Paul McKay
The Ottawa Citizen
June 8, 1998

How Martin, Eggleton signed $1.5-billion China loan guarantee without review of contract

Finance Minister Paul Martin signed a $1.5-billion federal loan guarantee for a Candu reactor sale to China without him or his department reviewing the export contract or financing agreements.

The $1.5-billion guarantee was co-signed by then-minister for international trade Art Eggleton, without a departmental review of the contracts and financing agreements.

Foreign Affairs also did not review the contracts or financing agreements before the loan was approved by the Chretien cabinet in November 1996.

The Candu was sold by Atomic Energy of Canada Ltd., a federal Crown corporation, to the China National Nuclear Company. It was financed by the largest government-backed export loan in Canadian history. The Chretien cabinet later matched the China deal with a $1.5-billion loan guarantee for AECL’s proposed Candu sale to Turkey.

The apparent lack of due diligence by Mr. Martin and Mr. Eggleton is confirmed in affidavits, filed by senior government officials under oath, in a pending case before the Federal Court of Canada. The case was launched by the Sierra Club of Canada, which contends that the $1.5-billion China loan financed an export deal that violates federal environmental law.

In a March 1997 affidavit sworn before a court officer, Peter Cameron, chief of international finance in Mr. Martin’s department, said: “The Department of Finance has not seen or reviewed the sales and financing contracts. The design, construction, delivery and financing of the (Candu) project is the direct responsibility of the two Crown Corporations.”

The federal Crown corporations referred to are AECL and the Export Development Corporation (EDC). They negotiated the Candu/China sales contract on behalf of the federal government.

Mr. Cameron’s affidavit contends that responsibility for the $1.5-billion loan rests with AECL and the EDC, and that a lack of direct ministerial involvement legally allowed the Candu sale to be completed without a full environmental screening under the Canadian Environmental Assessment Act. The Act requires a full screening of export projects financed by federal tax dollars or directly promoted by federal department.

Yet Mr. Martin co-signed the $1.5-billion loan guarantee on behalf of the EDC. And the AECL/China deal was formally approved by the ministers in the Chretien cabinet.

In his affidavit, Mr. Cameron states: “The (Canadian Environmental Assessment Act) gives the Minister for International Trade, with the concurrence of the Minister of Finance, the power to authorize the EDC to enter into any transactions or class of transactions.”

It was under this authorization that the loan guarantee was signed by Mr. Martin, and set up under the EDC’s “Canada Account.” The same affidavit confirms that if the Chinese default on the $1.5-billion loan, Canada’s taxpayers will be liable.

“When funds are required for Canada Account transactions, they are provided to the EDC from the Consolidated Revenue Fund (the federal treasury) and, in the event of a default situation, the CRF bears that loss. The strong expectation is that this sale of Candu reactors by AECL will not require funds from the CRF. China is the world’s second-largest holder of foreign exchange reserves and is considered to be a good credit risk.”

Mr. Martin signed the $1.5-billion loan guarantee on Nov. 8, 1996. A contract between AECL and the China National Nuclear Company was signed four days later. The AECL/China deal formally closed in Shanghai on Nov. 26, 1996, with Prime Minister Jean Chretien presiding at the signing ceremony.

Mr. Cameron’s March, 1997 affidavit confirms that the Department of Finance had still not reviewed the China deal contracts three months later.

A similar March, 1997 affidavit was filed by John Mundy, director of export financing at the department of Foreign Affairs and International Trade. In it, Mr. Mundy states: “The sales and financing contracts have not been seen or reviewed by my Branch.”

Both Mr. Cameron and Mr. Mundy state in their affidavits that they briefed Mr. Martin and Mr. Eggleton, respectively, on the proposed AECL/China Candu sale. But they and their departments had not reviewed the $1.5-billion contracts and financing agreements.

Mr. Martin and Mr. Eggleton apparently relied on their senior advisers for financial advice about the Candu sale, who in turn relied on AECL for financial advice about the contract terms.

AECL has a notorious record of becoming enmeshed in money-losing Candu export deals to Argentina, Romania and South Korea. During the past two decades, it has been slammed by the federal auditor general for paying $20 million in illegal bribes, losing hundreds of millions after failing to negotiate inflation-protection clauses in contracts, and underestimating project costs.

In 1994, a South Korean employed by AECL as its “business agent” was convicted of bribery after handing $350,000 in cash to the head of the state power commission, who subsequently approved an AECL bid to build Candu reactors in South Korea. The power commission official was also convicted.

AECL officials later conceded that the $350,000 — hand-delivered in paper bags — was given to its South Korean agent as a donation to a business promotion fund. They denied the money was for bribes.

In a 1995 CBC Radio interview, former federal auditor general Kenneth Dye gave this summary of AECL’s use of export deal “agents:” “I’ve seen examples where agents have been hired by countries, and I think the strategy there is to deal with the agent so that you don’t have to know — Canadians don’t have to know — what goes on behind the facade of an agent.

“The agent does whatever is done in those developing countries, and the Canadian is blissfully unaware. I’ve always been a believer that if directors of a corporation know — or should know — about these things, and they fail to take action, then you’re getting signals from the top that this loosey-goosey stuff is acceptable. I always thought it would be salutary in our country if directors of corporations were sent to jail for things that they could have stopped but failed to.”

According to a 1996 report by George Lermer, former dean of the Faculty of Management at the University of Lethbridge, federal expenditures to support AECL, from 1947 to 1994, totalled $9.4 billion (in 1995 dollars). He calculated additional federal subsidies for heavy water plants, prototype reactors and export financing totalling $7.5 billion.

Mr. Lermer concluded that if the $9.4 billion in direct federal subsidies to AECL had been invested elsewhere to earn a standard real rate of return, the current value of the fund would exceed $56 billion.

A comparable analysis, conducted by nuclear researcher David Martin for Nuclear Awareness Project and economist David Argue for the Ottawa-based Campaign for Nuclear Phase-out, estimated the historical subsidies to AECL at $15.2 billion in 1997 dollars. (See graph)

“After almost 50 years of consistent economic failure, it’s time to admit that the nuclear experiment in Canada is a bust,” says David Martin. “If the $15 billion in subsidies to AECL had been invested in social programs, or debt reduction, the benefit to the Canadian economy would have been much greater.”

He says he is appalled that Canada’s Minister of Finance would authorize a $1.5-billion loan on behalf of AECL’s China sale without he or his department first reviewing the contract terms.

“It’s another bit of evidence that AECL and its export program is out of control, and is not publicly accountable,” says David Martin. “The Chretien cabinet has promised another $1.5-billion loan to finance the sale of two Candu reactors to Turkey. The terms of that deal are even more outrageous than the China deal, because Turkey doesn’t have to put up one cent. That’s a condition of the bid.

“Did Paul Martin sign the same kind blind cheque for that deal, too?”

AECL currently receives a $100-million annual grant from Parliament. The Crown corporation has refused to disclose the terms of the China Candu sale. In response to an Access to Information request, it blanked out documents containing details on the $1.5-billion loan interest rate.

Mr. Cameron’s Federal Court affidavit did not reveal the interest rate on the AECL/China loan. It does confirm that the $1.5-billion loan in support of the AECL sale of Candu reactors to China will extend over 22 years; a planned seven-year construction plus a 15-year repayment period. As is typical of foreign-supplied export financing into China, the AECL transaction is denominated in U.S. funds.

“This gives rise to two significant risks which must be managed: foreign exchange risk and interest rate risk,” noted Mr. Cameron.

Federal government subsidies to AECL ($ millions)

Fiscal Nominal Equivalent

End Year Total in 1997$