Financing Disaster: Canada's Export Development Corporation and the Financing Agency Race to the Bottom

by Aaron Freeman

OTTAWA -- Kimy Pernia Domico is worried about his four-month-old granddaughter. Like a rapidly increasing number of the 2,500 Embera Katio indigenous people that live near the Sinu River in Colombia, she has recently fallen sick with malaria.

The malaria rate increase followed the construction of a massive hydro-electric dam built on the river by the multinational Urra consortium. As the project halts the flow of the river, the still water attracts mosquitoes, which carry the disease.

For centuries, the Embera Katio relied on the fish from the river and a few basic crops for self-sufficiency. With the construction of the dam, the Embera's traditional food supply has been wiped out, and their lands destroyed.

The dam has also brought a more direct threat to the community: military terrorism.

According to Amnesty International, six indigenous people protesting the project have been killed, and 10 additional members of the community have been disappeared. Often, this violence is carried out by paramilitary groups linked to the Colombian army.

"The dam has brought death to our people, death to the fish, death to the members of our community who have seen their source of protein vanish and death to our leaders who have protested or challenged the dam," Domico, a traditional leader of the Embera Katio, told a Canadian parliamentary committee in November 1999.

"The impact on my people is very sad," says Domico. "These days, with the fish gone, it is common in my community to see people fainting because they're weakened by malnutrition, which leaves people vulnerable to diseases that never used to affect us. The worst is that many children have died as a result."

The Urra project was built with an $18.2 million credit from Canada's Export Development Corporation (EDC), a Canadian government-owned financing agency known as an export credit agency. EDC is the main source of publicly supported export financing in Canada. A state-owned corporation, EDC provides Canadian exports with commercial and political risk insurance, and financing products to help their customers.

As a public institution, 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.

EDC financing has risen sharply in recent years. From 1993 to 1998, its volume of business tripled from $8.7 billion to $25.8 billion. Its customer base has also grown. In 1999, EDC had 4,297 customers in the first half of the year, a 21 percent increase over the same period a year before.

Despite the public benefits it receives, EDC has virtually no legal obligations to ensure that its lending meets basic social or environmental standards. The agency is exempt from the Canadian Environmental Assessment Act and Canada's Access to Information Act, and it even refuses to publish a list of projects that it finances. The result is that many EDC projects never come to light until they have become well-publicized disasters.

Assessing The Damage

Enough is known about EDC to generate increasing complaints from Canadian environmental and development groups.

EDC is a major financier of hydro mega-projects. In addition to Urra, it has supported China's controversial Three Gorges dam, financing the 1994 sale of $12.5 million worth of computers by Monenco-AGRA and Canadian General Electric's 1997 sale of $153 million worth of turbines and generators in connection with the dam. The dam, now under construction, will lead to the forced resettlement of nearly two million people from their homes, imperil endangered species along the Yangtze River, turn the river into a cesspool of human and industrial wastes, and submerge archeological sites dating back to 10,000 BC. Instability in the rock bed under the dam threatens its stability, posing a major potential threat of rupture once the dam is completed.

EDC has also financed several major mining projects. In 1992, EDC issued $163 million in political risk insurance to Montreal-based Cambior for its Omai gold mine in Guyana. A burst tailings dam at the mine released 3.2 billion liters of cyanide and heavy metal-laced effluent into the country's main waterway. Guyana's fishing, agriculture and tourism industries were decimated by the spill. [See "Courting Disaster in Guyana," Multinational Monitor, November 1995] Guyanese residents living near the mine tried to sue the company in Canada, but their case was dismissed, the judge ruling that they should sue the company in Guyana.

"The proprietors of Omai are saying that the water is safe, but the people living in the area say no," says Judith David, a plaintiff in the lawsuit who lives downstream from the mine. "We have kids who are severely affected with rashes, eye disorders and even psychologically." David recalls that at public demonstrations following the spill, residents shouted, "Take your poison back to Canada."

Another major sector that EDC assists is the nuclear industry. EDC has financed CANDU nuclear reactor sales to China, South Korea, Romania, Argentina and Turkey, as well as food irradiation sales to Algeria. (CANDU reactors are marketed by Atomic Energy of Canada, Ltd., a parastatal corporation.)

EDC is clearly not selective with regard to who it does business with, and many have raised security concerns regarding the CANDU sales. "In order to sell CANDU reactors to China, Canada looks the other way when it comes to human rights violations and nuclear weapons proliferation," says Elizabeth May, executive director of the Sierra Club of Canada. The Sierra Club is currently suing the federal government over the sale of CANDUs to China, alleging that the transaction broke the government's own environmental guidelines.

EDC finances CANDUs abroad despite these same reactors' record of wreaking economic and environmental havoc back at home in Canada. At CANDU reactors in the province of Ontario, pressure tubes have ruptured and reactor feeder pipes have worn thin, a phenomenon known as premature aging. Premature aging has increased the risk of a reactor meltdown, but the cost of fixing these problems is greater than the initial cost of the plant. As a result, Ontario Hydro has shut down one-third of its reactors, 20 years ahead of schedule.

"Too many of EDC's operations are morally repugnant, environmentally unsustainable and financially unsound," says Patricia Adams, executive director of Probe International, a Toronto-based research organization that has tracked many EDC-financed projects.

EDC Volunteers To Do Better

In 1999, the Canadian government began a statutory review of EDC. This review coincided with growing pressure on EDC and other countries' export credit agencies to ensure that basic social and environmental standards are met when these agencies approve project financing.

In response to this pressure, EDC introduced a voluntary, non-binding Environmental Review Framework in April 1999. According to EDC President and Chief Executive Officer Ian Gillespie, the Framework "strives to create a balance between ensuring environmental integrity and encouraging sustainable development for [emerging] countries to grow and create their own economic and social development."

EDC critics offered scathing reviews.

"The Framework's model considers only the impact of environmental risk on a project, rather than the impact of the project on the environment," says Linda Nowlan, an attorney with the Vancouver-based West Coast Environmental Law Association.

A coalition of Canadian human rights, labor, environmental and development organizations known as the EDC Working Group has called on the federal government to require EDC to adhere to binding social and environmental assessment standards. They point to other export credit agencies, such as the U.S. Export-Import Bank and the Overseas Private Investment Corporation, both of which adhere to mandatory World Bank standards.

EDC's Ian Gillespie concedes that "all ECAs must do better on environmental assessment," but he argues that EDC is "leading the world in this regard."

On this point, the Working Group may agree with Gillespie. Activists in other countries believe EDC has been promoting its own weaker, voluntary standards internationally as a way to head off U.S. efforts to promote more binding and effective World Bank guidelines as the international standard. Draft environmental guidelines released in November 1999 by Sweden's export credit agency, the Export Credit Guarantee Board, mimicked the EDC framework in providing no access to information, no consultation requirements, no sanctions for companies that fail to meet the guidelines and no requirement for analysis of alternatives to the proposed project.

"Even though some of EDC's own clients are already adhering to environmental assessment standards which require disclosure, consultation and contractual mitigation measures as conditions of their financing with other public financial institutions, EDC is in the shameful position of heading off calls for meaningful standards," says Nowlan.

"Canada's Framework is so ambiguous that, unlike U.S. or World Bank standards, it is attractive to other export credit agencies who are not interested in adopting standards to protect the environment or human rights of affected communities," notes Liam Phelan, an export credit agency campaign coordinator with AID/WATCH Australia.

It appears the EDC strategy is to head off calls for better government oversight by claiming that an international agreement is just around the corner. For EDC, this strategy is nothing new. A decade ago, when Canada was reviewing its environmental assessment laws, EDC, backed by the Department of International Trade, made the same claims.

"You will not stop an environmentally harmful project unless the credit agencies together agree not to support that sort of thing, EDC President and CEO R.L. Richardson told the parliamentary committee on environment in May 1990.

"The Canadian government is seeking a multilateral agreement to ensure that government-supported exports, no matter what their country of origin might be, do not add to the stock of the world's environmental problems," then-International Trade Minister John Crosbie wrote in a letter a month later. "A strategy to pursue this initiative has been developed by officials of External Affairs and International Trade Canada. ... The strategy will be put into play in the near future."

The EDC Working Group agrees that all export credit agencies must adopt better policies. But the Working Group says that Canada could encourage this process by adopting World Bank standards as a minimum, particularly in the area of disclosure. Without adequate disclosure, they argue, there is simply no way of knowing whether Canadian policies on human rights or other issues are being adhered to by EDC.

"The EDC's record of secrecy is unacceptable for a public financial institution," says Pamela Foster, coordinator of the Ottawa-based Halifax Initiative, which is a member of the EDC Working Group.

Gillespie says that disclosure would put EDC clients at risk. "We must be respective of the customer's commercial interest," he says.

However, the EDC Working Group notes that the disclosure obligations placed on World Bank, U.S. and other international financing agencies have not harmed the commercial interests of these agencies' clients -- including many of the companies EDC services.

A Positive Step Toward Accountability

The EDC Working Group won a partial victory in December 1999, when the parliamentary committee reviewing the EDC agreed with many of the coalition's recommendations. Specifically, the committee recommended:

• an ombudsman position be set up to respond to the negative environmental and human rights effects of EDC projects;
  
  
• EDC-financed projects should undergo environmental impact assessments;
  
  
• EDC should submit its forthcoming disclosure policy and Environmental Framework to a full public consultation; and
  
  
• EDC must "give due regard ... to the commitments and obligations undertaken by Canada under international agreements," including human rights and environmental agreements.

Calling the committee's report a "positive step forward," a statement by the coalition said, "While our coalition has some reservations with the report, we feel it takes a balanced approach in addressing the human and environmental impact of EDC."

The report has gone to the Minister for International Trade Pierre Pettigrew, who will likely introduce EDC legislation in the spring.

EDC and its allies are sure to fight the proposed changes. At the Committee hearings, Gillespie pleaded with the members of Parliament not to place social standards on the EDC, arguing that it would add too high an administrative burden on the corporation. "EDC follows government policy on human rights. It doesn't make that policy."

To bolster EDC's case, EDC clients also appeared before the committee. "Canada's policy should not be imposed through EDC," said Richard L'Abbé, president of Med-Eng Systems. L'Abbé pointed to U.S. anti-corruption laws as an example of the sorts of rules that would make doing business with EDC unwieldy. "If EDC had a rule that said we have to comply with every law of the land, EDC [would have] to open a law office. If would be very onerous."

But for Kimy Pernia Domico, even the parliamentary committee's proposed measures may be too late. In late November, the Urra consortium began filling the reservoir, in violation of a court order obtained by the Embera Katio. As the Embera Katio struggle to have the court order respected, further violence against their community is likely.

In Canada, activists can only hope that if they are successful in placing effective standards on EDC, projects like Urra will not be financed in the future.

Multinational Monitor Contributing Writer Aaron Freeman is author of Cashing In: Money and Influence in Canadian Politics. He is also one of the founding directors of the Ottawa-based Democracy Watch, which is a member of the EDC Working Group.