and that it is difficult to take notes and follow at the same time. It seems to me that your companies are all large enough to provide us with texts in both official languages. The growth of that of Mr. L'Abbé allows me to say that this is true for him too.

This being said, thank you for being here. Your contribution will certainly be very important for the recommendations the committee will be making. I would like to ask you three questions.

Mr. Smith, you add many recommendations regarding EDC, but you only enumerate them. I would like you to tell us a little about each one. Secondly, I would like to know if you agree with recommendation 28 regarding transparency, as well as on the recommendations regarding the environment and human rights.

Mr. L'Abbé, I would like to know if you agree with the recommendations regarding SMEs, because there are several. Finally, what do you say about the warning given by Mr. Lamarre of SNC- Lavalin to SMEs before they go into exports? If some of them can make rapid progress, and I believe this is your case, others may lose their shirts.

The Acting Chair (Mr. Bernard Patry): OK, Ms. Lalonde?

Ms. Francine Lalonde: Yes.

• 0950

[English]

The Acting Chair (Mr. Bernard Patry): Mr. Smith, you have identified eight specific ways. Please comment on them rapidly, and then comment on a transparent environment and human rights.

Mr. Peter Smith: The references to the eight specific recommendations were contained in the submission we made to Gowlings, and I'd be more than happy to provide that to the committee, as a means of giving much more detail on each of them.

I would like to comment on just a few. On the risk management assessment issue, we basically want to ensure that attention is being paid, particularly in relation to the aircraft industry in emerging markets, to the risk assessment and the management of that assessment being made available in a timely way. The issues there are a matter of ensuring that the capabilities that currently exist within EDC should also be shared with other financial institutions. We are quite open to further discussions in that regard.

The long lead commitments, in respect to the aerospace industry, are rather extraordinary in the sense that when you take a look at an opportunity, once there is a reasonable prospect of making a sale—once the sale has occurred—you don't sell aircraft generally for more than another 25 years because of the life cycle of the aircraft. Obviously it's a hit and a very serious miss if you don't make it.

On stretching the terms, reference is also made to taking delivery. Obviously, if you watch aircraft sales, airlines will generally buy on the basis of firm orders and options. There's an extended period of time over which the fleet will be renewed, hence some attention should be paid to the length of time in which these appropriate loan terms would take place.

Equity participation is another example we felt it was important to explore, because of the possibilities of operating lease companies and independent financial institutions. I think the options are available and they should be looked at in seriousness with respect to giving the flexibility to EDC.

Similarly, there are lease financing and guarantees.

The timeliness of decisions is also important. I made reference to it for the simple reason that the general statements of support are insufficient in a competitive marketplace, and if a potential sale is to occur, it is very important that we have the absolute assurance that EDC is comfortable about the financing, rather than being simply a support in this regard.

The conclusion is that we certainly have been more than happy to date with respect to the ability of EDC to respond. The numbers I made in my presentation are rather impressive in the sense of the support it has already given to the aerospace industry. These are simply suggestions to improve the flexibility within the marketplace.

On your other two questions with respect to whether I agree with recommendation 28 on accountability and transparency, as I mentioned in my comments—and my colleague Richard and others have made mention of it as well—it is a very difficult situation. Being a federal government instrument, obviously the taxpayers and members are there to ensure the appropriateness of the transactions. However, the disclosure of commercial confidential information can be terribly damaging in the marketplace. Therefore, we're expecting appropriate judgment and the appropriateness of external auditors or the Auditor General, as the case may be, or committees of this kind to bring the Export Development Corporation to task for its particular performance of the year. We certainly commend it. But the fact of the matter is that the absolute numbers that constitute a transaction can tend to be very damaging in the marketplace, particularly in a very competitive world such as aerospace.

You asked a similar question with respect to environmental and human rights issues. Once again, there are policies in place. Certainly the foreign policy of the federal government is well known by all of us. There are export control mechanisms in place, and we feel these are sufficient enough at this time to ensure the appropriate guidance is given to the commercial transactions that are taking place. I don't think the Export Development Corporation should be used as an instrument in protecting against these aspects of foreign policy, but those are my own personal views.

• 0955

I trust I have responded to your questions.

The Acting Chair (Mr. Bernard Patry): Thank you, Mr. Smith.

[Translation]

Mr. L'Abbé, please answer the question on small and medium- sized enterprises.

Mr. Richard L'Abbé: To answer your question, let's look at the history of Med-Eng. This company was founded by engineers who didn't have any knowledge of marketing, exterior sales, etc. It is through Foreign Affairs Department mentors that they were able to learn how to do business abroad. I'm referring to the various Canadian embassies around the world.

I think the people at SNC-Lavalin are right. Several companies that are not ready for export just dive in without knowing what's in store for them. But we have a good network of mentors here, in Canada, and there is no reason not to help small exporters access markets in the U.S., Europe, Asia, etc.

It would be interesting if the Export Development Corporation had such a service to help us with our exports. The mentors do not have to be large corporations. Even a corporation like ours spends about one day a month acting as a mentor for other smaller corporations that operate around it here in Ottawa, and even in Montréal, and that are trying to access the export market. To us, being big brothers is not a problem.

Ms. Francine Lalonde: And what about the recommendations?

Mr. Richard L'Abbé: The recommendations are good. I have added a few in my document, as you may have noticed.

Ms. Francine Lalonde: No, because I didn't read it. It is in English only.

Mr. Richard L'Abbé: It is in the blue book.

Ms. Francine Lalonde: It's because it's in English only.

Mr. Richard L'Abbé: Sorry. I think EDC should promote its products through the Canadian bank system. It's something that is already done, but not enough, specially in smaller centres. Here, in Ottawa, we are lucky, but in a small town outside large centres, local bankers may not be aware of the services that are offered. These services are very important.

For example, when we invoice abroad, we have insurance to protect us against bad debts. This product is very poorly understood by certain banks. Some of them consider that this is not an instrument that could enable us to increase our credit margin. For a small company, the lack of cash flow is a very big problem, and this product offered by the corporation is very important for us in terms of growth.

I have to insist on the notion of mentors. This is really what enables small businesses to grow. If we could learn from the mistakes of others and not from our own, it would cost a lot less.

The Acting Chair (Mr. Bernard Patry): Thank you.

Ms. Marleau, please.

[English]

Hon. Diane Marleau (Sudbury, Lib.): I really appreciate all of your points and I've been taking note of them. Obviously EDC has been of great help to you in developing your business, and we certainly want to see that continue to happen.

We're talking about public disclosure. We've had a number of people come before this committee and cite Ex-Im, the export development agency in the U.S., and the World Bank as examples of public disclosure. We've been accused of being more secretive than these groups. I don't know if any of you have had any dealings with them or if you know how much they disclose. Would that be a level that you would be comfortable with?

On the small and medium-sized business sector, Mr. L'Abbé talked about simple flexible bureaucracies, but I'm sorry, that's an oxymoron; it just doesn't happen. That's partly because of the role of governments and the safeguards that governments have to take. Not only do they have to be transparent and so on, but they have to appear to be. Every time there is a challenge, governments have to come in, and then be extra careful. That does cause a lot of what you're saying, and I believe that EDC could help.

• 1000

I want to ask you, in terms of small business, or anyone else who can answer this.... We've also had the private sector—the factoring industry as well as commercial insurance—come before us and say that EDC really is competing with them. Of course they feel they could do what EDC is doing. I would like to know whether you think so, and what kind of experience you've had with the private sector on the insurance side of things—not so much on the long-term financing, but on the insurance side of things. I agree with you in terms of banks often not really understanding. It is especially difficult for small business, and I think there is a role, of course, for government there.

If you would care to answer those questions, I would be very thankful.

The Acting Chair (Mr. Bernard Patry): Mr. Smith.

Mr. Peter Smith: Thank you, Mr. Chair. Perhaps I can start off.

With reference to your question on the comparisons or differences between Ex-Im Bank and others, our understanding certainly is that Ex-Im, as an example, is a lender of last resort and therefore is not operating exclusively on a commercial basis, as would Export Development Corporation. In this regard, I think the terms and conditions would be slightly different. In fact, being what they are, they would have to disclose, because it's a very high-risk arrangement in that regard.

To come to the question of what you feel the differences could be, or the previous testimony that you heard on whether the same services could be provided by other private sector insurance—I think that was the question you asked—again, my impression would be that one has to take a look at the reasons EDC was created in the first place.

In this regard, I would think their tolerance for risk is much higher than what would normally be the case for a private sector financial institution or insurance company. For that reason, it becomes a catalyst to promoting the trade of Canadian companies. In this particular case, I'm referring exclusively to the aerospace companies, who depend on in excess of 75% of their products being exported abroad.

We're looking at it in the sense of it being a duly created government instrument that has a higher tolerance for risk than would a normal private sector commercial operation in that regard.

The Acting Chair (Mr. Bernard Patry): Mr. Roth.

Mr. John Roth: Thank you, Mr. Chair.

With regard to what Peter said about disclosure, I think the current arrangement that EDC operates under is quite competitive. The institutions that EDC competes with in our industry are not so much the World Bank and Ex-Im, but more some of the commercial banks that operate out of other countries. If EDC were faced with more onerous conditions than they face, EDC would find that the companies that are looking for the financing arrangements would be reluctant to share the information that EDC needs to make sound decisions. So their ability would be severely compromised to make good investment decisions. I think this is an important consideration.

The Acting Chair (Mr. Bernard Patry): Mr. Fedchun.

Mr. Gerry Fedchun: Thank you, Mr. Chair.

We found that the reason EDC has been successful is that it tends to spend a lot more time doing research and getting into a new market. In fact, in the particular tooling program we have in automotive, some of the banks have indicated they would be interested in lending money into it, with EDC being the lead financer. They would contribute the capital, EDC would contribute the expertise, and they'd do some joint financing.

I think that's a tribute to the way EDC goes into some of these innovative markets, because it is more on the edge. It is prone to take up that higher-risk level, and that's where the innovation occurs. You have innovation not only in production of parts, but innovation in financing, so you keep that competitive edge; and therefore you win the next contract when you're doing your exporting.

[Translation]

The Acting Chair (Mr. Bernard Patry): Mr. L'Abbé, please answer the second part of the question regarding small and medium- sized enterprises.

• 1005

[English]

Mr. Richard L'Abbé: I think when you are talking about SMEs, one of the problems we have is credibility. Banks and various financial institutions would rather spend the same amount of time on a bigger fish than on a smaller one. So we are, I think, a nuisance, especially when we're on the smaller side. Once you get to a size like Med-Eng is now, at $20 million or $30 million a year, and you've won the Canada Export Award twice—things that very few companies have done—well, then you're credible all of a sudden.

We had to go through three banks before we finally found one that supported us. They just don't understand exports from the SME standpoint, and they just don't understand SMEs. Restrictions are thrown our way, because generally SMEs deal with local bank managers who have very limited knowledge of what exports are all about. So it's a real uphill battle for us until we get to a credible size, and then all of a sudden we're the greatest thing since sliced bread. Well, it took 15 years to get there.

The Acting Chair (Mr. Bernard Patry): Merci.

Madame Augustine.

Ms. Jean Augustine (Etobicoke—Lakeshore, Lib.): Thank you, Mr. Chairman.

I was really pleased to hear the presentations made to us this morning. I am sitting and trying to put a few things together, and you'll forgive me if I don't have all the expertise in business. I'll be asking a real layperson's question.

EDC says their basic purpose is to promote export trade, not to maximize return on investment. When they report on financial arrangements that they've facilitated, the volume of businesses they've supported, etc., from your perspective in working with EDC, looking at the recommendations that Gowlings has put before us, when you endorse the recommendation to remove the $10-million limit for equity participation, and when you look at the recommendation to increase the contingency liability, etc., how do you see that fitting with EDC's mission and mandate?

I'm just trying to get my own understanding of how this operates.

The Acting Chair (Mr. Bernard Patry): Mr. Roth, please.

Mr. John Roth: I think anything that increases the flexibility that EDC has to operate under is well worth considering. EDC has assembled a team of very strong expertise in the areas in which they do investment. While their primary mission is to increase the ability of Canadian firms to export, certainly their ability to earn a return on that enlarges the pool that they have to invest. Therefore, if they can make good returns on their investments, that helps everyone, because in fact they're helping, number one, good trade, sustainable trade, because if the deals turn sour, the continuous stream of exports will probably dry up.

If you take the situation of Nortel, many of the deals that EDC originally helped us to finance resulted in continued export streams without further financing. That's very important. So the ability of EDC to make shrewd investments, investments that will continue to grow long after the need for initial financial support is over, is I think one of the primary goals of EDC—and they've been very successful in picking the winners and avoiding the losers.

On that, if they are able to have more flexibility either to take equity investment in some of these firms—because I think those can be very good financial rewards for EDC that they could then reinvest in other deals—or to have greater latitude, I think this helps the interests of their mandate in particular, making more exports in general.

The Acting Chair (Mr. Bernard Patry): Mrs. Augustine, are there any other questions?

Ms. Jean Augustine: I was going to follow it up in a provocative way and ask if EDC has to be a government agency.

Mr. Reg Alcock (Winnipeg South, Lib.): That's a good question.

Ms. Jean Augustine: All right, Mr. Alcock agrees with me.

An hon. member: I happen to think it should be, but that's beside the point.

Mr. Gerry Fedchun: Let me comment that to a certain extent, if it's shareholder related—that is, if it's now owned by a number of shareholders—and the shareholder is definitely looking for a return on investment that's competitive with other things, then what are you? Then you are another bank.

• 1010

EDC, by being government-owned, has a higher tolerance of risk because the return on investment it has to earn is not the same commercial return that everyone else has to earn. It has to earn enough return to be profitable and to work well. But it can tolerate that higher bit of risk.

The reality is that in export markets there are higher risks. If you sell something to Russia you can't go to the court and sue someone, or if you do you're probably going to get shot on the way to the courtroom. That is the reality of some of the countries we sell to. So you need a higher level of risk. You don't have the benefit of the Canadian civil society to enforce commercial deals. So there is a whole political risk.

EDC is very good at political risk. That is one thing we found very helpful when we were going into new markets like Brazil and Argentina. They get their team down there and they understand the political situation, so you can obtain from them political risk insurance that's not available from anyone else. We found that to be very, very helpful.

The Acting Chair (Mr. Bernard Patry): Mr. Smith.

Mr. Peter Smith: I would like to add to that, if I might, as well. Certainly I am sure you are aware, because we have had other discussions about the dependency that aerospace has on exports, particularly in Canada—and I do not think we are any different from the telecommunications business or any others—that exporting is not an option for Canada any longer. The issue I think we have to contend with is, to further emphasize the point that has just been made, that export financing and risk management services are key, critical elements of the competitiveness of the Canadian industry, in particular the aerospace one.

In this regard, the intelligence-gathering and the risk assessments made by EDC are those instruments that make us that much more competitive in the global marketplace. So I can't imagine an independent financial institution having the capability that a government instrument has in this regard, because it has at its disposal the internal workings of the government to do those political assessments that are necessary.

As I mentioned earlier, when you take a look at the forecasts of aerospace requirements, there is no question there are single-digit growth projections with respect to passenger growth that would require new aircraft being built on a fairly steady pace over the next decade or more.

However, the replacement aircraft is another market that is a very interesting one. But unless there is a high risk at the front end...and again from a civilian perspective you can readily recognize that once a carrier purchases one or two aircraft it becomes cost-effective for them to continue to buy that same aircraft for training, parts, and other things. So the key issue is the risk at the front end, for which EDC provides that particular comfort level to consummate that particular deal, which becomes a long-term arrangement.

We don't see any other possibility of a commercial institution being anywhere close to the way in which EDC has been able to certainly expand Canada's aerospace industry, which as I mentioned is today $16 billion. Next year we expect it to be $19 billion, creating those highly advanced technology jobs that I think this government is looking for in the knowledge-based economy.

The Acting Chair (Mr. Bernard Patry): A small comment from Mr. Roth.

Mr. John Roth: Yes, on the point about whether it should continue to be a government-sponsored enterprise, I believe it should. Richard L'Abbé made the point about how difficult it is for a small or medium-sized corporation to deal with Canadian banks. I have to say that as you get bigger it doesn't get any easier.

Industry is often quite critical of government. But this is one asset the Canadian government has created that works extremely well. My only input would be don't change it too much. If it's not broken, don't fix it.

The Acting Chair (Mr. Bernard Patry): Thank you. We'll go now to Madame Lalonde, please.

[Translation]

Ms. Francine Lalonde: The first recommendation of the Gowlings report deals with international relations. It is said that we should consider making a clearer distinction between EDC's consensus activities and its commercial activities. I would like to hear you on this and get back to the transparency issue.

• 1015

As public funds are involved and EDC is a public institution, it is very embarrassing not to know exactly what kind of support it provides. For example, you would not expect the Caisse de dépôt et placement du Québec not to disclose how much it invests in any given business. It seems to me this is the same king of issue.

I might add that Mr. Lamarre was opposed to dividing the two functions, even though he was told that it was to better meet the international requirements we could see coming.

[English]

The Acting Chair (Mr. Bernard Patry): Mr. Smith.

Mr. Peter Smith: I was just making reference to the first recommendation and I don't understand what the question was, unless there is a different document. It was referring to the international—

Ms. Francine Lalonde: It's not your first recommendation, but that of Gowlings.

Mr. Peter Smith: No, no. This is the Gowlings I have.

Ms. Francine Lalonde: Okay.

Mr. Peter Smith: It makes reference in the Gowlings report to this, that “Canada should continue to participate actively in the shaping of changes to international rules and disciplines...”. Is that the one you're referring to?

Ms. Francine Lalonde: Yes. The last sentence.

Mr. Peter Smith: It says: “...including consideration of a more distinct separation of EDC's Consensus and its market-based activities.”

I will defer to my colleagues on that one.

The Acting Chair (Mr. Bernard Patry): You're a good president.

Mr. Peter Smith: On the issue of transparency and your comparison to the Caisse de dépôt, it is my understanding again that the Caisse de dépôt does not provide financial assistance to companies in a similar fashion to that of EDC.

Ms. Francine Lalonde: No, I know that, but—

Mr. Peter Smith: It would be investment in the province of Quebec generally to enhance capital capabilities and to expand plant facility, whereas in this particular case I think it would be unlikely that the Caisse de dépôt would find itself in a situation of trying to provide, or disclose for that matter, critical financial data to competitors within the province of Quebec.

The point we are trying to make is that what EDC is in the business of doing is trying to make a Canadian company, whether it's aerospace, telecommunications or any other sector, win a contract for which there are competitors out there. So the issue is that if there's a finite disclosure of unit prices or of margins or of the ways and means in which the financing package is put together, it becomes terribly critical and commercially damaging, in the sense that the next time around that same aircraft or that same telecommunications equipment is being exposed to another country, then obviously the competitor will have the advantage. That is the fine distinction we are trying to make.

I understand your frustration in the sense that they are public funds, but it's my understanding today that EDC doesn't cost the taxpayer one cent in the way in which it is operating. So the question you should be asking EDC is perhaps why a particular transaction wasn't successful, because we could collectively learn from that in the sense of the future—if it was a matter of flexibility in instruments of supporting Canadian companies, or if it was a matter of issues that perhaps were beyond its current mandate.

But as for disclosing the balance sheets and providing the financial data you're looking for, we feel very uncomfortable about that, unless there were some form of non-disclosure to those who would be accessing that particular information. It's just a very ruthless world out there, and the more information that's available, the more it comes back to bite you later on in further transactions.

The Acting Chair (Mr. Bernard Patry): Thank you, Mr. Smith.

Now we will pass to Mr. Alcock.

[Translation]

Ms. Francine Lalonde: But I did not get an answer to my first question.

The Acting Chair (Mr. Bernard Patry): You can ask him in private immediately after, Ms. Lalonde. He will surely give it to you.

Mr. Alcock, please.

[English]

Mr. Reg Alcock: Well, I must confess I have some interest in the answer to Madame Lalonde's question.

The Acting Chair (Mr. Bernard Patry): Go ahead and ask the same question. It's your time.

• 1020

Mr. Reg Alcock: Let me just ask a couple of questions.

I appreciate Mr. Fedchun's earlier remark, which has prompted me to speak. I understand the intricacies and difficulties in international markets. Would you include the U.S. in that?

Mr. Gerry Fedchun: Very much so. The U.S. is still not a domestic market. None of us gets to vote and they don't get to vote here. We are still different countries.

NAFTA has really made it much easier for us to sell into the United States, but our competitors are U.S.-based and Mexican-based companies. EDC financing has allowed Canadian auto parts to take a much larger share of the North American automotive production than we had earlier on. That was from the article today.

Ontario will probably surpass Michigan as the largest single jurisdiction in production of automobiles. We in Canada right now make 2.8 million vehicles a year. We only consume 1.4 million. We are shipping out twice as many vehicles as we make, and it's because we have a competitive edge.

Mr. Reg Alcock: So the auto industry couldn't find similar financing in the U.S.?

Mr. Gerry Fedchun: Well, maybe they could, but then the plant would end up being in the United States. From the parts side and the tooling side, we're able to supply a great deal of tooling to the U.S. directly and also supply tooling to the Canadian parts companies, who then export that product to the United States.

Mr. Reg Alcock: And relative to the U.S. market, Canadian banks would not provide support for exports to the U.S.?

Mr. Gerry Fedchun: They don't understand the tooling program we have going. There are a couple of very nice things in our particular situation. I could give a little explanation of what happens.

We get an order from Ford and they want six new press dies for $10 million. They will make progress payments for that, but the progress payments are always behind what it costs to do it. So the SME would go to the bank. The banks would ask, “What have you got? You have an order from Ford—that's no good, we want machinery and equipment.” The SMEs would say “Well, we haven't made it yet.” EDC says it knows the order is good for what it is and they will finance that tooling contract for the dies the company is making.

They take a little more risk than a bank will do, and that has been extremely successful and very lucrative for the Canadian tool and die industry. EDC has really been the heart of that financing.

The Acting Chair (Mr. Bernard Patry): Mr. Smith would like to add something.

Mr. Peter Smith: Perhaps you have seen some of the publications from the aerospace industry of late that have set off some alarm bells that are appropriate in this regard, in the sense of the necessity to have instruments like the Export Development Corporation.

Since 1995 through to 1998, the Canadian value added in the aerospace industry has dropped from 66% to 54%, and the reason for that is issues such as the flexibility of instruments like EDC, the availability of research and development funding within the federal government to provide support to the aerospace and other sectors, issues such as taxation and others. We have been trying to appeal to the government to point out that these instruments are critical to ensure that work stays in Canada. We have the capability of doing this; however, there are a number of other impediments that need to be addressed. We have dealt with the TPC issue. We are making representation with respect to taxation and what needs to be done there to ensure competitiveness.

To add to my colleague's comment, the fact that we have an EDC and the way in which it operates makes it a very attractive environment in which to work. We have the confidence that we have an instrument of government that can consummate the deal that is necessary for us to succeed in the world marketplace.

The Acting Chair (Mr. Bernard Patry): Mr. Alcock.

Mr. Reg Alcock: I will concede that EDC works quite well for large companies. I think that is true around the world. Mr. L'Abbé, can you comment relative to the U.S. market and small business? Have you had any experience in that area?

Mr. Richard L'Abbé: In 1992 we had revenues of about $40,000 in the States and we are up to $10 million this year. We have been doubling our revenues in the States every year for the last several years.

It's a question of credibility for us. We deal with mainly the governments, at the local, state and federal levels. It is extremely difficult for us to sell, for example, to the U.S. Army because the Americans have all sorts of protectionist measures—the Berry Amendment, to name one.

• 1025

So we had to battle through all of that as an SME and be able to conquer these markets, and we're conquering these markets because we are significantly better than all of our U.S. competitors combined. We reinvest a lot of money in R and D every year, and our competition doesn't. So it's a question of us being so much better. It's so blatant that at the end of the day we take the market away.

Our competition was almost all from the United States. Now we basically dominate 95% of the world market and 98% of the U.S. market. If we can do it, any other Canadian business can.

The Acting Chair (Mr. Bernard Patry): You have a small comment, Mr. Smith?

Mr. Peter Smith: Oftentimes this same analogy is brought up with respect to the United States and small to medium-sized enterprises, but my understanding is that the definition of small to medium-sized enterprises in the United States is companies of 500 employees and below, which is quite a different case as far as any comparison within Canada. One has to take into consideration, I think, the fact that, certainly from what I see, at least of the reference here to Export Development Corporation...they do have a considerable number of clients. Maybe perhaps the financial exposure is not as high as it would be for large companies, but I don't think we should forget about the fact that these larger companies...certainly in the aerospace industry there are only 13 companies that are in excess of $250 million a year in revenue. Three of them are in excess of $1 billion. So when you look at the tiering of those companies, the success they would have, a Bombardier, a Pratt & Whitney, a CAE, and others, exporting beyond Canadian borders creates the facility for the small and medium-sized companies within Canada to grow.

We would applaud, and I certainly commend Richard for raising the issues, ensuring this hand-helping and the introductions, either by EDC or by larger corporations that have successfully competed in a marketplace, to help the aspiring SME break into a market. It's not an easy deal to work abroad, and they can't afford, nor can anyone for that matter, to hit and miss too many times without affecting the bottom line of your particular company.

So I would suggest that we have to do this in a reasonable way in the sense of looking at the growth of our own companies who are well established and quite capable of exporting, but also paying attention, as Richard said, to trying to make those export-ready SMEs who have matured in product and financial expertise and can take the risk, export, because it is a very, very ruthless game.

The Acting Chair (Mr. Bernard Patry): Before closing this round table, I have a question for Mr. L'Abbé.

Mr. L'Abbé, on page 2, in the middle of your statement, you talk about “EDC and its services to SMEs”. In the last sentence of the first paragraph, you say “Canada's policy should not be imposed through EDC.” I would like you to comment, because I don't understand.

Mr. Richard L'Abbé: That's an excellent question. Canada's policies in international affairs, on whatever subject matter...I think EDC should be very transparent. If some of Canada's foreign policies are imposed through EDC, it can significantly hurt small businesses. One of the examples we have seen in the United States is the law on anti-corruption that was passed in 1977. These laws are very important, and we recognize the importance of this type of legislation. But if a corporation like EDC had a box that said you had to comply to the laws of every land, I agree with all of this, but at the end of the day, that means an SME has to set up a legal department, and a lot of SMEs don't have the resources to do that. We have to do significantly more due diligence than most SMEs understand they have to do already.

So by imposing certain aspects, it is very onerous for us. Next year, for example, with the passing of the legislation in Canada, it will cost our corporation about a quarter of a million dollars, because we are active in so many countries that we have to set up our own legal counsel, we have to set up our due diligence system, to make sure we comply with the legislation. So if through EDC you are forcing other SMEs to do what we're doing, I don't think they have the resources to do that.

• 1030

The Acting Chair (Mr. Bernard Patry): Merci beaucoup, Monsieur L'Abbé.

I thank all the participants this morning. It was very interesting and productive for our committee.

We will adjourn for five minutes.

• 1031

• 1042

[Translation]

The Acting Chair (Mr. Bernard Patry): Order, please. We will now hear the Export Development Corporation's witnesses.

[English]

We have the Export Development Corporation, with the president, Mr. Gillespie, and with him is Mr. Gilles Ross, Mr. Eric Siegel, and Madame Louise Landry.

Mr. Gillespie, I understand you have a statement. You have the usual 10 minutes. Please begin.

[Translation]

Mr. A. Ian Gillespie (President and Chief Executive Officer, Export Development Corporation): Mr. Chairman, thank you and good morning.

[English]

Let me just very briefly introduce my colleagues who are with me today. Louise Landry, whom you have mentioned,

[Translation]

is Vice-President, Corporate Performance and Communications; Gilles Ross is First Vice-President, Legal Services and Secretariat; and Eric Siegel is Executive Vice-President, Medium and Long-Term Financial Services.

Ladies and gentlemen of the committee, I would like to thank you for once again giving me the opportunity to speak before you. As you asked at the first hearing, we have sent you a detailed letter, including appendixes presenting our point of view on each recommendation.

As regards today's session, we have provided you with a written document which directly answers the questions raised during the hearings.

[English]

I won't repeat the contents of these written submissions but will instead speak briefly to what I believe to be the three fundamental issues: first, EDC exists because there is a real need; second, EDC meets this need by balancing commercial and public policy sensibilities; and third, Canada needs exporters—exporters are critical to our economic future.

Why is there a need for EDC? Because almost three million Canadian jobs rely on exports, because trade and investment are the keys to future Canadian prosperity, and because there are no other options for Canadian exporters and investors. I think the associations you heard from today, and earlier associations, whether it was the Alliance of Manufacturers and Exporters of Canada, the Canadian Chamber of Commerce, or even the Association of Consulting Engineers of Canada, have been very articulate on that point.

EDC is the Canadian financial institution exclusively devoted to providing Canadian companies with the financial tools they need to remain competitive on the world stage. That's why Canada created EDC, because Canadian businesses need EDC, whether the smallest, as you have heard from Richard L'Abbé this morning or John Roth of Nortel, himself a SME on the world stage.... During the recent SCFAIT hearings this need was often diluted or even forgotten by some of the witnesses. We need to return our focus to the very reason behind the review: to examine EDC's performance in meeting the needs of Canadian exporters and investors.

• 1045

Before I begin, however, I'd like to clarify that EDC does not rely on tax revenues or taxpayer dollars to operate. We do not receive any appropriations, relying on the interest and fees we charge borrowers, the premiums we charge on insurance products, and the interest we earn on our investments to cover operating costs and grow our financial capacity. The nearly $1 billion invested into EDC by the Government of Canada is not money that has been allocated and spent by EDC in the way that money is allocated to government departments on an annual basis. We are a financial institution. We are a business.

The money the government has invested in EDC is still on our balance sheet to support future business. In simplistic terms, for an investment of nearly $1 billion, the Canadian taxpayer has made approximately $800 million via retained earnings, plus building prudential reserves of more than $2.5 billion. The taxpayer has thus earned a significant return on his investment in EDC, to say nothing of the $300 billion in taxable exporter revenue supported by EDC's financial products and services.

[Translation]

As we pointed out to the committee during our first presentation, EDC is a unique management model which meets both its mandate requirements and the needs of Canadian exporters.

Achieving a good balance is key to our success. What I mean by this is the critical balance that must exist between EDC's commercial activities and its public mandate.

[English]

There are, however, a few key areas where I believe the review did not get the balance right. The first is with respect to disclosure, recommendation 28. Although EDC has met all its existing mandatory disclosure requirement—indeed, we have been cited by the Auditor General for three out of the last five years for excellence in annual reporting—we agree with the review that we need to do better if we are to maintain the high level of confidence that Parliament, the government, and Canadians have in EDC.

Disclosure is a necessary requirement of a crown corporation—indeed of all businesses. However, it must also be carefully balanced with the customers' need to protect their potential interests and with the commercial practices of the corporation. Again, a number of the people who were in front of you this morning were very articulate on that point.

Thus, we agree with the diagnosis emerging from the review but not necessarily the prescription, which does not reflect a balance that sufficiently protects the commercial interests of Canadian businesses. I again would point you in the direction of the submission by the Alliance of Manufacturers and Exporters Canada, who also spoke at length in their prepared remarks. As an alternative, we are working on a more comprehensive disclosure framework against which our disclosure performance can be measured, and indeed enhanced performance measures are the key. We expect to be in a position to report on this work in the early part of next year.

I turn next to environmental assessment. What should be the fundamental goal here? It's to have a positive and long-term impact on the global environment. To reach this goal, all export credit agencies, not just EDC, must strengthen their environmental assessment and mitigation practices.

Therefore EDC is leading the way toward this goal of a multilateral consensus based upon our own environmental review framework. We are helping in that sense to export Canadian values, and again Jacques Lamarre put that particularly eloquently when he made an appearance before this committee.

• 1050

This framework is intended to provide a clear, transparent, common sense approach to evaluating the environmental impact of projects. EDC used extensive public consultations, including with a number of NGOs, in establishing its environmental review framework. Other export credit agencies welcome our practices, which we intend to use as a foundation for OECD negotiations on common environmental guidelines, as mandated by the most recent G-8 and OECD ministerial meetings.

By comparison, the review recommendations, while properly motivated, provide an approach that does not reflect commercial practices and competitive circumstances and thus does not strike the right balance.

[Translation]

The credit insurance market has grown more than 400% over the last five years, and the private sector insurers' share has also increased, both in terms of volume and value. This demonstrated growth capacity clearly contradicts the comments of certain witnesses, according to whom EDC is pushing private insurers out of the market.

[English]

With respect to the specific review recommendations, EDC is already developing a partnership with the private sector to offer a single credit insurance policy. We hope to be able to make an announcement on this in the early part of next year.

I should note, however, that we cannot support the recommendation to move toward a sliding scale for eligibility for EDC domestic cover. This recommendation would decrease service to exporters and would even force EDC to withdraw coverage from existing customers. Again, I turn you to the comments of Clive Aston, the independent broker who appeared before you a few weeks ago.

While the report touches positively on EDC's bank relations in a number of areas, I will comment on one specific recommendation, number 14. We strongly disagree with the recommendation on bank guarantees. We and exporters believe it would be counterproductive to offer largely risk-free returns to the banks for medium-term financing.

[Translation]

I would now like to address the eventual amendments to legislation. We believe the committee should support the open and transparent process and the general orientation of the legislative review report. We do not believe it is necessary to significantly amend the current legislation.

[English]

As I have already made clear, we are concerned that certain recommendations may impede EDC's flexibility in delivering programs valued by the exporting community, in particular small businesses. We do not support recommendation number 2 or other recommendations such as 6 and 8, which would reduce the operating flexibility of the corporation and could ultimately hurt our capacity to adapt quickly to meet the needs of our customers. We also do not support the proposed changes to regulations 9 and 11, which would limit our operating capacity and flexibility.

At this stage we ask that the committee recommend fine-tuning the Export Development Act to more effectively meet the needs of Canadian companies—in particular: address the methodology for establishing the contingent liability ceiling in order to preserve EDC's operating capacity over an extended period; allow EDC to reach and serve more customers by endorsing our proposed enhancements to the corporation's identity and image; help EDC serve its customers more effectively through increased representation in key foreign markets; reschedule EDC under the Financial Administration Act, the FAA; consider possible amendments that would streamline the management of the Canada account; and finally, endorse EDC's efforts to modernize and strengthen our corporate governance model.

[Translation]

Allow me to conclude by reminding you that exports boost our economy in excess of 40% of everything Canadians produce and export. This represents a very large number of jobs.

[English]

Behind each larger exporter that EDC supports are many thriving small business suppliers. I think John Roth referred to 7,500 in his case. Behind each small business EDC directly supports are more new Canadian jobs. Canada's economic health is intrinsically linked to its ability to export, and Canada's export capacity depends on EDC's ability to innovate and manage risk.

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Finally, let me summarize what our customers told both Gowlings and this committee.

First, EDC provides a competitive advantage for exporters. Second, from the smallest to the largest, they need the insurance and financing solutions EDC offers. Third, EDC is more relevant than ever before. Fourth, EDC is an integral part of the solution for a winning Canadian global trade strategy. Fifth, exporters are vulnerable without a strong, flexible, and skilled EDC. Sixth, they have few options other than EDC.

As Gowlings mentioned, EDC is the recognized leader, the centre of excellence for trade finance in Canada. Its staff are highly skilled and innovative and provide prompt, knowledgeable service. It is the role model against which all other export credit agencies are judged.

It is our hope that the committee heard these views of Canadian exporters and investors and will act in their best interests when considering the review recommendations. In that sense the interests of exporters and investors are paramount.

[Translation]

The Acting Chair (Mr. Bernard Patry): Thank you very much, Mr. Gillespie, for this very thorough and detailed introduction. We will now go to the question and answer period.

Ms. Lalonde, please.

Ms. Francine Lalonde: I had asked a question about the first recommendation of the Gowlings report, a question about which we misunderstood each other. As I understand it, you recommend that we prepare to separate the two functions, the market-based and consensus activities, as recommended by Gowlings. This is my first question.

The Acting Chair (Mr. Bernard Patry): Mr. Gillespie.

[English]

Mr. Ian Gillespie: Not at this time is my short answer. There may be a need in future, but there is no requirement to separate the activities of EDC from its consensus and market-based activity. Indeed, I think that would only add a dimension of cost in administration.

EDC is fully compliant with regard to its consensus activities and its market-based activities, as was recently visited by the WTO. This may be a requirement in time should EDC continue to evolve, but at the present time I would not see it necessary to consider such a separation.

[Translation]

Ms. Francine Lalonde: Could you defend EDC's current position as regards the WTO negotiations? How would you do it, given the different evolution of European countries, among others?

[English]

Mr. Ian Gillespie: The way we defended ourselves—we were required to defend ourselves in the case of Canada-Brazil—was that we had to appear before the WTO panel, and indeed the appellate body, to demonstrate very clearly that EDC was operating as a commercial financial institution, that it conferred no illegal subsidy pursuant to the terms of the WTO. We were successful in making that case. I have no doubt that we will continue to be successful in making that case, because, as you've heard from the committee witnesses today, EDC does operate as a commercial financial institution and it is a discipline they value highly.

[Translation]

Ms. Francine Lalonde: I have read the research service documents which stated that EDC is expected to be reviewed the next time.

On the transparency issue, do you reject the Gowlings recommendation, or do you open a door?

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This would seem very difficult for a public institution. Even though you are not financed through an annual government subsidy, the business you administer is nonetheless a public one. It is therefore difficult to admit that citizens would not be informed of the assistance provided, at a minimum and even quite accurately, to both large and small businesses. It is very embarrassing to defend such a position.

I have heard Mr. Smith's and Mr. Roth's arguments. It's normal because they are defending themselves, but it seems to me there could be an opening.

The Acting Chair (Mr. Bernard Patry): Ms. Landry, please.

Ms. Louise Landry (Vice-President, Corporate Performance and Communications, Export Development Corporation): Yes, with pleasure.

First I would like to tell the committee that we have many documents which have already been distributed to the public. In fact, I have brought one of the binders that were prepared for our presentations. All these documents have been provided to you, including the organization's annual report, which contains 80 pages of statistics and quite accurate information on the organization's activities in terms of countries, products, scope, the types of exports we support, etc. Therefore, scores of data are already available to the public. The content communicated to the public is therefore not minimal but is rather quite substantial.

In addition, the corporation is now in contact with the public through the publication of a highly detailed report on its operations, and through a consultation process that has also been very broad. A great deal of data have been collected, and a great deal of information has been shared with the people concerned and was also distributed to the members of the committee.

I just wanted to stress that we already have a fairly elaborate process for disclosing information.

However, we are also aware of the presentations that were made before the members of the committee during the past few weeks. On the one hand, we would like the corporation to be able to disclose all the details of the transactions it supports, and on the other hand, our clients, who are faced with fierce competition on the international market, have informed you that it could cause them very serious damage if the information regarding each transaction were disclosed.

We must decide between the need to know and communicate the organization's activities to the public, and that of preserving the competitiveness of Canadian companies. Of course, we have heard the presentations, and we would simply like to say that, as in all the other activities of the organization, we will continue to review our current practices to see if there are ways of increasing the information that is currently available on the market.

The corporation is in a constantly changing market. Its practices must also change. We are here to tell you that we have heard the presentations and that we have created a small committee to find out what more could be disclosed to respond to the requests that have been made, without affecting the competitiveness of Canadian companies.

The Acting Chair (Mr. Bernard Patry): Thank you. Before I give the floor to Mr. Alcock, I will need additional information.

[English]

Mr. Gillespie, indeed, should there be a legislative change, in your number five you said you are considering “possible amendments that would streamline the management of Canada Account”. Are you talking about administrative changes or political changes or...? Is it possible to share what you mean by this with our committee?

Mr. Ian Gillespie: Monsieur le président, I'll ask Gilles Ross to speak directly to that.

The Acting Chair (Mr. Bernard Patry): Mr. Ross, please.

[Translation]

Mr. Gilles Ross (First Vice-President Legal Services and Secretariat, Export Development Corporation): Thank you, Mr. Chairman. Indeed we intend to recommend that the government make certain changes to the Canada account, mainly as regards the way it is administered, the way the account's assets and liabilities are managed.

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Among other things, we are thinking of proposing an arrangement that would allow, under certain circumstances, to transfer assets and liabilities from one account to another, thus making the corporation easier to manage. These are mostly housekeeping changes, as we say in English.

The Acting Chair (Mr. Bernard Patry): Thank you, Mr. Alcock.

[English]

Mr. Reg Alcock: Thank you, Mr. Chairman.

Good morning, Mr. Gillespie.

What I am going to say today will come as no surprise to Mr. Gillespie. We've had this conversation directly in the past.

I really feel a need to be very specific about this. I don't disagree with anything you've said in your statement in terms of the value of EDC and the job it performs for Canada and Canadian business. I also don't disagree with the importance of exports to Canada. I don't want to frame my remarks in the context of a condemnation of EDC as a corporation or as a suggestion that it does not fill an important niche in Canada or play an important role in Canada.

I would never pretend to be an export finance expert, but I can tell you, as I have told you, that it was in my experience in just one market, but one difficult market—that is, China—when I first began to sense that there were some difficulties with EDC and EDC programs. I was surprised at the reaction of the corporation, at its inability to explain what it was doing over there.

My personal experience grew enormously once people became aware that I was concerned about the services and the supports EDC is providing in that market. My concerns have grown, not diminished. We have a policy environment...and certainly in EDC's materials there seems to be a great deal of information that says loudly to small businesses—I think EDC works extremely well for large businesses—that they should go over there, that it is an important market, that Canada should play over there. I was with the Prime Minister when he made the speech about that recently. I was with him when we signed the agreement to support small businesses with regard to China and to make that a priority for the next five years.

A small business going to China and then walking in EDC's doors...because we point them. We say that if they have a problem once they have dealt with all of the complexity of trying to get active in that market, they can go to EDC for help. To date, the experience, at least in the area in which I have worked, has been anything but helpful. There have been enormously long decision times, producing very little in the way of support and often a great deal in terms of cost, to get to a negative answer.

As you know, I took the position some time ago that we should be telling small businesses not to go there until we have sorted out how we are going to support them. I'm sure you have a longer list than I have of small businesses that have gone over there because they felt they were being encouraged by us and by you to go over there, only to encounter serious disasters. I worry very much about how we are setting up small businesses.

You talk about a number of things here. The chairman asked about one, the amendments. You are talking about rescheduling EDC under the Financial Administration Act and endorsing “EDC's efforts to modernize and strengthen” their corporate governance model. I would be interested in seeing, on all six points, something in writing that outlines what your desire is there, with some detailing of what kinds of changes you would like to see on those points.

The Acting Chair (Mr. Bernard Patry): Monsieur Gillespie.

Mr. Ian Gillespie: Mr. Chairman, let me respond to Mr. Alcock's several questions. I think his comments in regard to China have some potential application for other countries in the world as well in the sense that small business—and I think you had a question to Mr. L'Abbé on that—going anywhere internationally is not easy. It is certainly not easy in China.

It is not easy in China because of the economic model they have there. It is not easy in China because we have also gone through and witnessed a very significant disruption in the economic climate in Asia. Obviously China was not unaffected by those activities. It has been a difficult market in that part of the world, and for various particular reasons, it has also been difficult for China.

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I think it's worth pointing out a couple of things. One, I believe your comments have most to do with regard to medium-term financing in China as opposed to our support under short-term insurance programs, which run a little bit differently. Certainly with regard to the medium term, the risk assessment becomes a lot more difficult. We need better financial information in order to make the appropriate assessments. In the case of China, that can be extremely difficult to obtain.

We have various programs there. I'll turn it over to Eric Siegel in just a minute, who will speak more fully about that, but this is a little bit of the environment we're dealing in. I think it is important, however, for the committee to understand that our support for small business globally has received very high marks from those same customers. Ninety percent of our customers are small and medium-sized enterprises.

We have just completed the annual customer satisfaction survey, whereby we go out to our customer base—something in the order of 1,000—to ask them various questions about EDC service. We have obtained a result this year of 80.4%, which I believe is the highest we've ever received. Obviously that is by the definition of the marketplace: 90% of those customers surveyed are small and medium-sized enterprises.

So we feel quite positive about that: we are finding solutions for Canadian companies in the markets of the world. As well, that information seems to correspond with the Environics study that was contained within the Gowlings document, wherein they said that 74% of small and medium-sized enterprises said they could not think of one thing that EDC should do differently in meeting their needs.

Clearly we are not meeting everybody's needs, and we are not meeting them in some of those difficult markets where the information is not readily available. As you can appreciate, I think, operating as a commercial financial institution, we cannot underwrite hope. We need to have some minimum basis in order to make an assessment.

Maybe I could turn to Eric to further amplify on the issues of China and small business.

The Acting Chair (Mr. Bernard Patry): Mr. Siegel.

Mr. Eric Siegel (Executive Vice-president, Medium and Long-term Financial Services, Export Development Corporation): Thank you, Ian.

Thank you, Mr. Chairman. I will try to just supplement it.

First, to pick up on Mr. Gillespie's and Mr. Alcock's points, it is an exceedingly difficult market. There's no question about that. I think the first thing EDC struggles with is that it walks a very fine line between trying to be encouraging in terms of exporters and also trying to be very realistic and pragmatic to them. That means in some cases telling them that in our view it is not a market that they would be well suited to at that time, that it is not a market they should pursue in that particular way, that it is not a market in which they should structure their contract that particular way.

Mr. Alcock, I think you would appreciate that this type of advice, while based on considerable experience, is not often well received. There are those who want to go to the market nevertheless, because they see it as a market that offers great opportunity, so it's damn the torpedoes, we'll find the support somehow along the way.

That said, EDC is working on a number of ways to try to structure support in that market. The first thing Mr. Gillespie pointed out was that the first line of support is our receivables insurance support. In that regard, in 1998 we concluded some $94 million worth of support to small and medium-sized enterprises in China. In fact, worldwide, it's the eighth largest market in which EDC provides small and medium-sized exporters with support. A third of those, from our calculation, are small exporters and two-thirds of those are medium-sized exporters.

So as difficult as the market is, I think we are making some progress in that regard. When it comes to trying to structure term financing, there we have had to rely on a number of avenues, recognizing that it is difficult to identify a counterpart at the other end that is creditworthy. You have a sovereign market that now has a burgeoning private market for which there is no readily available credit information. The legal infrastructure is very weak, very unproven, and very unreliable. There are a host of other issues associated with it. I won't go through them all. You know them quite well.

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But we have established lines of credit with a variety of banks that are now private sector banks. The Chinese have privatized their banking system, and they are now focused on identifying creditworthy borrowers from a on-lending perspective. We provide them with the funds to contribute to that on-lending.

Another area where things have been geared more is with respect to the concessional finance facilities. As you know, it is a market that has attracted concessional finance in the past, and that has made it a difficult market. The concessional facilities that Canada provides, although limited, have been structured in such a way that they are designed not to keep rewarding one particular exporter or large exporters, but rather to focus on relatively small transactions and to do it in a way that is spread across a variety of players.

We have examples of small and medium-sized enterprises that have been able to avail themselves of those facilities. In addition to that, we have a variety of other programs. I think the financing tends to be what most people focus on, but in terms of just straight contract support for exporters in that market, we structure a variety of programs, including bonding support, the effect of which is that we help exporters create working capital into that market by either insuring their bank and freeing up their line of credit or by insuring their risks of bonding call, and so on. Difficult as the market is, we have structured a variety of supports.

The last thing I would mention is that EDC has established a permanent representative in China as well. That is because it is a difficult market and the only way we are going to be of service to exporters is if we can have on-the-ground regular contact with various players in order to better advise exporters, no matter what size.

[Translation]

The Acting Chair (Mr. Bernard Patry): Just to conclude on this, I will allow Mr. Alcock to ask a very brief question.

[English]

Mr. Reg Alcock: I can always ask very short questions.

Rather than prolong the debate, what I would ask is this. You mentioned that you could provide information on small exporters who were receiving support from you, and particularly some of the concessional financing that was available to or going to small exporters. I would be interested in getting that information.

Mr. Gillespie, this goes back to my earlier question: I would be interested in receiving the information on your suggested changes to governance and the Canada account, if you could provide that information.

The final thing I would say about the review—and I tell you this as much to try to be helpful, in one sense—I started asking these questions as a novice, wondering why we were having this problem. As soon as the community became aware I was asking these questions, I had all sorts of people running in to provide supplementary information from all over the place.

It's never nice to be the policeman, the banker, or the tax man; I agree with that. When you say no to people, you are not going to get a lot of positive support, and I have no problem with that. But I think also when you are asking people about the services you provide, you might want to ask some of them, because you might learn something about the services you provide. Simply going out and asking a thousand customers who are all indebted to you for the money you give them is maybe interesting, but there's a whole community out there also that looks at you, and you represent us. If you want to represent us, then I think you should also speak to the Canadians who aren't very happy and find out things you could do to modify your services that would at least make you more helpful to them. Sometimes a no is a helpful thing if it comes early enough, but if you keep a person waiting six to eight months before you say no, you can cause them real problems.

The Acting Chair (Mr. Bernard Patry): Merci, Monsieur Alcock.

I do not know if that is a question, but at least it is a long comment. I will give you 30 seconds to answer.

Mr. Ian Gillespie: I might say in reply, with regard to the amendments, that I think we could provide some general commentary on the amendments. We can't give detailed commentary until we have had an opportunity to sit down and go through those amendments with the minister to get his full understanding and make sure he fully understands what is intended. But I think we can certainly ensure, broadly speaking, that you are cognizant of where we want to go.

My only comment with regard to Mr. Alcock's last comments, again, is to look at the growth of our support of small business in Canada over the last five years, both by dollar volume and the number of customers, and the associated customer satisfaction ratings of that constituency, which is actually much higher than it is for the largest companies you referred to, which I think is interesting. It is even the highest when we provide domestic credit insurance for those small companies.

I agree that we're not meeting everybody's needs, but as you've also heard, we're perhaps the only game in town, and so that makes it doubly more difficult.

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The Acting Chair (Mr. Bernard Patry): Thank you, Mr. Gillespie.

Madame Augustine.

Ms. Jean Augustine: Thank you, Mr. Chairman.

It's good to see you again, Mr. Gillespie.

Since I brought up the whole idea of diversity and gender balance, I want to compliment you on finding the women who should have been at the table with you in the first place. To know that you have a vice-president.... The perception you left at the time was that they were missing in the organization.

I was also very pleased to see the sheet where you spelled out your workplace and the percentage of people who come under the equity schedule.

I have four small issues on which I would like you to comment. One is that in your annual report you end by saying you do everything in an atmosphere of the highest ethical standards and environmental responsibility. I am not too sure what environmental responsibility means, whether it's the financial environment or whether we are talking about sustainable development involvement, clarity, or all those other things we were talking about.

Second, I would like you to make some comments about the year 2000, the risk, and whatever plans there are—because we know you're working in areas where there may not be the necessary compliance—and about how you would be assisting the small businesses you work with in that regard.

Third, Mr. L'Abbé mentioned the issue of strategic planning and mentoring that could be offered to small business. Do you see that as a legitimate comment within your role and mandate? Are there any plans afoot to look at that comment or that observation?

Fourth, we have a letter from the Auditor General that was very strong in terms of the Auditor General's response to the Gowlings recommendations that he not be the source of, or the desk under which, the necessary audit activities should participate. I'm not too sure if you have seen any of the Auditor General's comments, but I wondered where that recommendation was. I was looking through your list, with “agree strongly” and “agree”. Could you point to that in terms of the comments you have made in that regard?

The Acting Chair (Mr. Bernard Patry): Mr. Gillespie.

Mr. Ian Gillespie: I would like to thank the member for those four very good questions.

I will start with regard to the gender issue in your opening comment. I want you to know that not only could we find one, but we could find a whole lot more than one. We could fill this room with them. Indeed, I had offered to stand down so we could put the full slate forward. I was told I couldn't do that. But I'm delighted you noticed that there are people who are more interesting, knowledgeable, and attractive than the rest of the table.

With regard to the question on ethical standards and the environment, the comment in the annual report was around our environmental review framework. We certainly could come back to that and talk about that, the effort we've put into that in understanding the risks in supporting projects around the world, but it was meant to cover not only the code of conduct at EDC and our standards of conduct but also the environmental responsibility we have internationally.

With regard to Y2K and how we are assisting small business, one of the earliest decisions we had was whether or not to exclude the Y2K risk from the insurance cover we provide for the receivables to small business and to put that burden on the back of the exporter. We decided that we would not do that. We would assume that risk on their behalf. It was part of the coverage we were selling, the insurance policy.

That meant, however, that we had to ensure we had done sufficient due diligence with regard to the kind of counter parties we're taking on. Certainly for the better part of a year we have been looking very closely at the readiness of the counter parties internationally that we're taking a risk on.

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We have our own internal Y2K team, which is ensuring that not only are our own systems up to speed and our contingency plans in place but also that we make a full assessment of our portfolio as it currently stands and what we're likely to see. We do expect problems, particularly in the emerging markets.

In the formation of our corporate plan for next year, we have made certain assumptions with regard to non-payment of certain moneys from certain parts of the world or delays in payment, and we have modelled that as part of our financial plan. The consequence is that we would expect that the provisions will be higher in 2000 than in this year and, accordingly, the net income we might report is likely to be less than what we are looking at for this year, simply because of Y2K and hopefully taking what would be considered to be a prudent view of conservatism. But nobody knows.

With regard to Monsieur L'Abbé's comments on mentoring, I think it's a very interesting idea. We have not thought about that at this particular juncture. EDC is growing extremely rapidly, as you can see from our annual results. Last year we supported $34 billion. This year it will probably be $37 billion or $38 billion. Next year we expect it will probably be more than $40 billion of support.

We are required by our mandate to be, in effect, all things to all people. We have to serve small business well, in the way they want to be served. Monsieur L'Abbé's needs are very specialized. They're quite different from John Roth's needs, as you can appreciate and as you heard, or those of the aerospace industry or the auto parts industry. So we have to be able to respond to their needs in a very specialized way. We have to segment the market. We have specialized delivery systems.

The consequence of all of that is that we have 800 employees who are trying to meet the growing needs of Canadian companies doing business internationally. Just supporting the current activity is a challenge. To put in place the infrastructure, whether it's technology, risk management systems, or knowledge of foreign markets, is, in short, a daunting task.

I think we have been reasonably successful in meeting those needs, but as we get into new fields, as you're suggesting, we have to really think about that in terms of what the business model is, how we can support those needs, and how in practical terms we can get the right skills. It's not just a matter of adding people. We have to train those people. We have to be able to provide a service that is going to be be valued by Monsieur L'Abbé and others. That's not something we can simply do based on a good idea. It requires a good deal of consideration, and there are only so many initiatives we can take on in any given year.

I was most intrigued to hear his thoughts on how we might do that. The trade commissioner service is presumably there in part to help foreign companies do this in the markets themselves. So just finding where EDC's real niche is to add value and to ensure that it actually delivers something of value to him is something that would have to be carefully considered.

With regard to your last question about the Auditor General, I believe, if I am not mistaken, that refers to the recommendation to move EDC from part 1 to part 2 of schedule 3, which is recommendation 36. I believe what the Auditor General said is that provided he remains the Auditor General of EDC, which he would because of the current EDC legislation, he would not have any difficulty seeing EDC moved from part 1 to part 2 provided the government was satisfied with regard to the criteria that are set out for that particular part of the schedule, which require EDC to demonstrate clearly that it is operating as a commercial financial institution and has a reasonable expectation, for example, of being able to pay dividends.

I think he has indicated he would have no difficulty if the government decided that was in the best interests of EDC, which I saw as an extremely positive endorsement of that recommendation.

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[Translation]

The Acting Chair (Mr. Bernard Patry): Ms. Lalonde.

Ms. Francine Lalonde: I have here a letter from the Auditor General. You must also have this letter. To explain why he wants to maintain his role, the Auditor General says:

EDC has an important public interest role. The risks it assumes are greater than those normally assumed by private sector organizations. For example, the fact that it has made loan-loss provisions for its entire portfolio which are several times greater than those of Canadian commercial financial institutions reflects this incidence. It has also been said that EDC takes more time than private sector institutions to withdraw its products and services when export or domestic markets experience economic difficulties.

It seems that for this reason alone, and there are three others, the Auditor General should remain the Auditor General for EDC. I don't think you can really be against this.

I would like you to explain why your loss provisions are several times greater than those of Canadian commercial financial institutions. I will tell you that this makes me feel more uncomfortable regarding the absence of nominal information, because we don't know how, in any specific case, this can happen.

And I will add this about the survey you refer to. A survey always leaves me ill-at-ease, because a survey provides answers in relation with the sample you used, and different answers depending on whether it is a longitudinal or an annual survey.

I had raised the same objection with the Canadian Bankers Association, because they always showed a 90% rate of satisfaction. Companies that went bankrupt were not part of the survey; obviously, the others were happy. I would like you to address these concerns that I have.

Mr. Ian Gillespie: Thank you. Mr. Chairman, to answer your question...

Ms. Francine Lalonde: I'm playing my role as a citizen.

Mr. Ian Gillespie: Yes, thank you.

[English]

With regard to the Auditor General's statement, clearly EDC is taking risk that is greater than that of the private sector. We have ensured—and I would think parliamentarians would want us to—that we are operating on a sound financial footing. One way of characterizing it is to say that we want to be aggressive on the risk and conservative on the accounting. I think that is in the taxpayers' best interests. I think we can demonstrate very clearly that we have been aggressive on the risk. Again, I only need, I think, to refer to some of your recent witnesses in terms of the growth of their export activity.

At the same time, we are dealing in an international environment that is extremely volatile, as we have seen in the last couple of years. Simply look at a country such as Korea. It had a credit rating not unlike that of Canada, and within six months or less they almost lost their complete credit rating. I think they went down to a single C in Moody's or Standard & Poor's terms. That is a huge change. We are dealing in 160 countries in the world for which that is the volatile environment.

So it's important that we set aside prudent reserves in order that we, in short, are not caught short in the event that the worst thing happens and we sustain substantial losses.

We want to ensure that we can manage those losses within the framework of EDC and not be reliant on the shareholder to make good on them. That is why we have put together a very strong financial model that is in the best interests of exporters and the shareholder.

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It's one that the Auditor General as well is very satisfied with. Given that we are taking significant risk that the private sector would not take, and given that we have a public policy mandate, he feels he should continue as the Auditor General of Canada, and we have agreed. We disagree with Gowlings. We agree with the Auditor General. He should remain for precisely those reasons.

My only comment with regard to the survey results would be to say that the EDC survey on customer satisfaction is not the only surveying that has been done. Gowlings did their own independent surveying using Environics and Environics' own methodology. That has been shown to be extremely consistent with EDC's own internal results.

I fully accept your point that statistics can lie and you can make them say what you want. I think in this case there is enough statistical information from other surveying entities, as well as, more particularly, the value of hearing from the witnesses you have had today and earlier in terms of EDC's support for their industries. That is the real customer satisfaction survey for you, I believe.

Louise, is there anything you would like to add?

[Translation]

Ms. Louise Landry: I would also like to add that the survey is an annual survey which has been carried out since 1994. The results have always been consistent since that time. The corporation's satisfaction rate has not changed significantly since 1994. What has is the larger number of questions on products and client service. Over the years, discrepancies have been noticed. On specific questions, the results may have changed, but overall, the rate has been fairly consistent at approximately 80.

Ms. Francine Lalonde: Have you ever considered a longitudinal survey, that is using the same survey with the same companies over a certain number of years?

Ms. Louise Landry: Actually, the companies that responded to the current survey may be the same that responded to the previous surveys. However, the sample gets larger every year, because respondents are selected from the overall clientele. Therefore, the same organizations sometimes respond to the survey, but there are also others, since the population is broader.

The Acting Chair (Mr. Bernard Patry): Thank you, Ms. Landry.

We will go to Ms. Marleau, please.

Ms. Diane Marleau: I did not quite understand the question. I'm sorry, but I was not listening. I will ask a question that may be the same one. If it isn't, well, fine.

[English]

In terms of consumer satisfaction, you talked about surveying your customers. Do you survey all of the customers, even those who turn you down?

The other question I have for you is....

[Translation]

That's what you had asked. I had not understood the question. I was listening but...

Ms. Francine Lalonde: That's fine, because I was not satisfied with the answer.

Members: Ah, ah!

[English]

Ms. Diane Marleau: The other question I have has to do with some of the accusations that were made by the factors organization. You'll remember that one company said you were unfairly competing with them and that they had lost business to you, and another said you shouldn't be in that business at all and that they should be there. Part of my answer, of course, was that government is never as efficient as private enterprise, so if you think you can do a better job, why aren't you in there aggressively doing it? I'd like to have your response to the criticisms that were levied against some of the things that have happened in terms of your dealings on this particular side of things.

The Acting Chair (Mr. Bernard Patry): Mr. Gillespie.

Mr. Ian Gillespie: Thank you, Mr. Chair.

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Thank you for those questions.

On the customer satisfaction survey, we don't survey all our customers. We have some 5,000, so we do a sampling of them. I think we started with a universe of something like 3,500 that we go out to, and we try to find out from those who are prepared to spend some time with an independent polling company to ask the questions. It requires a time commitment, as you can appreciate, on the part of the customers.

Ms. Diane Marleau: Is that random, or do you try to also hit on a number of customers who have been turned down? How do you get a balance, so you get a very good customer satisfaction or whatever? I would like to know how you can guarantee it's a fair balance, if you don't survey all of your customers.

Mr. Ian Gillespie: We need to ensure that we have a strong sampling of customers in all the various segments, whether it's those who use our medium-term activities, those who use our short-term insurance, or those who are part of what we call the emerging exporter group—those exporters with less than $1 million in export sales. So we need to make sure we have statistically valid samples for all the kinds of customers we have.

We have various industry teams. So we want to ensure we have a sampling of all the various industry teams. Out of that, we have to be satisfied at the end that it is a good representative sample, plus or minus 5%, 19 times out of 20. That's all done by external resources, not EDC resources, to ensure we have a complete and a fair picture.

With regard to turning down companies, maybe there's a misunderstanding there. We're trying to ensure that we can find solutions for all the companies that approach us. There may be a company we're doing business with that wants us to do a second piece of business, or a 23rd piece of business, in a market for which we are not satisfied. So we may say, in regard to individual buyers in some markets in the world, we are not prepared to take that risk, or we're not prepared to do that contract in this other country. But it would be very unusual to find a Canadian company that couldn't find one of EDC's products and services of value. We might have to turn down a piece of business with them, but that's quite a different situation.

The Environics study I referred to that was established by Gowlings also surveyed non-EDC customers. So that's where you get some additional benchmarking that is not just within EDC.

On the factors, it is very important to understand that factoring is different from credit insurance. It is a different business. The critical success factors of being successful are different. Factors can't afford to take risk. They can't afford to lose money, whereas credit insurance works on a pool. You can afford to have losses—make sure the losses are covered by the premium income. So it's quite a different business, and in some cases Canadian companies that want to have all their receivables covered will not find satisfaction with a factor. They can only go for a credit insurance model. Therefore their options are EDC or one of the private sector companies.

On the private sector credit insurance competitors, I would refer you again to Clive Aston's comments. He is an independent broker who appeared as a witness some weeks ago, where he talked about EDC and the fact that the key areas to really consider are not issues of price. Indeed, I think he commented that he could not think of areas where EDC was cheaper than the private sector—where it was buying business, to use that expression—because of its privileged position.

He focused on what companies really need in the case of insurance, which are capacity, service, the product itself, its claims reputation on paying, and its turnaround time. Those are areas where I think EDC has clearly outshone the competition. He further indicates that the market in Canada is under-served, that there are few companies offering credit insurance. Those others that exist in addition to EDC are all foreign-owned, and they tend to be very fickle because their limits are set offshore. As well, they often establish minimum premium criteria, which may be well above what normal SMEs can afford.

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That is why we wanted to respond to the Gowlings recommendation with regard to creating capacity in the domestic marketplace and are looking to partner with a private sector Canadian company to help build domestic capacity so that Canadian companies will have more options available to them.

[Translation]

The Acting Chair (Mr. Bernard Patry): Thank you.

Mr. Paradis, please.

Mr. Denis Paradis (Brome—Missisquoi, Lib.): My question is about human rights in some of the countries you do or may do business with. In the appendix, specifically at numbers 34, 35, etc., we can see that you do take into account the human rights policy in your assessment of countries. A little further, you say that you ask the Department of Foreign Affaires for advice regarding government policy for assessing the risks in foreign markets.

Do you do this based on your intrinsic interests, considering that you must review what the situation is in terms of human rights in these countries in order to be able to assess your loan risks, in order to be able to determine how the country is positioned on the world stage?

I believe several requests for doing more have been made. There was talk about a code of ethics, which you mention a little further. You are a government organization, and I believe that, to the rest of the world, you must reflect the overall Canadian policy.

Therefore, I have a problem with your approach, which relates to your activities and the need to avoid any major risk in countries where human rights are violated. You may have to go a little further and ensure that human rights are promoted in some of those countries.

Do you have a list of countries? How do you operate in this respect, internally for example, not for assessing risk, but for promoting human rights?

[English]

Mr. Ian Gillespie: Mr. Chairman, the honourable member has asked a very complicated question.

The Acting Chair (Mr. Bernard Patry): It's not the question that is complicated; it's the answer.

Mr. Ian Gillespie: EDC follows government policy on human rights. It doesn't make government policy. That is really, at the end of the day, where we are. We have public sector directors on our board. Indeed, the deputy minister of the Department of Foreign Affairs and International Trade is on our board.

We consult extensively with Foreign Affairs with regard to various high-risk markets in the world in relation to these issues. But it is up to DFAIT ultimately to set the ground rules. We have a very focused and specific mandate that is our responsibility. We get input in terms of where in the world we can play, so to speak, to help Canadian exporters succeed. We obviously have to look at the risk in those same markets. That's why we have economists and political risk practitioners, to be able to assess those risks.

At the end of the day, once we have done our due diligence, if we are comfortable and if the government has no other reason for us not to participate, then we would be looking to support the interests of Canadian exporters.

Eric, would you like to comment?

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Mr. Eric Siegel: The only point I would add to what has already been said is to perhaps correct a misconception in some of the previous testimony. When EDC does an assessment of risk, and particularly in this respect I'm referring to environmental risk, it does not look at the socioeconomic impact, which is not specifically human rights but has a human rights component to it, there's no doubt.

I can confirm that the environmental review framework that EDC employs extends to looking at socioeconomic impact as part of its overall environmental assessment. As Mr. Gillespie has pointed out, that is coupled with the fact that the Department of Foreign Affairs and International Trade determines whether exporters are free to engage in trade in that market and therefore whether Canada and EDC are free to engage in providing support.

[Translation]

The Acting Chair (Mr. Bernard Patry): Mr. Paradis.

Mr. Denis Paradis: You say that it would be inappropriate for the adoption of a code of ethics to be a sine qua non condition for obtaining assistance from EDC. And you say that conditionality could undermine the confidence clients have in EDC as a commercial partner. How could requiring companies to adopt a code of ethics in certain countries before providing your support, because human rights are violated in these countries, undermine the confidence clients have in EDC?

The Acting Chair (Mr. Bernard Patry): Mr. Gillespie.

[English]

Mr. Ian Gillespie: I'm not sure I fully understood the question. What I did understand was to what extent can EDC require or make as a condition of its support that Canadian companies enter into a code of ethics. What we have said is that we could not as a condition of our support insist that Canadian companies develop a standard or their own code. We feel there may be an opportunity for us to act as a catalyst to show best practices in this regard and we would hope Canadian companies might take up that challenge.

But ultimately, at the end of the day, and I go back to what Jacques Lamarre of SNC so eloquently said, we are really about exporting Canadian values, and that is our best opportunity to make a change in the global landscape.

[Translation]

The Acting Chair (Mr. Bernard Patry): Thank you. Yes, go ahead, Mr. Paradis.

Mr. Denis Paradis: Mr. Chairman, you talk about

[English]

exporting Canadian values; maybe human rights is a Canadian value too.

[Translation]

The Acting Chair (Mr. Bernard Patry): We will conclude by allowing Ms. Lalonde to ask a very brief question. You have been very patient.

Ms. Francine Lalonde: You'll see how interesting it is. The Gowlings report, on page 26, states the following:

Certain people would say that supporting the investments of Canadian businesses abroad means exporting jobs. However, if we do not support the businesses that want to set up their companies in locations where they can reduce their costs or have a better access to foreign markets, their growth will slow down, they will not be able to optimize their scale economies, and they will be vulnerable to competition.

My question is the following. It is possible that a large company would close down its facility in an area because it is not profitable enough and that you would support its establishment and investment abroad to help reduce its costs and obtain a better access to markets. Is the answer to this yes?

The Acting Chair (Mr. Bernard Patry): Any volunteers?

Ms. Francine Lalonde: This is the reason why we often need information.

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[English]

Mr. Ian Gillespie: I think what is often forgotten in these kinds of situations is that the Canadian company has to be competitive in the world, and if they don't make changes, they won't survive. By entering into foreign direct investment they are more likely to increase the likelihood of their ability to grow and prosper in Canada, not diminish it.

That is a model that has not been well understood historically, that somehow we are just exporting Canadian jobs. Indeed, we are helping to sustain and create new Canadian jobs. It may be a different job, however. That's something that is extremely important. Canadian companies normally do their R and D at home, and by growing internationally, by establishing those foreign investments, they create the supply links for goods and services that allow them to take on world product mandates elsewhere in the world. It is not one of Canada losing by our support; it is actually Canada winning with our support.

[Translation]

Ms. Francine Lalonde: But is the answer to my question yes?

The Acting Chair (Mr. Bernard Patry): There is never a very clear yes, dear Madam.

Ms. Francine Lalonde: Thank you. I nonetheless understood yes.

The Acting Chair (Mr. Bernard Patry): This puts an end to this morning's hearings of witnesses. Thank you, Ms. Landry.

[English]

Thank you, Mr. Gillespie, Mr. Ross, and Mr. Siegel.

[Translation]

If I may, I would also like to thank all the participants who came to share with us their concerns about the review of the Export Development Act. I also thank those who could not be here but who sent us their briefs. Thank you to all the members of the team for the ongoing professional work they accomplished for holding these hearings.

The committee will now analyse all the data submitted and produce a report that will be tabled as soon as possible. In our jargon, this means before the end of the session. Thank you very much.

The meeting is adjourned.