EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 11, 1995

.0910

[English]

The Chairman: I call this meeting of the committee to order.

We have with us this morning, from the Export Development Corporation, Mr. Labbé, the president; Mr. Hutchison, the vice-president; and Mr. Henri Souquières, who is the corporation's vice-president for Africa, Middle East and Europe.

You have received copies of their annual report. Mr. Labbé has distributed a statement, but you'll recall that under the new procedures we can no longer just take such a statement and have it read in the record. I've asked Mr. Labbé if he'd be good enough to take us through what he considers to be the important points in this statement and then members can ask questions.

Mr. Labbé, you have the floor.

Mr. Paul Labbé (President, Export Development Corporation): Thank you very much, Mr. Chairman. Merci.

I'll try to go through the statement and if I embellish it along the way I hope you'll not hold that against me.

The Chairman: It depends on what you put in.

Mr. Labbé: All good stuff.

[Translation]

It is always a pleasure for me to come and talk here about the EDC, especially when we have good things to tell you.

[English]

I know we're here to talk about the main estimates, but before we get into the specifics, if I may I'd like to spend a few moments talking about what the Export Development Corporation is and what we do on behalf of Canadian exporters.

As you know, we're a crown corporation and we're owned by the government. Our signature, if you want, is that we like to refer to ourselves as a financial services corporation that is dedicated to helping Canadian enterprises succeed in world markets. We're governed by a board of directors, which is the decision-making authority for the corporate account business, and we report to Parliament through the Minister for International Trade.

The Export Development Act, as you know, gives us the capacity to assist Canadian companies, in very broad powers. They were actually broadened a couple of years ago and received support from all parties in both Houses, so we are very appreciative of that.

Under the act, we can do two types of business. First, we do what we call the corporate account, which is business we do through the corporation itself within our own authorities. Then there's also what we call the Canada account, which is the subject of the estimates this morning. We'll get into that a little later.

We do basically the same types of things under the corporate account as we do under the Canada account, except the Canada account tends to be a little riskier. The terms may be more difficult. There may be concessional financing. There may be an issue of concentration for the corporation or more than the corporation can take, or the risks, political or other, may be higher.

We would do that under what we call the Canada account. That is something that is within the purview of the government to decide. They decide whether they want to go or not, but we administer that with them, trying to apply the same disciplines we apply to our normal corporate account business.

The Canada account part of our business is small. It was about $600 million last year, but that's only about 5% of our total business; 95% of the business the corporation does is under the corporate account, which is the subject of the annual report we tabled in Parliament a few weeks ago.

In less legal terms, we're operating in the export credit sector. We are a rather unique organization inasmuch as we have a number of different businesses under one roof. We have an insurance business, a loans business, a guarantee business, and a foreign insurance business.

[Translation]

In other countries, we offer the same services, but generally through different organizations. In the United States, for example, there are several entities, the Eximbank,

[English]

the Overseas Private Investment Corporation, and a foreign investment insurance corporation as well. So there are different entities but we are able to do it under one roof, and I would argue that certainly gives us a leg up in terms of capacity and responsiveness and flexibility.

For the businesses we're in, we provide export credit insurance. That's generally short term; anything under 360 days would be short-term credit insurance. For our Canadian exporters we actually grant credit terms to a foreign buyer. We are ensuring that it is receivable against non-payment. That's essentially what the credit insurance is about.

We're into export financing inasmuch as we lend money to foreign buyers to buy Canadian goods and services. Then those foreign buyers undertake to repay us over a period of time.

As I mentioned, we are in bonding and guarantee services as well. If a Canadian exporter has to provide a bond or a performance guarantee, we can extend that for him.

.0915

The advantage there is that we are doing it and it doesn't impinge on the enterprise's lines of credit with their Canadian banks so it gives them more flexibility in terms of their capital.

We also do foreign investment insurance. There are more and more, in this age of globalization, Canadian enterprises that are trying to establish themselves abroad. They are nonetheless moving into risky markets and they're looking for some kind of insurance against expropriation, against war and insurrection and inconvertibility or inability to repatriate their capital and their profits. We provide that kind of support as well.

With the changes to the act last year, we were able to do a number of additional things to help the Canadian exporters and the Canadian enterprises.

One is to provide domestic insurance. Receivables insurance is a part of the European business culture. It's not that spread out in North America, but if the receivables of a corporation are insured against non-payment then the strength of those receivables is better and it's easier to get credit lines from the bank on the basis of those insured receivables.

There is a desire among a number of our exporters to get that receivable in Canada. They didn't want to have to deal with two different insurance companies because a lot of these things are intermingled right now. Parliament agreed to allow us to extend that domestic insurance.

[Translation]

So, domestic receivables insurance is an extra power that has been granted us through the last changes to the act. It has also made it possible for us to invest in foreign projects,

[English]

which basically would strengthen the project and allow the promoters to go and raise money in the equity markets internationally. If you have a stronger capital base, you can raise more money. This protects us from having to lend more money on the debt side to some of those things.

We have not done an equity transaction yet. They are very risky things but we have the power to do it and we have been in discussion on a number of transactions.

I'd like to spend just a few minutes on the business results, if you want. You have the annual report, but I want to remind you that last year we supported $12.2 billion of Canadian exports, $11.6 billion on our corporate account through our own facilities, and $600 million under the Canada account. We reported net earnings of $20 million, but those net earnings were enhanced by debt forgiveness that boosted our bottom-line profit to $170 million.

I'd like to give you some background with regard to the debt forgiveness. There is something called the Paris Club, which is basically the OECD countries and a number of others that meet regularly, once a month generally, to discuss the possibilities of rescheduling the debt of countries that are not able to pay their debts in an orderly fashion. It's called debt rescheduling.

It operates on the basis of equal treatment, and treats all creditors equally. If one country has 100 and the other country has 10 and they're rescheduling, one will get 10% and the other will get 90% of the pay-back.

In 1990 the Paris Club agreed to reduce their share of Poland's and Egypt's official debt by 50% through an international agreement. Canada then was the fourth-largest creditor for Poland and the sixth-largest for Egypt.

Implementation of debt reduction can be achieved either by reducing the country's annual payments by 50%, which is called debt service reduction, or by reducing half of the debt itself and allowing the country to pay the balance. Either way it works out to the same thing, but one has a more immediate benefit whereas the other takes a longer term to work its way down.

We have an agreement with the government that if the government decides to remit debt it will hold the corporation harmless. In other words, it's not our decision, it's the government's decision if the international community decides they are going to remit a country's debt.

If part of our debt is swept up in that, the government has agreed to hold us harmless. That is why they gave us $150 million, because they forgave the debt of Poland but they covered us. In essence, it came back to us. We allowed that money to flow to the bottom line of the corporation, which strengthens the corporation and our ability to carry on supporting exporters in additional years.

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The EDC is a self-sustaining corporation. Our vision is to be the best in the world in what we do in providing those services to our exporters. We have to be that way. We don't have a choice. Canadian exporters need it. We don't have the huge financial capacities other countries have to throw money at those problems, so we have to be more creative, we have to be faster, we have to be more flexible, and that's what we have dedicated ourselves to do.

We're not a lender of last resort. We're in a high-risk business, but we're not a lender of last resort. We operate on a user-pay basis. The exporters pay for the insurance, the foreign buyers pay fees on the loans and pay us interest. We don't provide grants or subsidies and all of our operating expenses are covered through our own revenues. We're not dependent on parliamentary appropriations to cover operating expenses, and we've turned an operating profit in every year since we started, 50 years ago, except in one year, back in 1988 where we had to take some money out of retained earnings and put it into provisioning. That was an issue we had with the Auditor General in those days.

You may have heard a degree of criticism from some banks and other organizations saying that we should be operating on a pure cover system, a different type of system than we have here in Canada. I'd like to be quite blunt about that. We've looked at it; Parliament has looked at it. They've not agreed to go that way. The government has not agreed to go that way. The reality is that it would be quite expensive to do. It's open-ended risk for the government and ultimately I'm not sure it's going to increase the availability of trade financing for exporters. We make a small return on our money.

When I came in there was no strong direction given to crown corporations, but since we're self-sustaining I said that we should be making at least the rate of inflation on our equity base. If we're not doing that, we're actually losing money. Our equity base is $1 billion right now. So we have to be trying to make at least the rate of inflation on our equity just to be able to sustain ourselves from one year to another.

[Translation]

If we compare ourselves with other countries.

[English]

Mr. Chairman, the Americans, the Brits, the Japanese, lose a lot of money on their foreign trade support. It's anywhere from $2.5 billion to $5 billion a year. Last year the U.S. EXIM Bank, for example, had an appropriation of $800 million just to cover its operating losses. We don't have that luxury in Canada so we have to try to figure out how we can scramble and protect ourselves and be able to still support the exporters as best we can. That's the challenge we often have right now.

Nonetheless, what we are doing is working with the Canadian banks and Canadian financial institutions to try to figure out how we can share and expand our services to support the Canadian exporters.

[Translation]

We have launched a number of initiatives with Canadian financial institutions in order to offer other benefits to Canadian exporters. I would like to talk briefly about them.

[English]

We have a facility we're talking about right now that will secure for the banks the foreign receivables. If the foreign buyer of a Canadian customer goes bankrupt and the Canadian customer runs into difficulty, we will guarantee that payment to the bank. It's a new program we're developing that we're going to be piloting soon with the Canadian banks - two to begin with. Then what we want to do is try to get to an actuarial broad-based thing, low-cost, and just say fine, we'll cover the banks, so the banks therefore will be able to extend more credit to Canadian enterprises.

With the banks, we have been working on a medium-term guarantee facility to provide medium-term financing to exporters where they don't have to come through us but they would go directly to their bank.

Another thing we're doing is providing Northstar Trade Finance, a new company, partly funded by the Bank of Montreal, to provide financing to medium-sized transactions. Initially it was for OECD countries, and now they're looking more broadly, but we're ensuring those transactions for Northstar, and Northstar is extending the credit to Canadian medium-sized enterprises to finance internationally. It's another facility that's at their disposal.

We also have an agreement with the Toronto Dominion Bank where we guarantee 50% of the financing the TD Bank is extending to people in the auto parts sector for a lot of the money they have to invest up front to tool up to design parts for the auto sector. This is all exported, or mostly exported. We've partnered with the Toronto Dominion Bank. We guaranteed 50% of that facility and they will extend that financing to the Canadian auto parts makers. It's risky. You don't know whether or not they're actually going to get the contract or whether they're going to be able to maintain it. But we're doing that to support Canadian exports and smaller Canadian enterprises.

.0925

There's a huge demand for capital. Sometimes it exceeds the capacity of those firms to do that tooling.

We've also been doing a similar type of transaction with Canadian Imperial Bank of Commerce for other partners. Over the last ten years the Canadian government has invested in EDC $153 million in new equity for the corporation.

The Chairman: Over how many years?

Mr. Labbé: Over the last ten years.

The Chairman: Only $153 million?

Mr. Labbé: If you want to go back, actually the equity investment of the Canadian government in the Export Development Corporation - I'm talking about equity investment -

The Chairman: Right.

Mr. Labbé: - is $833 million over the last fifty years. That's the capital the corporation invested. In addition to that, we have some $213 million of retained earnings, which brings us up to $1 billion of equity.

What Canada has got out of that -

The Chairman: But I understand that in the last ten years there's been only $153 million of fresh money that's gone in on top of the original $800 million.

Mr. Labbé: No, I'm sorry. The total amount is $813 million. So it was $150 million over$600 million and some.

Over that period we've supported $100-billion worth of exports.

The additional thing I'd like to point out is that equity is still there in the corporation. Not only is it there, but it's buttressed by another $1 billion of provisioning for bad loans.

So the corporation today is in fairly good shape. That is enabling us actually to extend our support to Canadian exporters, because we're taking on more risk today than we were then.

I'd like to go back now to the issue of today's meeting, I assume, which is the resources supporting export financing. We're talking about the main estimates, going back to the Canada account; that 5% of our business.

Historically, there have been two uses for the Canada account. There's what we call the budgetary reference levels, which are set out in the Foreign Affairs International.

I am sorry. There are two pots. There's the budgetary and there's the non-budgetary.

The budgetary is an expense. It's an expense in the year. It has two uses: equity of the corporation, which comes out of that pot of money, and the concessional financing that is provided to what we call ``spoiled markets'', for somebody who is looking for financing below market prices. It comes out of the budgetary reference in the main estimates.

Then there's another reference, the non-budgetary, which we would call upon to make loans in circumstances where it's a good loan or it's a higher-risk loan, but it's a commercial loan that's going to be repaid.

There are two examples of that type of thing. Right now we have extended loans to Russia, for example, under that. We can't absorb that under the government account right now. It's just too uncertain, too risky. But the government decided, with a number of other governments, that we had to do something for Russia and a number of eastern European countries. They did that under the Canada account. So we've extended those loans. They are commercial loans, with commercial interest. A number of them have been repaid, and they're going to be recycled.

Another instance where we would call on that account is where there's a good transaction for us but it's just too big for the corporation; it's beyond what prudent financial management would say we should undertake. A good example I keep quoting on that one is the first nuclear reactors we sold to Korea, back in the 1970s. It was a very good transaction, a good utility, but it was about $600 million in those days, and the equity of the corporation was $500 million. So it was more than the equity of the corporation, more than we could prudently invest in one transaction. The government did it, and it's been paid back on that. That is where you would call upon the non-budgetary reference levels we're talking about right now.

In 1995-96, the main estimates provided for $280 million of net repayments; net repayments of $92 million, if you look at the figures we're talking to you about right now. This is a non-budgetary item. It does nonetheless represent an element of the government's borrowing requirements, because the government has to borrow that money to put out. We administer it for them. It's paid back with interest. That's the non-budgetary.

They also refer to $148 million for concessional or soft financing: funds that have traditionally been used to assist Canadian companies in entering high-potential but spoiled markets, as we call them. China is one of them.

.0930

In the report we give to Parliament every year on the Canada account - it's something you have, tabled on May 5 - you have an indication of what this is all about and where we use it.

To wind up, let's move back to our own business right now and to some of the things we're doing on the corporate account. We've taken a number of new initiatives under the corporate account on behalf of the Canadian exporters.

You've probably heard sometimes that we're risk-averse. It's a criticism that's made about us at times, that we're averse to risk. But we're trying to manage the pot of money we have in a responsible fashion. We're trying to protect the money we have, because we want to get the money back. We want to be able to reinvest the money and send it out again. We always have this challenge of how much risk we can take, and of how prudent or imprudent we can be. It's a difficult balancing act.

Since we're self-supporting, we try to use sound business principles. The debt crisis of the 1980s also persuaded us to adopt an approach to country risk that is still in practice today. We try to have a flexible policy of coverage towards potential, existing or high-risk countries. The huge losses recorded by most of the world's ECAs over the past decade - I referred to those a little earlier - have had an enormous fiscal cost to the national treasuries of other countries as they try to absorb those things.

Our approach to managing risk has meant that we try to improve the recoveries on non-performing loans and to strengthen our balance sheet. Then we can take additional risks, and that's what we have been trying to do.

To ensure that Canadian exporters can compete on a more level playing field with international competitors, we're constantly reviewing and assessing the opportunities.

For example, last year we increased our cover on a number of emerging markets. These included higher-risk, high-potential countries such as Argentina, for example, which was developing, but had gone through a very difficult credit period. Others were Ghana, Jamaica, Jordan - this is coming on - Lebanon, Romania and Vietnam, just to name a few. We look at each one of these countries and try to figure out how much we can extend.

We also govern by the IMF and some of the concerns the IMF may have with regard to extending more credit to these countries. The IMF doesn't want the countries to extend themselves for more than they can afford to repay, because the IMF ends up with a problem as well.

So there are a number of factors we have to take into consideration when we look at the credit risk and how much credit we can extend. That's the way we've been trying to manage our affairs.

I will also point out another challenge for us. Ten years ago, 75% of the loans we were making would have been sovereign loans. They would have been made to a government or to a government entity in a foreign country.

With all of this talk of globalization, privatization, deregulation and all of those things that are going on, those countries don't want to stand behind the creditworthiness of the enterprises any more. They say no, if you want to deal with that power authority, you have to deal with that power authority and if you want to deal with that telecommunications company, you have to deal with that telecommunications company. They say they are not going to guarantee the repayment of that debt. That makes a very different risk situation for the Export Development Corporation.

In terms of assessing the risk, in addition to that the structures of those financings are very difficult and the monitoring of those loans is very difficult. That's why we need such highly skilled people within the corporation. We're well-served.

As the chairman may know, I've worked for a number of organizations over my years in both the private and the public sectors, and I have never seen such a dedicated, highly skilled, strongly committed group of people as the group within the Export Development Corporation who are working in the interests of the Canadian exporters. We structure our deals. We insist on repayment. We do whatever we can to collect.

In one country we've also held up the privatization of an enterprise that owed us money. We were suing them because they weren't paying us. We told them that before they privatized, they had better settle their account with us.

We sometimes surprise people with regard to our attitude about those things, because we say, listen, you owe some money to Canada and you should be paying it back. We want that money back so we can help Canadian exporters do more business and other transactions. That's part of what we're doing right now.

The Chairman: Mr. President, you said it was 25% ten years ago. Would it be 75% now?

Mr. Labbé: Ten years ago 75% of those loans were sovereign loans. Today, 65% to 70% of the loans we're making are private sector loans.

The Chairman: Okay. So you're about 40% still -

.0935

Mr. Labbé: Yes, 40% still sovereign, China being a big part of it right now. That's our biggest market, as you know.

Let me say a few words on the small exporters. They're very important to us. Some 1,800 of our 2,146 customers are small and medium-sized exporters. That exporter base of ours, that customer base of ours, has grown by 34% over the past five years, and it's going to continue to grow. We have a new initiative that I'll talk to you about in a minute.

Short-term credit insurance is a big part of the small businesses, because they are extending credit to foreign buyers on short terms. Turnaround time for those buyer-on-credit approvals is very important, and we've worked very hard over the past few years to hasten it.

Back in the 1960s and 1970s, it used to take us two or three weeks. Somebody says, ``I'm prepared to sell to company X in Argentina or Thailand or somewhere else, and I need a credit approval from you for $100,000. Will you approve it?'' Nobody knows who this buyer is and whether or not we can afford to insure it.

We used to go through a very long process to try to find out whether we could insure that corporation, getting some bank references and all of those things. That was time-consuming and not very useful.

Today we're able to do that in three days, a lot of them in 24 hours. We've invested a lot of money in technology, in terms of databases, to be able to turn those things around so we can give our exporters very fast answers on those things and still be able to manage our risk. We've invested a lot in technology in that regard.

Another thing with regard to small and medium-sized enterprises is cash. You're always very much looking for cash. We've tried to speed up our processes with regard to claims payments, for example. If an enterprise has a claim - somebody has not paid and they're looking for their money - then once we decide it's a legitimate claim, we've been turning those claim payments around in 10 days. It used to take 48 days to turn around. We can turn around in 10 days right now. So we try to get the money out very quickly.

It's the same for our loans payments. We get those out very quickly to help the small enterprises in their thing.

Looking ahead, we've also created - very recently, at the beginning of April - a new group of people dedicated to what we call the emerging exporters. John Hutchison is my vice-president in charge of that. We've set up a team of exporters totally dedicated to the smaller exporters. We have a 1-800 number. We're doing all kinds of wonderful things. We're issuing policies over the phone; we're issuing credit approvals within the day.

You may want to talk to him more about that in a few minutes.

The Chairman: We might be asking for one.

Mr. Labbé: If you are an exporter, we'll look at it.

In addition to that, we equip the people on the phone to be able to provide advice on the plethora of other government programs, both federal and provincial, that may be available to small and medium-sized enterprises.

[Translation]

For small and medium-sized businesses, we have just set up a special telephone service through which we can now issue insurance policies and even credit approvals within 24 hours.

The team handling this has access to up-to-date information that allows it to respond quickly to all kinds of inquiries related not only to export credit programs but also many other federal and provincial programs and services currently available to help them capture export markets.

That is one of our newest initiatives. We are currently looking at other services that could be put in place to help SMEs take advantage of export market opportunities. We currently have a team that is totally dedicated to that particular function.

[English]

There's another thing. I mentioned the changes and what's going on. There has also been another change going on, finally, to wrap up, with regard to the complexity of some of these transactions, the export financing transactions particularly. Making a loan to a foreign government in today's terms we'd call plain vanilla. It's a fairly simple thing. Once you've negotiated the loans and you draw down on them, it's fairly simple.

However, when you get involved in project finance, aircraft leasing, complex telecommunications systems, companies that don't want to have these assets on their balance-sheets but are looking for different ways of structuring those loans - leasing, for example - we've had to develop a wholly new skills set to be able to meet that demand.

The aerospace industry, for example, is a key industry - one of the fastest-growing sectors in Canada, one of the strong exporters, one of the ones that's penetrating internationally a lot. Yet the cash demands for that are huge. If you sell these airplanes at $15 million or $20 million a pop and your plan is to sell 400 or 500 of those things, you need a lot of cash. We've have to try new ways to finance that.

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Historically, we would have financed 85% of the cost of an aircraft. Our capacity won't do that any more. But you still have to be able to get those aircraft placed, so we're trying to figure out how we can do it.

One of the things we've set up very recently is what we call the CRJ Capital Corporation with Bombardier. We're setting up a subsidiary that's going to be dedicated to providing special solutions, in partnership with the exporters or other financial institutions, to be able to find solutions for those more difficult financing situations. On the CRJ Capital, for example, the notion would be that we and Bombardier would be 50:50 equity holders. We may get another equity holder down the road.

We will be leveraging that money we're going to be putting in, which is basically at this stage about 10% as opposed to the 85% we would be called upon to do in the past, but using that money to structure things so that we can go and raise money on the capital markets to support the sale of each one of these aircraft. It's very complex. A lot of it is tax-driven. It's multijurisdictional; it could be Japan, the U.S. and Germany.

But you have to be able to develop those skills, you have to be able to respond, and you also have to be able to do it with a fair degree of predictability. So we're sharing with the exporter on that thing, and we're leveraging our own capacity to finance these things more than we have been in the past.

Another area is the project finance. As you know, we talked about privatization, but you're getting involved in very limited recourse. People talk about private power and private telecommunications companies. You finance that and the only way you're going to get your money back is from the cashflows that come out of those projects, but there are all kinds of requirements.

You can put the project in place in 24 months or 36 months.

[Translation]

It takes three or four years to complete this kind of project - say to build a nuclear or electric power plant or a telephone system - and we are repaid over a 20 year period. Our only sources of funds are revenues from these kinds of projects.

There are problems with taxation, exchange rates and cost adjustments, as well as legal and regulatory problems that have not yet been solved and that must be handled before we can go ahead with the loans.

[English]

So it's a whole new and different area. We had done a number of limited-recourse financings in the past but we set up the whole project dedicated to that as well.

One of the comforting things about that is we are recognized by our friends at EXIM Bank in a report they made before Congress as being the most advanced, the most flexible, the most understanding, and the most creative in being able to put together these project financings, because we don't do it only with ourselves; we have to do it in partnership with other organization, other export credit agencies, other private banks or some of the multilateral banks.

We're developing all kinds of relationships actually with the multilateral banks, the EBRD, for example, and some of the regional development banks, to try to figure out how we can work together to better position Canadian exporters, Canadian enterprises, in capturing those markets that exist in those respective jurisdictions.

Mr. Chairman, I've taken a few more minutes than I expected. I think I've tried to lay out what the groundwork is, how the corporation operates, the difference between the Canada account and the corporate account and how we try to apply the same degree of probity and discipline with regard to those loans, recognizing nonetheless that the Canada account loans tend to be much more risky. We're administering all that in a degree of probity and professionalism that protects the interests of the Canadian taxpayers and yet at the same time tries to put the Canadian exporter on a fairly good competitive basis with these competitors internationally.

[Translation]

I am now ready to answer your questions.

[English]

The Chairman: Thank you very much, Mr. Labbé. Perhaps you'd be good enough to send to the clerk of the committee the reference from the congressional record or from the EXIM Bank that you referred to. I think the other members of the committee would like to see what other people are saying about what we do. I think it's very helpful.

Mr. Labbé: Thank you very much.

[Translation]

Mr. Paré (Louis-Hébert): I'm no expert and so my questions may seem rather naive to you, but I intend to ask them anyway.

First of all, you said a couple of times that the EDC is a self-sustaining financial corporation. I believe those were the words you used a couple of times, and yet a significant portion of your operating budget comes from government funds. How do you reconcile your status as a self-sustaining corporation with the reality that you receive government appropriations?

.0945

Mr. Labbé: The 5% of our business that comes from the Canada account is sort of our safety valve.

We work in an industry that involves a great deal of risk. Despite that, we do provide concessional financing in certain circumstances.

We provide financing by raising funds on international markets. We pay commercial rates for our loans, but at the same time we have a very good cash flow and are very creative. However, if another country offers lower rates, we cannot respond in kind.

All of that is part of the budget estimates we are currently discussing. A major portion of that money comes from there. In a way it is our safety valve.

Mr. Paré: Is it true that of all the money available to the corporation for trade promotion, the equivalent of about 5% comes directly from government appropriations?

Mr. Labbé: Yes, approximately 5%. It does vary from one year to the next, but overall, it's 5%.

Mr. Paré: I understand the EDC also provides different kinds of support to Canadian or foreign enterprises or foreign governments in order to facilitate the export of Canadian goods. How do you reconcile that with the sustained efforts being make within GATT to eliminate subsidies, tariffs and trade barriers? Do you not think that this is a kind of hidden subsidy in a way?

Mr. Labbé: There are two parts to your question. Yes, we are a commercial enterprise, we are profitable and we do cover our own costs. So, in that sense, the term subsidy simply isn't appropriate. At the same time I would agree there is an element of subsidy involved in concessional credit.

Concessional credit is provided through a specific international agreement called the Helsinki Agreement. Through the latter, the OECD seeks to limit the use of this kind of concessional credit. In the report tabled with the Committee in May - a report on the Canada Fund - you will see that one standard applies when this type of credit is granted.

For example, the country's per capita GNP must not exceed approximately $2,200 at this time. So this type of credit is only available to those countries and for non-commercial projects.

So, we do try to limit the provision of concessional financing internationally. It still occurs, but it is starting to be more limited. This is in full accordance with GATT regulations and those of the World Trade Organization.

Mr. Paré: At one point in your opening remarks, in reference to the Canada account, you referred to recent loans or assistance that Canada had recently provided to Russia and some former East Block countries, adding that none of those loans had been repaid yet.

Mr. Labbé: If that's what I said, then allow me to correct myself.

Russia has partly repaid its loans. As for Ukraine, I understand it has fully repaid the loan it was provided. Other loans however have yet to be repaid.

Mr. Paré: Have they not been repaid yet because they have not come to term?

Mr. Labbé: They have been repaid. There are also others that have not.

Mr. Paré: I have two other somewhat different questions to put to you.

How do you ensure that assistance you provide to governments does not become a means for them to buy arms and oppress their population? Are you concerned with those issues?

Mr. Labbé: Yes, I am. We do not provide assistance to governments. A commercial contract is signed and a way of financing the activities covered by the contract must be found. We only come into the picture after the commercial contract has been financed. As a result, we know exactly what we are financing. If military equipment is involved, we do not provide financing. The Canadian Government is responsible for deciding whether or not it will issue export permits for goods of that nature.

We fully agree with government policy as far as the terms under which such loans can be granted.

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If a telecommunications system is involved, then that is what we finance; we do not finance the line of credit. However, we do approve lines of credit for transactions that we have approved ourself and that the foreign government wishes to apply to its credit line. Both parties must agree.

Mr. Paré: In terms of your business relations with other countries, I noted your previous comments in that respect, but beyond what you have already said, is it possible for you to make use of that business relationship with countries where there are serious human rights violations to take action to help the population? Are you in a position to use your influence to try to improve the situation in a country?

The Chairman: Mr. Paré, let's just take the example of Indonesia that we spoke of the other day. I believe you do business in Indonesia...

Mr. Labbé: We are doing business in Indonesia with the Canadian Government. We have taken part in trade missions with the prime minister and other Canadian ministers and we have made those kinds of representations.

However, we are less and less able to intervene because more and more of our loans are provided to enterprises rather than to governments.

Our overall goal is to support Canadian exports in order to create jobs here in Canada. The Corporation's mission is to create jobs in Canada, and to develop commercial undertakings that are viable in the international context.

Mr. Paré: Thank you.

[English]

Mr. Penson (Peace River): Welcome to our committee, gentlemen. I appreciate the nature of the business you're in. It is a high-risk business, but I'm beginning to wonder if we shouldn't start to reduce our level of risk to some extent. As you've said in your report here, about 26% of our total receivable loans are in the non-performing category.

Mr. Labbé, with all due respect, I just want to read the quote from page 34, which says:

Non-performing loans, as a percentage of total gross loans receivable, decreased during 1994 from 37% to 26%. The improvement can be attributed to loan disbursements exceeding loan repayments....

Well, the percentage is going to get smaller if we loan more and more money. There's no doubt about that.

I have a couple of questions here. First of all, isn't that a high level to have? When we're talking about 26% of all loans being non-performing, there is a significant exposure for the Government of Canada. I understand we have written off $321 million this year through EDC, and there may more coming down the road.

My second question is a follow-up to Mr. Paré's question, where he was talking about whether or not EDC is a self-sustaining corporation. I can see in the international trade estimates that this year's totals are $420 million - almost half a billion dollars. That's up about 40% from last year's $273 billion.

Isn't that a sign of things to come in that we have a substantial non-performing loan portfolio that's going to get us in a lot of trouble down the road? There are going to have to be some large write-offs at some point because we still have countries, like Poland, that probably will not be able to pay these loans back.

Don't we have to be more cautious? As a government that has a substantial debt itself, and appreciating the business you're in, don't we have to try to pull back a little bit and get out of some of those high-risk areas?

Mr. Labbé: Your questions are very good. Let me put that in the context of some of the exporters who think we're risk-averse. We had over 30% of non-performing loans at one stage. There were two things that happened.

One, the loan portfolio has not grown that much, so while we did put more loans out, we are getting repaid. We are collecting money on some of the non-performing loans nonetheless. They're not being honoured the way they should be, but we're still collecting a degree of money on them. That's the first thing.

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The second thing is that when we received debt forgiveness from the government it reduced the level of indebtedness of the countries in question - Poland, in this particular case - by 50% to us. It also enabled them to carry on servicing the other part of their loans, which is a bit of a benefit to us. So we're getting that money back.

The other thing we've done - and I suggest you have to pay attention to it as well - is that we now have about $1 billion of provisioning on those loans, so when we have about $2 billion in non-performing loans, the provision is in the order of 50% right now. So we have done a great deal in terms of looking after the corporate account.

The part of the estimates we're talking about right now is not part of the annual report; this is something different, the Canada account. In the estimates you have two portions. One portion is called the concessional. There are two purposes for that. There is equity of the corporation. We're not going to be looking for equity in a corporation, but the equity of the corporation would have normally come out of that budget. There is also the concessional money to what we call the spoiled markets, places like China; there aren't very many others right now. That's where that money goes.

In the Canada account on the non-budgetary subtotal, you have $373,000, with $92,000 coming back over previous loans for a net of $280,000. That is what we would call an asset of the Government of Canada. It's not an expenditure as such. It's an asset of the Government of Canada. We have a loan out there that's going to be repaid.

Mr. Penson: Mr. Labbé, we can't treat these in isolation as members of this committee and members of Parliament. It's all an exposure for the Government of Canada. Whether yours is written down through this Paris Club obligation or not, it's still a draw to the Government of Canada.

So the bottom line is that you will be asking for about 40% more funding from the government this year than last year. Is that not true?

Mr. Labbé: The reality I'd like to put on the table here, though - and you'll have to discuss that with Mr. MacLaren when he comes here - is that it's not our discretionary money. The government decides whether or not it wants to spend that money. That is why we do not even project that in our business plans. This is a discretionary decision of the minister of the government and the ministers as to where they want to apply that money. We administer it for them in a responsible manner.

Mr. Penson: Just to follow up on the concessional funding you were talking about, we see you have a total of $1.7 billion. China's total is $537 million, and $431 million is in receivable. I think my information is accurate, but if it's not, maybe you can correct me.

When we're talking about trading more with China, isn't it a caution we have to observe that there's already a substantial portion still out there as a receivable?

Mr. Labbé: Yes, there's a large portion out there in receivable. It's a concern to us and we have explained that to the Canadian export... it's our largest debtor. We're trying to manage it as best we can, but that's the nature of our business. We do have concentrations. Mexico is another huge market for us. It's an important market for Canada, but it's a huge market for us. So we end up having portfolio concentrations that we try to manage. As a corporation, we're doing our best to try to manage those exposures and spread our risk among other countries as well.

Mr. Penson: I wouldn't like to see it become another Poland account where we have to write it off someplace down the road. That's what I'm getting at.

Mr. Labbé: The issue with regard to Poland and Egypt is not the only one. There's Canada's wheat. There are other things involved in those exposures to Canada than just the Export Development Corporation. The government has to decide itself whether... It ends up being part of the aid budget, if you want to look at it that way, and it's part of Canada's contribution to the international community.

But you're right. That's what we're trying to manage. We're managing our own affairs and our own accounts as best we can, recognizing all those pressures of exporters wanting more credits, and trying to be manage things in a responsible fashion. That's the tug we're continually being subjected to.

If you look at the record of what Canada has done and the cost to other other countries, I think we've done marvellously well. We're getting a lot of bang for our bucks.

Mr. Penson: I don't disagree. I'm just saying we also have substantial debt in this country that's rising, and that's a concern.

Mr. Labbé: I agree.

The Chairman: We will move on. Then we can maybe have another swing back later on.

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Ms Beaumier (Brampton): These are all very simple questions, because I'm a very simple person.

When you're lending money to Canadian businesses, how carefully are the negative impacts, or the potential negative impacts, to the Canadian businesses....? I'll ask you in relation to this: what percentage of Canadian content is required in the lending of these loans for development?

Mr. Labbé: Generally, we don't lend to Canadian businesses. We will lend to foreign buyers of Canadian products. We don't have very much exposure to Canadian businesses.

Ms Beaumier: Is there a Canadian content requirement?

Mr. Labbé: Yes, there is.

Ms Beaumier: What is that?

Mr. Labbé: It's a minimum of 50% right now. We are trying to improve it.

Ms Beaumier: Was it not higher?

Mr. Labbé: It was 60%.

Ms Beaumier: When was it dropped, December?

Mr. Labbé: It was dropped last year. We discussed that with our board. That's a reflection of the reality of what the international industrial markets are all about.

When we talk about globalization, the reality is that people are trying to spread their production all over the place. We're trying to ensure that Canadian enterprises are able to capture those markets, secure those markets and carry on doing business in those markets. That's what's driving us. While we may have dropped the content requirements as an absolute, we're looking at the ability of the Canadian enterprises to expand, capture more markets and create more jobs for Canadians, both here and in exporting.

Ms Beaumier: If we're referring to Canadian enterprises, are we talking about a company that has its headquarters in Canada or a company that employs Canadians?

I'll tell you what I'm getting at. In my riding I have Northern Telecom, which gets the lion's share of EDC money, especially in China, in spite of the claim that small business is a priority. With the reduction to 50% in Canadian content, it has continued to announce lay-offs of Canadian workers. I think you're probably familiar with that deal where the computer works in the switch is going to be considered the Canadian content. It is protecting jobs in Carolina, and of course it is creating jobs in China.

My constituents have a serious problem with the Canadian government lending money for projects that are ultimately going to end up with lay-offs in Canada. I'd like to know if that has ever been given consideration in some of these loans.

The Chairman: That's hardly a simple question.

Ms Beaumier: There must be an explanation for this or we couldn't be doing this.

Mr. Labbé: There is. The reality is when we talk about Northern Telecom, Bombardier, Pratt and Whitney, or ownership - I don't think it makes a lot of difference - these enterprises are in very competitive markets.

Northern Telecom is doing marvellously well in terms of capturing international markets right now. What it sells is not just the switch, but total systems. It is penetrating markets because of its capacity. It's into cellular markets in Mexico and other parts of the world, which it wouldn't be into if it didn't have the market presence we're trying to get it to establish.

So on an individual contract, I understand what you're saying, but if we weren't able to help it there, it wouldn't be a player. Canada's growth in exports is coming from telecommunications, aerospace and some of the electrical things we're talking about. These require high technology, high skills and strong market presence internationally.

Ms Beaumier: I have no doubt. I'm very proud of what Northern Telecom does. But what you're talking about is not creating jobs for Canadians. It may be increasing profits on the statements for investors, but what benefit is it having to Canadians who pay the taxes? I'm a little concerned about that.

I had an interview with one of the vice-presidents at Northern Telecom who told me it had a certain amount of research money but was no longer putting it into Canadian universities because Canadians weren't qualified.

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I understand what they're doing but I'm not sure if Canadian taxpayers are prepared to subsidize international markets and international capitalism if in fact it's going to hurt Canadian workers.

Mr. Labbé: I'm certainly not the one to try to make Jean Monty's case with regard to what he's doing. You may want to talk to him here. Let me tell you, though, you may look at one switch and one product of Northern Telecom's and say there's a degree of Canadian content there that meets your needs. But Northern Telecom as an enterprise is penetrating a number of markets right now that they would not be penetrating, even on other products that are manufactured in Canada - perhaps not in your riding, but they are manufacturing products.

I'll give you another example, in the aerospace sector. We've had some problems, we've gone through difficulties with regard to De Havilland, and that is back on its feet. But in the aerospace sector right now you're finding components coming from all over the world. They're being incorporated into an airplane and then they're being shipped off. We do run into issues with the Canadian content there as well.

You're talking about engines, navigation systems, simple paint jobs. You're talking about the equipment that goes into the plane, the floor sweepers and everybody that has an impact on those particular enterprises and all the suppliers. If we were not players in that field, all of those jobs would disappear.

Ms Beaumier: Absolutely, but as Canadian content goes down, lay-offs occur in Canada. That's all I'm saying.

The Chairman: I think that's a valid point.

Mr. Alcock.

Mr. Alcock (Winnipeg South): Thank you, Mr. Chairman. I'll try to continue with some simple questions.

To pick up on the final point, you made a comment that Northern Telecom is penetrating other markets. What proportion of their export business, just to use them as an example, would be financed outside of the EDC?

Mr. Labbé: I don't have the figure offhand, but the major portion of their exports are financed outside of the EDC.

Just to get back to the point Ms Beaumier mentioned a minute ago - and I think it's a valid point - Northern Telecom's Canadian content is 72% overall of our financings.

I'm sorry, I don't have the figure you're talking about right now. They are an important customer of ours and we are an important supplier of theirs, but we don't finance the majority of their exports.

Mr. Alcock: Okay.

My experiences thus far as the EDC have been very positive. To small businesses desiring to export, and with not a lot of expertise in foreign markets, the EDC thus far has been quite helpful. I'm a little surprised by some of the information today. I'd just like to get a sense of a couple of things.

I think you mentioned that 1,792 of 2,146 of your clients are small and medium-size. Could you define what you mean by ``medium-size'', and what proportion of the total disbursements they would have?

Mr. Labbé: There's no doubt that most of the disbursements go to the larger enterprises. We have figures on that. John Hutchison here, my expert on small and medium-size enterprises, is telling me that $2 billion of the $11 billion goes to SMEs. Again, we have to be careful about that, because when you look at those exports, you find that in an aircraft, for example, or with Northern Telecom, or in a power system there are many sub-suppliers that don't show up in those figures. But they are actually sub-suppliers to those systems that get exported.

The other area we don't have a good count on is with a program we have with the banks called the Documentary Credits Insurance Program. That is viewed as bank business, but coming under that are lot of small and medium-size enterprises that are being financed through the banks guaranteed by Export Development Corporation.

So yes, the majority of the exports go through large enterprises. We have 100 enterprises in Canada responsible, I think, for 75% of Canadian exports. Our business reflects that as well. On the short-term credit insurance business, though, a lot of it is small and medium-size enterprises.

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Mr. Alcock: The other area I'm interested in is that in a sense, the Export Development Corporation fills a niche that is not being filled by the commercial banks. Is that a fair statement? So where funding is not available, where you'd expect there would be difficulties, or they may be funding something in a Cambodia or Laos, some place that's just coming together....

I'm a little surprised, though, at the volume. Your largest exposure is in the U.S. I would have thought the commercial bank relationships with the U.S. would be such that the EDC would not need to be involved. Why such a large involvement? Obviously it's a large export market.

You made a comment about the need for capital of small businesses. There is an enormous need in western Canada, where I'm from. We're quite concerned about the way the commercial banks respond to that.

So I'm surprised to see how large your involvement is in the U.S. market. Would this be reflective of small businesses trying to get in, or would there once again be large businesses that are using you to finance ventures in the U.S.?

Mr. Labbé: First of all, it's reflective of Canada's exports; 80% of our exports go to the United States. The second thing is that most of that is short-term credit insurance. It's insurance on receivables.

Mr. Alcock: What's the failure of the commercial banking system that makes it necessary for you to get involved? Why are you involved in that particular market?

Mr. Labbé: The banks are not in the credit insurance business.

Mr. Alcock: Why is there a need for it in the U.S.?

Mr. Labbé: There is a need for it all over. We are using it domestically right now. The Europeans use it as part of their commercial practice. They insure everything in Europe. It's not quite as well spread out in North America, but there are some private insurance companies in the United States that are doing it. They're not much larger than the Export Development Corporation. There are two in particular, and they are about the same size, if you look at our short-term credit insurance business.

It's a specialized niche. It's not a big business. It's big for us, but it's a specialized niche.

Mr. Alcock: Your largest exposure.

Mr. Labbé: Yes. But you have to look at it in relative terms.

Mr. Alcock: It just strikes me we're letting the banks off the hook.

Mr. Labbé: It's a facility that actually enables the bank to extend easier credit to the enterprise because the receivables are secured. When you look at a working capital line, you look at what the receivables are part of. If those receivables are insured, they have greater value than if they were not insured.

Mr. Alcock: I understand that and I understand the value of doing it in a country where there's instability, where there's a lack of development in the systems or the international relations and everything else. I have less understanding of it in the United States market, that's all.

Mr. Labbé: Well, we talk about the greater exposure. I'll tell you, it's also the market where you have the greater losses. If you are a Canadian exporter and you've extended credit to a firm in the United States and that firm goes into chapter 11, you could be waiting for two years to get your money back. Canadian enterprises can't afford to wait that long. The credit insurance we offer them covers them against that loss.

[Translation]

Mr. Bergeron (Verchères): I have a number of questions.

First, I would like to refer to the report by the Special Joint Committee that has been reviewing Canada's foreign policy. In one of its recommendations - please correct me if I misrepresent the spirit of that recommendation - the Committee asked for streamlining and a better co-ordination of export promotion and assistance programs. It even advocated setting up some kind of umbrella organization in order to better ensure the co-ordination of the various programs.

I was wondering on one hand to what extent EDC will be able to implement the streamlining and the better co-ordination of the various export promotion and assistance programs and on the other hand to what extent the current mandate of the Corporation would have to be modified for it to be able to exercise such a mandate.

Mr. Labbé: You are asking a good question. We are part of an interdepartmental group that tries to better co-ordinate the promotion policies of the government.

EDC doesn't do any promoting. We are a business corporation dealing with some companies. We try to develop an ongoing relationship with those companies. We work mostly in the area of financing or securing their business deals.

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We are not a big organization. We only have 500 employees distributed among nine offices across the country.

We could not afford to assume the leadership of such a thing. I am not convinced that this should be our role since it would lead us into an entirely different direction from what we are doing at the present time and where our expertise lies. I would very much hesitate to try to get such a mandate because my feeling is that this will be detrimental to the business side of the Corporation's activities.

On the other hand, we are constantly working together with the interdepartmental committees in order to co-ordinate and advise them with regard to this consultation exercise. I can hardly picture this Society taking over the leadership. I think that would be a mistake.

Mr. Bergeron: This is a very appropriate answer. this leads me to ask you a complementary question, so to speak. Can we expect any results coming more or less rapidly from this interdepartmental working committee that is supposed to bring about some streamlining and some co-ordination of the export promotion and assistance activities?

Mr. Labbé: I have a feeling that yes, we can, but you should discuss this with the Minister for International Trade who, I understand, will be coming before this Committee in a few weeks. This exercise takes place under his care.

Mr. Bergeron: We will have to ask him about this.

Mr. Labbé: I would hesitate to answer on his behalf but I think the program is progressing satisfactorily.

The Chairman: We are going to check whether or not there is an agreement.

Mr. Bergeron: Certainly. I am convinced that this gentleman is going to call the Minister within the next few minutes to make him aware of the question you intend to ask him.

You probably know that the members of this Committee have expressed their interest in looking into the various assistance programs aimed at the small and medium-sized businesses. In that regard, when one reads your presentation and the reports you have tabled with us, we notice EDC's activities involving small and medium-sized businesses seem to be very successful. You referred to a new program that you have set up, the 1-800 telephone line. Are you in a position at this stage to assess the positive or negative impact of this new program aimed at small and medium-sized businesses?

Mr. Labbé: I shall ask John to answer your question but it would be premature to assess the program since it was launched only two months ago.

Secondly, although we do our utmost to be of assistance to small and medium-sized businesses and intend to increase the scope of our activities, our impact is relatively limited compared to the overall needs of such businesses. Generally speaking, export doesn't represent 50% or 60% of their overall activities. That being said, I am going to ask John to answer your question.

Mr. John Hutchison (Vice-President, Emerging Exporter Team, Export Development Corporation): Generally speaking, the acceptance is very high. As Mr. Labbé just said, it is somewhat too early to say that the program is a huge success. We haven't yet started doing any marketing in that area, but it is very popular with the exporters who have found that, just with a phone call, they could get their exports protected in just a few minutes.

Mr. Bergeron: The SMEs can use the line without incurring any costs?

Mr. Hutchison: They have to pay for the insurance. They pay the premium but the line and the service are free.

Mr. Bergeron: Therefore, if I make a call only in order to get some information, I won't necessarily have to...

Mr. Hutchison: You won't have anything to pay to get some information on the other services.

Mr. Bergeron: A few months ago, the Canadian Exporters Association presented a number of recommendations to the Minister for International Trade; among other things, they asked him to centralize within the federal government all export assistance and promotion programs, including the provincial programs.

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I would first like to know your reaction to that proposal and second whether you feel that the export assistance programs or the export promotion programs implemented by the provinces compete with yours and may in some regard negatively impact on them.

Mr. Labbé: I think that those programs complement themselves much more so now than they used to . We have made much progress in this regard. We are involved and we have our records, our information. I think the governments are right to try to streamline this type of assistance since there obviously is lots of duplication. With this in mind, I regard this recommendation as positive.

We don't do any prospecting. Our role is to facilitate transactions that are on the verge of being finalized. This is what we put the emphasis on.

Mr. Bergeron: Would it be possible for us to get, if not today then at least later on, some breakdown by provinces of the assistance you provide to businesses?

You referred to 400,000 jobs that would have been maintained through your programs. Could you also give us a breakdown by provinces of the number of jobs maintained in each Canadian province?

Mr. Labbé: We could give you an indication of the volumes in each region. This is quite easy. However, I would ask you not to make too much out of such data.

For example, when a plane is sold out of Montreal it represents an export out of Montreal but it contains many components originating from other provinces such as British Columbia. We don't have any way to make a breakdown of all those things. We must therefore be very careful when we are referring to a breakdown of jobs.

The only way to try and assess the impact of those programs on the job situation is to take a factor relevant to exports and to apply it to exports as a whole. My initial impression is therefore that this might slightly distort the calculations.

For example, the whole program dealing with banks is concentrated in Ontario. It does however impact on exports from across Canada. I would even be reluctant to provide you with those figures. If you look at the breakdown of exports by region you will note that it has an impact but, even in that case, I would advise you to utilize those figures with some caution.

Mr. Bergeron: That being said, with regard to the assistance you provide to businesses, can we get a breakdown by province of the dollars involved or of the value of the insurance policies?

Mr. Labbé: We could indicate to you the value of the export that receives some assistance through our loan programs or our insurance program.

[English]

The Chairman: Mr. Mills.

Mr. Mills (Red Deer): Thank you, Mr. Chairman. I have a couple of questions.

First of all, it would seem to me there's somewhat of a communication problem regarding the Canada account. The communication we get from the government is, ``Well, that's EDC's decision''. From EDC we hear, ``Well, that's really the government's decision, and we administer it''. So when we write off loans to Poland and Egypt, there's this passing of the buck.

It seems to me the Canadian public is the third player in this. You're writing off loans to wherever and you're telling them you have this serious problem yourselves. Then they see loans to China, they see loans to Saudi Arabia. All of these just conjure up a real communication problem for you, I think. There's only one taxpayer, so the money comes from either source. I would ask you, in terms of reputation - it's a small part of your portfolio - are you not running a rather dangerous public perception by taking care of this portfolio?

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My second question is that you were talking about gaining equity in companies as part of your process. Again, my experience or my position on government involvement in companies would not be a very positive perception.

I wonder if you could elaborate on those two issues.

Mr. Labbé: Those are two very good questions.

Let me deal with the Canada account issue first. The authorities that are here under the main estimates are under the authority of the Export Development Act. That's where they come from, and that's why it's tied to us.

The decision with regard to whether or not we will use the Canada account is ultimately a ministerial decision. We would look at a transaction and say that we cannot do it in good conscience with our corporation because we cannot do subsidized financing or the risk is too great or it's more than we can actually take on for that particular country. Then we'd give the ministers our view on what the transaction is worth and ask, ``Would you want to consider taking it under the Canada account?'' In that respect, it is their decision to go or not to go with this money here. There is a high degree of transparency, because we report to Parliament every year on how we manage the Canada account. So I think in terms of transparency, in terms of openness, it's there.

In terms of debt-forgiveness, it's not out of the Canada account money. As I understand it, the Minister of Finance, under the general budgetary system, decides where they want to go.

The only good point I'd make with regard to the debt-forgiveness is that while we've forgiven debt to Egypt and Poland, we've actually invested more money in the Export Development Corporation, which will help us support more exports in the future.

With regard to how much of that we can afford, I'm saying that our balance-sheet shows that we have a very respectful balance-sheet, despite the risks we undertake. We manage those risks. We manage them for the benefit of Canadian exporters and Canadian jobs.

We are in very strict, stiff competition with other countries. The French, the Germans, the Brits, the Italians, the Americans, the Australians - everybody's into jobs.

More and more challenges are coming out of this particular exercise. We talked about project financing. There is no doubt that the countries themselves that we're talking about, these emerging countries, do not have the financial resources to be able to pay for all of these infrastructure developments they're looking for: telecommunications systems, power systems, road supports, all of those things.

The international financial institutions, the World Bank and regional development banks, are saying that they can't cope with that either, so we should be doing it in the private sector. The private sector ends up washing us up with a number of other things.

We're saying that there are things that can be done and things that can't be done, but there are some basic issues with regard to government regulations, with regard to legal situations in the country, with regard to transparency, with regard to all those things that create challenges for us. If they are not addressed, then they are not going to be able to be financed.

In a sense, we are the spokesmen in many regards for trying to bring about some order in those markets, and it's still going to be a risky proposition. That's the business we're in.

You asked me another question, which was....

Mr. Mills: The equity.

Mr. Labbé: Right.

That's one of the reasons why we have not rushed into any of that. It would not be equity in a Canadian corporation. It would be equity that we would take with another organization, such as the International Finance Corporation, which is another subsidiary of the World Bank, which takes an equity position in a number of these projects, which makes them more credible and attracts other people's money on the debt side, and they get their money out faster. We would view that only in a circumstance where you're dealing with complicated financing but it still makes business sense and you can put some money in and thereby attract other equity or other debt as well try to make this project viable. But I agree, it's not an easy transaction.

The IFC, on the other hand, has done fairly well with its investments over the years, and we would be looking to partner with an organization like that. It would bring: one, credibility; and two, a fair amount of market presence.

Again, we're getting back to Canadian skills and Canadian abilities. That would be done to support a Canadian group that was actually up there in the driver's seat trying to bring one of these things to happen. If we felt we could help them along that way in partnership with other people, then we would be doing it. Most likely, the financing would come from many countries, not just one.

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[Translation]

Mr. Regan (Halifax West): Mr. Labbé, I would like to ask you four questions. They are all quite simple.

Mr. Labbé: I am suspicious of simple questions.

The Chairman: Simple questions always get the longest answers.

[English]

Mr. Regan: I'll ask all four of them now and then I'll let you answer.

What do you feel is the biggest obstacle, if anything, to improving the customer satisfaction index? I realize that 8.3 is a very positive sign; it's a good level, but perhaps there are ways of improving that. I'd like to know what the obstacles are in your view.

Secondly, what targets do you have, and how do you set them? For instance, it seems to me that EDC works to be involved in more and more of the Canadian export pie, whereas I'm suggesting there may be a need to work more with the foreign affairs department and obviously Mr. MacLaren's department to increase the size of the pie. That should be more of the objective of the corporation.

Third, I can't help but note, being a member from Nova Scotia, Atlantic Canada, that 75% of your business is with companies in central Canada, Ontario and Quebec, 23% in the west, and about 2% in Atlantic Canada. In my region, in my riding, if I am to defend the government's contributions to EDC and the use of government equity or resources by EDC, I need to know what you're doing to create jobs in Atlantic Canada. I'm wondering what your plan is to improve that performance.

The Chairman: With a somewhat more eastern perspective.

Mr. Labbé: Customer satisfaction index - a very good question. It's a huge challenge because one of the realities of this customer satisfaction exercise that everyone is going through is that the more you give to the customer the more they expect. It gets more and more difficult to move up that scale.

We have in our customer satisfaction index a number of subcomponents that we look at, that we question customers on. For example, they look at our professionalism and they're very supportive of it. They look at our knowledge, they look at our service, our accessibility, our turnaround times. We do very well in all of those things.

When you look at some of the other areas where they challenge us, they say we don't have the right risk appetite, and then we try to manage that with regard to some of the comments made with regard to just how much money we can afford to lose. That's a difficult balancing act. We keep trying to manage that particular one.

Pricing is another one. People would rather not have to pay for the export services, but again we look at whether or not we are we self-sustaining and try to manage ourselves in a self-sustaining fashion. Those are the challenges we obviously have to try to meet.

In our polling, we canvass most of our customers every year to try to find out exactly what it is they're doing and where it is they find we're strong or weak. The interesting thing is.... I don't have the slide right now, but if you take a picture of our customers and take a picture of people who would be our customers but who are not our customers, they're diametrically opposed on what their perception is of what we do.

Our customers think we're responsive and businesslike and we do all kinds of things. Our non-customers think we're bureaucratic, slow to respond and have all those problems. That's a huge communication problem we have ourselves that we're going to be addressing. Basically those are the issues we have to try to manage.

You talk about the size of the pie. You're right; we're not trying to take more of the existing pie. Canadian exports have grown tremendously over the last three years. Export development volumes have more than doubled over the last three years. We are helping grow that particular pie and I think we're doing a fairly good job in that regard.

With regard to Atlantic Canada, if you look at the exports and the structure of the exports, they are generally a reflection of Canada's industrial base. Let's take that as a bit of a given. The challenge we have, and the one we're really working on, is trying to address better the needs of the small and medium-size enterprises. We're doing that in two ways.

First of all, we have the special service we set up where people from anywhere can call in on the 1-800 number and get an answer right away. We have extended hours for that so we can cover the people from the Maritimes as well as from the west coast through their working day, and they can still call and get some service.

We're also making sure our regional development programs and our knowledge and the information we get out in the regions, working with the federal government and the provincial departments and the industry associations, is broadly known. That's an education issue.

Every year we have what we call a ``let's talk risk'' workshop where we actually go out and bring business people in and talk about the risks. We talk about some of the challenges facing exporters and what they have to be mindful of, and how they can mitigate those risks in terms of their development and their contracting.

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That's broadly an educational type of thing. Given our means, we're doing as much of that as we can, participating with other organizations.

Mr. Regan: I want to ask one quick question on the first point about customer satisfaction. You spoke about the knowledge base of the corporation. I'm interested in the issue of the institutional memory. Is that a concern to you in terms of turnover of employees or in terms of companies that call and may have a concern about having one person to talk to at one point and then having someone else a few months later?

Mr. Labbé: I think there are three points about institutional memory.

You're right that turnover is a great concern of ours. We have highly skilled people, very specialized people, who operate in a market that is not necessarily only in Canada. A lot of people are being lured away to London and to New York, and on the financial side to large private enterprises, because as things are developing there's a desire to get that. That is a challenge of ours and we're trying to deal with it.

In terms of capturing, we invest a lot of money in gaining knowledge of countries. We have people travelling all over the world all the time. They come back, and they've done transactions there, they've met contacts, they're dealing with institutions, and a challenge in an organization like ours is to figure out how you capture that information and keep it. We're working on that as well.

The other issue you mentioned was in regard to a company calling and asking us if we have fifteen different people they'll have to deal with. We're trying to cope with that as well. There are two things there. First, we're reorganizing ourselves on an industry sector basis where we'll have people who will better understand the needs of an industry and will have better and stronger relationships with various enterprises.

As well, on the other side with regard to the SMEs, the small businesses, we have a database that will come up right away when somebody calls in. We'll know what the previous history has been with that enterprise, who he's talked to and what the issues are, so we'll therefore be able to respond much more quickly.

A lot of that has to do with technology, and it's a huge investment we have to make over the next few years, not only on that side but in treasury operations as well. We have very complicated loans, and a loan portfolio that's been rescheduled many times. Our technology needs are sometimes daunting, and we're attacking that right now as well. It's part of where the corporation is going.

Mr. Flis (Parkdale - High Park): I have referred many Canadians to EDC and I'm very pleased when they give me a call or write me note thanking me for referring them, telling me they were pleased. I'm glad you complimented your staff. I'm glad they're on our side, not on our competitors' side.

Mr. Labbé: Thank you. We'll record that as well.

Mr. Flis: I'd like a brief explanation. You said EDC had a profit in every year except 1988. I thought 1986, 1987 and 1988 were the good years. I'm wondering if you could explain to the committee why that year was not a good one for EDC.

Mr. Labbé: Mr. Chairman, I think the hon. member may have better institutional memory than I have, because I was not involved with the corporation in those days.

There was a rather heated debate between the Auditor General and the corporation over provisioning policy and whether they had there the loans were or were not adequately provisioned. The saw-off that came with the Auditor General of the day was that they would take about $200 million and put it into a provisioning pot. That actually affected the bottom line as well, because they scooped up whatever profit there was and put it into that provisioning pot.

In fact, it had the effect of creating a loss of $200 million that year so that the provisioning could be built up. That was a change in the policy of the corporation with regard to a lot of those loans. The argument was whether or not they were ultimately collectable.

It's changed. It was a very difficult stage for the corporation at that time, but in retrospect I think it was a good move. It's now forced the corporation to do a better job of provisioning and to do a better job of set-asides on insurance things so that we are better able right now to sustain a loss, if we are going to get a loss, without imperilling the corporation.

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Mr. Flis: The next question is about international financing. This committee is in the process of preparing a report for the Halifax Summit. I'd like you to take us through page 63 in your annual report, where you talk about foreign currency balances.

In Deutschmarks for 1994, you have DM136 million in debt as opposed to DM180 million in 1993. But with the currency, with rate of difference and rate of exchange, are we in a worse-off position or a better position, and do our balances here affect our credit rating as you talk about the triple-A ratings, and so on, on the next page?

So maybe we could get into our balance and how it affects the strength of our dollar, our rating, and so on.

Mr. Labbé: Those are very interesting and very challenging questions.

I mentioned a little earlier in my comments that we fund ourselves on international markets. When we lend money, we actually borrow the money on international markets and we lend it off. We have varying requirements, depending on what our loan portfolio is, and especially on the loan side, it tends to be a little lumpy. You get big transactions and smaller transactions, but we generally try to balance our portfolio.

Our treasury operation is highly sophisticated. Generally we don't borrow money in Canada; we borrow money in international markets. So we borrow in pounds, we borrow in U.S. dollars, we borrow in Deutschmarks, we borrow in Japanese yen, but we generally have to swap the stuff back. We get into derivative business, which is a bit of a dirty word, but we generally have to swap these things back into U.S. dollars, either fixed or floating, depending on what the requirements are.

It's the reputation of the organization and its reputation on the international market, plus our treasury skills, that has enabled us to go into the markets at the right time and get the right package of money, if you want, at the right rate. It's always as low a rate as we can, so that we can then turn around and re-lend it at a competitive rate and enable our exporters to be competitive in the type of offerings they make.

Our portfolio is balanced, not on a loan basis, but on a portfolio basis. So generally if you look at our loans on our payables, we end up having a fairly good balance in that regard. But on the treasury operations as well, we try to balance our currencies. We're into the swap business and we manage those accounts in a reasonable fashion, with the result that we have very good credibility on the international financial markets, and that's what is helping us help Canadian exporters.

Because we don't borrow in Canada, we are a large part of Canada's foreign borrowings. But the argument we like to make at the rating agencies is that our loans are fully backed by other loans receivable; they're backed by equity; and they're backed by provisioning.

So in terms of security of those loans, it is very good. That's why we have lots of credibility with the borrowers every year. But we spend a lot of time with international lenders, explaining what it is we're doing, explaining our balance sheet, explaining what a cashflow situation is, and how we're going to apply those loans.

Mr. Flis: Why do we not borrow more on the local market as opposed to dealing with the national markets?

Mr. Labbé: There are a couple of issues. I think initially there was a desire not to be seen to be crowding out the requirements on the national market.

The second thing, and the reality as well, is that most of the loans we make are denominated in U.S. dollars. So in some sense it would be better to have the balance sheet of the corporation done in U.S. dollars than Canadian dollars, because we get hit in huge fluctuations with the changing currency of the Canadian dollar. It's a challenge we're facing right now and examining, but because it's the currency of international trade, most of the loans are made in U.S. dollars. So we borrow in U.S. dollars or we borrow in other currencies and swap the U.S. dollars.

Mr. Flis: I have time for one final comment rather than a question.

EDC has put out quite an impressive annual report here. This is also Save Our Trees Week, and I wonder why you do not use recycled paper and why you would put out such an expensive report.

When I get these annual reports from big companies I usually send them back as a reminder that when you can do it a little more cheaply and on recycled paper I will read them.

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Mr. Labbé: I'm reassured that it is on recycled stock. We're certainly conscious in that regard. I apologize that the recycle symbol is not on it, but I've just been reassured. It was one of the decisions we made with regard to the recycle stock.

As to why we put out this kind of report, this corporation has practically $10 billion in assets. It borrows a couple of billion dollars internationally in every market. We have a billion dollars worth of revenue. It's a world-class corporation and we have to deal with international borrowers who are fairly sophisticated. I don't say this is the be-all and end-all, but our position is very important in that regard. We use this very much as a marketing tool.

It's the reason why you have a larger MD and A than you might otherwise have. It's also one of the reasons why the Auditor General gave us an award last year; it wasn't just because of the presentation of the annual report, but also its content. We do a lot of disclosure and we use it extensively, not only with the people from whom we borrow money but also with the banks that sell our paper to some of their smaller depositors.

It's important to have the right image. That's why we have, over the years, put so much effort into the annual report.

Mr. Flis: Corporate image -

Mr. Labbé: It's a corporate image.

Mr. Flis: - should be in keeping with the goals of all departments of the government so that we're working together.

Mr. Labbé: But ours is somewhat distinct in the sense that we are dealing in a very competitive international market, both on the borrowing side and on the lending side. When we walk into a large borrower utility somewhere and tell them that we can put their financing together, we can put it together fast, and we are a professional organization, that helps our marketing.

Mr. Flis: Thank you.

Mr. English (Kitchener): Thank you for the very good presentation today. I think you answered a lot of our questions.

The Library of Parliament very kindly circulated a column by Terence Corcoran about the EDC.

The Chairman: He's one of your non-users, Mr. Labbé.

Some hon. members: Oh, oh.

Mr. English: You said in your presentation that your American counterparts were very complimentary about the EDC as being most sophisticated and responsive. In this, Mr. Corcoran said that EDC has 500 employees to administer $10 billion in assets and the comparable export lending agency in the U.S. needs only 350 employees to shuffle the paper on $52 billion in assets.

I'd like to give you the opportunity to respond to Mr. Corcoran's comments.

Mr. Labbé: There are a couple of things. I think as politicians you must recognize that you can't please all of the people all of the time. While Terry was very critical, a number of other people, including David Crane, Jim Ferrabee, and a number of people in Montreal, thought we were doing the right thing.

Mr. English: Yes, we have the other columns, too.

Mr. Labbé: The only comment I would make to Terry Corcoran - and I've had conversations with people at The Globe and Mail, though not with Terry directly - is that if he wants to use the EXIM Bank as an example, he should have said as well that the EXIM Bank cost the U.S. treasury $800 million a year. That's the other reality.

Another thing is that we are in more businesses than the EXIM Bank. We have an extensive credit insurance business as well. There's an issue of critical mass that we need to be able to administer our portfolio, and we're actually very thin on some of that stuff.

In terms of our ability to respond - to get back to the article by Terry Corcoran - we have the thing I mentioned earlier, the report to the U.S. Congress by the EXIM Bank. I'll give you that. It gives you tables of where they think we are.

I think the issue Corcoran did not address is that we are partnering with the Canadian exporters as well. They are assuming a part of the risk; that's providing us a higher degree of security, and together we are doing, I would argue, better than a lot of other organizations. A lot of these airplane financings are either driven by tax credits, which are not available in Canada, or some other instrument, and we are trying to be creative and as flexible as we can. I think we're succeeding.

Mr. English: One other point he makes is about the change in your mandate. He talks particularly about joining up with Bombardier, which you alluded to as well. He writes:

Using its new powers, the EDC announced it was joining Bombardier to set up a joint financing outfit to sell Canadair Regional Jets to Air Canada, stretching the bounds of export finance logic.

How can a Canadian corporation selling regional jets to another Canadian corporation become a vehicle for export financing by the EDC?

Can you respond to that in terms of your mandate?

Mr. Labbé: The vehicle we're putting together is a vehicle that's going to look after export planes generally. With that kind of situation you first of all need the vehicle, and in that vehicle you need a portfolio of operators that is very diversified. Eventually you may end up being able to sell off to other people that paper you've accumulated. What you need is a diversity in the portfolio.

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The inclusion of Air Canada has a couple of things. First of all, we want to build up this portfolio. That's one of the transactions that are there right now.

The other reality is that the financing of these aircraft to Air Canada, fortunately or unfortunately, is done through a tax vehicle in the United States that provides equity providers in the United States and debt from Canada and other places.

So it's a rather complex international financing structure, but it's going to be part of a broader pool of things. The biggest challenge we have in terms of aircraft financings is that we don't have as broad a variety of airplanes and buyers in that pool that will enable you to securitize it and sell it off as you would normally have. So the Air Canada deal is intended to be one small part of a much larger pool.

But we have only two aircraft, which is a bit of a handicap as well. If you look at GPA, for example - I don't know if you're familiar with it - it's a huge Irish-based corporation that does aircraft leasing as well. That's what this thing is going to be all about. They have 737s, they have Airbuses, they have 747s. It's that variety in the portfolio and variety of operators that enhances the credibility and the marketability of the paper that comes out.

So that's part of the thinking.

Mr. English: He goes on further to ask a question: using the business principle as a guide, you could lend to just about any company in Canada. How would you define the limits here? To what companies could you not lend? Why this particular company?

Mr. Labbé: There are two things. Our focus is export financing. What we're trying to do in this particular case - this is an exceptional case - is launch an aircraft that has a world market. The Canadian market for this aircraft is minimal compared with what this world market is going to be, but it has to be launched. You have to get a good customer base established so that you have a good market for that thing.

That as well is one of the driving principles with regard to the challenges we faced in terms of these aircrafts. They are $20 million Canadian a shot. The objective is to sell 400 or 500 of those things. You're talking about $20 billion. We can't do it all ourselves.

You're trying to put together new vehicles. Some of the airlines buy them themselves, but more and more, airlines don't want to own airplanes. They want to lease them. Then you have to try to figure out what kind of a facility you put together to meet that particular challenge. This is what we've been coping with.

Mr. English: I don't want to be the voice of Terence Corcoran any more.

Just shifting directions here, I noticed that you increased your exposure in China in 1994 over 1993. In 1994 there were many more indications of problems with China in terms of commercial transactions with the country.

How do you decide when to reduce your exposure to an area that is potentially troublesome? As you very well know, the history of the exposure of investors, etc., to areas, very much depends on what is popular at the moment. Mexico was; it's less so now. If we go back to the early 1980s, Mexico was popular, but by 1984 it no longer was.

At what point would you decide that you're too exposed to China and decide to pull back from it? What would you do? Would you cut off doing any new business in China?

Mr. Labbé: Quite apart from the China issue, you're really dealing with the crux and the greatest challenges an organization like ours has to cope with. I maintain that looking ten years forward, the greatest challenge we have is assessing not the economic capability of countries to repay their debts but the political stability issues that are going to be involved in those countries. It's a big challenge we have. It's a challenge we've always had, and in our risk analysis and our risk mitigation we have to take a number of factors into consideration.

For example, Mexico was a huge country of exposure for us back in 1984-85. We still have a fair amount of exposure. We had a billion dollars exposure in Mexico - short term, long term, and medium term - in this last go-around.

The difference in Mexico is that a lot of our loans right now are with private sector enterprises - banks, Pemex, Tel-Mex - enterprises that have a certain amount of substance, in the medium term, where we're still very comfortable with the ability of these enterprises to be able to repay those loans.

We are running into some problems on a short-term credit insurance side, because companies are having difficulty meeting their obligations and there are some extensions going on, but we think we're going to work our way through that without too much damage.

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The China situation is not unlike the situation we had in Algeria. Algeria had a huge exposure a few years ago and we gradually tried to work it down.

When do we make that decision? We try to review our portfolios on an ongoing basis.

There's no doubt we have a large exposure in China. It's a matter of continuing concern among ourselves as to how much more we can take. We have an agreement with the Canadian government to help us on some excess stuff right now.

We're looking at where the exposure is. Nobody wants any problems to happen in that country. The things we have financed are in areas of the country that probably have a greater degree of stability than some of the other areas of the country.

Obviously there's a lot of crystal-gazing when one gets engaged in that. But we have had conversations with the government on the size of the exposure and how much we can actually take. We're looking for facilities to be able to accommodate that, because there's a tremendous demand, as you know.

We're not alone, though. Most countries are running into the same problem with China.

Mr. English: So you have conversations with the government about -

Mr. Labbé: Our exposure, and what we can do, how we can mitigate it, how it's going to get paid down, and how we manage that particular exposure. It's an ongoing issue with the corporation. It's one we're managing as best we can.

We have considered the opportunity or the option of being able to sell off some of the China debt we have. Right now the situation on the international markets is not very good for national debt with a number of these countries, but that opportunity may re-present itself and it's another option we'll be looking at.

Mr. English: Is your crown corporation scheduled? You are a crown corporation. You talked with the government about the risk. If the government wants to encourage trade with a country about which you have doubts as to risk - without revealing, of course, the conversation you had with Mr. Volpe - how does that take place? How does that work itself out?

Mr. Labbé: It's a longer process. Many people are involved, obviously, both at the official level and at the administerial level. Ultimately it's a cabinet decision that decides it's in the Canadian interest to do something in a particular area.

We're talking about the Canada account right now.

Mr. English: What role does your board of directors have, then?

Mr. Labbé: They don't play that much of a role. They approve the general guidelines for our lending. If it falls beyond that, then we would go back to our shareholder and say, listen, this transaction has been put to us; it has these merits, it has these down sides; on balance... you make the decision; would you like to finance it or not? That's really the prerogative of the government. That's how it's handled, ultimately.

Mr. Penson: It just occurs to me that our exposure for China might get a lot more after the Prime Minister's recent trip, selling CANDU reactors.

I'll leave that there for the moment, but I do want to deal with a couple of other points, including the idea of taking an equity position in Bombardier and Canadair.

Mr. Labbé: Just a correction. We are not taking a equity position in Canadair. We are setting up jointly a specialized unit in which they will take equity and we will take equity. It's slightly different.

Mr. Penson: I appreciate that.

Haven't we really come full circle on this particular corporation? Didn't the Government of Canada own it at one point?

Mr. Labbé: Again, though, the point I would make is this is a very specialized financing vehicle that is going to be selling and owning planes, or mortgages on planes, or some equity in an asset that is actually owned or operated by somebody else; some airline somewhere. You have the airplane as an asset. If the operator goes down, you seize the asset.

What we have with Bombardier is the ability.... Obviously, though, they'll come back and refurbish that asset very quickly and put it back on the market. That is where their exposure is.

Mr. Penson: I understand what you're saying technically. I'm wondering out loud here. We were in this field completely at one stage, as the Government of Canada, and decided to get out of it. We'll leave that for a moment.

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My big concern is that as a result of the trade agreements we've put together it seems to me Canada is in quite a different position from the one we were in before, in that we have lots of opportunities under these new trade deals to take advantage of the GATT and NAFTA, for example, for our small and medium-size companies. In fact, they're going to have to become a lot more aggressive because even the Canadian market is going to be wide open to some extent and they are going to have to compete.

I know your mandate has been changed to service the small and medium-size enterprises. It seems to me this is a logical way to go for a corporation like the EDC rather than trying to finance operations for General Electric, who could probably finance the Government of Canada. They're big companies.

Shouldn't our mandate be focused more on getting more small and medium-size companies into the export business? To survive, isn't that the way we are going to have to go in the future?

Mr. Labbé: That's interesting, and a good question. I'd like to make two points. First of all, the mandate really hasn't been changed to help the small and medium-size enterprises. We're just using our powers to do more to respond to the needs of the small and medium-size enterprises.

The second point I'd make is that the financing we're talking about right now, even though it's done by large enterprises, would probably not be done if we weren't there. We are in a high-risk area. We're extending credits for long periods of time at fixed rates. The banks are not there. Nobody is there. The export credit agencies around the world are doing that kind of business.

Until the foreign export credit agencies disappear or something else is brought into place, you need a vehicle to be able to support your Canadian exports. If we weren't there, it wouldn't happen. I can cite you a number of enterprises that are in this country because of the Export Development Corporation. If we weren't there, they wouldn't be there. In that sense I wouldn't want to downplay the role of the Export Development Corporation any more than one has to, because I think it's a very critical element in Canada's international competitiveness.

With regard to the small and medium-size enterprises, yes, there's a big challenge, and we have to do more. I always have a concern with regard to trying to bring small and medium-size enterprises to the four corners of the world. Exporting is already one thing. A lot of them are exporting to the United States, but more and more of them are exporting into Mexico or had been exporting into Mexico. Once you cross that other river into a different language, into a different culture, you're better equipped to expand to other markets.

There have been good examples of Canadian enterprises that have gone from the States to Mexico and then beyond. I would argue that our ability to help them is contingent upon our presence in those markets, and the fact that we work with some of the larger enterprises also gives us a much better understanding of the operations of those markets, of the players, of the large banks, of the ability of the large banks to give creditworthiness to buyers. If we weren't there for the large businesses, we would not be very useful to the small businesses because we couldn't do business in a cost-effective manner.

Mr. Penson: The point I was really making here is that, yes, I understand what you're saying; you need that presence. But in order for small and medium-size businesses to survive in Canada, they are going to be facing increased competition even here in our own markets. Aren't they going to have to reach out and start to look for markets outside of our country and therefore have more demand on your type of services?

Mr. Labbé: They will, and I would argue that the capacity of the Export Development Corporation at this stage with regard to meeting that demand is not an issue. We could meet that demand. When you're talking about small and medium-size corporations, they are not large exporters in terms of the total of what their portfolio is.

If they export 10% or 15%, it may be important to them, but they have another 80% or 90% challenge with regard to their financial capability as well. That is not something the Export Development Corporation can answer. That has to be answered somewhere else. We are doing the best we can to be able to meet the needs of the small and medium-size enterprises in the international markets in that field where we play, which is on the export side.

Again, I go back; it's not an issue of capacity at this stage with regard to helping them. We have to be a little more effective and we're trying to find ways of being more effective to help them.

Mr. Penson: Are you working with them to make them aware of your services?

Mr. Labbé: Yes, we are. John Hutchison was a little modest a few minutes ago in terms of what he was doing for the export, but we're receiving 80 to 90 calls a day on that 1-800 line in addition to a number of other things. We are focusing our marketing effort to try to help them more.

The Chairman: Just on that point, you'll recall that our next project will be a study into small and medium-size businesses. We'll have a chance to have the vice-president back here to go into detail as to what the perspectives are in that respect.

Mr. Volpe, you had a short question.

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Mr. Volpe (Eglinton - Lawrence): Yes, very short. I just want to pick up on the direction of Mr. English's last question.

Monsieur Labbé, when you're constantly upgrading your analyses of the economic environment in your markets, you don't do that independent of the two departments involved in foreign affairs and international trade, do you?

Mr. Labbé: Oh, no. We source Foreign Affairs and International Trade. We source the World Bank. We source the banking community generally. We'll grab information wherever we can to try to maintain our analysis current. There are all kinds of international publications as well that look at various countries.

We try to take as much of that as we can and distil it to make our views, given our exposure to the market, our capacity to do more things in the market and what we think the risks are.

Mr. Volpe: I had occasion to read your analysis of what was going on in Cuba just recently. It didn't seem to jibe with what our ambassador on location is doing. I don't think I'm doing him an injustice if I describe him as a little bit of a dynamo trying to make sure that every Canadian who wants to do business in Cuba has access to the highest decision-makers in the country.

Mr. Labbé: We've had a long experience with Cuba. We've been very accommodating. They have some practical limits as to how much they can borrow and how much they can pay back. We are being as flexible as we can with them. We've had a very good relationship with the Cubans. We're trying to figure out if there are additional ways we can help them through this period.

They do owe the Canadian government money and they are not able to pay it back. It gets a little difficult at times to extend future additional loans to debtors who are finding it hard to meet their existing obligations.

Having said that, there are new, different, creative ways to do some financings on a shorter term. We are exploring a number of them and actually have acted on some of them as well.

The practical limit is how much Cuba can afford to borrow and be able to pay back.

Mr. Volpe: There are other countries, as you're well aware, that are going into Cuba and making loans to achieve exactly what you're trying to achieve in many other areas. Some of those countries, France being one of the latest ones, are supplanting Canadian producers by economic instruments they're making available to Cubans.

Mr. Labbé: I get back to the issue we've been talking about here. How much exposure can you afford to take in a reasonable fashion? Unless you want to write it off. Is it not more an aid issue than a loan issue? That's another aspect of Canada's international relations that we have to examine.

We're trying to do things in a businesslike fashion, and I think there's a lot of merit in doing things in a businesslike fashion. Having said that, I recognize nonetheless that a number of countries have additional needs. If we can't meet them in a businesslike fashion, rather than trying to mask them with some other quasi-loans that aren't there, shouldn't we be addressing the issue squarely on the aid side rather than having some mixture of the two that tends to confuse the whole issue? That's a question back to you.

Mr. Volpe: So we should remove the ambassadors who are hustlers for Canadian businesses.

Mr. Labbé: There are hustlers for Canadian business and there are Canadian business people we have been able to support over the years in a very difficult time nonetheless. The issue basically then is how much more risk you want to take.

Mr. Volpe: Fair enough.

Mr. Labbé: I don't want to say Cuba is this type of situation, but we have run into situations over the last few years where the country has completely disappeared.

There's no more government in Yugoslavia. We had loans to Yugoslavia, but there's no more Yugoslavia. I don't think those loans are going to get paid back. They aren't large loans.

The international environment has changed fundamentally.

The Chairman: What's your security for those loans, and how do you seize it?

Some hon. members: Oh, oh.

Mr. Labbé: I'm not saying that's the Cuba situation; don't get me wrong. There are issues nonetheless that are not easy in this environment.

Mr. Volpe: That's probably for another discussion. Thank you very much.

The Chairman: I wonder if I could just, in closing, follow up with two themes that may call on comments. They follow up on Monsieur Paré's and Madame Beaumier's lines of questioning.

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If we are to persuade the Canadian taxpayer to continue to fund an operation like EDC, it seems to me the very significant problem you have to face is that you're operating in an international environment where your competitors - COFACE, EXIM Bank, etc. - are operating with different ground rules.

You say you will not lend below your cost of funds because you are operating on a commercial basis. We know they lend below their cost of funds, and therefore you are competing with them on an unequal basis. They are willing to let their taxpayers bear the brunt of this competition.

We know there are OECD rules that are supposed to prevent this form of hidden subsidy. We know that within the subsidy code there are references to this. But so far the international community has not been able to enforce those rules.

Do you think that in the context of the World Trade Organization we will see a better enforcement of rules governing your foreign competitors so that you're carrying on your business on a more level playing field? That's my first question.

My second question is a follow-up on Madame Beaumier's question, and it seems to me it's something we have to come to grips with as well. Clearly the means of production in the world have changed enormously.

In your answer to Madame Beaumier, you said you're lending to Northern Telecom and you've reduced to 50% or 60%, even bearing in mind that the philosophical basis of your organization was to create employment in Canada. You've moved this concept to a much more indirect notion of employment. You support Northern Telecom even if it's sourcing from South Carolina, because in the end Northern Telecom is going to be able to create employment in Canada.

But when Northern Telecom becomes a vast international, transnational corporation and loses its Canadian identity, only the tail is left of the Cheshire cat; not even the grin is left in Canada. The president is now an American president.

It seems to me we are now into a new ball game, Mr. Labbé, where the very principles and philosophical underpinnings of the creation of your organization have slid away from us by virtue of the nature of modern production, which is now transnational rather than national.

I appreciate that you have to operate in that environment and I'm not criticizing you, but I'm trying to get us as a committee to understand what we can do in these circumstances, particularly where services are now replacing the manufacture of products as an important component of the export.

You alluded to that in your answer about Northern Telecom. But are the service factors in Northern Telecom being produced in Canada and creating Canadian jobs or are they being produced in the United States and creating U.S. jobs there too? To what degree are you focusing on these issues?

I'm not saying this is easy. I'm suggesting to you that if you're going to be doing a Northern Telecom deal with China, maybe you should be doing a joint venture with the EXIM Bank of the United States and let their taxpayers help bear some of the burden of the loan financing for it too. After all, they're getting a big part of the benefits.

You seem to be going in this direction. I wonder if you see that as a future way to handle this aspect of the problem.

Sorry; I've thrown a lot on your plate. Everybody's tired and they all want to go home, including you, but....

Mr. Labbé: No, not at all. You're touching on some very fundamental issues; there's no doubt about it.

Let me go back to our competitors and concessional financing and so on. It's more than concessional financing. If you talk about loans that are being extended right now by Germany to the former Soviet Union, they are huge. They had $10 billion extended just a couple of years ago.

They're commercial loans, but whether all of them are actually going to get paid back or not is something else. They are doing it for political reasons; they have to do it. There are all kinds of issues driving that.

It's not a market in which Canadians are highly competitive anyway. It's pretty far away. We're doing a few things with some Canadian enterprises, but there's a lot of other areas of the world that Canadians are more directly attracted to.

I think you have to separate the concessional and the non-concessional. On the concessional, my sense is discipline has been brought to bear within the OECD Helsinki accord. On the non-concessional - and there's a huge lot of that - my sense is all governments are running under increasing pressures in terms of their ability to fund a number of things. The social costs in the various countries are increasing. The budget deficits are the same all over. That's going to bring a degree of discipline into that area as well.

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Will we ever get rid of it completely? I don't suspect we will. Can we afford to go head-to-head with these people on those markets? I say we can't. What we have to do is try to be more creative with some of the things we're trying to do. That's how we're trying to manage that particular aspect.

Getting back to Northern Telecom and others, we talked about services, and services are very important. Fully 12% of Northern Telecom's revenues are spent on research and development, and a big chunk of that is spent here in Canada - not as much as was before, but a big chunk.

Ms Beaumier: It's getting smaller and smaller.

Mr. Labbé: You cannot have a multinational or global enterprise based in one country. You have to make up your mind which way you want to go.

If you don't want to have a multinational or global enterprise, we can try to go back within the borders, but we would not be very big players anywhere right now. We were talking about services. The services are not just the R and D services; they're the management services, the technology and all of those things that go on. That's part of the equation.

Yes, we are always challenged a bit to try to figure out how far we can go. One switch may be less than 50% but another switch is more than 50%. How do you manage that particular thing? Those are the issues we have to come to grips with.

Take automobiles. When we talk about the automobile sector, what is the Canadian component of even an automobile that's manufactured in Oshawa? I would imagine that if you were to look at some of the imported automobiles, you'd probably get as much North American content as you'd get on another automobile.

This is a reflection of what is going on in the power sector, in the telecommunications sector, in the aerospace sector and in all large sectors. What you want to do at the end of the day, though, is have the capacity, the capability, the vision and the presence to take on those industry sectors.

We want to be able to say we can be a world leader and we can help Canadian enterprises to be world leaders. We can help ongoing exports or we can go with another enterprise and support them as much as we can, recognizing they may not be there for the long term, but they're creating jobs, so we'll keep on doing some of those things for the short term. They may disappear.

I don't have an answer for you.

The only other thing I would say is if you are a leader in packaging and you're putting things together, you have an ability to establish and control that market and to partner with other people.

We are endeavouring as much as we can to partner with other organizations. We have partnered with other organizations on financings of projects in third markets, whether it be power projects in Thailand or China or something in Indonesia.

We've put together financing packages for a big power plant where we've had the EXIM Bank, the Japanese EXIM Bank and the Export Development Corporation each financing a portion. A big part of the driver was nonetheless the Canadian capacity to be able to go out there and identify the project, structure it and bring it together.

The Chairman: From what I'm hearing from you today, it seems to me that the national EDC, which was founded, as you said, some years ago -

Mr. Labbé: Fifty years ago.

The Chairman: - with a view to creating jobs in Canada, has moved from that vocation to being a major player in the international or global financial marketplace. You see that as your way of supporting Canadian jobs and exports in the best way you can in the present globalized, international economy of goods, services and finance.

That is the way I would summarize what I've learned from listening to you today. I suppose we, as a committee, have to absorb and try to understand that and maybe decide where the policy of the Government of Canada could be.

We quite understand you're speaking in a NAFTA context. The Government Canada has already put us into NAFTA, so we can't say we should keep you, as an organization, trapped in the 1950s if in fact we've moved into the future.

As members of Parliament, we've benefited a great deal from your testimony and your reflections. You've given us a great deal of food for thought, Mr. Labbé. We appreciate your coming here.

Mr. Labbé: On your last comment, Mr. Chairman -

The Chairman: You're not going to let me get away with that summary, are you.

Some hon. members: Oh, oh.

Mr. Labbé: I was reacting to your interpretation of my projecting the Export Development Corporation as being a major player in international financing.

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We try to be able to play. The Canadian exporters need us to be able to play, toe to toe, with the other partners.

When a Canadian exporter is trying to put together a project, its ability to maintain control of that project depends on its ability to bring financing and to be able to control the other players. If you have a credible organization with you, you can do that job.

I think that is different from some of the issues we're talking about right now with regard to the Canadian content of an export from Canada. If you're talking about an airplane that has parts that are bought somewhere else, brought into Canada, and then incorporated into the airplane, which is then shipped out, that is the issue with regard to Northern Telecom and that is the issue with regard to the airplanes.

The reality, though, is that you still control the market for all of that airplane. There's a lot of ongoing business in terms of servicing, maintaining, upgrading and additional sales to those particular buyers. This business is also important for Canadian exporters.

Ms Beaumier: I think there's one issue we're forgetting in all of this. You're talking about the service aspect of a switch being the Canadian content.

I think everyone seems to forget you can only sell a service once. You only create a service once. Once the service required to build that computer component is made, no longer does it employ Canadians, because it is there to be mass-produced.

So to take the service aspect and consider that 50% Canadian content does not benefit either research and development in Canada or the labour market in Canada....

Mr. Labbé: I guess the argument I can make is that there is ongoing servicing of those switches. There's ongoing upgrading of those switches. Lots of software goes into those switches. This software is continually upgraded after the switch is sold. This is an ongoing market. This is a market that is controlled by the enterprise that sells the switch.

The Chairman: On behalf of the committee, thank you very much for coming. We'll be able to pursue with your colleague the issues for small and medium-size business. We look forward to that and to working on some of those issues.

Mr. Labbé: Thank you very much.

The Chairman: Members, we will finish with a short meeting in camera.

[Proceedings continue in camera]