CAIDP Contracting Workshop Contracts Performance Guarantee Update December 10, 2015

Intro 1 2 3 4 5 Introduction Objective: Update and seek input from CAIDP on the use of performance guarantees for DFATD development contracts above $500K For Clarity: Contracts in support of International Development are projects designed by DFATD which are implemented by an Executing Agency “Consultant” and are governed by the Treasury Board Contracting Policy Topics to be Covered: Performance security overview – ISLOCs Performance security overview – EDC’s PSG Program Understanding the Concerns around ISLOCs Managing Contract Risks – An Evolving Process for DFATD Key Themes and Take-Aways Please share your thoughts and comments – your input will help shape DFATD’s thinking and approach

1 Irrevocable Stand-By Letters of Credit (ISLOCs) Intro 1 2 3 4 5 1 Irrevocable Stand-By Letters of Credit (ISLOCs) Brief overview to make sure we are all on the same page An ISLOC is a guarantee of payment issued by a bank on behalf of a Contractor Used as a type of "payment of last resort“ should the Contractor fail to fulfill its contractual commitment Is a sign of good faith in business transactions ISLOCS specify an amount (e.g., 10% of contract value) and tenor (e.g., 3 years) The Bank will require security to issue the ISLOC, e.g., Contractor’s line of credit If EDC backstops the Bank, the Bank does not need security from the Contractor EDC Bank Buyer (e.g., DFATD) APSG ISLOC x SECURITY, e.g.: Line of Credit Exporter/ Contractor Recourse CONTRACT

2 EDC’s APSG (Account Performance Security Program)* Intro 1 2 3 4 5 2 EDC’s APSG (Account Performance Security Program)* An “account” (the APSG) is established whereby EDC agrees to issue guarantees to the Contractor’s Bank covering ISLOCs with tenors potentially up to 3 years (to a maximum $ amount)** On an annual basis, EDC reviews and potentially renews the account (the APSG) EDC protection to the Bank is a 100% guarantee (with recourse to Contractor) EDC guarantee frees up the Contractor’s line of credit, as the Bank does not take security from the Contractor if it has EDC protection Example (assuming APSG established for ISLOCs up to 3 years) Yr 1: EDC guarantees all ISLOCs issued during the year with terms up to 3 years Yr 2: EDC guarantees all ISLOCs issued during the year with terms up to 3 years Subject always to a maximum $ amount for all ISLOCs, maximum ISLOC term as agreed between EDC and Contractor, and annual renewal of the APSG account Year 1 Year 2 Year 3 Year 4 Year 5 ISLOC 1 ISLOC 2 ISLOC 3 ISLOC 4 ISLOC 5 ISLOC 6 * Based on information available on EDC’s website ** While the APSG program provides guarantees for ISLOCs up to 3 years in tenor, EDC may consider guarantees for ISLOCs longer than 3 years; however this would be on a case-by-case basis

3 Concerns Regarding ISLOCs Intro 1 2 3 4 5 3 Concerns Regarding ISLOCs DFATD is aware of concerns among CAIDP members regarding the use of ISLOCs in connection with contracts: When are ISLOCs required and why? How do ISLOCs correspond to the nature and level of contract risk? What amount of ISLOC is necessary? What term of ISLOC is necessary? What will my bank charge to issue an ISLOC? What will EDC charge to guarantee my bank? How long an ISLOC will my bank provide? Will EDC provide cover for the same amount of time? Will all contracts require an ISLOC for the full term? Can DFATD consider other measures (e.g., holdbacks) for lower-value contracts? DFATD wants to minimize the cost and burden on contractors, while still being able to deal with contract problems if they arise

4 Managing Contract Risks at DFATD Intro 1 2 3 4 5 4 Managing Contract Risks at DFATD DFATD awards millions of dollars in contracts in order to help achieve Canada’s international development priorities When it awards contracts, DFATD wants to know that the contract will be completed and, if problems occur in the developing country, that these problems can be addressed Ensuring no problems in the developing country is of utmost importance as DFATD is issuing these contracts in order to achieve benefits in the developing country What kinds of exposures could arise for DFATD, if these contracts are not able to be completed? (note: not all will apply to each contract) Retendering Costs Local Networks (managing or re-establishing) Need to Deploy Experts Dealing with Unpaid Debts in Country Dealing with Unpaid Subcontractors Larger replacement contract (e.g., if IP cannot be transferred) Security Concerns Consequences of a Major Accident (without insurance) Contractor Health & Safety problems (without insurance) Legal TB Policy Text Excerpt S12.6 “Contracting authorities should take the necessary steps to serve and protect the interests of the Crown in meeting the terms of the contract and then to protect (where appropriate) the interests of other parties involved in the contract.”

4 Evolving Framework for Managing Contract Risks Intro 1 2 3 4 5 4 Evolving Framework for Managing Contract Risks If a contract cannot be completed, there are various potential exposures to DFATD in the developing country context ISLOC is only one mechanism used to mitigate these risks! Relying on other mitigating techniques – as relevant to the contract – keeps the ISLOC amount and tenor as low as possible to minimize contractor burden ISLOCs in most cases should be set mainly to cover DFATD’s retendering cost – which depends on the complexity of the contract Other problems can be addressed in other ways This risk-based approach – still in development – minimizes the tenor and amount of ISLOC required DFATD Potential Exposures upon Contract Termination Risk Mitigation Technique(s) Being Explored Retendering Costs Local Networks Deploy Experts Unpaid Debts in Country Unpaid Subcontractors Larger Replacement Contract Security Concerns Consequence of Major Accident Contractor health & safety problem Legal ISLOC Local agencies Contract legal terms Liquidated Damages ISLOC Remainder (if any) Existing Project Budget Contract payment terms Contractor Insurance

4 Assessing the ISLOC Amount and Tenor (Evolving) Intro 1 2 3 4 5 4 Assessing the ISLOC Amount and Tenor (Evolving) ISLOC amount and tenor may be assessed based on two factors: How much would it cost to retender the contract, if necessary? How complex is it? In what year does DFATD’s risk profile peak? The lower the retendering cost, the lower the ISLOC amount Exposure to DFATD Risk Profile Retendering Costs Staff time Contracting time Issuing new RFP Low Med High Local Networks Need to manage or re-establish local relationships? Low Med High 1 2 3 4 5 Need to hire technical, audit, evaluation experts? Low Med High 1 2 3 4 5 Deploy Experts The earlier the risk peak, the shorter the ISLOC term Unpaid Debts in Country Potential for sizeable unpaid accounts (e.g., for material, unfinished work)? Low Med High 1 2 3 4 5 Low Med High 1 2 3 4 5 Unpaid Subcontractors Numerous subcontractors? Potential for severance and other payments? Low Med High 1 2 3 4 5 Larger Replacement Contract Sizeable custom IT? Potential for inability to transfer IP? Potential for sensitive information (e.g., armoured cars, confidential information) or increased conflict/political risks? Low Med High 1 2 3 4 5 Security Concerns Low Med High 1 2 3 4 5 Fallout from major accident On the ground accident which is NOT covered by insurance? Contractor health/safety problem Potential for Contractor health or evacuation needs which are NOT covered by insurance? Low Med High 1 2 3 4 5

5 Key Themes and Take-Aways Intro 1 2 3 4 5 5 Key Themes and Take-Aways DFATD wants to avoid a “one size fits all” approach DFATD seeks to minimize the cost and burden on the contractor by using a risk- based approach, so that risks/exposures are covered by both ISLOCs and other means DFATD will not require that all contracts have ISLOCs with 5 year fixed terms In most cases, a non-complex contract with limited termination exposures may simply require a 1-year renewable ISLOC Contracts which are more complex, but where exposures are minimal after year 3 may only require a 3-year fixed ISLOC, with renewable 1-year ISLOCs thereafter Contracts below $500K will not necessarily require ISLOCs, but will use other measures (e.g., holdbacks) EDC’s APSG program parameters allow for ISLOCs up to 3 years to be guaranteed DFATD continues to engage with EDC on this important issue

Thank You! Questions?