Finding new markets for Cdn exporters means more risk to Crown corp: report

10/28/2012 04:00 EDT | Updated 12/27/2012 05:12 EST
OTTAWA - A Crown agency that promotes Canadian exports of arms and other products will have to accept much more risk as it moves into new markets abroad, says an internal report.

The Canadian Commercial Corp. is under pressure from Canadian firms to find new customers in the Middle East, South America, Africa and India as its traditional market — the United States — shrinks.

The corporation, created in 1946, negotiates government-to-government contracts to reduce the risks of non-payment to exporters, who lack the clout of the Canadian state when foreign governments try to skip their bills.

But the agency has itself become "risk-averse," and will have to shed that attitude to better serve firms hungry for a more diverse customer base, says an analysis ordered by Ed Fast, the international trade minister.

"The corporation would have to be less risk-averse if it is to develop business in promising geographical regions, e.g., Middle East and in emerging economies," the report concludes.

At the same time, the analysis urges caution in at least one export sector — nuclear energy, including Canada's Candu reactors — where costs can rapidly spiral. Last year, the federal government licensed its Candu design to a subsidiary of SNC-Lavalin.

The agency "should conduct an analysis of strategic and transactional risks to the corporation if it were to undertake very large contracts such as those encountered in the nuclear energy sector."

The $156,000 review of the Canadian Commercial Corp., commissioned from Ottawa-area consultant Capra International Inc., is dated March 29 this year. A heavily censored copy was obtained by The Canadian Press under the Access to Information Act.

Since the 1950s, the corporation has been responsible for the Canada-U.S. Defence Production Sharing Agreement with the U.S. defence department.

Major Canadian suppliers to the American military, and to NASA, are required to go through the non-profit agency, which gets about $15 million annually from the federal government to act as middleman. Today these defence and aerospace arrangements represent about 90 per cent of all contracts signed, worth $1.7 billion in 2011-2012.

But in 2009, the corporation was given a broader mandate, which included selling more Canadian military goods and services to allies and "like-minded nations." The move, which also focused on other exports to developing markets such as Latin America and Africa, was made as military procurement in the United States stalled.

"Defence budgets in the U.S. and other countries are expected to decline especially for capital acquisitions," says the report.

"A general decline in procurements in traditional aerospace markets along with longer project cycles is expected to reduce revenues for Canadian exporters."

But exporters, and some of the corporation's own 135 staff members, told Capra International that Canada may be missing out on overseas business because the agency is allergic to risk.

"Generally, (the corporation) manages foreign customer credit risk by extending open account terms only to parties with the highest of credit ratings, and seeks security where the rating falls below this threshold."

Only in Cuba, where the agency has been doing a sideline business since 1991, have officials accepted significantly higher levels of risk, says the report.

Canadian firms provide tourism training to the Caribbean nation, as well as some agricultural supplies, together worth about $70 million a year.

"With the exception of Cuba Contracting, (the agency) never accepts balance sheet risk," officials told Capra.

The report finds generally that Canada does not promote its export industries to the same extent as competing countries, which offer low-rate financing and political lobbying abroad, among other tactics.

And Capra heard from key insiders that the agency does not work well with another Crown corporation assigned a financing mandate, the Export Development Corp., or with Foreign Affairs itself, its parent department.

The agency was also criticized for having an opaque fee structure, and failing to cater to small and medium-sized businesses wanting to export.

A spokeswoman for Fast did not respond to detailed questions about the report's findings, but said the minister and Foreign Affairs are reviewing a plan by the Canadian Commercial Corp. that responds to Capra's recommendations.

"This plan having been received, the minister and the Department of Foreign Affairs and International Trade will ensure that the plan to implement these recommendations is effectively carried out," Caitlin Workman said in an email.

Recent deals brokered through the Canadian Commercial Corp. include:

— bullet-proof vests supplied to Costa Rica's police academy;

— construction of an airport in Quito, Ecuador;

— and biometric voter registration kits supplied to Kenya.