International Trade Committee on Feb. 13th, 2007

[Stephen Poloz]

Thank you for the question.

It's probably not appropriate for me to comment specifically on those moves. As a general proposition, although I would like to see more feet on the ground, I also would like to see them optimally allocated. Strategically we don't have limitless resources in this respect. Those kinds of decisions, to the extent that I've seen them, are driven by the business needs in the locale, and there are more demanding needs in other market spaces such as China and India--not just in China, but in specific places in China. Perhaps with respect to St. Petersburg, for instance, there was not a lot of business happening in that specific location, so the resources are better spent in another location. That's an hypothesis worth examining.

In the case of the emerging markets, if you look around the world, you see basically that emerging markets are growing on average more than twice as fast as our established markets. So yes, there is still a great opportunity for us to grow our business, let's say, in Japan. Of course there is. It's an excellent marketplace. Yet the degree of leverage or lift that you can get from an additional resource may be two or three times as great if it were, let's say, somewhere in the GCC, or in India, China, or Brazil. I think when you have limited resources, you have to look to see where the lift would be greatest. Certainly that's what we do at EDC.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

Yes, I know.

[The Chair, Conservative, Leon Benoit]

You have about a minute left, Mr. Bains.

[Navdeep Bains, Liberal, Mississauga—Brampton South, ON]

I appreciate that.

With respect to infrastructure, you alluded to that in your comments as well. I think that's a very important subject matter, because Canada is a trading nation and we have to prepare ourselves if we increase trade. You indicated a two-pronged strategy, maybe not just bilateral trade but also trade in investment as well, perhaps as a step-by-step approach. In order to prepare for that additional increase in trade, we need to invest in infrastructure.

You mentioned ports and other examples. Where do you think the money should be spent? Again we're dealing with limited resources, so what would you prioritize as our number one weakness in infrastructure where we need to invest?

[Stephen Poloz]

Thank you.

Perhaps rather than characterizing it as a weakness, it's a potential for opportunity. I would say the top of the line for me is ports. I know we have good capacity in Halifax and Montreal. We have a tighter situation on the west coast, and for sure on the U.S. west coast. It seems to me that with the extreme tightness in the U.S. west coast, we do have a significant opportunity there that dollars spent in the Pacific gateway could have immediate payback.

I also saw a presentation last week from someone from Halifax that showed us that when we're looking at India as a market space, the distance from India to, say, Chicago is substantially reduced if one goes through Halifax and connects into the nodes that way than if one goes in the opposite direction. One saves several days worth of time and money. So we do have the solutions to offer to the world. This is another place where branding could be very helpful, because those ships can go almost anywhere they wish. We have some capacity, and I think on the west coast an opportunity, to truly develop it.

It's not just a port, though, because you have to be able to take the containers and move them to Chicago or Los Angeles or wherever that destination is in the United States. So you need the rail and the bridges or the other conduits. It's a package deal.

[The Chair, Conservative, Leon Benoit]

Thank you.

Now we will go to Monsieur Cardin for seven minutes.

[Serge Cardin, Bloc, Sherbrooke, QC]

Thank you, Mr. Chair.

I would hate to create a conflict between the new president and the senior vice president of EDC, but, Mr. Poloz, I want to know why you say on the title page of your submission: “The views expressed here are those of the author, and not necessarily of Export Development Canada.”

Are there differences between your policies and those of the new president? Which of the views expressed in this document are specifically yours?

[Stephen Poloz]

This is a standard clause in the economic world. There is usually a very distinct separation between risk analysis, and particularly economic analyses, and decisions made about transactions.

We routinely use this formulation. It does not indicate that Mr. Siegel does not agree with me. As a matter of fact, I think he is in complete agreement.

[Serge Cardin, Bloc, Sherbrooke, QC]

So this is some kind of a precautionary measure?

[Stephen Poloz]

Yes.

[Serge Cardin, Bloc, Sherbrooke, QC]

This is normal in the insurance business.

[Stephen Poloz]

Yes, it is.

[Serge Cardin, Bloc, Sherbrooke, QC]

Since we are talking about insurance, I want to refer to the dispute you have with a company named Iron Ore. I think the case is public now. This company is suing EDC, I guess, and the case is presently before the courts. According to section 2405 of the Quebec Civil Code, an insurer cannot unilaterally end the term of an insurance policy. It seems this is exactly what EDC did and was doing for several years.

It was generally mentioned earlier that people did not know all of EDC’s services. But if the people who know them are being bullied, so to speak… This is in the area of receivables insurance. There are monthly fluctuations, so premiums vary. However, there is normally a contract with a term of one or several years in order to set the premium based on volume.

These are often open corporations for which risk assessment is possible. When EDC knows a client has receivables, how can it cut off his insurance? This puts the clients, with whom it is supposed to establish a relationship of trust, in a rather precarious situation.

[Stephen Poloz]

Thank you.

I think I will let my president answer this question.

[Eric Siegel]

Obviously I can't comment on the specific case; that's a matter before the court. But let me explain that EDC credits insurance. We provide receivables insurance. We're not the only provider of receivables insurance; in fact, there is a private market, and there are a number of private market players that provide this same product. The same principles apply to EDC as to the private market, that is, we provide a coverage for exporters against receivables that they wish to incur with foreign buyers. They have to approach EDC as they would have to approach the private market, and they actually have to get an approval for their ability to ship against a foreign buyer.

From time to time the risks will change, and the insurer will notify the insured if there is a change in risk that affects the price under which they're prepared to provide receivables insurance on a going forward basis--not retroactively--or if they're no longer in a position to provide that coverage.

You'll appreciate that in the private market they are not only providing that insurance, they are actually calling upon the reinsurance market to provide a great deal of capacity, and the reinsurance market is prepared to do it on the basis of the program's being structured in that way.

So EDC's coverage is no different from the private market's. This is a product that has been offered for many years, and this is the basic convention on which it's provided in order that the insured understands what coverage they are getting, and the insurer is able to provide adequate risk coverage.

Now, at the same time, Mr. Poloz indicated a situation that we faced in the automotive sector, where that type of coverage would not provide the type of protection that suppliers to the automotive sector might need. For instance, there was a risk that General Motors might file for bankruptcy, and we had suppliers who were under contract to provide goods and services or parts to GM for, say, a period of a year. If there were to be a filing by General Motors, they would find themselves in a situation whereby they had goods that had already been shipped for which they were not going to be paid, and in fact might have had to continue to provide goods, notwithstanding the bankruptcy. They wanted to seek out coverage for that.

At that point, conventional reinsurance would have.... The private market was doing exactly what it would do. When the risk got to a point where it was prohibitive, they were saying they were not going to insure new sales into General Motors. Anything that had been insured under the existing policy continued to be insured until one had been paid, or if not paid, one would be able to claim under the insurance.

EDC stepped up and provided a whole different insurance policy in order to cover the new risk and provided, in a sense, a non-cancellable period of coverage for a period of time until the disposition of General Motors was better known. Ultimately, when the filing risk went down with General Motors, parties returned to the conventional receivables insurance.

[Serge Cardin, Bloc, Sherbrooke, QC]

Do you generally have a reference period? Do you analyze risk on a monthly, weekly or daily basis, in order to determine when risk goes over an acceptable limit and when it is time to resort to insurance?

According to section 2405 of the Quebec Civil Code, you cannot unilaterally change the terms of an insurance policy. If you are dealing with a Quebec client, which legal provisions apply?

I also want to know on what period you are basing your risk assessment. How often can you change your insurance terms?

[Eric Siegel]

First, do we provide it for a term? We do. When an individual takes out a receivables insurance policy with us, they then approach EDC and identify particular buyers that they wish to ship against. EDC then provides an approval up to a certain limit that they can ship to that player.

If there is a change in the risk, it is the obligation of EDC to then approach the insured and advise them that there is a change. If on a going forward basis it affects either the premium or ultimately the level of coverage, then the insured is aware that future sales are now subject to change in terms of the insurance coverage. But we cannot change retroactively that which has already been shipped and insured under that period.

You also made reference to the civil code. I'm not a lawyer, but obviously the question is whether that really applies to credits insurance or whether that is a factor more applicable to property and casualty insurance. Clearly the concept of taking out an insurance policy, under property and casualty, for a defined term and the inability of the insurer to change that within the defined term....

Credits insurance is a very different product, though. Credits insurance is based on a series of continued declarations on ongoing shipments for which the insurer is constantly monitoring the risks and constantly advising if there is a change in those risks. So if the risks deteriorate, the insurer can reduce its coverage on a going forward basis--as I say, not affecting it on a retroactive basis.

[The Chair, Conservative, Leon Benoit]

Thank you, Monsieur Cardin.

We'll go now to the government side.

Mr. Menzies, seven minutes.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair.

Congratulations to you, Mr. Siegel. I don't imagine our support was necessary, but I am glad we were able to show it.

Thank you, Mr. Poloz, for your presentation. I enjoyed reading the piece you had provided to us in advance. It's always nice to get these in advance, so thank you for that.

I want to pick up on your comments about per capita productivity increasing sixfold in the U.S. and fivefold in Canada. That's an interesting dynamic, and we've heard different explanations from different witnesses for what's causing that. You referred to it as a paradigm shift.

Is this just part of the fact that Canadian companies, in fact companies worldwide, are exporting more services than merchandise?

And I guess taking that as a premise, how is EDC changing to adapt to that?

[Stephen Poloz]

Thank you.

To back up a little, the story really doesn't distinguish between goods or services, but what it envisions is that the process of taking an idea and ending up with a sale, whether that sale be of a service or a good, usually involves a sequence of activities, some of which could be thought of as services and others that involve merchandise in one form or another. We usually think of the ideal model as being a vertically integrated firm that has just the right combination of things in-house, and from basement to top floor everything happens and they earn a nice cheque from somebody abroad. That's the traditional export model.

What is happening in this world of better communications, lower trade barriers, and better logistics providers is the ability to take that model and disintegrate the firm, and take the pieces, whether they be service or production pieces, and locate them globally wherever they make the most sense to the company. With that disintegration of the company, what you need then is international trade to tie it all back together again so that you can actually do the export trade.

You need to do trade twice, as a supply process and then as a final sale process. What that means is the productivity improvement that the company enjoys depends on the distributed model. If you're unwilling to take this slice and move it to India, let's say, for some reason or another, you don't pick up those extra few percentage points of productivity improvement domestically.

If it's a low productivity task that we're talking about, if you move it to another country, it just disappears from Canada's statistics. Therefore, you get the so-called productivity miracle that the U.S. has enjoyed, and you can argue that although, of course, there are people who do that low-productivity task, their jobs are at risk from that reallocation globally.

The improved purchasing power and the extra income that is generated generates jobs in many other sectors. The biggest one in Canada has been in the construction sector, as the higher incomes have generated a much bigger demand for housing, bigger and better houses and additions and all that. So there's been a lot of construction work.

That's why we have record low unemployment even though this is going on, because people are transferring into other sectors of the economy that are expanding as a result of this underneath phenomenon. That's why it's important to keep in mind that it's a 50-year story and not one that just began a couple of years ago. We've been coping with it year after year for two generations.

[Ted Menzies, Conservative, Macleod, AB]

I have many more questions, but I would like my colleague Mr. Lemieux to have an opportunity.

[The Chair, Conservative, Leon Benoit]

Mr. Lemieux, go ahead, please.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Thanks, Mr. Poloz. I enjoyed reviewing what you had submitted to us as well.

I have a couple of questions, actually, on the models that you're presenting, particularly the one that you have of a company looking outward and integrating its imports to help it build a product that it may eventually export.

One of the questions I have is this. From your point of view, which technology market sectors in Canada seem to be transforming themselves, or basically taking advantage of this business model you're proposing?

Secondly, what is the ratio--you might not be able to quantify it, but you might be able to comment on it--between companies that are transforming themselves to take advantage of this model and new startups that are immediately starting into this new model. I think of something like textiles. They have a very hard time transforming into the model. It's a whole sector of the economy that's affected. But there are new businesses, in fact, that spring up and they just immediately take advantage of what you're talking about.

Would you comment on those two questions, please?

[Stephen Poloz]

Thank you. Those are both good questions, and they do allow me to finish what I forgot to say to Mr. Menzies.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

I'm glad to help.