By Ian Madsen
and Alexandra Burnett
Frontier Centre for Public Policy
Export Development Canada (EDC) is unable to convert its reported profits into cash, posing an increasing risk to Canadian taxpayers. And it has been funding ventures that are normally considered too risky for commercial banks to handle.
EDC is a federal Crown corporation that guarantees export financing loans to Canadian corporations. Additionally, it guarantees and finances investments by foreign firms into Canada, which can be controversial.
Recently, EDC loaned nearly $1 billion to a company called Turquoise Hill Resources, a mining company based in Vancouver that has avoided paying nearly $700 million in Canadian taxes. The company avoided paying Canadian taxes on income from its massive Oyu Tolgoi mine in Mongolia, using shell companies in Netherlands and Luxembourg.
In addition, EDC loaned the controversial South African Gupta family $52 million to help finance a new Bombardier jet. According to the Guptas’ lawyer, EDC was fully aware that the family has been involved in criminal activity before it loaned money to their company.
Should a federal Crown corporation loan money to individuals such as the Guptas or to companies like Turquoise Hill Resources?
Or do these loans make a clear case for divesting this massive Crown corporation?
The Frontier Centre for Public Policy recently released a research paper in the Public Choice Alternatives series on the valuation of EDC. According to the report, EDC can’t convert reported profits into actual cash and continuously papers over this deficiency by increasing its debt.
EDC’s mode of operations could cause a major disruption in Canada’s foreign trade and investment if efforts aren’t made by the corporation or the federal government to make its assets more liquid.
This is a cause for concern for Canadian taxpayers.
Often when a company shows substantial positive net income by adding up revenue financed by short- or long-term debt in the form of common equity injections, it struggles. Not surprisingly, EDC is in this situation and has yet to demonstrate that it’s capable of converting its profits into cash. Yet its capital base has increased. This is only possible because it has the full backing of the government of Canada in guaranteeing its obligations.
EDC plays a valuable role in Canada’s economy. But if the corporation can’t make money, a private investor is better suited to take on this risk. Government-owned corporations that have been divested are known to run more efficiently, with results realized quickly when divested. Whether or not EDC is divested, the federal government should take action to make it a profit-generating firm.
EDC could be worth up to $30 billion if it was divested. But it could be worthless if it can’t realize its assets as cash.
Ultimately, it’s up to Canadian taxpayers through their elected representatives to decide if EDC should be divested. Otherwise, it’s a major looming risk.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy. Alexandra Burnett is a junior research associate enrolled in the Frontier Centre for Public Policy Internship Program.
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