EDC’s Lack of Cash Threatens Taxpayers

Alexandra Burnett, Commentary, Crown Corporations, Ian Madsen

Currently, Export Development Corporation (EDC) is unable to convert its reported profits into cash, posing an increasing risk to Canadian taxpayers. Moreover, EDC has been funding ventures that are normally considered too risky for commercial banks to handle.

EDC is a federally owned Crown corporation that guarantees export financing loans to Canadian corporations. Additionally, EDC guarantees and finances investments by foreign firms into Canada, which can be controversial at times.

Recently, EDC loaned nearly $1 B to a company called Turquoise Hill Resources, a mining company based out of Vancouver, which has avoided paying nearly $700 M in Canadian taxes. They were able to avoid paying Canadian taxes on income from their massive mine, Oyu Tolgoi in Mongolia, through shell companies in Netherlands and Luxembourg.

Surprisingly, this is not the only controversy that EDC has been involved in. EDC loaned a controversial South African family USD$41 M to help them finance a brand-new Bombardier jet. According to the Guptas’ lawyer, EDC was fully aware that the Guptas have been involved in criminal activity before EDC loaned money to their company.

It is questionable if a Crown corporation owned by the federal government should be involved in loaning money to individuals such as the Guptas, or even to Turquoise Hill Resources. These are important reasons to consider divesting this massive Crown corporation.

Last week, the Frontier Centre for Public Policy released a research paper in the Public Choice Alternatives series on the valuation of EDC. According to the report, EDC is unable to convert reported profits into actual cash, and continuously papering over this deficiency by increasing its debt. As it stands now, EDC’s current mode of operations could cause a major disruption in Canada’s foreign trade and investment if efforts by the corporation, or the federal government, to make its assets more liquid are not taken. This is a cause for concern for Canadian taxpayers.

Often when a company shows substantial positive net income due to adding up revenue financed by short- or long-term debt in the form of common equity injections, it struggles. Not surprisingly, EDC is in this situation, and has yet to demonstrate that it is capable of converting its profits into cash, yet its capital base has increased. This is only possible because EDC has the full backing of the Government of Canada guaranteeing its obligations.

EDC plays a valuable role in Canada’s economy, but if the corporation is unable to make money, a private investor is better suited to take on this risk. Government-owned corporations that have been divested are known to run more efficiently, with results realized quickly, when divested. Whether or not EDC is divested, the federal government should take action to make EDC a cash-profit generating firm.

EDC could be worth up to $30 B if it was divested, but as of now, it could be worthless if it cannot realize its illiquid assets as cash. Ultimately, it is up to Canadian taxpayers through their elected representatives to decide whether or not EDC should be divested; it is a major looming risk, otherwise.