Slow and steady wins the race

The Export Development Corporation (EDC) is an agency of the federal government. EDC has been selling credit insurance since 1944. Over the past 56 years it has been advanced more than $1 billion in capital by Canadian taxpayers to support the expansion of its insurance and lending operations. The public also supports the agency in a number of other ways, namely the EDC has never paid any taxes, nor is it subject to the regulatory requirements in effect for the other insurers and lending organizations operating in Canada.

In the early 1990s, EDC rebuffed the efforts of the major banks that were seeking to establish fair competition between EDC and other lending organizations in Canada. Indeed, for more than five decades the agency has fought a sustained battle to maintain its initial mandate, rejecting the modernization that has been introduced by its counterparts in the U.S., Britain, Germany, France and elsewhere. Today Canada stands alone in its interventionist approach to supporting exporters short-term financing needs.

The EDC has worked hard to avoid operating like private sector financial institutions, as it does not pay any taxes and it has never paid any returns to its shareholders. The agency also works to avoid operating like other government operated credit insurance corporations, which have all exited the short-term export credit insurance markets because they have found that the interests of exporters can best be served by private insurers.

Leveling the playing-field

In particular, EDC clearly stated its intention to fight to maintain the public advantages that have allowed it to dominate the short term export credit insurance market in Canada. In 1998, they pressed for a quick review and affirmation of the agency’s mandate.

Nevertheless, the Insurance Bureau of Canada’s (IBC) credit insurance committee and privatization opportunities steering committee have been working to promote reforms that would bring Canada’s trade policy back in line with best practices found in other countries around the world. IBC argued that EDC should immediately stop underwriting domestic credit insurance and eventually get out of the short-term export credit insurance business. The quick 1998 review of EDC’s mandate continued through 1999 and is still ongoing at this time, awaiting a statement by the Minister of Trade. Furthermore, the IBC lobby also contributed to the decision that the agency would stop underwriting domestic credit insurance.

IBC succeeded in sustaining this debate about EDC’s mandate through an active research and communications program. In particular, the bureau’s research papers show that reforms introduced to better support the credit insurance needs of exporters in the U.S. and Europe have been consistently absent here in Canada. These reforms lead to increased competition, greater capacity and lower prices — the benefits of which have been absent in Canada. In brief, EDC’s counterparts have increasingly reduced and then eliminated their activities in the short-term export credit insurance market to focus their support on the medium and longer-term market.

The hard facts

The IBC also worked to document the many special advantages that the federal government has granted EDC over the years, advantages that have allowed the agency to maintain a near monopoly over this market for more than 50 years. For example, all credit insurance companies, except EDC, must pay income and premium taxes. All lending institutions, except EDC, which also market insurance, are required to manage their in- surance operations at arms length. All credit insurance companies, except EDC, must comply with insurance regulations to demonstrate that they are appropriately serving consumers.

Furthermore, IBC surveyed Canadian exporters to determine their views. We found that 94% have had problem with receivables not paid in full, the concern that is addressed through the purchase for credit insurance. However, less than 10% of Canada’s exports are covered by EDC. More than 75% of exporters believe that EDC should pay taxes and meet all of the other requirements governments impose on private insurers. Also, 90% of exporters would prefer to buy coverage in a competitive market.

Driving the message home

These arguments were presented by IBC in 1998 to the review team who assessed testimony from IBC and others who sought to share their views concerning EDC. The subsequent Gowlings Report included a primary recommendation that Canadian practices should be brought into line with practices currently in place in the other major countries around the world, advice fully consistent with the approach advocated by IBC and its members.

The House of Commons trade committee held hearings after the Gowlings Report was published. Again IBC shared the industry’s advice that EDC’s mandate needs to be modernized. The Senate trade committee also held hearings to discuss possible reforms to EDC’s lending practices. The Committee reports have been published in recent weeks so all interested parties are now waiting for the Trade Minister to announce the government’s current views.

Despite the strong lobby by EDC to maintain the status quo, and their long history of fighting to maintain their special privileged status in the marketplace, the insurance lobby has been successful to get our message heard in Ottawa. Human rights and environmental groups have also been vocal in their criticism of EDC’s lending and accounting practices. It is welcome news that EDC has stopped underwriting domestic credit insurance, and someday they should also follow the lead of the other major industrial countries and exit the short-term export credit insurance market.

Looking to other privatization

The participation of insurers in the debate about EDC’s mandate is one of several markets where IBC is pressing to secure an increased role for private insurers. Some governments in Canada provide auto insurance, crop insurance and workers’ compensation coverage. Private insurers can better serve these markets. As a step toward privatization, consumers would benefit when government run insurers open their markets to competition with private insurers. Naturally the benefits for consumers of this increased competition will only be sustained if it is accompanied by the elimination of the major barriers to fair competition.

The industry’s lobby is perhaps most visible in British Columbia where insurers and others are actively pressing the local government to introduce competition and choice in the market for basic auto insurance coverage. The very satisfying lesson of the EDC debate shows that solid research, sustained communications and considerable patience is essential if insurers are to secure important changes in markets served primarily by government run insurers.