Export Development Canada (EDC) is a unique institution when compared to other export credit agencies. With its progressive business model, it represents Canadian interests overseas with more obvious success than its counterparts in other countries. Yet its tactics still provoke debate, writes Rebecca Spong.
During a recent conference Eric Siegel, president and chief executive officer at Export Development Canada (EDC), spoke in defence of EDC’s unconventional methods, and dismissed some of the criticism it still receives as merely fuelled by ‘envy” and ‘distrust’.
Speaking at an event organised by the Montreal Council for Foreign Relations (Corim) at the end of September, Siegel presented his arguments to the audience: “EDC stretched to meet its mandate and today it is a major player in Canada’s trade. I am proud of that. I think that’s something to be admired. I also know that growth in size and importance can attract envy or distrust. I happen to believe that EDC is poised, for a number of reasons unique to the Canadian business and financial scene, to make a very real and positive contribution to our country’s success abroad.”
He added: “I know that opinion isn’t universal. We have our detractors who would like to see an EDC smaller in reach. I believe that would be a terrible mistake – costly to Canada’s exporters and investors and costly to Canada’s trade.”
During his speech Siegel openly compared EDC to European export credit agencies (ECAs) and even US Ex-Im Bank, drawing comparisons to highlight the failings of other ECAs.
“Some 20 years ago, the prime ECAs were those of France, the UK, and US. Today, in my view, those organisations preside over static and occasionally shrinking business volumes with fewer and fewer companies,” he remarked.
Backing his arguments with statistics, he reports in 2006 that UK’s ECGD had 20 customers, mainly in the aerospace and defence sectors, while French ECA Coface had 142. Even US Ex-Im only had 2,677, which was less than half of EDC’s total number of clients.
In light of EDC’s achievements, Siegel asserted: “I believe it is because our commercial model has uniquely positioned us to navigate the dramatic changes wrought by globalisation.”
Responding to globalised trade
This assertion is, in part, reference to the much-discussed shift in the global economy from the traditional two-way flow of goods from one country to another, to a three or four-pronged trade flow.
The continued globalisation of the world’s economies has led to companies relocating aspects of their businesses in order to keep costs low.
Products are now often made by a European or North American company through an emerging market subsidiary or factory and then shipped on to new markets. Or sometimes specific components are made in an emerging market and then shipped to an economy such as Canada where some kind of added value is given to the product and then it is re-exported again. All these trends present new challenges to the traditional export credit agency model.
But these effects of globalisation are now common knowledge and such trends have not appeared overnight. Yet EDC presents itself as one of the few ECAs making radical changes to its business model to reflect these new trade flows.
For instance, it will make investments domestically that will boost trade opportunities; it will invest as a bank in large-scale financings abroad or even take equity positions both at home and abroad in order to encourage Canadian exports into particular sectors or regions. It is no longer just taking on the traditional ECA role as ‘lender or insurer of last resort’.
Investment in the Americas
EDC’s business model has resulted in the relatively rapid increase in its investment in the emerging markets. Recent statistics released in September showing its business volume increasing by 30% over the same period in 2006, of which almost a third, C$12bn (US$12.27mn), involved trade with emerging markets. This marks a 58% increase from last year’s figures.
Out of the top six emerging markets EDC is active in, two of them are in the Americas. Trade with Mexico stands at C$1.12bn (US$1.14bn), EDC’s largest emerging market, while business volumes in Chile stand at C$559mn (US$571.24mn).
Over the coming year, the Chilean market is particularly attracting the interest of EDC, with the ECA hoping to open up some form of representative office in the country.
EDC’s most recent Chilean transaction was with the state-owned copper producer Codelco.
In September Codelco raised a US$400mn seven-year facility via initial mandated lead arranger and underwriter BBVA. EDC, as well as Royal Bank of Canada and Bank of Tokyo-Mitsubishi UFJ then joined the facility as additional mandated lead arrangers, with EDC lending US$50mn.
The deal is a clean unstructured facility, as is now expected with such a high profile large borrower such as Codelco. Pricing is also low, with the facility paying 12.5 basis points for the first year, rising to 20bp in the final two years.
Rob Forbes, EDC’s vice-president of international business development, spoke to GTR during his recent business trip to Chile. He explains why the agency chose to participate as a commercial player in the syndicated facility, rather than negotiate some kind of separate export credit agreement with the borrower, as is more typical practice for an ECA.
“Codelco made the firm decision four or five years ago that it wanted to consolidate its financing activity for efficiency reasons and because their credit rating allowed them to do that. They no longer wanted to do bilateral export credit facilities so EDC’s ability to change the way we provided our financing support and participate alongside other banks has allowed us to maintain our relationship with the client,” he says.
He suggests that in this “post-privatisation and liberalisation environment”, most buyers and borrowers have become highly commercial entities, even if they remain state-owned.
Maintaining a strong relationship with Codelco will be of even more importance given its activity in non-mining sectors. The Chilean company is particularly active in the power sector, a segment of the economy in need of investment and imports of equipment and services.
Codelco is in the process of issuing tenders with the aim of investing potentially over US$400mn on obtaining new power supplies. It is also developing a joint venture natural gas plant in northern Chile in conjunction with Suez Energy International.
The mining company’s interest in securing steady energy supplies reflects the wider trend in Chile to increase and diversify its energy sources. Chile used to rely heavily on supplies of natural gas from Argentina, yet in 2004 Argentina imposed damaging restrictions on its gas exports leaving Chile short of power.
Over the next decade and a half, Chile is expected to increase its capacity of its power grids, support the construction of new generating plants and invest in renewable sources of energy such as hydro-electricity. According to a news report from the government department, Foreign Affairs and International Trade Canada, Chile will need around 7,500MW of new power over the next 15 years.
Other Latin American regions showing promise include Brazil and Panama. In Brazil, Canadian exports rose sharply by 26%, partly due to Canadian pension funds making major investments in shopping malls and power. The prospect of free trade agreements being signed between Canada and Peru and Colombia are also signs that EDC will be more active in these areas.
Potential in Asia
Trade flows to and from India and China are becoming increasingly important for Canadian exporters, with EDC’s total volume of business in China for 2006 standing at C$872mn (US$890.5mn), and C$550mn (US$561.67mn) for India.
According to Canadian government statistics, total bilateral trade between Canada and India reached US$3.6bn in 2006.
However, these figures still remain lower than desired, and a number of initiatives are in place to further boost trade and investment with India. In June, a foreign investment protection and promotion agreement (FIPA) was signed between India and Canada.
A FIPA aims to provide a secure legal framework to trade and investment between the two countries. It encourages two-way investment by providing investors with a degree of security often required when dealing with emerging markets. Canada has previously signed one of these agreements with Peru in 2006, and is negotiating an agreement with China.
EDC has also been eagerly increasing its presence in India, having set up its second representative office in Mumbai this year.
Outlining EDC’s approach, Forbes comments: “In other markets, we tend to be more niche-orientated. When we look at a market like India, there are very specific sectors that we are targeting. You are not going to see Canadian companies in the headlines everyday, but we want to make steady progress based on long-term committed strategy.”
Niche sectors in India include the oil and gas market where EDC has participated in a syndicate of banks raising US$2bn syndicated loan for Reliance Industries for a gas exploration and development project off the coast of India this year. EDC provided a US$100mn loan towards this 10-year facility. It has also participated in a number of other syndicated loans raised for Indian companies such as engineering and construction company Larsen and Toubro and Hutchinson Essar.
China remains a far stronger trading partner for Canada than India, with imports and export volumes totalling US$42.1bn in 2006. China is second only to Mexico in terms of trade volume. Earlier this year a bilateral science and technology agreement was signed, following a visit to China by the minister of international trade, David Emerson. This agreement aims to change China’s perception of Canada as purely a supplier of natural resources.
Russia also offers a number of opportunities for Canadian exporters and EDC. At the end of 2006 EDC opened its first permanent representation in Moscow, and it has been negotiating various lines of credit with Russian banks such as UralSib Bank and VTB.
Trade between the two nations has also been on the increase, with EDC having supported US$750mn-worth of business into Russia last year, marking an increase of 50% compared to 2005. Again EDC is targeting niche areas of Russia’s economy, with particular concentration on resources and agriculture. With Canada and Russia sharing similar climates, Russia can take advantage of imported Canadian agricultural equipment designed to withstand both countries’s harsh weather conditions.
Stretching the mandate
Having already established itself as a fairly progressive export credit agency, as of this year EDC has gone one step further. In March the federal budget set out new regulatory changes enhancing EDC’s ability to invest in private equity and venture capital funds. EDC is also now allowed to invest in international partnerships that can also benefit Canadian companies through procurement, market intelligence and contacts.
There are three separate parts to EDC’s equity programme, including domestic investment in venture capital class, and domestic investment in private equity.
By making domestic investments, EDC aims to support companies whose staple markets are overseas.
Jennifer Brooy, EDC’s vice-president of equity, provides an example: “The technology market is not a Canadian market – they are next-generation exporters so by investing in these companies, directly and indirectly, we are looking to build the next generation of exporters, so in that way we meet with our mandate compliance.”
However, it is EDC’s third strand of its equity business; its expansion into investing in overseas equity funds that is generating most interest.
“The third piece of the programme, which we are very excited about, is that we are looking international to invest in funds that are largely in emerging markets. There are two sorts of funds we are looking at: infrastructure and private equity,” Brooy explains.
EDC has just made its first equity investment in India in August after committing US$7.5mn in Avigo SME Fund II. Avigo’s aim is to invest in high-growth small and medium-sized businesses in India. The fund also has a Canadian connection in that its managing director is Achal Ghai, a Canadian citizen and former investment banker with CIBC.
Brooy explains the motivation behind making equity investments: “By investing in a fund, we are looking to buy into a network where their people have their feet on the ground. Take India as an example, the fund managers there are investing in companies where they have an understanding of the strategies of these firms, their procurement needs and the types of business arrangements they might have to enter into.”
Brooy wants EDC to act as an intermediary between an overseas venture capital fund and a fund manager in Canada, which in turn may provide Canadian SMEs an opportunity to gain a foothold in an emerging market. “Making these kinds of connections between SMEs in Canada and emerging markets in India is very hard to do unless you really have boots on the ground.”
She adds: “The lion’s share of the Canadian economy is driven by SMEs and we have to ensure that they have a sustainable advantage in this global economy. You need to be a lot more creative and proactive to help these companies, and one of the key things they need is risk capital.”
As well as the Indian fund, EDC has signed off an investment with Thailand’s Lombard Investments equity fund in June, it has invested in a Europe-wide facility, European Clean Energy Fund, as well as in an Israeli fund known as Vertex Venture Capital. EDC is also working on closing an equity investment in China, and has started to make preliminary investigations into funds in Africa.
However, EDC’s almost aggressive pursuit of deals seems to have re-ignited calls for the partial privatisation of EDC or at least its reduction of its role.
From the perspective of some commentators and Canadian banks you find there is a degree of conflict of interest between the commercial banking sector and EDC. For instance, banks are happy to work alongside EDC on short-term letters of credit using the agency’s insurance cover. Yet the bank’s structured trade finance teams can almost find themselves competing against EDC for transactions. There are a few dissenting voices that wish to see the provision of export credits and similar financing tools left to the private sector.
In fact some market commentators have suggested that there may be some bankers harbouring a wish to see EDC become a little more like its counterpart in the US. One source remarks to GTR, “Most Canadian banks do a lot of work with US Ex-Im, where the bank finances the deal and US Ex-Im provides a guarantee. Many would secretly prefer this kind of model.”
Yet US Ex-Im only last year publicly aired the problems inherent in its own business model. In a report published in June 2006, US Ex-Im stated that due to the aggressive steps taken by other ECAs, US Ex-Im had lost market share of 15% to 20% between 2000 and 2005 while Canadian, French and Italian ECAs radicially increased their share.
The report states: “ECAs are faced with the choice of staying with the ‘made in/lender of last resort’s philosophy and seeing their business volumes shrink, or effectively following their national champions offshore by changing their content and business orientation.”
It is clear from Siegel’s recent speech what choice Canada has made, and in which direction EDC is heading. Referring to criticisms of EDC, Siegel argues: “At its heart is the notion that the efficient delivery of services on a commercial basis and public ownership don’t mix – at all.
He adds: “I happen to believe that effective delivery of commercial services and public ownership do mix. They do so for the benefit of Canada.”
In 2008 there will be an opportunity to challenge Siegel over his comments, and the role of EDC as there will be a full legislative review of the agency next year as required by the Export Development Act. This review will carry out extensive independently conducted research into EDC’s mandate and achievements. The last review was conducted in 2001.
Concluding his speech, Siegel presents this challenge to the Canadian market. “I also expect a few surprises during the review as well. I hope Canadian business steps up and speaks out.”