Export Development Corporation, ‘EDC’, a Crown lending corporation owned by the federal government, has found itself in controversy by virtue of providing funding to a mining company, Turquoise Hill. This mining firm utilized offshore entities to minimize taxes it pays, including to Canada. The amount EDC lent it is big, at USD$700 M, or nearly 1.5 percent of EDC’s assets. Additionally, EDC is also trying to repossess a Bombardier executive jet from deadbeat crony friends (the Gupta brothers) of the ousted president of South Africa. Bombardier is another large client.
Aerospace accounts for 15 percent of EDC’s finance and insurance portfolio. Bombardier is by far the largest player in this space in Canada, fostering suspicions that EDC unduly exposes itself and Canadian taxpayers to the risks of lending or guaranteeing lending to one large single politically important (Quebec) client. Bombardier went through a near-death experience courtesy the US Commerce Department and Boeing Corporation. Washington imposed 290 percent tariffs on Bombardier’s C-Series aircraft. Aircraft purchases by domestic and foreign buyers are heavily financed by government agencies, such as EDC. The C-Series division was given away to Airbus to manufacture in Alabama, before the tariffs were struck down. EDC could have been on the hook, badly, for a sales contract that fell through with Delta Airlines prior to that decision.
EDC’s mission is to aid Canadian exporters with trade finance and also Canadian firms investing or operating abroad (5,749 clients in 2016). It funds ventures that are too risky for ordinary commercial banks or insurers to handle; unavoidably so, for industries such as mining. Few nations are deemed entirely safe, uncorrupt, honest, and transparent by the World Bank and Transparency International. Mongolia, whose royalty and tax regime is unreliable, and where Turquoise Hill operates, is not one of them.
Several other nations have worse policies toward mining companies, some of the latter victims including Canadian firms. Most nations that EDC’s clients are involved with, luckily, are not in turbulent or corrupt third-world autocracies. However, even advanced economies and legal systems can be hard to navigate for naïve Canadian firms. Import restrictions, product standards, logistics, enabling counterparties in the importing nations, and language issues complicate international trade and investment.
Just securing payment for goods, or not having assets in a foreign location damaged, stolen, or confiscated, is hard enough. Ensuring funds elude corrupt officials is nearly impossible. Multinationals spend billions of dollars globally, on sales facilitation, consulting and lobbying firms, and individuals. They end up spreading cash around to clinch contracts with local firms or governments.
EDC plays in this vipers’ nest, hence episodes such as Turquoise Hill and the Gupta brothers may be inevitable. While EDC recently sent a multi-million dollar dividend to Ottawa, its true risks and implicitly assumed costs may not be fully reflected in its portfolio of loans and other investments of dubious quality or safety.
Superficially, at least, judging by its reported financial results, EDC appears to be quite solvent and prosperous. The company provides a great deal of disclosure, while maintaining client confidentiality, but it is difficult for outsiders to know how much risk, and the nature of it, EDC is really taking on.
At minimum, reinsurance or sale of some of the worst risks seems to be indicated. As the firm is solidly profitable, growing, and has a surprisingly and fairly consistently low loan loss ratio (under 1 percent), it is a good candidate to launch into the private sector. A plan to divest Canada’s taxpayers of this valuable financier cum political football is a plausible idea policy-makers should put on their agenda.