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Exporting Irresponsibility:

Canada’s Export Development Corporation and the Damming of Chile’s Biobío River

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Introduction

The research and writing of this paper were undertaken by two undergraduate students, Reid Allaway and Jeff Wilson during the fall and winter of 2001. The project was submitted as a research paper for a course entitled Economic Development. This course is the core element of Mcgill's International Development Studies program and is taught by one of McGill most brilliant and open-minded professors, Myron Frankman. To compensate for the very general nature of the course's subject matter, the majority of the grade is based on independent projects and that were to be of a specific and detailed nature. The case of Canada's Export Development Corporation's involvement in the Ralco dam project fit perfectly. It is at once both close to home and of international importance, as EDC is a Canadian crown corporation which exhibits many of the disturbing traits of unregulated international business.
 

We first learned about the Ralco Dam project and the Mapuche's struggle against it through Gisela Frias, the coordinator of the ACCESS working group of QPIRG Mcgill. She introduced us to Armando Navarrete of the Comite de Apoyo al Pueblo Mapuche, Montreal, ( Mapuche Nation Support Committee in Montreal) who badly needed detailed information on EDC and its involvement in the damming of the Bio-Bio river. Armando gave us some initial background and an excellent master's paper written on the subject by Lorenzo Nesti and we began our research. The eventual result was this paper.
 

We would like to acknowledge our indebtedness to Probe International and the NGO's comprising the ECA-Watch coalition, as the information provided on their web sites made up a significant portion of our research on EDC. Also, our thanks go to professor Frankman, who's innovative teaching style provided us with the opportunity to work on this project.

As undergraduate students it is seldom that one feels as though their work is concretely tied to the real world with productive goals in mind. Working on this paper in the hopes that it may find some use in the struggle against the injustices done to the Mapuche-Pehuenche People of the Alto Bio-Bio was a pleasant and inspiring departure from the norm.

Thank you to everyone who is working on this ongoing struggle and especially to the Pehuenche families who continue to refuse to give up their land. You are an inspiration to people further away than you might imagine.

Jeff Wilson

Reid Allaway


Exporting Irresponsibility:

Canada’s Export Development Corporation and the Damming of Chile’s Biobío River

 

International Development Studies

McGill University, Canada

Jeff Wilson – 9921340

Reid Allaway – 9724374

Montreal, March, 2001

The concept of export financing and the institutions which engage in both the promotion and execution of such financing is one normally relegated to the realm of economic theory, a somewhat unique world where the implications of theory in real life are seldom considered.The goal of this paper is to reexamine both the theory and practice of export financing by considering the costs and benefits resulting from export financing.This goal will be pursued through the examination of a real world export financier, Canada’s Export Development Corporation (EDC), in conjunction with an examination of a large-scale construction project in Chile, which EDC helped to finance.The project entails the construction of one (of six planned) hydroelectric dam and the planned construction of the second.The dams are known as Pangue and Ralco and are located in the high altitude regions of Chile’s Biobío River, in central -eastern Chile near the border with Argentina.

By examining a specific case and making reference to others in which EDC has been a key player, we can establish a solid basis for the examination of a widely accepted form of financial incentive.Generally referred to as export financing, this practice involves a private or governmental lending agencies in a developed country offering tied loans or lines of credit to contractors in foreign countries.These loans tend to be concentrated in less developed countries, and are given in order to subsidize export sales for businesses in the financing country.Though the terminology is imperfect, this is a trade system by the North, for the North, to the South.In the case of the EDC, the export credit agency (ECA) is also a crown corporation, which brings other levels of complexity to the analysis with respect to both its domestic and international responsibilities as well as impacts.

In analyzing the EDC we seek to understand its role in the international financial community, its role as a promoter of Canadian trade with less developed countries, its impacts macro-economically on both the recipient country and in Canada, and its responsibilities to international conventions signed by Canada and the Canadian people.These diverse characteristics of the EDC can all be analyzed effectively in the context of a “development project” gone bad in which the EDC was involved, the dams on Chile’s Biobío river.

1. The Case of the Biobío river

In order to understand the scale of the project undertaken in Chile and the implications of involvement in such a project, some social and historical context for the region is required.First of all, the region in question is geographically remarkable.The Biobío drops from headwaters at the spine of the Andes to the Pacific Ocean over a mere 300 or so kilometers.This huge drop in elevation not only makes it ideal for hydroelectric development but also means that the ecosystems and human settlements along its banks are particularly limited in flexibility with respect to location.There are only certain regions that are productive enough to support a population at certain times of the year.This seasonal shift and the access to lands along the river are an integral part of the traditional way of life of the indigenous people of the Biobío valley, the Pehuenche.The Pehuenche are a sub group of Chile’s largest indigenous group, the Mapuche, who compose 10% of Chile’s total population.The Pehuenche name comes from the pine nut or Pehuen, which is the major staple of their diet gathered in their ancestral lands along the Biobío.The Pehuenche way of life is inextricably linked to the ecosystem which they inhabit and the sacred sites which their ancestors have occupied and been buried in for thousands of years.

Approximately 600 Pehuenche are or will be affected by the dams built and planned along the Biobío.These dams will force their relocation, flood their ancestral lands and sacred sites, and effectively eliminate their traditional way of life by making their extensive agriculture and foraging practices impossible, and prevent their movement from traditional winter and summer habitations.

Problems of this sort are not new to the Pehuenche, the Mapuche in general or to Chilean indigenous people as a whole.Under the Pinochet regime, two decrees permitting the leasing and sale of indigenous lands to non-indigenous people resulted in the loss of approximately 400,000 hectares of land nationwide.Furthermore, Pinochet’s government passed an Electrical Services Law which allowed the need for electricity to supersede indigenous title to land and paved the way for projects such as the Pangue and Ralco dams.This occurred in a political climate of intense trade promotion where the government sought investment both domestically and abroad as a means of boosting economic performance.This demonstrates that as early as 1978, when the plans for hydroelectric development on the upper Biobío were first announced, international trade was threatening the way of life of the Pehuenche and other indigenous peoples in Chile.

Though Pinochet had been ousted by 1989 when the Pangue project was approved by the Chilean government, it was through his 1982 Electrical Services Law that the relocation of Pehuenche families was justified. Construction of the Pangue dam began in 1993 when the Chilean company ENDESA established an international funding base shown in Table 1.Simultaneously, plans for the Ralco dam were revealed despite the fact that financing through the IFC was contingent on the Pangue dam remaining a standalone project.[1]

Table 1:International Financing for Pangue dam[2]
 
 
Lending Institution Amount of Loan (million US$)
World Bank International Financial Committee (IFC) 170
Swedish Board forIndustrial and Technical Cooperation  28
Norwegian Agency for Development Cooperation (NORAD) 14
European Banks (10 total) 100
Total 312

On a more positive note, 1993 also saw the Chilean congress unanimously approve the Ley Indígena (Indigenous Law) and the formation of CONADI, the National Indigenous Development Board, both of which aimed to redress some of the damages done to Chile’s indigenous people by past governments.However, as we will repeatedly see, the presence of strong regulations and good intentions is not always enough to hinder the progression of damaging development in the name of economic benefit.Similarly, profit-seeking motives are expert at maintaining an outward appearance of concern for those they marginalize while lacking the will to effectively meet their purported goals.A perfect example of this is the Pehuen Foundation, established by ENDESA and the IFC to help mitigate the negative effects of the construction of the Pangue dam.With the following laudable goals the Pehuen foundation sought to apply a patina of humanity to the mega-project:

nto be a vehicle for sustainable development in order to provide long-term benefits to the Pehuenche by promoting their socio-economic development;

n

nto attempt to mitigate negative effects of construction activities;

n

nto preserve and reinforce Pehuenche cultural identity; and

n

nto make its best efforts to arrange for the supply of electric power to the communities[3]

This same foundation came to be criticized so harshly by the independent consultants hired by the IFC to review its performance that their reports were stifled.As a result, further investigation of the case was undertaken by the Committee for Human rights (CfHR) of the American Anthropological Association (AAA) at the request of Theodore Downing, the Anthropologist whom the IFC had originally commissioned to examine the Pehuen Foundation[4].The other consultant commissioned to review the project by the IFC was the ecologist Jay Hair, who echoed many of Downing’s criticisms and concluded that he considered the IFC to have failed to comply with 80% of its environmental and social policies[5].These two studies as well as that produced by the AAA CfHR offer proof positive that when huge investments and mega-projects are at stake, the rules are easily broken.

“Bank officials from President Wolfensohn down are wont to cite the Bank’s numerous operational directives when responding to criticisms of Bank performance.Over the years, the Bank has adopted these directives on topics such as resettlement and the special problems of indigenous people, in efforts to prevent the recurrence of abuses perpetrated in previous Bank-funded projects.In fact, the Bank’s policy on indigenous peoples is ‘strong’…The problem however, is not with the letter of the Bank’s policy directives, but with the way its projects subsequently proceed to violate them.ENDESA and the IFC violated virtually all the main provision of the operational directive on indigenous peoples in the Pangue-Ralco project, a project that began after it and other relevant operational directives had been in effect for a half-dozen years.The Pangue-Ralco project also blatantly violates the World Bank’s directive on resettlement, which has been on the books since the early 1980’s.[6]

Despite the widespread criticism of both ENDESA and the IFC during and following the completion of the Pangue dam, it became obvious that ENDESA intended to go ahead with the next phase of the project, the dam at Ralco, as soon as possible.The way in which ENDESA dealt with protests and threats from the IFC is quite telling.The solution was simple: when the IFC threatened to declare ENDESA in default on the loan due to violations of many regulations set out for the project, ENDESA quickly refinanced the loan through the German Dresdner Bank. This effectively severed their ties to the IFC, allowing the IFC to relinquish almost all responsibility with respect to the negative impacts of the Pangue Project.[7]In a world of highly mobile capital and easy refinancing of loans, even on a scale such as this, it becomes beneficial for potential lenders to maintain the lowest possible standards with respect to human rights and environmental protection.This competitive advantage of low standards will be discussed in greater detail later.

Having refinanced it loan from the IFC and freed itself from the encumbrances of dealing with a development bank with directives regarding the environment, indigenous peoples and human rights, ENDESA was free to forge ahead with the more ambitious part of its plan, with only the Chilean government to answer to.The EDC and the other lenders financing the construction of the Ralco dam not only had the benefit of claiming an impartial financial interest but also of maintaining low standards for their loan recipients’ behaviour, a self-reinforcing practice for all players in a competitive international export market.By 1997, the only remaining impediment to the commencement of work on the Ralco project was the presence of about 700 residents, 400 to 500 of the Pehuenche in the towns Quepuca-Talco and Ralco-Lepoy.Once these were relocated work could begin on the 570-megawatt generation station and the dam which would inundate 3400 hectares of land at a total cost of US$ 500 million.

Unfortunately for ENDESA, both the Chilean Environmental Agency (CONAMA) and the National Commission for Indigenous Development (CONADI) declared the Ralco project illegal.Reasons ranged from the presence of an active volcano nearby (6 km), to the finding that the power generating capacity of the dam was not warranted by trends in Chile at the time.Further, the Ley Indígena of 1993 made it illegal for the sale of indigenous lands to “encompass the home of the indigenous family and the land necessary for the family’s survival”.[8]

It is around this time that President Eduardo Frei becomes a key player in the promotion of the project.In 1996, Frei had already, dismissed the head of CONADI, and Mauricio Huenchulaf, who was of indigenous origin, moved quickly to do the same to the director of CONAMA.Soon after the dismissal, CONAMA reversed its ruling on the legality of the Ralco project leaving CONADI’s ruling as the last remaining impediment.[9]Over the course of 1998 Frei sought to resolve this problem by dismissing 3 members of CONADI’s board and forcing the resignation of then director Domingo Namuncura.[10]At the time of these decisions President Frei held an interest not only in ENDESA but also in two enterprises contracted to build roads and parts of the dam.

Other unusual business deals occurred with respect to ENDESA Chile in the years of 1997 and 1998.The Spanish company ENDESA España purchased a controlling share of ENDESA Chile and the business was frozen by the Chilean Anti-Monopoly Commission because this granted control of 55% of the electricity sold through the national grid to a foreign company.[11]EDESDA Chile was later unfrozen with some restrictions.

All the while, the progress of the mega-project was being kept on hold by 8 or 9 families of Pehuenche who refused to leave their homes no matter how much money ENDESA offered them.They were protected against forced relocation by the Ley Indígena of 1993, something which neither Frei nor ENDESA could contravene.The attitude of defiance of these Pehuenche who, as of this writing, are still holding out against pressure from ENDESA, is well expressed in the words of their spokesman Nicolasa Quintremán who stated in 1998, “We are on our land and you won’t get me off for a sack of gold.Over my dead body.”[12]

Since 1998 the situation in Ralco has largely remained one of stalemate with varying degrees of intimidation and numerous legal battles being fought. Dozens of NGOs from all over Latin America, Europe and North America have lent their support to this cause, a reminder that the international citizenry and international financial systems are definitely at odds.This case is yet another case of global importance in determining the way in which indigenous peoples’ rights are regarded when capital is at stake.Further, numerous campaigns of public pressure including divestment campaigns have been, and continue to be, pursued against ENDESA Chile, ENDESA España and other key financial players like Canada’s EDC.As Manuel Baquedano of the Institute for Political Ecology in Madrid stated in 1998, “The decisive battle over Ralco has not yet been fought.That will happen on Wall Street and in Spain.ENDESA will lose.”[13]

However, it is now two and a half years later and the financial backing for the project has not evaporated despite widespread outrage and mobilization by NGOs around the world.We must recognize that there are elements of the international financial system that can afford to ignore the calls to reform their practices and respect laws other than those of economic profit.

A clear and familiar conflict can be seen between the goals of the NGOs, independent consultants, indigenous peoples, and the goals of the financial elite who plan, finance and execute these major projects in the name of “development”. This history of conflict can be distilled to a general rule (under current international economic conditions) wherein the natural environment, and indigenous peoples’ rights are seen as being in direct opposition to the rights of financiers to a return on their investment.The two sides are often seen as mutually exclusive and this can only change through the implementation of a system of financier responsibility that is currently lacking in almost all elements of the international financial system.Canada’s EDC is particularly significant in this struggle, due to its low environmental standards and significant involvement in international trade.The second section of this paper examines EDC in greater detail.

 

2. Canada's Export Development Corporation

 

Few Canadians know much about the Export Development Corporation (EDC).Aside from some scant coverage in the National Post and Ottawa Citizen over the past year, little attention is paid to EDC’s activities.This is unfortunate, as EDC often plays a questionable role in international economics.EDC’s involvement in the Ralco Dam project is only one of many contentious projects it has financed.EDC’s environmental and human rights standards are very low, and it has repeatedly financed environmentally devastating projects.Further, EDC’slack of transparency renders it largely unaccountable to the public.This section of the paper gives a brief overview of what EDC is and how it operates, provides additional examples of environmentally destructive projects financed by EDC, and then examines EDC’s environmental and public disclosure standards in detail. Established in 1964, Canada’s Export Development Corporation is a crown corporation, operating with public funds, that acts as a private financial institution.According to the preface of EDC Environmental Review Framework, “its mandate is to support and develop, directly or indirectly, Canada's export trade and Canadian capacity to engage in that trade and to respond to international business opportunities.”EDC does this in two ways.First, EDC sells investment insurance to Canadian corporations operating in foreign countries.Investment insurance is offered in two forms:financial risk insurance in various term lengths to cover losses from default on a deal; and political risk insurance to cover losses due to political instability in the host country, such as seizure of an enterprise by the government or damage caused by political upheaval.Such coverage allows corporations to operate in politically unstable countries where it would otherwise be too risky to invest.It also provides a large percentage of EDC’s earnings for most years, allowing it be financially self-sufficient.

The second, and more important, role of EDC is that of an Export Credit Agency (ECA).ECAs, sometimes called bilateral aid agencies, provide loans to developing countries or corporations on the condition that the money be used to purchase exports from the ECA’s home country. Theoretically, ECAs serve the dual purpose of providing development aid and subsidizing domestic corporations.Most developed countries have some type of ECA.The US Export Import Bank (ExIm) acts as an ECA in the US, and the Export Credit and Guarantee Department is the United Kingdom’s equivalent.

EDC makes no claim to be a development organization, but instead focuses on its role as service to Canadian businesses.Positive examples of EDC’s role as an ECA can be found on EDC’s web site[14].For instance, in December 2000, EDC provided a loan of US$10 Million to Turkey for the purchase of 127 road graders from Champion Road Machinery Limited of Ontario to be used to fight forest fires.On the surface, the practice of providing export credit seems like a good idea, as both a developing country and a Canadian Corporation benefited from the loan.However, as demonstrated by the situation in the Biobío valley, not all of the exports EDC finances are so positive.The following examples serve to demonstrate the negative side of export credit.

3. EDC and Dams

The best known example of an EDC financed project is the infamous Three Gorges Dam in China.The Three Gorges Dam is the biggest hydroelectric project in the world.Both the World Bank and US Export Import Bank have refused to fund the project due to the extreme environmental impact of the dam.The reservoir created will be 366 miles long, submerge two cities and one hundred and fourteen towns, inundate thousands of hectares of arable land, and force the relocation of 1.3 million people.Canada’s EDC was the first ECA to provide financing for the Three Gorges Dam.Not wanting Canada to be the only beneficiary of the project, the ECAs of Germany, Switzerland, and Japan announced financing for the project as well[15].

In this case, EDC led what has been termed a race to the bottom[16].Because EDC possessed lower environmental standards than the World Bank’s financial arm (IFC), and US ExIm Bank, it was willing to take advantage of a project that others would not finance.In such cases, one ECA’s decision to provide financing creates a strong incentive for other ECAs to do so as well, so as not to allow one country to obtain sole benefit from the project.Because of this, there is a constant downward pressure on the environmental standards of ECAs, hence the term ‘race to the bottom’.

EDC also provided financing for the Sinu Dam in Columbia. EDC provided the Urra S.A. Company a US$18.2 million loan to purchase construction equipment and services from the Foundation Company of Canada.The construction of this dam resulted in significant human rights abuses.The reservoir created by the dam resulted in the flooding of the traditional land of the Embera Katio indigenous people.The Emberra people protested the destruction of their lands and fought for compensation.This resulted in a backlash against them.Emberra activists were under repeated threat by paramilitary units, and in September 2000, paramilitary forces murdered 4 Emberra activists and abducted 21 others, who were later released unharmed.Eventually the Emberra succeeded in their protest and managed to obtain an injunction against the filling of the dam’s reservoir in 1998.The Urra company ignored the court order and continued filling the reservoir.The protests continued and in August of 2000 the Emberra reached an agreement with the Urra corporation and Colombian government for partial compensation and a halt to plans to build a second dam that would have displaced 2800 more people.The 60,000 downstream fishermen that lost their source of income when the dam was completed remain uncompensated[17].

This example demonstrates that EDC’s human rights standards are so low as to allow them to finance a project in which people are forcibly relocated without their consent, not compensated, and — in extreme cases — killed for protesting.Clearly EDC cannot be held responsible for the actions of the mine owners but does have a responsibility to ensure that the projects they finance respect basic human rights.

4. EDC and Mines

 

In addition to Dam projects, EDC has provided financing for a series of environmentally catastrophic mining operations[18].In the early eighties EDC provided $88 million in exports credits to help finance the Ok Tedi mine in Papua New Guinea, 19% of which is owned by the Canadian company Inmet.In 1984, a landslide destroyed the dam retaining the mine’s toxic tailings and 80,000 tons of toxic waste rock, containing zinc, copper, cadmium, and lead were dumped into the Fly and Ok Tedi rivers.Needless to say, the disaster had a severe impact on the surrounding environment.Almost 70 kilometers of river have become biologically dead and fishing and garden production has been contaminated for 30,000 landowners.The mine continues to operate without a tailing retention facility and continues to dump toxic effluent directly into the Fly river. In August 1999 the Ok Tedi mine announced that environmental impacts would be far greater than their studies originally predicted.Further, the mine has stated that it is unable to meet the terms of an out of court settlement and cannot build a new tailings retention facility nor pay compensation to those effected by the disaster.The mine continues to operate.

A similar event occurred in the Omai Mine in Guyana.In 1992, EDC provided $163 million in political risk insurance to Cambior, a Canadian based mining company that owns a 60% share of the Omai mine.In 1995 millions of liters of cyanide-laced effluent were released into the Omai river.The contamination spread to the Essequibo river and the Essequibo fishery was wiped out.The accident was due to geological instability in the tailings pond of the mine.The mine officials had been warned by a geologist months before the disaster, but took no action.

EDC is also involved in the Kumtor Mine in Kyrgyzstan.Cameco Corporation of Saskatchewan owns a one third share in the mine, and EDC provided insurance for 90% of Cameco’s subordinated loan and provided US$50 Million in senior debt to the mine.In 1998, two tons of cyanide was spilled into the Barskoon River.2,500 people were effected, there were 800 hospitalizations, and four deaths.

An even worse example is the recent EDC guarantee of a syndicated $26 million loan from the Union Bank of Switzerland to investors in the Lihr Gold mine project in Papua New Guinea.The mine will be located on an island located near a pristine coral reef.The mine is located on top of a geo-thermally active volcanic and extracting the gold requires lowering the water table and using the ocean to cool the volcano and then discharging the water back into the marine environment along with waste rock and tailings.The mine itself acknowledges that at least 7km of coral reef will be destroyed.Submarine tailing disposal is illegal in Canada and the US Overseas Private Investment Corporation (OPIC) has already refused to insure the project, stating that it violates international conventions prohibiting waste disposal at sea.

The final example in the extensive list of EDC financed mines is the Marcopper Mine on the Philippine island of Marinduque.In 1982, EDC lent $1.36 million to the mine.Between 1975 and 1991, more than 200 million metric tons of tailings were released into Caluncan Bay, severely impacting fish stocks.Around 12,000 fishermen have been affected and the impact on families relying on the surrounding ocean has been severe.A structural collapse in 1996 resulted in the discharge of 2 million cubic meters of tailings.This spill affected approximately 20,000 people.A study in 1997 found high levels of lead and mercury in the children living around Calancan bay.Soil samples indicated unsafe levels of lead and the Philippine President Fidel Ramos declared “a state of medical calamity for health reasons” in the area.A Philippine court found Marcopper responsible and a United Nations investigation found that Marcopper mine failed to exercise good management.

Again, EDC cannot be held responsible for every accident that occurs in every project it finances.However, the regularity and degree of extreme environmental damage in these cases indicates that not even basic environmental standards were applied.If the above mine projects had been held to the even the standards of the World Bank, many of the accidents above probably could have been avoided.

In addition to hydroelectric and mining projects EDC has also financed the sale of CANDU reactors to Argentina, China, Romania, South Korea, and Turkey[19].Although not as dubious as the projects above, the environmental concerns of nuclear power are widely known.The practice of subsidizing the export of a technology that is known to pose serious environmental risks and whose use is on the decline domestically is questionable at best.

5. The Need for a Strong Review Framework

These examples are of the worst projects EDC has financed.Although EDC can not be held directly responsible for accidents, EDC does have a responsibility to ensure that the projects it finances have adopted reasonable environmental standards, respect basic human rights, and are socially responsible.The sheer number of catastrophic accidents described above indicates that EDC routinely did not concern itself with such issues.

EDC adopted a new environmental framework in 1999 under pressure from Canadian NGOs and various coalitions of citizens negatively effected by EDC financed projects.Unfortunately, even EDC’s new environmental standards are shockingly minimal.EDC’s new framework is based on very ambiguous language.The reliance on the words “should” and “may” instead of “must” and “will” render EDC’s new environmental guidelines almost ridiculous.The remainder of this section is devoted to examining EDC’s Environmental Review Framework.

In March of 1998, a coalition of NGOs gathered in Mesum, Germany and launched a campaign calling for an international environmental standard to be applied to all ECAs.The proposed international standard was called the Mesum declaration.As part the Mesum campaign an analysis of EDC’s environmental framework was made, comparing EDC’s framework with the Mesum declaration and the environmental standards of other international organizations.This study clearly detailed the critical shortcomings of EDC's new environmental review framework and forms the basis of this evaluation[20].

By far the greatest failing of EDC’s environmental framework pointed out by the study is the fact that EDC does not require that an environmental impact assessment of the projects it finances be carried out.Although the term environmental impact assessment is not internationally defined, the term is commonly understood by environmental professionals and civil society to consist in an impartial and independent study of the environmental impact of a project that is released to the public.

Instead of requiring an environmental impact assessment, EDC requires what it calls an “Environmental Review Report (ERR)”[21].Unlike an environmental impact assessment, an ERR may be carried out by the organization pursuing financing, with no independent review required.Further, the ERR is considered confidential and will not be released to the public without the explicit permission of the party seeking financing.It is easy to conceive a link between such a scant environmental review process and the mining disasters mentioned above.

The second failing of EDC’s environmental framework is its lack of clear environmental standards for the projects if finances.Most international finance organizations, including the World Bank and US ExIm Bank, maintain clear prohibitions against financing certain types of projects.For example, the World Bank’ environmental guidelines prohibit it from financing projects or equipment used for logging operations in tropical moist forest.There are also formal mechanisms and environmental review requirements that must be complete before a project may be financed.The guidelines of the US ExIm bank are similar.They maintain an “exclusion list” of substances whose export it will not finance or insure.The World Bank and ExIm Bank also possesses formal and numerical guidelines on maximum levels of environmental impact that any project it funds must fall under.

EDC possesses no such guidelines.The section of EDC’s environmental framework dealing with requirements for finance (5.1) simply states, “EDC will decline support for Projects which, after taking into account the implementation of mitigation measures, are, in its opinion, likely to cause significant adverse Environmental Effects that cannot be justified by anticipated positive effects of such projects.”Subsequent sections identify basic guidelines for making such a decision, but provide no concrete criteria.

The shortcomings of this framework are fairly apparent.First of all, the criteria for rejecting financing are discretionary and informal.There is no concrete or specific criterion for granting financing aside from the “opinion” of EDC.Further, section 5.1 explicitly allows “anticipated” economic benefits to outweigh environmental concerns.This is ridiculous.No institution would finance a project if it thought the negative consequences outweighed the positive.The purpose of an environmental framework is to prevent supposed economic benefits from justifying environmental damage.In this sense, EDC’s Environmental Review Framework violates both the precautionary principle and the basic tenets of sustainable development.

The only other criteria EDC establishes for deciding whether or not to support an environmentally damaging project are given in sections 2.6 and 6.2.Section 2.6 states that EDC will “consider” established international standards and best practice when determining whether or not to finance a project. Section 2.6 only requires that EDC “consider” international standards, but makes no requirement that international standards be followed.

Section 6.2 requires that any environmental covenants, “if any”, established with contractual parties will be consistent with the laws of the host country at minimum.These provisions do little to strengthen the framework.The environmental laws of many developing nations are very lax.Further, EDC’s promise not to violate law should be taken for granted.The fact that the use of the phrase “if any” could be interpreted to mean EDC may finance projects that operate illegally is shocking.Such a suspicion would be incredible if not for the fact that EDC is doing just that with the Ralco project in Chile.

Section 1.2 of EDC’s environmental framework also contains a very questionable provision.It states that EDC will seek to identify the adverse environmental impacts of projects it intends to finance, “where the nature and level of support requested of EDC has a material impact on the ability of the Project to proceed.”In other words, according to EDC’s framework, EDC need only consider the environmental impact of a project if the project would not go forward without EDC’s support.This allows EDC to provide partial financing to environmentally destructive projects without considering environmental impact.Such a policy is completely indefensible.The environmental impact of a project should be considered in every instance.

EDC’s guidelines are silent on human rights issues.The subject of human rights is not mentioned in the Environmental Review Framework, not in any other publicly available policy document.EDC’s Code of Business Ethics makes brief mention of human rights, and states that EDC “promotes the protection of internationally recognized human rights, consistent with the policies of the government of Canada”, and commits to creating and maintaining a working environment free of discrimination.However, this statement focuses solely on the rights of EDC employees and makes no specific mention of human rights concerns in the context of financing projects that infringe upon human rights.In contrast, both the World Bank and ExIm Bank include human rights and social concerns within their criteria for financing projects.

The final aspect of EDC environmental review report that is problematic is section 10.1.It states, “Consistent with commercial practice, EDC considers any transaction information that is not known to the public as confidential and will not disclose such information without the permission of the relevant party or parties, as the case may be.”This policy renders EDC effectively unaccountable for many of the projects it finances.In the case of environmentally destructive projects, both EDC and the party receiving financing have a strong interest in keeping the details of the financing from the public.In the past, Canadian NGO’s have only found out about environmentally destructive projects financed through EDC when people affected approached them requesting help.EDC is not subject to the freedom of information act.

EDC has recently announced that it intends to release a new policy on disclosure.However, if EDC’s environmental guidelines are any indication, there is not much hope of EDC’s new disclosure policies resolving EDC’s transparency problem.The draft version of EDC’s new disclosure policy currently available to the public contains only an outline and no actual content[22].

The shortcomings of EDC’s environmental guidelines are fairly apparent.The lack of concrete standards combined with EDC’s secretive disclosure policy not only allows them to finance projects with little regard for environmental, social, and human rights concerns but also serves as an excellent shield against EDC’s critics.

In addition to the long-term consequences of such lax environmental standards and the moral implications of turning a blind eye to human rights abuses, the manner in which the EDC operates also adversely affects the efficient operation of the Canadian economy, by absorbing both an explicit and an implicit trade subsidy. 

6.Domestic Economic Implications

An interesting consideration with respect to the EDC’s special status is the effect that it has on the finances of the federal government through its raising of capital on international markets.As mentioned earlier, the EDC enjoys the full backing of the federal government when it seeks to raise capital on international money markets which allows it to receive preferential terms from lenders.This confers an implicit subsidy of trade financing by the federal government on top of the explicit subsidy of the EDC’s usual 1% better than prime lending rates from the Canadian government.This is not an unusual stance for the government to take nor a radical departure from accepted economic thinking.

“Governments generally have specific objectives in encouraging exports.Exports are typically regarded as one of the main engines of economic growth and job creation.Export promotion activities are meant to serve the same purpose as other protectionist trade policies.Higher export volumes are encouraged in order to lead to increases in employment, allow infant industries to achieve internationally competitive production characteristics, diversify trade and reduce balance of payment deficits.”[23]

Despite this logic for the promotion and subsidization of export trade, the implicit subsidy which the EDC’s enjoys when raising capital is substantially subsidized by economic efficiency losses in the domestic economy, an effect which is examined in detail by Arvin Jelliss and Chun-Yan Kuo in a paper they published in 1987.

Their analysis is based on the logic that the EDC’s raising of international capital on the world’s open money markets causes a reduction in the funds available to all borrowers.In fact, in the analysis offered by Jelliss an Kuo, the source of the EDC’s funds, be it domestic or foreign borrowing, does not affect the outcome of the calculations.[24]The framework established to analyze this implicit subsidy uses a weighted average social opportunity cost which had previously been estimate at 10% real.[25]

“…the social opportunity cost of [borrowed] capital is given as a weighted average of the net of tax real cost of incremental domestic saving, the real marginal cost of incremental foreign borrowing, and the gross of tax real return on incrementally displaced private investment…These incremental changes in domestic savings and investment and foreign borrowing occur in relation to the change in interest rates caused by incremental capital market borrowing as determined by the relative responsiveness of domestic investment—and of domestic and foreign savings—to Canadian interest rate changes.”

What Jelliss and Kuo mean by this is that their model can show varying degrees of impact depending of the responsiveness of the domestic market for borrowing on incremental changes in the Canadian interest rate.Therefore as they carry their analysis further, they use the full range of responsiveness from no shift in response to a full (100%) shift where shift refers to the shift of the supply curve of foreign funds to Canada.In an empirical simulation their model yields a range of implicit subsidy from 6.75 to 17.13.They also establish ranges based on the loan period, showing that the subsidy ratio is highly dependent on the period of the loan

Table 2.Concessionary Export Sales Financing Subsidy Ratio (%)[26]
 
 
  Lending Rates
10.00% 8.00% 5.00%
SDR at 10% real      
10 years 11.94 17.05 24.67
20 years 16.45 23.49 33.99
SDR at 7% real      
10 years 8.50 14.08 22.40
20 years 12.23 20.24 32.20

Note: the subsidy ratio is defined as the ratio ofthe export subsidy to export sales value; SDR stands for social discount rate (social opportunity cost) of capital in Canada.The figures in this table are based on the assumption that a shift of the foreign funds supply curve to Canada amounts to 50% of the value of borrowing/lending involved.

By applying these subsidy values to the EDC’s trade finance volumes we can establish a range, in dollar values for the subsidy conferred on the EDC and the exporters it assists by the Canadian economy as a whole

Table 3:Social Subsidy to EDC (in millions $CDN)
  1995 1997 1999
Gross value of loans receivable[27] 9,910 12,373 18,598
SDR 10% Real 10 year  1,689 2,109 3,170
20 year 2,327 2,906 4,368
SDR 7% Real 10 year 1,395 1,742 2,618
20 year 2,005 2,504 3,764
Share Capital 851 983 983
Retained Earnings 322 562 815
Shareholder’s Equity 1173 1545 1798
Total Subsidies and profits (min. value) 3741 4832 6214
Total Subsidies and profits (max. value) 4673 5996 7964
Note:the figures presented in this table are based on a lending rate of 8%, the median value of Jelliss and Kuo’s selected values (5%, 8%, and 10%).

The figures shown in table 3 represent estimates for the dollar amount of implicit economic subsidy to the EDC’s export financing operations based on Jelliss and Kuo’s framework for quantifying implicit export subsidies and EDC’s disclosure of earnings for 1999.These values, ranging from CDN$ 2.6 billion to CDN$ 4.3 billion for 1999 are not negligible amounts by any means.They represent a large transfer of economic activity out of the Canadian economy into the export trade administered and controlled by the EDC.When combined with the amounts of retained capital and earnings remitted as share capital and Shareholder equity the number become truly enormous (CDN$ 6.2 billion to CDN$ 7.9 billion for 1999).

The reason for equating the values in this way is that is offers a tangible measure of the amount of wealth, in terms of economic efficiency and profits for the EDC and its shareholders which is diverted out of the Canadian economy and into the sector of the economy controlled by the EDC and its shareholders.One obvious conclusion that can be drawn from this analysis is that the EDC is effectively diverting wealth out of the domestic economy in general and concentrating that wealth and economic productivity in the hands of a small number of exporters and financial elite.

By this analysis it becomes evident that not only does EDC involvement often have disastrous effects on the environment, human rights and sustainability of the regions to which it makes loans, but as a result of its status as a Crown corporation it had negative effects on the efficiency of the domestic economy and contributes to a further concentration of wealth in Canadian society, which in turn threatens social programs, environmental protection and human rights at home.Throughout all this the EDC fails to uphold any of the well-accepted principles of relating to human rights, environmental protection, sustainable development, transparency and accountability which the Canadian government attempts to promote.[28]

EDC’s contradictory self image of being both Crown corporation and an independent financial institution which exempts itself from federal government standards has caused frustration not only among Canadians but has also garnered a good deal of criticism from other ECAs worldwide.The US EXIM bank has been particularly critical of the dual role of government body and financial institution EDC has established for itself.

 

7. EDC vs. Uncle Sam

 
United States has recently made it clear that it considers the subsidies EDC provides to Canadian Business to be in violation of OECD agreements and is currently threatening a trade war.Last summer US Treasury Secretary Larry Summers stated that unless Germany and Canada cease providing unfair subsidies through their ECAs, the United States, “can and will act.”The bulk of the American threat comes in the form of a war chest, which would allow the ExIm Bank to match all “illegal” subsidies offered by EDC and its German counterpart KfW[29].This action would likely lead to a trade subsidy war and significantly, “undermine the multilateral discipline” that the OECD countries have worked to achieve[30].EDC defends its actions by claiming that it operates as a private financial institution and not as a government body.This exempts it from the OECD agreement.However the US disagrees, claiming that EDC relies on its government status to guarantee loans and therefore constitutes a government subsidy.Whether or not this is the case is very difficult to establish because the operation and activities of EDC are highly secretive.

This conflict is an excellent example of the controversy surrounding ECAs in international trade.If one country subsidizes its exports, the others must as well.If they do not, the country with the most subsidies has an advantage.EDC is particularly amplifies this problem because it combines an active and aggressive role in international trade with very low environmental and human rights standards.The US conflict with EDC over trade subsidies is of the same nature as international NGO’s conflict with EDC over social justice issues.EDC must be forced to adopt standards which are acceptable to the international community and the Canadian people, both in terms of trade subsidization and in terms of social and environmental protection if it wants to retain its status as a Crown corporation.

8.Conclusion

The EDC is unique among ECAs both in the range of services it provides and in the benefits it experiences as a Crown corporation.Because it is neither a lender of last resort as many ECAs are and because it provides ‘one-stop shopping’ for exporters by offering export financing and two kinds of insurance (both financial and political risk).This breadth of services combined with the strong financial base and the willingness to operate as a lender of first choice for most export-related enterprises means that the EDC plays a major role in many of Canada’s export industries.Given this large market share and its status as a Crown corporation, EDC should, despite it’s purely financial mandate, be acting as a promoter of Canadian international policies and standards.A greater degree of responsibility should be expected of the EDC because of its special status as a Crown corporation.

“As a Crown corporation, EDC pays no taxes, and it raises funds on international capital markets with the full faith and credit of the Canadian government, which allows it to receive preferential terms from lenders”.[31]The fact EDC is a crown corporation implies that its actions are mandated from the Canadian government and therefore the Canadian people.If the EDC wishes to continue enjoying benefits derived from being a crown corporation and Canada wishes to continue calling itself a democracy it follows that the EDC should answer to and represent the people of Canada by adhering to the principles to which the government adheres.

One type of responsibility which Canadians should be able to expect from Crown corporations is that they will uphold the standards set by the Canadian government with respect to environmental protection, respect for indigenous people’s rights, and basic human rights.This is a field in which the EDC has failed Canadians and citizens of many other countries, bringing into question EDC’s status as a Crown corporation.The tolerance of the irresponsible business practices demonstrated by the players in the Pangue-Ralco project have come to be accepted of the private sector, largely because the power and wealth of Trans-National Corporations (TNCs) have become so great that the citizenry feels it is beyond their control.

“Even strong national governments are no longer able to exert any sort of control of TNCs.Ifa country passes a law that TNCs regard as a hindrance to their further expansion, they merely threaten to leave and establish themselves elsewhere…Indeed, TNCs are now free to scour the globe and establish themselves wherever labor is the cheapest, environmental laws are the laxest [sic], fiscal regimes are the least onerous, and subsidies are the most generous”.[32]

However, this is not to say that this is desirable or unavoidable, simply to make reference to the dire straits into which international free-market capitalism has cast us and to suggest that we can certainly hold governmental agencies such as the EDC to a higher standard than the private sector.They are, after all, using the government as their guarantor and benefiting from the arrangement

We must therefore demand of the EDC that it not abuse its privileged position and the implied faith of the Canadian people in the ways it has in the past.When conducting international business, EDC must be forced to evaluate its borrowing partners on criteria which reflect, not only the rules for conducting business domestically in Canada or in the country of trade, but which also reflect the various international treaties and conventions on environment, human rights, and indigenous peoples’ rights.IfCanada wishes to maintain its excellent international reputation it must cease dragging its heels on the adoption of international standards for Export Credit Agencies.The Pangue/Ralco project is not one that Canadian citizens would want their country associated with.

Endnotes


[1] Lorenzo Nesti, Indigenous peoples’ right to land:international standards and possible developments.The cultural value of land and the link with the protection of the environment.The perspective in the case of Mapuche-Pehuenche, European Master’s Degree in Human Rights and Democratization 1998/99, University of Padua, University of Deusto. p. 18.
[2]Ibid, p. 18.Reference has been found suggesting that EDC financing to the project began in 1994 but the EDC’s lack of transparency makes this difficult to confirm.
[3] Ibid, p.18
[4] Downing’s report, submitted in 1996 and held by the IFC due to its harsh criticism was eventually released by the IFC at the end of 1997.It’s findings were essentially that the consultation process and structure of the Pehuen foundation both implied a poor understanding of Pehuenche culture and inadequate mechanisms for an informed decision on the part of the Pehuenche.Downing’s complaint to the American Anthropological Association (of which he was a member) resulted in the CfHR report mentioned in note VI.
[5] Hair J.D. Ph. D., Benjamin D. Ph. D., Luke J.D. Esq. And Avra O.R.; Pangue Hydroelectric Project (Chile): An independent review of the International Finance Corporation's Compliance with Applicable World Bank Group Environmental and Social Requirements , 1997. 
[6] B. Johnston, T. Turner.The Pehuenche, the World Bank Group and Endesa S.A.violations of human rights in the Pangue and Ralco dams projects on the Bio-Bio river, Chile,Committee of Human Rights of the American Anthropological Association.March 1998.p. 27.
[7] The IFC continued to hold a 2.5% interest in Pangue S.A., the company set up to build an operate the dam, but it’s responsibilities as a lender under World Bank directives ceased.
[8] Lorenzo Nesti.p. 19.
[9] Clifford Krauss, Indians Make a Stand on a Historic River in Chile, New York Times International, Aug 16, 1998.Section 1, p. 3.
[10] Ibid.
[11] Lorenzo Nesti.p. 20.
[12] Manuel Délano,The Mapuche’s Divided Stand, El País, Madrid Aug 30, 1998.Cited in World Press Review, November 1998.p. 35.
[13] Ibid
[14] www.edc.ca
[15] International, Canadian Environmentalists Protest Canadian Support for Three Gorges Dam, Three Gorges Probe, March 26/1996 (available at www.probeinternational.com)
[16] ECA-Watch, The Impact of ECAs on Environment, Development, and Human Rights,March 1999. (Available at www.eca-watch.org/documents.html)
Grainne Ryder, Compensation for EDC-financed Dam Falls Short for Colombia's Indigenous Communities, Probe International (news release), August 2000 (available at www.probeinternational.org)Embera Katio Disappeared by Paramilitary, Inter-Church Committee on Human Rights in Latin America, September 2000. (available at www.probeinternational.org)
[18] Details of all mining operations are taken from: Joan Kuyek, Presentation to the Standing Committee on Foreign Affairs and International Trade Review of the Export Development Act, Mining Watch Canada, November 1999. (available at www.web.net/~halifax/edc/pubs/submit.htm)
[19] Financing Disaster: Canada’s Export Development Corporation, Halifax Initiative Factsheet (available at www.g-20.net/EDC.htm)
[20] Jon Sohn, Analysis of Canadian Export Development Corporation's (EDC) "Environmental Framework" in Comparison to Mesum I Declaration and Internationally Recognized Environmental Goals, Guidelines, Standards and Principles, Friends of the Earth, September 1999. (available at http://www.eca-watch.org/documents.html)
[21] EDC’s Environmental Review Framework is available at www.edc-see.ca/corpinfo/pubs/ERF/ERFindex_e.htm
[22] The draft of EDC’s new disclosure policy is available at www.edc-see.ca/corpinfo/csr/disclosure/index_e.htm 
[23] Paul R. Marchand, The Export Development Corporation:Catalyst in Canada’s Promotion of International Trade.Masters Thesis, Institute of Comparative Law, Faculty of Graduate Studies and Research, McGill University, Montreal.1985.p. 169.
[24] Arvin D. Jelliss and Chun-Yan Kuo,On Measuring the Economic Subsidy of Export Sales Financing, Economic Development and Cultural Change, Vol. 35, no.4, (July 1987) p. 837.
[25] G.P. Jenkins, The Public-Sector Discount rate for Canada:Some Further Observations,Canadian Public Policy, vol. 7, no. 3, (summer 1981)
[26] Jelliss and Kuo, p. 844.The inclusion of the two SDRs in this section is in recognition of the two different values arrived at byG.P. Jenkins (note VI) and D.F. Burgess who has estimated it at 7% real (see Burgess, The Social Discount Rate for Canada:Theory and Evidence, Canadian Public Policy, vol. 7, no. 3 [summer 1981])The 3% real difference in the estimated social opportunity cost of capital is considered to be significant, and both Jenkins and Burgess agree that the difference can only be resolved through the conduct of further empirical analysis.
[27] EDC Financial Review, 1999 (available at www.edc-see.ca/corpinfo/pubs/report/1999/Financial_e.pdf)
[28] Aaron Freeman, p. 58.
[29] The US threatened to utilize its war chest unless the issue was resolved during the OECD meeting last November.I was unable to locate current information on this conflict.
[30] Patricia Adams, EDC tempts a Trade War, in The National Post, July 6/2000. (available at www.probeinternational.org)Patricia Adams and Paul Waldie, U.S. Threat Over 'unfair' Exports: Canada's EDC Targeted, in The National Post, July 6/2000. (available at www.probeinternational.org)
[31] Aaron Freeman,Make the EDC Respect Human Rights and the Environment, Policy Options, May 2000, p. 56.
[32] Goldsmith E., Development as colonialism , in: Mander J. & Goldsmith E. (edited by); The case against the global economy , Sierra Club Books, San Francisco, 1996, p. 265.