Anne McIlroy and Shawn McCarthy
The Globe and Mail
June 11, 1998

Lawsuit contends government dodged environmental rules on China contracts

Parliamentary Bureau

OTTAWA The federal Finance Department spent months working on a $1.5-billion loan guarantee that was crucial to financing a controversial sale of two Candu nuclear reactors to China, according to documents filed in the Federal Court of Canada.

The documents appear to undercut the sworn statements of a senior Finance official and recent remarks by Trade Minister Sergio Marchi about the extent of the federal government’s involvement in the deal with China in 1996.

The issue is central to a lawsuit launched by the Sierra Club of Canada to try to force Ottawa to do an environmental review of the $4-billion sale.

Under the Environmental Assessment Act, all federally financed projects on foreign soil must undergo at least a preliminary environmental screening at home if one is not required by the recipient country.

The Sierra Club is arguing that because the loan is guaranteed by the federal government – in effect, leaving taxpayers on the hook if for some reason the Chinese default – the project is federally financed and therefore the environmental review is required.

In addition, the cabinet would have had to approve the loan from the Export Development Corp. to the Chinese State Development Bank, and a senior Finance official acknowledged that departmental staff would have had to review the provisions of the loan to advise the Finance Minister.

Mr. Marchi and other cabinet ministers have repeatedly distanced themselves from the sale, arguing that two Crown corporations – Atomic Energy of Canada Ltd. and the EDC – forged the deal and that the government had very little involvement.

They argued that the government’s limited involvement is the reason it did not have to do an environmental review because Crown corporations are exempt from the requirement.

“When it comes to specifically looking at the financing proposal, that is handled by the Export Development Corp., a Crown corporation. When the specifics of the contract are looked at, that is also done by AECL,” Mr. Marchi said in the Commons on Monday.

However, the Sierra Club maintains that the documents filed in court on April 24 show that the government was far more involved than it has admitted.

One of the documents is a letter from EDC president Paul Labbe to David Dodge, then deputy minister of finance.

“Officials from the EDC have been working with Department of Finance officials for several months now on the text of the (loan) guarantee. I understand that your officials are satisfied with the text, subject to final review of the actual loan documentation,” the letter says.

“We are enclosing for your information both a copy of the guarantee and an overview of the terms and conditions of the proposed loan agreement (between the EDC and the Chinese). This overview was tabled with the Chinese for discussion purposes.”

The letter, dated June 26, 1996, was obtained by the environmentalists through an access-to-information request filed 1-1/2 years ago.

A copy of it was sent to Morris Rosenberg, who was then assistant secretary to the federal cabinet.

EDC spokesman Rod Giles said the $1.5-billion loan was financed under the agency’s Canada Account and would have required the approval of the full cabinet before the EDC could approve it.

“The risk ultimately lies with the Canada Account, i.e. the government, and not the EDC,” Mr. Giles said yesterday.

The agency has two accounts: a corporate account and the Canada Account for loans that are either too large or too risky for the agency to fund on its own.

Mr. Giles said the agency and the Finance Department ultimately decided that they did not need the explicit loan guarantee discussed in the Labbe letter.

He added that the government automatically backstops loans that the EDC makes from its Canada Account.

Officials from both the Finance and International Trade Departments have sworn in affidavits that the government had a minimal role in the deal with China.

In his affidavit, Peter Cameron, a senior Finance Department official, said that “the Department of Finance has not seen or reviewed the sales and financing contracts.

“The design, construction, delivery and financing of the project is the direct responsibility of the two Crown corporations.” As a transaction for a Crown corporation, it would not require an environmental assessment under the Canadian Environmental Assessment Act, Mr. Cameron said.

One government source confirmed that departmental officials would not have reviewed sales or financing contracts as such, since the EDC acted as agent for the government.

However, as the Labbe letter indicates, Finance officials were actively involved in preliminary work.

In an interview, Mr. Cameron said Finance Minister Paul Martin would have had to approve the loan. “Loans of this kind require the concurrence of the Minister of Finance. That is in the act.”

He also conceded that Finance Department officials would have to review the provisions to advise the minister.

But he said his affidavit is accurate because Finance officials had no involvement in the direct negotiations with the Chinese.

Leslie Swartman, a spokesman for Mr. Marchi, said yesterday that the government does not believe that there is any contradiction between Mr. Cameron’s affidavit and the letter to Mr. Dodge.

She said it would be up to the court to decide whether an environmental review is required.

Environmentalists have long criticized the government for the way it has managed this issue

. They say that on Nov. 6, 1996, the cabinet met in a hastily arranged special session to make changes to the Environmental Assessment Act. The new regulations, which release the federal government from an obligation to undertake comprehensive environmental assessments on its overseas projects, were given the force of law the next day. The requirement for a preliminary screening remained, however.

The usual procedure of a 60-day period for public comment was scrapped, and the regulations were not made public in the Canada Gazette until Nov. 27, the day after the contracts for the sale of the reactors had been signed in Shanghai.

David Boyd, a lawyer and executive director for the Sierra Legal Defence Fund, said the government’s attempt to evade its responsibilities in this case are troublesome for all Canadians who want to see environmental laws enforced.

“This is the latest example of the federal government willing to do end runs around their own environmental laws. . . . This is a profoundly disturbing real-life example of that.”