ARCHIVED — Vol. 147, No. 12 — March 23, 2013

Regulations Amending the Export Development Canada Exercise of Certain Powers Regulations

Statutory authority

Export Development Act

Sponsoring departments

Department of Finance and Department of Foreign Affairs and International Trade

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issue

As part of Canada’s Economic Action Plan in 2009, the Government provided Export Development Canada (EDC) with temporary domestic powers and suspended provisions of the Export Development Canada Exercise of Certain Powers Regulations governing EDC’s domestic activities in order to add capacity to domestic credit and insurance markets. These temporary measures were set to expire on March 12, 2013.

The Government has reviewed and assessed EDC’s use of its temporary domestic powers since 2009. While EDC’s temporary powers have contributed positively to providing additional credit and insurance capacity since 2009, these broad powers are no longer required. However, an asymmetry in the regulations governing EDC’s domestic activities prior to 2009 may have prevented some Canadian exporters from receiving domestic financing from EDC in the past, while providing a degree of flexibility for domestic insurance that is no longer warranted.

The proposed regulatory amendments clarify the circumstances under which EDC could provide support in the domestic market without the requirement for Ministerial approval. In line with EDC’s export-related mandate, the proposed regulatory amendments would allow EDC to provide domestic support (financing, guarantees and insurance) to companies that have at least 50% of their total annual sales in the export and foreign markets. EDC would also be required to ensure that its domestic transactions complement those of the Business Development Bank of Canada (BDC) and private sector institutions.

Background

In 1994, the Export Development Canada Exercise of Certain Powers Regulations (the “Regulations”) were introduced in part to govern EDC’s domestic financing and domestic insurance activities. For transactions where EDC is unable to determine that the transaction relates, either directly or indirectly, to the carrying on of business or other activities outside Canada, the Regulations define them as either “domestic financial transactions” or “domestic insurance transactions.” Domestic direct financing falls under domestic financial transactions, while domestic guarantees fall under domestic insurance transactions.

Export Development Canada does not require Ministerial approvals for transactions where EDC can determine that a transaction relates, directly or indirectly, to the carrying on of business or other activities outside Canada, e.g.: (i) a transaction involving the support of imports or other purchases of goods, for the purpose of incorporating them into existing or potential export offerings, such as supply chain inventory financing; (ii) the support of production projects or manufacturing plants which have as part of their purpose the production of goods aimed at international markets; (iii) the support of start-up companies or new technology developments targeting international markets; and (iv) a transaction involving the financing or guarantee of revolving facilities, working capital facilities or similar-type facilities supporting activities outside Canada.

The Regulations require EDC to obtain the approval of the Minister of International Trade and the Minister of Finance for any domestic financial transaction. The Regulations also require EDC to obtain the approval of the Minister of International Trade and the Minister of Finance for domestic insurance transactions where

  • (a) the export transaction business volume of the company with whom or in relation to whom EDC is providing the insurance is less than 15% of that company’s total business volumes and less than $5 million; and

  • (b) EDC’s aggregate contingent liability with respect to all domestic insurance transactions will be or will continue to be more than 40% of the aggregate maximum contingent liability of the Corporation under all outstanding insurance, reinsurance, indemnity or guarantee transactions entered into by the Corporation.

When the Government introduced the Regulations in 1994, there was a clear intention to allow EDC more flexibility to provide domestic insurance than to provide domestic financing. The rationale for this asymmetry was the limited offering of domestic short-term credit insurance from the private sector in the Canadian market, with exporters emphasizing the need for “one-stop shopping” from EDC instead of obtaining two credit insurance policies (i.e. domestic and foreign). However, with commercial insurance providers gradually gaining a foothold in the Canadian market, EDC exited the domestic short-term credit insurance business following the 1998 EDC Legislative Review.

EDC’s temporary domestic powers

In 2009, the Budget Implementation Act, 2009 amended the Export Development Act for a two-year period to include domestic activities in EDC’s mandate, and the regulatory requirements for Ministerial approval of EDC’s domestic financing and insurance activities were temporarily suspended in order to add capacity to domestic credit and insurance markets. A provision was also added into the Export Development Act to require that EDC’s activities under its temporary domestic mandate be complementary to the products and services available from commercial financial institutions and commercial insurance providers.

Export Development Canada deployed its temporary powers in partnership with the BDC and private sector lenders under the Business Credit Availability Program (BCAP) to improve credit access for Canadian businesses during the financial crisis. While BCAP is no longer in place, EDC and BDC have established a new Protocol in November 2011 that calls for the two organizations to ensure that their service offerings are complementary to one another.

Since 2009, EDC has used its temporary powers to provide a total of about $11 billion in domestic support. Of this amount, $7.8 billion has been provided in direct domestic lending, $105 million in domestic loan guarantees, $651 million in domestic credit insurance and re-insurance, and $2.7 billion in domestic contract insurance and bonding.

Budget 2011 and Budget 2012 announced extensions of EDC’s temporary powers to March 12, 2012, and March 12, 2013, respectively, to help meet the financing needs of Canadian exporters during a period of uncertainty. These extensions also enabled the Government to undertake a comprehensive assessment of EDC’s ongoing role in the domestic market.

While EDC’s temporary powers have contributed positively to providing additional credit and insurance capacity since 2009, these very broad powers are no longer required. Overall credit availability has improved since 2009, with aggregate data and broad credit surveys suggesting a general stabilization and modest recovery in business lending conditions over the past two to three years in Canada. At the same time, there is continuing fragility in the global financial environment in the context of the European banking and sovereign debt crises and increasing capital requirements for commercial banks.

Objectives

With the proposed amendments to the Regulations, the Government seeks to clarify EDC’s ongoing role in the domestic market, in order to

  • I. allow EDC to continue to provide capacity in the domestic credit market to meet the needs of Canadian exporters, beyond what EDC was providing prior to 2009; and

  • II. ensure that EDC’s ongoing domestic role is aligned with its mandate, clearly distinguished from the role of the Business Development Bank of Canada (BDC), and limited to providing additional credit capacity without crowding out the private sector.

Description

The proposed amendments to subsections 5(2) and 6(2) of the Regulations would specify that EDC could provide domestic support (financing, guarantees and insurance), without the requirement for ministerial authorization, provided that the transactions are entered into with, or in respect of, a company whose annual export and foreign market business volume is at least 50% of its total annual business volume.

If the company requesting domestic financing or domestic insurance does not meet this 50% export and foreign market business volume threshold, EDC could seek specific ministerial authorizations from the Minister of International Trade and the Minister of Finance to permit EDC to enter into domestic transactions.

The proposed subsections 5(3) and 6(2.1) would specify that, once a ministerial authorization has been provided for a domestic financial or insurance transaction with a specific company, ministerial authorizations would not be required for subsequent domestic transactions with the same company, for up to 24 months from the date of the original ministerial authorization.

The proposed section 4.1 would require EDC to ensure that domestic financial transactions and domestic insurance transactions complement the products and services available from commercial financial institutions, commercial insurance providers and the BDC.

“One-for-One” Rule

The “One-for-One” Rule does not apply to this proposal, as there is no change in administrative costs to business.

Small business lens

The small business lens does not apply to this proposal, as there are no costs to small business.

Consultation

Stakeholder consultations conducted since the introduction of the temporary powers in 2009 have indicated a continuing desire on the part of domestic credit users to see EDC retain flexible lending powers in light of ongoing global economic uncertainty. At the same time, some stakeholders have expressed a desire to apply a constraint on EDC’s domestic powers to limit overlaps with private sector financial institutions and other Crown corporations such as the BDC.

Rationale

Given the continued fragility in the global financial environment, a full withdrawal of EDC’s temporary domestic financing capacity could create a gap that may not be filled by private sector lenders. By establishing a clear 50% export and foreign business volume threshold, the proposed amendment to subsection 5(2) of the Regulations would allow EDC to provide some additional domestic financing to meet the needs of Canadian exporters once the temporary powers expire, beyond what EDC provided prior to 2009. To illustrate this point, EDC has provided $7.8 billion in temporary domestic financing since 2009, which EDC would not have provided prior to 2009 — approximately 70% of this temporary financing volume would have met the proposed new threshold.

Given that EDC exited the domestic short-term credit insurance business in 1999 and that this market is now served by private sector credit insurers, the more flexible ministerial authorization requirements for domestic insurance are no longer warranted. The proposed amendments address this issue by establishing a clear threshold that would apply to both domestic financial transactions and domestic insurance transactions.

The Government expects that the vast majority of EDC’s transactions should have an international market connection. However, in cases where a transaction cannot be determined to have an international market connection, but where EDC believes that the transaction falls within its mandate, the export and foreign market business volume threshold would serve as a secondary test for EDC to determine whether it can support this transaction without a ministerial authorization. The Government would expect EDC’s domestic transactions to be linked to trade facilitation, with priority to sectors facing challenging credit conditions.

The proposed 50% export and foreign market business volume threshold would set the boundary of EDC’s core mandate, by requiring that the majority of the company’s sales be in the export and foreign markets if the transaction in question has no international market connection. Transactions that do not have an international market connection and that are in relation to companies falling below the export and foreign market business volume threshold are expected to be supported by either the BDC or the private sector.

In relation to the proposed amendment to require EDC to ensure that domestic transactions complement the products and services available from commercial institutions and the BDC, complementarity includes collaboration with the BDC or with private sector financial institutions, as well as EDC providing capacity on its own in a manner that does not compete with these same institutions. This proposal would be consistent with the complementarity requirement that was part of EDC’s temporary domestic mandate, and would build upon the efforts by EDC to enhance collaboration with the BDC and complement the private sector financial institutions.

In order to improve the efficiency of the ministerial authorization process, the proposed amendments would allow a ministerial authorization to cover multiple domestic financial and insurance transactions with the same company within a 24-month period.

The Government plans to review the new export and foreign market business volume threshold in three years, to reassess developments in credit markets.

Implementation, enforcement and service standards

As before the introduction of the temporary powers in 2009, EDC would first decide whether a transaction has, directly or indirectly, an international market-related connection. For transactions where EDC is unable to determine such a connection, EDC would apply the new export and foreign market business volume threshold test to the potential recipient. EDC would be able to seek specific ministerial authorizations from the minister of International Trade and the Minister of Finance to support domestic transactions that do not meet the new 50% export and foreign market business volume threshold, but where there is a strong international market-related policy case and a need for additional capacity from EDC.

In order to ensure there is no gap between the expiry of the temporary powers on March 12, 2013, and the date when the regulatory amendments come into force, EDC’s temporary domestic powers have been extended until March 12, 2014, or until the date when the amendments come into force (whichever is earlier).

Contact

For more information, please contact

International Finance Section
Department of Finance
L’Esplanade Laurier, 14th Floor, East Tower
140 O’Connor Street
Ottawa, Ontario
K1A 0G5
Email: International_FIN_internationales@fin.gc.ca

PROPOSED REGULATORY TEXT

Notice is given, pursuant to subsection 10(8) (see footnote a) of the Export Development Act (see footnote b), that the Governor in Council, pursuant to subsection 10(6) (see footnote c) of that Act, proposes to make the annexed Regulations Amending the Export Development Canada Exercise of Certain Powers Regulations.

Interested persons may make representations concerning the proposed Regulations within 60 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part Ⅰ, and the date of publication of this notice, and be addressed to the International Finance Section, Department of Finance, 14th floor, East Tower, 140 O’Connor St., Ottawa, Ontario K1A 0G5 (e-mail: international_FIN_internationales@fin.gc.ca).

Ottawa, March 7, 2013

JURICA ČAPKUN
Assistant Clerk of the Privy Council

REGULATIONS AMENDING THE EXPORT DEVELOPMENT CANADA EXERCISE OF CERTAIN POWERS REGULATIONS

AMENDMENTS

1. The Export Development Canada Exercise of Certain Powers Regulations (see footnote 1) are amended by adding the following after section 4:

4.1 The Corporation must ensure that domestic financial transactions and domestic insurance transactions complement the products and services available from commercial financial institutions, commercial insurance providers and the Business Development Bank of Canada.

2. Subsection 5(2) of the Regulations is replaced by the following:

(2) A domestic financial transaction to be entered into by the Corporation requires the approval of the Minister and the Minister of Finance if it is entered into with or in respect of a person whose annual export and foreign market business volume, at the time of the person’s request for credit to the Corporation, is less than 50 per cent of that person’s total annual business volume.

(3) Despite subsection (2), the approval of the Minister and the Minister of Finance is not required if, within 24 months before the person’s request for credit, the Ministers approved a domestic financial transaction entered into by the Corporation with or in respect of that person.

3. Subsection 6(2) of the Regulations is replaced by the following:

(2) A domestic insurance transaction to be entered into by the Corporation requires the approval of the Minister and the Minister of Finance if it is entered into with or in respect of a person whose annual export and foreign market business volume, at the time of the person’s request for insurance, reinsurance, indemnity or guarantee to the Corporation, is less than 50 per cent of th at person’s total annual business volume.

(2.1) Despite subsection (2), the approval of the Minister and the Minister of Finance is not required if, within 24 months before the person’s request for insurance, reinsurance, indemnity or guarantee, the Ministers approved a domestic insurance transaction entered into by the Corporation with or in respect of that person.

COMING INTO FORCE

4. These Regulations come into force on the day on which they are registered.

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