The Legislative Review of Export Development Canada December 2008 World Exchange Plaza 100 Queen Street, Suite 1350. Ottawa. Ontario. K1P 1J9. Canada tel: 1.613.742.7829 fax: 1.613.742.7099 www.i-financialconsulting.com [email protected] The Legislative Review of Export Development Canada Submitted to: Minister of International Trade Focus: December 2008 Our Approach The Changing International Trade Scene Export Credit Agencies Other Countries’ Relevant Institutions Short-Term Business Medium/Long-Term Business Domestic Financing Governance Civil Society Other Issues Recommendations Mandate and Regulation Changes International Financial Consulting Ltd. Table of Contents Executive Summary vii 1. Introduction 1 2. Our Approach 3 2.1 Introduction 3 2.2 Raising Awareness of the Review 4 2.3 Optimizing Stakeholder Engagement 5 3. The Changing International Trade Scene 7 3.1 Introduction 7 3.2 What Constitutes an Export? 8 3.3 Financing and Risk Management Needs 9 3.4 How the Business of Exporting is Evolving 9 3.5 Exporting is Less Predictable and More Complex 10 3.6 Looking Ahead 10 3.7 The Dynamics of Fragmegration and What This Means for Exporters and Their Needs 12 3.8 The Impact on Canadian Firms 12 3.9 Recent Financial Market Instability 13 3.10 Conclusions 13 Table of Contents i International Financial Consulting Ltd. 4. Export Credit Agencies 15 4.1 Introduction 15 4.2 Recent Events and Changes 16 5. Other Countries’ Relevant Institutions 19 5.1 Introduction 19 5.2 Japan 20 5.3 Germany 21 5.4 Czech Republic 21 5.5 United States 21 5.6 Other Countries 21 5.7 Concluding Observations 22 6. Short Term Business 23 6.1 Background 23 6.2 Some Relevant Statistics 24 6.3 The 1998 Review 24 6.4 Does EDC Operate Only in a “Market Gap”? 25 6.5 Public Policy Considerations 25 6.6 Competition and “Unfair” Competition 26 6.7 Difficult Times: Large Limits and Staying on Cover 29 6.8 Should EDC have an “Exit Strategy”? 30 6.9 Should EDC Set-Up a Subsidiary to Handle Short Term Business? 31 6.10 Is EDC Making Losses on its Short Term Business? 31 6.11 Operating as Insurer of Last Resort 33 6.12 Small and Medium Sized Enterprises 34 6.13 Increasing Total Capacity: Co-operation between EDC and Private Insurers 35 6.14 Conclusions: Should EDC Withdraw From or Significantly Reduce its ST Activities? 36 6.15 Summary of Recommendations 39 7. Medium and Long Term Business 41 7.1 Background 41 7.2 MLT Facilities 42 7.3 Recent Developments 43 7.4 EDC’s Objectives 43 7.5 Higher Risk Business 45 7.6 Non-OECD Countries 48 7.7 Summary of Recommendations 49 8. Domestic Financing 51 8.1 Introduction 51 8.2 Commercial Market Considerations 52 ii Table of Contents International Financial Consulting Ltd. 8.3 Public Sector Financing Support 52 8.4 Business Development Bank of Canada 53 8.5 Public Policy Considerations 53 8.6 EDC’s Position on Domestic Financing 54 8.7 Overlaps Between EDC and BDC 55 8.8 Conclusions 55 8.9 Summary of Recommendations 59 9. Governance 61 9.1 Introduction 61 9.2 EDC’s Governance Environment 61 9.3 Legislative Instruments 63 9.4 External Factors 65 9.5 Governance Activities 65 9.6 Evaluation of EDC’s Governance 68 9.7 Conclusions 69 9.8 Summary of Recommendations 70 10. Civil Society 73 10.1 Developments Since the Last Review 73 10.2 Current Civil Society Concerns 74 10.3 Conclusions 74 10.4 Summary of Recommendations 76 11. Other Issues 77 11.1 Introduction 77 11.2 Offices Overseas 77 11.3 Taxation 79 11.4 Government Guarantees 79 11.5 Portfolio Management 79 11.6 Canada Account 80 11.7 Summary of Recommendations 81 12. Recommendations 83 12.1 Recommendations Relating to ST Credit Insurance 83 12.2 Recommendations Relating to Medium and Long Term Business 84 12.3 Recommendations Relating to Domestic Financing 84 12.4 Recommendations Relating to Governance 85 12.5 Recommendations Relating to Civil Society 86 12.6 Recommendations Relating to Other Issues 86 Table of Contents iii International Financial Consulting Ltd. 13. Mandate and Regulation Changes 87 Annexes Annex A: Review Team 88 Annex B: ED Act and Regulations 90 Annex C: Statement of Work — Scope of the Review 110 Annex D: Communication and Engagement Strategy 113 Annex E: Bibliography 122 Annex F: Summaries of Town Hall Meetings 127 Annex G: Town Hall Meeting Participants 134 Annex H: List of Stakeholders Consulted 138 Annex I: List of Written Submissions 142 Annex J: List of Berne Union Members 143 Annex K: List of Prague Club Members 150 Annex L: Locations of Current EDC Overseas Representative Offices 154 List of Figures Figure 1: Phases of the Legislative Review 3 Figure 2: Characteristics of an Export 8 Figure 3: Segmentation of Production 11 Figure 4: Further Segmentation of Production 11 Figure 5: EDC’s Governance Environment 62 List of Tables Table 1: Breakdown of Claims and Expenses Ratio 33 Table 2: New MLT Official Export Credit Volumes 48 iv Table of Contents International Financial Consulting Ltd. Glossary AIG American International Group Inc. Arrangement See Consensus BDC Business Development Bank of Canada Berne Union International Union of Credit & Investment Insurers CAP Capital Adequacy Policy CBA Canadian Bankers Association CCC Canadian Commercial Corporation CEAA Canadian Environmental Assessment Act CEB Czech Export Bank CIDA Canadian International Development Agency Consensus OECD agreement on terms of medium & long term export credit CRA Canada Revenue Agency DFAIT Foreign Affairs & International Trade Canada DFI Development Finance Institution DOF Department of Finance Canada ECA Export Credit Agency ECGC Export Credit Guarantee Corporation (Indian ECA) ECGD Export Credit Guarantee Department (UK ECA) EFIC Export Finance & Insurance Corporation (Australian ECA) EGAP Export Guarantee and Insurance Corporation (Czech ECA) EXIM Bank Export-Import Bank FAA Financial Administration Act GAAP Generally Accepted Accounting Principles GDP Gross Domestic Product ICT Information and Communications Technology IFRS International Financial Reporting Standards IT Information Technology JBIC Japan Bank for International Co-operation KfW-IPEX KfW IPEX-Bank GmbH (German export & project finance bank) KfW-DEG German development finance institution Glossary v International Financial Consulting Ltd. MLT Medium & Long Term (credit or loans L/T maturities over 2 years) NEXI Nippon Export and Investment Insurance (Japanese ECA) NGO Non-government organization OAG Office of the Auditor General of Canada OECD Organisation for Economic Co-operation and Development OPIC Overseas Private Investment Corporation OSFI Office of the Superintendent of Financial Institutions Canada Prague Club An association of credit and investment insurers not yet eligible to join the Berne Union SBA Small Business Administration (US) SCFAIT Standing Committee on Foreign Affairs & International Trade Sinosure Chinese ECA SME Small & Medium Size Enterprise or Exporter SRC Strategic Risk Capital ST Short Term (Credit less then 2 years) TBS Treasury Board Secretariat US EXIM Export-Import Bank of the United States WTO World Trade Organization vi Glossary International Financial Consulting Ltd. Executive Summary The Changing International Trade Scene In considering the global and competitive landscape, both since the time of the last review and looking forward, one could almost say that nothing has changed yet everything has changed. Businesses have the same basic goals that they have always had: stay in business, overcome competition, increase revenues, and minimize costs. What is changing — rapidly so in some cases — is the complexity and predictability of the environment in which businesses pursue their goals. Increasingly, businesses activities can be located anywhere in the world. The rise of emerging economies like India, China, and Brazil creates new competitors, but also offers ready and able sources of highly-skilled workers. All of this change has fundamental and far-reaching implications for how global commerce is conducted today. Despite this rapid evolution, much of the recent popular talk of a totally “borderless world” still appears to be more theoretical than real. Countries are still defined by national boundaries; imports and exports still have to flow across these boundaries; and the nature and magnitude of these flows still are important to national governments. That said, the world of exporting has changed considerably, including the types of goods and services being exported, the kinds of entities involved in export transactions, and the financial and risk management services being more routinely provided. In short, exporting activity has become less predictable and more complex. A decade ago, this change was noticeable, as firms explored the emerging possibilities of doing business in a more integrated, globalized world. Today’s exporting environment is marked by the ever-increasing granularity of production processes leading to the final export transaction. The kinds of flows of intermediate Executive Summary vii International Financial Consulting Ltd. goods and services into or out of various companies, and the frequency with which these flows can occur, are growing day by day, as exporters grow more intricately linked into global supply chains. More and more, a firm’s commercial success is driven by its ability to tap into or to construct these international networks. And as production processes and exporting activities continue to evolve, so to do the associated financing and risk management needs. In some cases, entities requiring support may be only indirectly or tangentially related to a particular export transaction. But even though parts of the chain may become remote from the original export activity, each part of the chain must succeed in obtaining support in order for the original export (and all other exports in the chain) to be realized. For Canadian exporters, this is giving rise to financing and risk management needs that are driven as much by the dynamics of the supply chains they find themselves involved in as by the specifics of a particular export transaction.