Strategy

EDC starts to flex its muscle

Having silenced its critics, the Crown corporation looks to expand its mandate.

Here’s a sure way to win customers: lend them US$1 billion to buy your stuff. In October, Export Development Canada announced it will provide that much financing to Vale SA, a Brazilian mining giant. Half of this unsecured loan will fund capital projects in Newfoundland and Ontario; the rest is earmarked for purchases of Canadian goods and services for Vale’s operations outside Canada. EDC reckons this will open doors for Canadian companies in Brazil, a key emerging market.

Ten-figure government loans often provoke controversy, but unions pounced on this one because it went to a foreign company with which they’ve been locked in bitter, protracted labour disputes. It also exposes EDC’s growing clout. The Crown corporation’s mandate is to support the nation’s export trade and foreign investment, which it pursues using a wide variety of financing tools. For example, it routinely insures Canadian companies for receivables owed by foreign customers, and loans foreign customers money to buy Canadian goods. Domestic borrowers have traditionally been off-limits.

But that changed two years ago when Canada’s exports plunged and companies suddenly found borrowing more difficult. The federal government turned to several Crown corporations. Among other things, Ottawa boosted EDC’s borrowing capacity, and temporarily allowed it to finance domestic trade.

The Canada Account, a controversial pool of federal money, also grew to $20 billion, from $13 billion. Though administered by EDC, it’s reserved for risky transactions deemed to be in the national interest by the ministers of international trade and finance. Historically, it provided large loans or insurance to politically connected companies like Nortel Networks and Bombardier, but it lay mostly dormant in the years before the recession. Then it went into overdrive. Among other things, it paid billions toward bailing out General Motors and Chrysler during their respective restructurings. It extended hundreds of millions to Air Canada at a time when some thought the airline might file for court protection from creditors. Another recipient, shipbuilder Davie Yards, subsequently did file, even after receiving up to $250 million in assistance.

Critics have long sought to curtail EDC’s activities. Whereas the United Kingdom and Australia largely privatized their formerly state-run short-term credit insurance programs, EDC still controls three-quarters of that market in Canada. Private competitors complain EDC crowds them out, using the federal government’s sterling credit rating, which allows it to raise capital cheaply. Kevin Gaudet, federal director of the Canadian Taxpayers Federation, laments EDC’s growing influence. “Further extending the powers of an organization that seems to accept a tremendous amount of risk and generates insubstantial returns on equity seems to be the exact opposite approach to what economic stimulus ought to be.”

But Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada, says EDC’s performance during the recession puts the debate over EDC’s mandate to rest “for a generation.” (Hodgson worked at EDC for a decade before leaving in 2004.) Its business volumes in 2009 were down slightly from the previous year, but that was in the context of plunging global trade. “They clearly stepped into a big gap in the financing and credit market for trade,” Hodgson says. “For a very small investment in EDC, the federal government got a huge payback.” Its representatives have spent much of the past two years basking in lavish praise and congratulations from Parliament.

This goodwill arrives at a fortuitous moment. EDC is nearing the end of a review of its powers and mandate that’s conducted every decade. Among other things, EDC seeks the ability to open its own foreign offices. (Currently, it must co-locate in Canadian embassies and consulates.) There’s also discussion of extending its domestic powers beyond their planned expiration in March 2011. The recession’s fallout may yet sting — EDC admits it took on considerably greater risk, and consequently expects elevated loan losses and credit insurance claims. But for the moment, EDC seems well-poised to extend its influence.