Patronage Canada

Export Development Corporation Is Unnecessary, Costly, Unaccountable.
Misleads the Canadian Public Is an Environmental Wrecker.
Patronage Agency Should Be Shut Down.

Submitted Gowling, Strathy & Henderson

1. Executive Summary

The Export Development Corporation (EDC) transfers the private risks of international business to the public sector. By socializing this risk, it spawns moral hazard allowing exports, investments, and projects to proceed that are otherwise economically unviable. It also interrupts important messages, conveyed by the market, that an open, transparent, accountable, and honest government that respects the rule of law is good for business. By doing so, it bankrolls or reinforces bad governments against their people and spawns crony capitalism.

Because of its exemption from the Access to Information Act, EDC's activities are sheltered from public view. The absence of public sector oversight and market discipline make EDC's activities a perfect breeding ground for corruption and for business activities that destroy the environment, sink Third World citizens in debt, and cost Canadian taxpayers money. Export credit is a government tool to win economically compromised sales for favoured exporters. It's sole raison d'etre is as a patronage dispensing agency that awards pork barrel contracts and supports unduly risky foreign investments for such firms.

With its preferential financing, tax, and regulatory position, EDC crowds out viable private sector businesses, such as the short-term credit insurance industry. There is no public policy reason for EDC to exist. Trade agreements are increasingly restricting the level of subsidies export credit agencies can deliver to their firms, and other Organisation for Economic Co-operation and Development (OECD) countries are privatizing their export credit agencies. Canada should follow suit. By doing so, it will protect the global environment, encourage a healthy Canadian and global economy, and allow democracy to flourish throughout the Third World.

2. Probe International's History Investigating the Export Development Corporation

Probe International has been investigating the activities of the Export Development Corporation for the past decade. Based in Canada, we have worked with citizens groups in Third World countries, and OECD countries, to research the environmental, social, and financial damage caused by projects supported by EDC. Probe International has 20,000 supporters across Canada, many of whom regularly write letters of concern about EDC to their members of parliament. Patricia Adams, Probe International's Executive Director, and an economist, has written about the costly activities of EDC and other export credit agencies in Odious Debts: Loose Lending, Corruption, and the Third World's Environmental Legacy (Earthscan, 1991), and in The Next City, Spring 1997. Probe International has corresponded with Canadian government officials, including the various ministers who have been responsible for EDC, and with EDC officials, in an attempt to disclose the details of EDC's operations for the Canadian public. The following research and analysis is the result of Probe International's work investigating the EDC.

3. EDC Finances Economic Fiascoes and Environmental Disasters

EDC refuses to release even the most basic details of its operations, including whether or not it is supporting a particular project, "because it is our practice to respect clients' and potential clients' right to privacy in regards to their financial affairs." Hence, it is impossible to get a complete picture of the damages caused by EDC's activities. The following, obtained from trade journals, press reports, and correspondence with EDC, is the tip of the iceberg of economically unviable and environmentally damaging projects financed by EDC. These projects are among the world's most notorious environmental destroyers and infamous boondoggles.

Three Gorges Dam - China: In China, EDC is financing the sale of Monenco-AGRA's super computer (US$12.5 million in 1994) and the sale of Canadian General Electric's turbines and generators (US$153 million in 1997) for the Three Gorges dam. The super computer will help coordinate construction of the dam and the forced resettlement of 1.9 million people from their homes. The turbines and generators are intended to generate electricity. The Three Gorges dam is the world's single most environmentally damaging project under construction today. The dam will 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. Three Gorges is also recognized as an economic white elephant. Under optimistic conditions, the Three Gorges dam is estimated to cost US$34 billion. But a Chinese banker told the Wall Street Journal that he expects the final cost to be US$77 billion, making it the most expensive source of new power in China today. There are cheaper, cleaner, and more readily available ways to generate power and to reduce China's greenhouse gas emissions than by building the Three Gorges dam.(1) Chinese and foreign experts believe that the Yangtze's sediment-laden waters could destroy the dam's power turbines, cause flooding, and disrupt navigation. Because the dam is being built over fault lines, seismologists fear its weight will induce an earthquake. The dam, now under construction, is plagued with problems such as instability in the rock bed under the dam and popular resistance by the people who are slated to be moved in the next few years.

EDC was the first export credit agency to support the Three Gorges dam -- indeed the first international financier -- despite the better judgement of other institutions. The World Bank has warned that the project will not be economically viable. The U.S. Bureau of Reclamation, the world's foremost dam building agency, withdrew from the project after supporting it for 50 years, arguing that the dam is neither environmentally nor economically feasible. The U.S. Export-Import Bank (Ex-Im) concluded after an extensive review that it did not meet Ex-Im's environmental standards. Public debate and criticism of the dam is strictly forbidden in China; journalists who have attempted to publish critical views of eminent Chinese experts have been jailed, and documents criticizing the dam have been banned.

Gehe Yan Dam - China: The Canadian federal government quietly gave the green light for a $130-million EDC loan for the Gehe Yan dam in China, a month after the Tiananmen Square massacre in June 1989. According to the Canadian Press, which quoted a government source, the government would normally have announced the deal with a press release. But the government had strongly denounced the bloody action by the People's Liberation Army and, apparently, did not want to attract public attention in Canada by supporting the regime. A group of seven companies headed by MIL Group Inc. and Asea Brown Boveri Canada won a contract to build turbines and other generating equipment for the dam.

Candu Reactors - China, South Korea, Romania, Argentina, and Turkey: EDC has been the source of life support for Candu nuclear exports over the years. It has financed Candu sales to South Korea, Argentina, and Romania. In 1974, EDC financed the Argentine government purchase of a Candu nuclear reactor from Atomic Energy of Canada Ltd., another Crown corporation that markets the Candu. The Cordoba plant continually breaks down, threatens the environment, and creates chaos for the economy. It has also resulted in millions of dollars in losses to Canadian taxpayers. Because the Candu could not sell on its own merits, the government enlisted the EDC. Meanwhile, in Romania, slave labour was reportedly used to build that Candu. In South Korea, the reactors are the subject of frequent protests. The Canadian government also tried, but failed, to sell Candus to Mexico. In 1982, Prime Minister Trudeau flew to Mexico City promising $1.5 billion in EDC loans and another $4 billion from the Canada Account, which EDC administers, if Mexico chose Candu reactors. Mexico's debt crisis hit soon after and spared Mexico this ill-conceived investment.

In 1997, the Liberal cabinet approved a $1.5-billion EDC loan to enable Atomic Energy of Canada Ltd. to finance the sale of two Candu reactors to Turkey. In 1998, EDC announced it will back the sale of still more Candus to Korea and Romania. EDC also lent China $1.5 billion for two reactors to China. EDC will finance these sales despite the fact that we can't run Candus safely and affordably in Canada and the fact that they are so defective and uneconomic that there is no longer a market for them here. Pressure tubes have ruptured and reactor feeder pipes have worn thin, a phenomenon known as premature aging. This increases the risk of a reactor meltdown, yet the cost of fixing these problems is greater than the initial cost of the plant. North America's largest utility, and the Candu's largest customer, Ontario Hydro, is known to have been bankrupted by this technology. Ontario Hydro has shut down one-third of its reactors, 20 years ahead of schedule. Finally, nuclear reactors produce highly radioactive waste by-products that will have to be managed for thousands of years to come. Wherever the old electric monopolies are being dismantled, cleaner and cheaper sources of power, such as combined cycle gas turbines, are the first choice of investors.

All of the foreign Candu sales have been approved by EDC without any formal public debate in Canada or in the recipient country, without environmental assessments, and without independent financial scrutiny. The courts are now considering whether or not the federal government violated its own environmental assessment laws in approving the recent Candu sale to China.

Kumtor Gold Mine - Kyrgyzstan: In 1995, EDC provided US$50 million in senior debt to Kumtor Gold Company, a Kyrgyzstan joint stock company one-third indirectly owned by Cameco and two-thirds owned by the government of Kyrgyzstan, for a US$452-million gold mine in that country. EDC also insured 90 percent of Cameco's subordinated loan and its equity contribution to the Kumtor Gold Company. On May 20, 1998, a truck carrying sodium cyanide to the mine crashed through a bridge, spilling nearly two tonnes of deadly cyanide into the Barskoon River. Company officials failed to notify local officials of the danger of drinking water from the river for five hours. Since then, it is reported, as many as 2,000 people were poisoned, 800 hospitalized, and four died as a result of the accident. Company officials deny responsibility, but Canadian Department of Health expert John Harrison, who went to the site of the accident, thinks if a person drank some of the water "within perhaps up to 24 hours after the exact spill, they would probably get a good size dose." Since then, it has been reported that 70 litres of nitric acid leaked from a truck on its way to the mine and that the mine is dumping tailings on a nearby glacier. Local community leaders and members of parliament are up in arms, demanding that the mine be shut down until an independent investigation can be carried out, compensation is paid, and those responsible for the harm are held to account.

Omai Gold Mine - Guyana: In 1992, EDC issued US$163 million in political risk insurance to Cambior for its Omai gold mine in Guyana. Of this, 34 percent was reinsured by the Multilateral Investment Guarantee Agency of the World Bank group.

Just before midnight on Saturday, August 19, 1995, the earthen dam holding back a waste pond at this gold mine in the Guyanese Amazon erupted, spewing 3.2 billion litres of cyanide and heavy metal-laced effluent into the Omai River. Forming a crimson plume, the effluent snaked its way down a narrow tributary leading to the Essequibo River, Guyana's main waterway. Via helicopter, boat, and runners, the Guyanese government tracked the Omai gold mine's plume and warned people by loudspeaker to stay out of the water. It hastily posted danger signs, warning people not to drink, swim, bathe, wash, or fish in the river and to keep their livestock away from the river's edge. The government then rushed drinking water to communities throughout the region. Within two days, the news of cyanide flowing down the river had devastated the country's fishing industry, with the origin of all fish now suspect. In the markets of Georgetown, Guyana's capital, catches could not be sold, and some Caribbean countries banned all seafood products from Guyana. Other industries, too, suffered in the wake of the spill. Farmers could not sell produce grown along the river, small mining and logging operations were put on hold and local abattoirs, which wash the meats with river water, had to shut down. Guyana's fledgling tourist industry, boasting river eco-tours on this northern tip of the Amazon rain forest, received cancellation after cancellation. Roger Moody of the London-based group Mine Watch, an authority on mining operations, reported that the cyanide plume killed the spectrum of life in the Omai River, from fish to microbes, and caused a ticking time bomb in the Essequibo River by leaching out heavy metals such as cadmium, copper, zinc, iron, and mercury. Within five days, the crimson plume stretched the full 115 miles from the mine to the river's mouth. Throughout the country, Guyanese citizens adopted cries reminiscent of the Yankee Go Home calls that rang throughout Latin America in previous decades: "Take Your Poison Back Home to Canada"; "Stop Killing Our People"; "Let Omai Pack up and Leave."

A Dam Review Committee, created to investigate the cause of the accident, found that the dam broke because of "inadequate application and execution of sound practice for design, construction, supervision and inspection that are well understood in current embankment dam and tailings dam technology." Later, the United Nations Development Programme stated that "baseline and continuous monitoring at Omai have largely been inadequate."

Guavio Dam - Colombia: West of Guyana in Colombia, EDC backed the Guavio hydroelectric complex in 1989. It has become synonymous in that country with white elephant. Delays due to collapsing tunnels and other technical problems, and stubborn landowners who refused to evacuate their homes to make way for the dam, doubled Guavio's cost to over $2 billion. The cost overruns equalled the cost of building a subway system for the capital city of Bogota, half of the country's annual coffee exports, or half of the country's social spending. Colombians suffered as a result, but not Canadian General Electric, which carried out the work.

Lihir Gold Mine - Papua New Guinea: EDC guaranteed $29.6 million of a syndicated loan from the Union Bank of Switzerland to investors in the Lihir gold mine project in Papua New Guinea -- a project that will dump 400 million tons of waste rock and toxic tailings into the ocean. EDC refused to provide further details of this guarantee.

Mae Moh Power Project -Thailand: In 1979, EDC and the Bank of Montreal supported the sale of a Babcock & Wilcox steam generating unit for the Mae Moh lignite fired generating station in Thailand with a $15.58-million loan. According to Watershed, a Bangkok-based journal, Mae Moh has become "one of the most serious public health disasters in Thailand's history of economic development." At least 42,000 village people near the plant suffer chronic respiratory diseases, breathing problems, and skin disorders; livestock regularly fall ill and die; large areas of orchards, vegetable gardens and rice crops wilt from acid rain; streams and waterways are blackened by the emissions as well as by the run-off from the coal mining operations. During the cold season from September to November every year, a combination of low temperatures, high air pressures, and the absence of strong winds leaves a dense shroud of toxic sulphur dioxide hanging over the Mae Moh valley. In April and May of 1996, six village people from Sob Paad village in the Mae Moh valley died of blood poisoning, suspected to be caused by sulphur dioxide emissions from the Mae Moh lignite burning plants. Mae Moh is one of the largest point-sources of poisonous sulphur gas in South East Asia.

Panjapol Pulp Mill - Thailand: In 1989, EDC provided one of Thailand's largest pulp companies, which threatened to convert natural forests and farmland to eucalyptus plantations for pulp, with a US$78-million loan to purchase equipment and services from Klockner Stadler Hurter. Thai peasants hate eucalyptus because it dries up natural springs and destroys fragile tropical soils.

Because Thai environmentalists have difficulty getting information about the project, we asked the EDC if an environmental assessment had been done to ensure that the project was environmentally and economically sound and that those affected would be properly compensated. EDC replied that it had not, even though those impacts could render the project uneconomic, making loan repayments difficult or impossible.

The Thai business press gave front page coverage to this pulp loan giveaway, calling it "the single largest loan and grant package, with the best terms ever awarded to a private Thai group." It went on to say, "Financial experts expressed amazement at the group's successful efforts to clinch the favourable package deal."

Marcopper Mine - Philippines: In 1982, the EDC lent $1.36 million for the Placer Dome Marcopper mine on the island of Marinduque in the Philippines. Between 1975 and 1991, Marcopper dumped more than 200 million metric tons of tailings from its Mount Tapian mine into the shallow and coral-rich waters of Calancan Bay. The 12,000 fishermen and their families who depend on the bay for their primary source of food and livelihood have been devastated by its demise. The rich diversity of life previously supported by the bay's coral reefs, including an abundant fish population, has been dramatically reduced. Because of the loss of income caused by poor fish catches, some villagers can no longer afford to buy rice, while others have become ill after eating seafood caught in the bay.

A study conducted in 1997, confirmed the villagers' worse fears. A medical team from the University of the Philippines and the Philippine Department of Health found elevated mercury and lead levels among the children from Calancan Bay area. A doctor from the area has also reported a number of deaths potentially related to metal contamination.

Philippine President Fidel Ramos declared a "state of medical calamity for health reasons" for the Calancan Bay area. In his Proclamation No. 1172, he noted that soil samples collected, as well as air monitoring results, indicate lead levels higher than allowable limits.

That wasn't the end of problems for the people of Marinduque Island. In 1992, Marcopper began dumping its mine tailings into the mined-out Mount Tapian pit. On March 24, 1996, a tunnel beneath the pit failed and over a period of several weeks, more than 2 million cubic metres of tailings poured from the tunnel into the Makulapnit and Boac rivers.

Philippine President Ramos declared the region a state of calamity and the United Nations, which described the spill as an "environmental disaster," reported that the affected rivers suffered a "total loss of aquatic life and biological productivity." At least 20,000 people were affected by the spill. Hundreds of local villagers were evacuated from their homes while many others became stranded. Officials warned villagers not to drink water drawn from their wells for fear of contamination. Provincial officials predict the affected rivers will take 25 years to rehabilitate.

According to United Nations investigators, Marcopper failed to exercise good environmental management at the mine. A waste rock siltation pond operated by Marcopper was found by the UN to be poorly maintained and seeping toxins that exceed international water quality standards.

Local legal rights groups are organizing a lawsuit to seek payment for rehabilitation and compensation for all the people affected by the Marcopper mine.

Ok Tedi Copper Mine - Papua New Guinea: Located in the Western province of Papua New Guinea, the Ok Tedi mine is supported with $88 million in export credits from EDC and is the third largest open-cut copper mine in the world. In 1984, a landslide destroyed the dam retaining the mine's toxic tailings, sending 80,000 tons of waste rock containing lead, cadmium, zinc, and copper into the Fly and Ok Tedi Rivers. The mine continued to operate despite its lack of tailings retention facility. Ok Tedi fish stocks have reportedly declined between 50 percent to 80 percent, nearly 70 kilometres of the Ok Tedi River became "almost biologically dead," and 130 kilometres of riverbank (including gardens, plantations, and forests) have reportedly been severely degraded, allegedly causing 30,000 downstream land owners to loose their ability to derive an income from fish and garden crops.

Carhuaquero Hydroelectric Project - Peru In 1980, EDC approved US$10 million to support Shawinigan Engineering's work on this hydrodam. The dam was brought to a standstill in the mid-1980s, due to a lack of soft loans and because of a lack of water. It was later revived, although the area suffers from a seasonal lack of water.

Chamera Dam - India: In 1984, EDC and the Canadian International Development Agency co-financed $650 million for the Chamera dam in India, winning all the foreign contracts for Canadian exporters, including SNC, Acres International, Marine Industries, and Canadian General Electric. Preliminary documents obtained through the Access to Information Act indicate that the dam is suffering from serious technical problems, including, failure of the concrete lining. Generating units have had to be shut down and repaired, and remedial work on spillway gates has become necessary.

Guri II - Venezuela: In 1978, EDC lent Venezuela $50 million to support the sale of Canadian General Electric hydroelectric generator sets for the Guri II power plant. Since then, thousands of people have lost their land to the dam reservoir and to transmission lines. Major protests have ensued. Much of the land cleared has been encroached on by settlers and gold-mining companies causing major sedimentation problems in the reservoir. Human rights groups criticized the "aura of secrecy" around the construction of these dams and noted that apparently no consideration was given to the environmental or social impact of the hydrodam complex.

Indah Kiat - Indonesia: In 1996, EDC provided Cdn$285 million in limited financing for the construction of the Indah Kiat Nine project in Indonesia, which has been responsible for massive destruction of primary rain forest.

Soroako Nickel Project - Indonesia: In the 1970s, EDC lent up to $60 million for INCO's massive open-pit nickel mine in Indonesia. The mine's dam caused the flooding of rice fields, coconut groves, and a local mosque, leading local people to launch a law suit. It also disrupted the migratory patterns of eels, an abundant and important protein source for local people.

Food Irradiation - Algeria: EDC supported the sale of a food irradiator to Algeria. Irradiated food has not been proven safe for human consumption. Free radicals form during irradiation, creating carcinogens and mutagens. Irradiation kills vitamins, causes meat to smell like "wet dog," and disguises botulism.

Yacyreta Dam - Argentina: In 1987, EDC agreed to lend US$86.4 million to finance the sale of four Canadian General Electric turbines for the Yacyreta dam on the Parana River. Yacyreta was supposed to cost US$3.7 billion. Today, this figure is expected to top $10 billion. Yacyreta has been called the dam that financed the Falklands war. It was also called a "monument to corruption" by Argentine President Carlos Menem. Cost overruns, law suits from some of the 50,000 people who have had to move to make way for the dam, and shortages of money have meant that the dam will probably never operate as planned. It is alleged that the filling of the reservoir introduced stagnant, polluted water and contaminated ground water supplies used for drinking. Improperly cleared vegetation in the reservoir area also caused water quality problems. Crops, fish stocks, and human health have been adversely affected.

Musi Pulp - Indonesia: In 1997, the Musi pulp and paper project was reportedly supported with a $50-million EDC loan. Siti Hardiyanti Rukmana, the daughter of former Indonesian president Suharto, is believed to be one of the owners of the venture. The Musi Pulp project gets its supply of wood from a 193,500 hectare tropical timber estate, part of it primary tropical forest, in South Sumatra. The respected Indonesian environmental organization, the Indonesian Forum of Environment (Walhi), said the venture will cause "massive social problems" by taking away local villagers' livelihoods because the company "seized the people's forests and farmland without any prior consultation." In 1997, Indonesian Minister of Forestry Djamaludin accused the company of contributing to the infamous forest fires that raged across the country that year.

Pangue Dam on the Bio-Bio River - Chile: EDC announced in 1994 that it would lend US$20.5 million to finance the export of Canadian generators and cables from Alcatel and Canadian General Electric for the Pangue hydroelectric dam on the Bio-Bio River in Chile. The Pangue dam, the first of six on the Bio-Bio River, flooded lands of the Pehuenche native people and appropriated their forests. It threatens unique fish species, and disrupts water flows to downstream farmers. It is built in the second most seismically active area of the world, threatening to cause reservoir induced seismicity, landslides, and avalanches. So rich with sensational gorges and towering waterfalls, the Bio-Bio River, many have argued, is worthy of world heritage site status.

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