PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, February 19, 1998

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[English]

The Chairman (Mr. John Williams (St. Albert, Ref.)): Good afternoon, ladies and gentlemen. I'd like to call this meeting of the public accounts committee to order. The orders of the day are pursuant to Standing Order 108(3)(e), consideration of chapter 29 of the December 1997 report of the Auditor General of Canada dealing with Industry Canada and management of the small business loans program.

We have witnesses today from the Office of the Auditor General: the Auditor General of Canada, Mr. Denis Desautels; Mr. Richard Flageole, the assistant auditor general; and Mr. Harry Ruthnum, the principal of the audit operations branch.

From Industry Canada we have Mr. Kevin Lynch, the deputy minister; Mr. Peter Sagar, the director general of the entrepreneurship and small business office; and Marie-Josée Thivierge, the director of strategic planning and corporate services.

Welcome. We will start as usual with the opening statement by the Auditor General. We restrict the opening statements to approximately five minutes. Mr. Desautels.

Mr. Denis Desautels (Auditor General of Canada): Mr. Chairman, thank you for the opportunity to present the results of our audit of the management of the small business loans program. There are three main messages in our report.

First, we believe there's a need to better define the results expected from this program and to ensure that it is designed in a way to maximize its impact. There's also a need to strengthen program management and delivery mechanisms. Finally, the department should provide Parliament with the information necessary to assess whether the program is achieving its objectives. I'll elaborate very briefly on all three issues.

I might remind you that the small business loans program was established back in 1961 to increase the availability of loans on reasonable terms and conditions for the establishment, expansion, modernization, and improvement of small businesses. In the last four years, 177,000 new loans have been guaranteed for a value of approximately $11.2 billion. Increasing the availability of loans to small businesses has been the objective of the program since 1961. This is a very broad objective indeed.

We noted that Industry Canada, in its monitoring of the program, concentrates mainly on the level of activity, such as the volume of loans, the characteristics of borrowers and lenders, and the expected number of jobs to be created. In our view, this does not provide sufficient information on the results being achieved. To do so, the department needs to clarify expectations and develop indicators of the program's performance in establishing, expanding, modernizing, and improving small businesses.

We're not suggesting a complicated system to keep track of the results achieved by every loan made. What is needed is a performance evaluation framework that will allow the department to assess periodically whether and the extent to which the program is achieving its intended results.

Incrementality is also critical to the purpose of this program. Lending should be additional to lending that would have occurred anyway and not merely replace it. A 1994 study indicated that between 30% and 40% of guaranteed loans were made to firms that would have received financing from lenders anyway. The latest study, in 1996, indicated that only 54% of the loans could be considered incremental, particularly those to newly created enterprises. We believe it's important for Industry Canada to define the level of incrementality it expects from these loans.

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[Translation]

Mr. Chairman, in the last two years, Industry Canada has placed considerable emphasis on moving the program toward full cost recovery. We consider that under the present fee structure and loss-sharing ratio, it is uncertain whether full cost recovery will be achieved. We suggest that in future assessments of the program, the Department carefully study the extent to which the objective of increasing the availability of loans at reasonable rates can be achieved simultaneously with the objective of full cost recovery.

Although the Canadian economy has evolved significantly since 1961, the legislation governing the program has remained essentially unchanged with respect to types of assets eligible for financing—that is the purchase or improvement of land, buildings and equipment. The service sector and the knowledge and information sector form a much greater part of the economy today, with the latter sector having a high net employment growth. Furthermore, in recent years, financial institutions have also introduced new services and new products for small businesses. The need for the program to meet any financing gaps in the market may therefore change significantly. These questions will require careful consideration in future reviews of the program.

In delivering the program, we found that the Department needs better tools to properly forecast future loan losses and to monitor carefully any changes in its loan guarantee portfolio. We also raised concerns about the adequacy of controls to ensure that financial institutions exercise due care when making a loan and comply with the conditions of the program. For example, our review of lenders' loan files showed that they did not always contain the information necessary to perform a thorough credit risk analysis. In addition, we noted several cases where, contrary to the Act, lenders had charged administration fees for granting loans under the program. We believe that it would be cost-effective for Industry Canada to thoroughly review selected files, using risk- based criteria, to satisfy itself that lenders have complied with the Act and have exercised due care when making a loan.

We also noted cases where related borrowers were able to obtain numerous loans whose total exceeded the 250 000$ loan limit to operate the same business. In one case, a group of 23 related corporations obtained more than 4 million dollars in loans. We believe that these practices are contrary to the intent of the Act. Currently, there are no provisions under the Small Business Loans Act to prevent this. We note that such rules exist under the Income Tax Act, which has provisions designed to limit access to the low corporate rate of tax for small businesses and to prevent abuse by the creation of a number of related corporations.

[English]

Finally, Mr. Chairman, the department should provide Parliament with better information on the results achieved by the program. More rigour is needed in evaluating its job creation impact. Better financial information is also needed.

For example, we estimated that the program would incur a net loss of $210 million for the loans issued between April 1, 1993, and March 31, 1995. This compares with a surplus of $72 million reported for those years on a cash basis. The difference occurs because the department does not include a provision for loan losses in its annual report.

Industry Canada is currently carrying out a thorough review of the program. A bill has recently been introduced in the House to extend the program to March 31, 1999. The committee can play an important role in obtaining a firm commitment from the department to correct the deficiencies that are noted in our report as part of that review.

Mr. Chairman, this concludes my opening statements. My colleagues and I would be very pleased to answer your questions.

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The Chairman: Thank you, Mr. Desautels.

Now we'll turn to Mr. Lynch, deputy minister for Industry Canada. The statement he provided has just been circulated to members of the committee.

Mr. Lynch, it has been the committee's policy that we restrict opening statements to five minutes, and that they be distributed ahead of time. That hasn't been the case, but perhaps you could summarize your remarks in approximately five minutes. Your full statement will be appended to the minutes of this meeting as per the policy of this committee.

I'll turn the floor over to you, Mr. Lynch.

Mr. Kevin G. Lynch (Deputy Minister, Department of Industry): Thank you, Mr. Chairman. I'm pleased to meet with the public accounts committee to respond to chapter 29 of the Auditor General's report.

[Translation]

As I mentioned, I will limit my comments to preliminary observations and a very brief overview of the program and measures we have taken in recent years in order to improve our efficiency and performance.

[English]

I apologize for the lateness of my speaking remarks, but we did table with the committee a much more detailed response to the Auditor General's report, which I think the committee got much earlier.

Mr. Chairman, access to credit remains a major concern for many small business owners. In their January 1988 survey on the credit conditions of small business, the Canadian Federation of Independent Business reported that lending worries for smaller businesses have not eased the past ten years. And meeting this concern is a key objective of the SBLA. The SBLA program touches many Canadians.

Last year the SBLA underwrote loans equalling 20% of all loans under $250,000 made by the commercial banks and qualified lenders to small business in Canada. The average SBLA loan size is about $65,000, and more than 78,000 SMEs have used the SBLA program since the program was put on a cost recovery basis in 1995. In fiscal year 1996-97 alone, some 30,000 SMEs used the program to access over $2 billion in financing.

With a minimum of bureaucracy, the program is delivered across Canada by some 1,500 third-party lenders. In 1994 the program was supported by the Standing Committee on Industry in its report Taking Care of Small Business. Last year it received support from the small business working committee, which included representatives of the Canadian Federation of Independent Business, Canadian Chamber of Commerce and others.

[Translation]

But all those who have supported the program have also encouraged us to continue to improve it. We need to increase its effectiveness and lower costs to the taxpayer. With this in mind, Industry Canada welcomed the Auditor General's report.

[English]

As honourable members will know, Bill C-21, currently before Parliament, would extend the SBLA for one year beyond its termination in March. This extension is being sought specifically to ensure that we would have adequate time to conduct a thorough review of the SBLA program. The Minister of Industry has emphasized that this review will include careful consideration of all the recommendations in the Auditor General's report.

[Translation]

I will outline in a few moments how we will be conducting our review, but first, I would like to add some context to the report of the Auditor General.

[English]

Chapter 29 of the Auditor General's report assesses the performance of the SBLA during a period of profound transition. In 1992 Parliament approved changes that made the program more appealing to lenders and borrowers, but frankly, riskier for the crown. Those changes, which came into effect on April 1, 1993, are summarized in the written text that I provided.

The impact on SBLA lending can be seen in figure two in the written presentation. Before these changes SBLA lending averaged about $500 million annually, but within two years lending soared to $4.4 billion. Since loans can be repaid over a maximum of 10 years, it'll take several more years before we see the full impact of the 1993 change, but it is already clear that the 1993 change has impacted substantially, as the Auditor General noted, on the cost of the program by increasing both its absolute size and its relative risk. And it is equally clear that we'll continue to pay for the changes made in 1993 for some time to come.

In this context, the next supplementary estimate will include the requirement for $90.2 million in addition to the original program allocation of $151.6 million to meet the statutory SBLA obligations for 1997-98.

[Translation]

While a portion of this reflects our success in accelerating the processing of claims, saving interest expenses in the long run, it also represents the costs associated with the 6.9 billion dollars of loans made from 1993 to 1995.

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[English]

In response to this escalating risk and cost, in 1994 and 1995 the government and Parliament enacted substantial elements to modify the program and steer it towards cost recovery. These amendments are set out in the written text that I provided to you, as did the Auditor General. Since these amendments were put in place, the annual dollar value of loans has dropped into the $2 billion range.

With respect to administrative changes to the SBLA, beginning in 1995 the SBLA administration took significant steps to reallocate resources and re-engineer the processes and practices in the program. The administration provides substantial direction to lenders, including comprehensive lenders guidelines, which were issued in 1996. These guidelines contain explicit directions to financial institutions extending credit under the SBLA. They address such issues as the need to exercise due diligence when making SBLA loans and other issues raised in the Auditor General's report.

[Translation]

In May 1996, administration issued a notice to lenders, warning them to be on the lookout for loan application splitting. This is one of the issues which we will examining further as part of the program review.

[English]

To reduce interest costs charged to taxpayers, Mr. Chairman, the SBLA administration has cut the time needed to process loan loss claims from 90 to 30 days. The SBLA administration is also implementing new techniques to forecast both the program's impacts and the crown's liability.

We initiated a 1996 study by Professor Riding of Carleton University, who argued that improved forecasting of claims costs will require more data, particularly for claims made in loans in the 1993 to 1995 period, and we continue to work with him and other experts to improve our forecasting capability.

One measurement issue the Auditor General touched on is the difficulty of accurately recording the number of jobs created as a result of SBLA loans. In reporting job creation, Mr. Chairman, the SBLA administration uses data provided by the borrowers themselves to the lending institutions.

When borrowers make their applications, they estimate the number of jobs they will create as a result of the loan. The average reported is some 2.4 jobs per loan, or about 37 jobs per million dollars of lending. This data, provided by borrowers to the lending institutions, provides the basis of our estimates for the SBLA annual report.

The Auditor General's report cites one job estimate from studies commissioned by Industry Canada. Using this estimate and implying a discount factor of 40% on the assumption of non-incrementality, the Auditor General's report concludes that only seven jobs are created per million dollars. However, the same econometric study provides a wide range of job estimates.

In responding to this range of estimates, Industry Canada commissioned a study in 1996. It consisted of telephone surveys—a large-scale, random sample of SBLA loan recipients. It also sought to establish the incrementality of SBLA lending using a battery of criteria. It found that 54% of SBLA lending was 100% incremental according to these criteria, while 32% of SBLA lending was partially incremental on the basis of these same criteria.

[Translation]

That study also found that borrowers had, in fact, hired on average 3.9 new people per loan as a result of the program compared to the 2.4 they reported on their loan forms. This translates to some 59 jobs per million dollars of loans, or roughly 36 jobs per million dollars of loans using the discount factors applied by the Auditor General.

[English]

To conclude, Mr. Chairman, we have taken the recommendations of the Auditor General very seriously. On November 20, 1997, when he launched a comprehensive program review of the SBLA, Minister Manley said “the program works because we periodically update it to adjust to changing economic circumstances.” Now it is the time to continue that process.

The minister also committed to thoroughly considering any recommendations made by the Auditor General in the comprehensive review. In the current text of this review, we will examine issues such as lender designation, compliance, business needs, program parameters including loan size and insurance limit, all the administrative processes the Auditor General's report commented on, evaluation frameworks, risk management and so on.

Mr. Chairman, Minister Manley has indicated that the SBLA that emerges from the comprehensive review must remain relevant to the needs of small business. It should be financially self-sustaining and have a clear accountability framework. The findings and recommendations of the Auditor General will assist us greatly in meeting these objections.

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[Translation]

This is not a small challenge, but this is a program of importance to thousands of small businesses. It deserves and will receive our very careful attention.

[English]

Mr. Chairman, I welcome the committee's questions. Thank you.

The Chairman: Thank you, Mr. Lynch. That was a long five minutes.

Mr. Grewal, eight minutes.

Mr. Gurmant Grewal (Surrey Central, Ref.): Thank you, Mr. Chairman.

I have two questions. I will be brief and I will expect brief answers so that we can cover all the questions.

Some 46% of the businesses granted loans were eligible to get loans from any other financial institution because they were qualified and met the criteria. In other words, the condition that is stipulated as incremental loans is not being followed.

Also, the needs of small businesses are not being taken care of. These small businesses are not the ones being supported by the SBLA program—it's the banks that are granted the default against the loans. Of loans, 85% are granted by the banks. How do you comment on that? What need is there to replace the existing commercial institutions that otherwise would find innovative and alternative financing techniques for business? What are needs of the system?

Mr. Kevin Lynch: Thank you.

The SBLA program is designed to be delivered through financial institutions rather than by the government per se. So by program design, 100% of SBLA lending is delivered through private sector intermediaries. That was done purposely to eliminate the need for bureaucracy to implement the program.

The issue of incrementality that you raise—it's an issue that the Auditor General raises as well—is always a challenge when designing lending programs, and it is one that we will look at in the course of the comprehensive review.

Again, we initiated a study with Professor Riding and looked at this in depth in 1996. He set out a series of criteria, because defining incrementality is not an easy issue in any lending program. Again, I go back to the remarks I made. On that series of criteria he found that 54% of the lending met every one of the criteria, while a further 32% met some of those criteria, which suggests a substantial amount of incrementality in the program.

What we've heard from the small business community is that access to credit remains a challenge for them, so it's not solely an issue of price, it's a question of access. They've argued to us—and it's an issue that we'll pursue in the comprehensive review—about how we continue to evolve the SBLA program to meet the needs of small business and at the same time meet the government's target of self-sufficiency of the program.

Mr. Gurmant Grewal: As it is 36 years old, the conditions stipulated in the act are as old as 1961, which is when the act was introduced. But the marketplace has changed and businesses have changed. There is more economic growth and employment growth in service and knowledge-based industries, so the old act is not meeting the requirements of businesses in these modern times. So I think the act is somewhat redundant.

Moving on to my next question, there have been instances of financial institutions charging file-opening fees, which according to the act is illegal. Industry Canada has done nothing to either punish the financial institutions that have been charging illegal fees, or even detect whether they have been complying with the conditions stipulated in the act over a number of years.

Even small businesses have been abusing the system. Twenty-three organizations that are related parties have been duping the system of up to $4 million. They have been taking advantage of the system to the tune of millions of dollars, at the cost of some small businesses that perhaps couldn't qualify for a loan or couldn't take advantage of the system.

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Also there is no provision for loan losses in the act.

Why is there a pattern of mismanagement or non-detection of the problem and a lack of rigour by the department to find out or solve these problems?

Mr. Kevin Lynch: Certainly the instances that are noted in the Auditor General's report are of concern. We take those very seriously. On the cases raised in the Auditor General's report, there haven't been claims filed with the department yet.

Again, within the department it's the lenders who actually implement the SBLA program for us. I believe we've improved and increased the frequency with which we try to make the 1,500 lenders who carry forward the program for us aware of all the design details of the program. We audit the claims when and if the claim comes in. For the cases of splitting that were referenced, a claim hasn't come in.

We have to work with the lenders to make sure they're fully aware of their obligations, to make sure we have a process, and to make sure we have the ability to ensure it's implemented the way it's designed to be.

Mr. Gurmant Grewal: Are you saying that since the claim files are not opened or claims have not been filed, as long as the claims are not filed and the Auditor General doesn't detect that this thing is happening, then Industry Canada is not taking any action?

Ms. Marie-Josée Thivierge (Director, Strategic Planning and Corporate Services, Department of Industry): The way the process is structured, in the lenders guidelines there are some specific instructions regarding fees, for instance, which is the point you were raising. Fees are prohibited, except for the 2% and the 1.25% administrative fee.

Mr. Gurmant Grewal: Those are already built in?

Ms. Marie-Josée Thivierge: Yes.

The registration form and the claims for loss form, which are submitted, were redesigned in 1995 to make sure that the fees were spelled out on those forms. At the time of registration, all the statutory eligibility criteria are verified before the loan is registered.

In terms of the fees, when the claim is submitted to the administration for payment, there have been many instances when we do the audit of the file, we find such fees, and therefore we reject the claim.

There are many ways of finding those fees. Actually, when we saw that it was becoming a problem, we issued notice to lenders instructing them or reminding them that administrative fees associated with opening a loan or assessment of a loan were prohibited under the program. We have ways of finding that in the loan documentation as well as the statement of account. When we get the debits of accounts, if there is a number that is inconsistent with the normal monthly payments, we normally question that. In most instances those were fees, and based on that we reject the claim.

Mr. Gurmant Grewal: I have one small question for Mr. Lynch.

The act is in the form of a bill in the House for renewal for one year and $1 billion is to be pumped into this system, which is not operating efficiently and effectively at this time. What are the long-term plans? Do you think this bill will be coming to the House for renewal? Are there any long-term plans if the system is sustainable?

Mr. Kevin Lynch: Certainly what Mr. Manley has set out—and again you'll see it in my written remarks—is that we have under way a comprehensive review. The written documentation I provided you with gives a list of issues that we're seeking views on. One of the reasons for asking for the one-year extension is to have a very comprehensive review of the issues raised, not just by the Auditor General but by a number of lenders.

Mr. Gurmant Grewal: Why has the review not been done since 1994, when the industry committee asked for it?

The Chairman: I think we'll come back to that later.

Mr. Laurin, you have eight minutes.

[Translation]

Mr. René Laurin (Joliette, BQ): My first question is for the Auditor General, Mr. Chairman. You refer to 23 related corporations obtaining over 4 million dollars in loans. What is a related corporation?

Mr. Denis Desautels: Mr. Chairman, basically they are corporations that are controlled by the same shareholders.

Mr. René Laurin: I see. We are not necessarily talking about a family relationship or corporations run by a father and son.

Mr. Denis Desautels: They are not related as far as family is concerned, but rather insofar as share ownership is concerned.

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Mr. René Laurin: They are corporations that might be involved in very different areas of activity, but that belong to the same shareholder, as I understand it.

Mr. Denis Desautels: That would be one possibility, Mr. Chairman. It could also be a parent company that has set up subsidiaries in different areas to carry out different projects in different sectors of activity. Basically, we are talking about corporations that do have a link as far as the shareholder-owners are concerned.

Mr. René Laurin: Thank you. I would now like to put a question to the deputy minister on the same subject.

How was it possible for such a situation to occur? It seems to me it should not have taken long to realize that these corporations were gaining access on a number of occasions to $250 000 loans. It seems to me it should have been flagged quickly as an abnormal situation. How is it that the department was unable to detect this practice and notice that this was occurring?

Mr. Kevin Lynch: This kind of practice goes against the spirit of the Act. We made a point of telling the financial institutions to conduct the necessary checks and to reject any loan applications from people with this type of relationship.

Mr. René Laurin: Is it because of a deficiency in the Act or because of the interpretation given by officials that this kind of situation was able to take place?

Mr. Kevin Lynch: I think it's more a matter of the way the commercial institutions interpreted the Act in dealing with loan applications. Perhaps Serge or Marie-Josée could give you more information.

Mr. Serge Croteau (Director General, Programs and Services, Industry Canada): I think that we have indeed recognized, with the observation of the Auditor General, that it would be possible to improve the Act for greater clarity in this respect. There are examples in the Income Tax Act that deal with similar situations and we could use similar wording to avoid any chance of this kind of interpretation, if indeed there is such a possibility of misinterpreting the Act.

However, as we said, since 1996, we have reminded all financial institutions that use the program that this was not the intent of the legislation, and that if they were inclined to make such an interpretation and grant loans, the claims that they would be submitting later on would be turned down since they would be deemed not to comply with the spirit of the law.

[English]

The Chairman: Mr. Laurin, I would like to introduce Mr. Serge Croteau, who gave us that response from Industry Canada. My apologies for interrupting.

Mr. Laurin.

[Translation]

Mr. René Laurin: Thank you. As a result of this action or the new instructions provided to lenders, can you now confirm that such situations could never reoccur?

Mr. Serge Croteau: If we said that this was no longer possible, we would really be describing a final situation. Nevertheless, I can assure you that we have done everything possible to rectify this situation. We have acquired a new computerized system that captures various data and enables us to associate a business with various loan applications. When we receive claims, we can now automatically check them out through our system and, in most if not all cases, we can spot where the problems lie.

Mr. René Laurin: Before the department authorizes a loan, does it consider certain factors that could result in a business' loan application not being approved because this business would be competing with an already existing business in the region?

Mr. Serge Croteau: As was said earlier, the department does not authorize the loans, the financial institutions do. The department does not get involved whatsoever in the decision-making. The lender merely ensures that the loans are given in compliance with the provisions of the Act and existing regulations.

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As far as I know, the only thing that comes close to the situation that you are describing—and this would mean that the lenders would be interpreting the legislation in very broad terms in order to go as far as you have just described—is that everything must be done in the public interest. Perhaps somebody could say that this had an impact on competition, that public interest may be jeopardized, but we have never applied this aspect of the legislation to similar situations.

Mr. René Laurin: Could federal officials in the regions have possibly considered this aspect? People have come to my office and told me that their application was not approved. They wanted, for example, to set up a specialty print shop. Government consultants apparently told them that they couldn't recommend approval of the loan because there was already an existing print shop and that there would be, to some extent, competition. By acting like this, are we not promoting monopolies? We don't want to hurt an already existing industry, one whose administration is very poor and one which perhaps does not operate very well, and so we refuse to authorize loans to another entrepreneur who may very well be a better administrator. By acting like this, we are not encouraging competition; we are encouraging monopolies instead. I would like to know the department's philosophy on this matter.

Mr. Serge Croteau: Once again, the example you have given deals with direct delivery programs. The agencies or the provincial government make the decision and they are the ones who look at the possible impact that expansion or that a new plant may have on competition. Again, this type of thing does not happen under the SBLA program because the officials don't get involved in the decision-making. The lenders merely apply the provisions set out in the legislation and its regulations.

Mr. René Laurin: In small communities where there is only one lending institution that has already given a loan to an existing business, the institution would no doubt not be interested in financing, through this type of loan, a second business that could possibly compete with the already existing business and hurt it. The same lender could find itself having to finance two businesses, each competing with each other, and fear that one of its loans would not be reimbursed. Does this not go somewhat against the spirit of this legislation?

Mr. Serge Croteau: The Auditor General also raised this issue. If, in creating new businesses, the new jobs that are created are simply displaced jobs, we have not really increased the region's economic activity. However, if there is room for both and we are simply concerned about hurting the other business, I believe that the system must allow the small borrowers to have access to financing because they will be creating additional employment.

[English]

The Chairman: Thank you.

Mrs. Barnes, eight minutes, please.

Mrs. Sue Barnes (London West, Lib.): Thank you, Mr. Williams.

Welcome. I'm going to ask a series of short questions and I hope I get short, specific answers. First, I will go to the Industry Canada representatives. I want to start with Mr. Sagar, the director general of the entrepreneurship and small business office.

I won't hold you to exact numbers, but I would like some comparison between the rates of loan losses that come from chartered banks generally, a category that is the Small Business Loans Act loans, and the venture capitalist loan losses. I'm sure they're different percentage rates. What in your opinion would you attribute it to?

Mr. Peter Sagar (Director General, Entrepreneurship and Small Business Office, Department of Industry): Speaking roughly, the chartered banks typically book a loan loss rate of about 0.9% for loans under $250,000. It's under a 1% loss rate, which is fairly small in the whole scheme of things.

The SBLA has been running loss rates of around 5% to 6%, although it may have been a bit higher during the period 1993-95. We're just getting those results. The higher loss rates suggest we're into a different class of loans there.

Interestingly enough, as you move up the scale of financing into venture capitalist, they will typically say they lose two out of five or four out of 10 investments they make. There's quite a sliding scale depending on the type of financing going on, but for the type of work we're doing with SBLA it's down to around 5% or 6%.

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Mrs. Sue Barnes: Would it be fair to say that without the SBLA a lot of those small businesses we have existing in Canada right now would not be financed by the regular chartered banks?

Mr. Peter Sagar: That's what the Riding study suggests. He found clearly that only 14% of the loans made would not have been made. He found clearly that 54% definitely would have been made.

Mrs. Sue Barnes: Perhaps we can have a little bit more on the Riding study. I understand it was a study by a university professor outside the department.

Mr. Peter Sagar: Yes.

Mrs. Sue Barnes: Did it compare the G-7 counties—Canada to U.S., Germany, Japan, and Great Britain? Was that it?

Mr. Peter Sagar: Yes.

Mrs. Sue Barnes: Okay. Tell me the results of the administrative costs and the loan lost claims and how we stack up.

Mr. Peter Sagar: Generally the administrative costs are much higher. The other programs tend to be much more interventionist, less directed through the chartered banks than ours. Loan losses are typically higher, several factors higher. Costs are generally higher.

You have to be very careful in comparing these programs, because although they are involved in similar types of activity, they have different types of goals as well. Other countries will try to use their programs, for example, for regional development purposes as well as general applied development investment needs, which is the Canadian approach with the SBLA program.

Mrs. Sue Barnes: This could be answered either by Mr. Lynch or Ms. Thivierge.

I note that your departmental review for the next year talks about business needs being one of the areas. I have a great deal of sympathy with a lot of my constituents who talk about their knowledge-based businesses, and I know they're creating a greater proportion of the new jobs in this country, yet we still have the asset-based lending the Auditor General's talking about.

I want to know if you will assure us today that business needs include the knowledge-based industry business needs. They are significantly different, and I know the regular banking system has had to make this transition. It's not fully there, even though there are programs in all of the large banks. Anecdotally we still hear it everyday in our ridings. I want to know whether you think you're there now and, if not, if you're going in this direction to protect these particular entrepreneurs.

Mr. Kevin Lynch: May I answer that, please.

We are moving more into the knowledge-based economy in Canada. I think we've really got to work at it. One of the big changes the government made two years back was to the mandate of the Business Development Bank of Canada. As part of that mandate change, focus is on knowledge-based lending. The ultimate goal of the lending of the BDC is that 35% will be towards knowledge-based industries.

You see the list of things we're looking at as part of the comprehensive review. We're reviewing the whole range of assets and the targeting of this program as well. I'll just draw to your attention that we did very explicitly change the mandate and the focus of the Business Development Bank of Canada toward that knowledge-based economy need in the small business community.

Mrs. Sue Barnes: I think some of the criteria for the loans infringe upon the business decision making of the business people involved, such as whether you're going to finance a leasing or an asset purchase operation. Are you going to be looking at that area?

Mr. Kevin Lynch: Leasing is one of the issues on the list for the comprehensive review. We've received a lot of representation from the leasing associations. We are going to look at it as part of the comprehensive review.

Mrs. Sue Barnes: Okay, thank you.

I'd like to know why you feel $1 billion is needed, to take it from $14 billion up to $15 billion this year, while you're undergoing reviews. Is there a need? Are you getting close to your ceilings?

Mr. Kevin Lynch: Yes, we are. We'll likely hit the ceiling, and then we would not have the capacity to meet the needs the program serves.

Mrs. Sue Barnes: In other words, you'd have a program review without having a program if you didn't have it funded.

Mr. Kevin Lynch: You could have the program stopping and not making any guarantees.

Mrs. Sue Barnes: Okay. How many more minutes do I have?

The Chairman: You've got two more minutes, Mrs. Barnes.

Mrs. Sue Barnes: Do you know at this time if we're going to be looking at a brand-new piece of legislation? Do you have a timeframe?

Mr. Peter Lynch: I can't tell you that. The issues you've raised are important ones. The issues the Auditor General has raised are important ones. We want to carry the review through in a comprehensive way but have it done as quickly as possible. We've got a program that meets the needs of Canadian small business within the parameters the Minister of Industry has set out.

• 1615

Mrs. Sue Barnes: I also have a quick question for the Auditor General.

You raised cost recovery as perhaps being in opposition to some of the other goals of accessibility, and I'd like you to expand on your views.

Mr. Denis Desautels: Mr. Chairman, I think the objective of cost recovery is quite clearly stated, but if one calculates all the costs of providing the guarantees as a financial institution would, they can get pretty high, particularly if we push the incrementality issue to its ultimate or optimal level.

I think the costs that would have to be passed on to small business could be high. We're not saying it's impossible, but the more you open it up and the more you insist on incrementality, the greater the losses are going to be. Therefore, to get full recovery you will have to increase the fees you charge to those with small businesses.

There's a difficulty in due course of reaching the right balance between those conflicting factors.

Mrs. Sue Barnes: C'est tout. Merci.

The Chairman: Thank you, Ms. Barnes.

Before we move on, Ms. Barnes had a question for Mr. Sagar about comparing the Canadian experience with the international experience.

You said the cost was significantly higher, but I think you were referring to the international experience being higher and Canada's being lower. Am I correct in that perception? Could you clarify that, please.

Mr. Peter Sagar: Yes, but I do urge the committee to consider that these are very different programs touching different types of businesses. While the Canadian program operates at what appears to be a relatively modest cost given the cost recovery efforts that have been put in place and relatively modest loan rates, we are not operating necessarily on the same types of companies or for the same social or economic objectives. So I caution you not to draw absolute comparisons this way.

The Chairman: Thank you very much.

Ms. Wayne, you have eight minutes.

Mrs. Elsie Wayne (Saint John, PC): Thank you very much, Mr. Chairman.

First I would like to know what formula you have for the different provinces. Is there a formula for how much in loans is allowed by the government under the Small Business Loans Act, or is it open-ended in every province?

On page 18 of the Auditor General's report he refers to a specific case study or an example of a start-up business being awarded a $250,000 loan. The business failed and there was a $188,000 loss to the government. It says they did not even have a business plan. How could they possibly get a loan if they did not have a business plan? Can someone explain it to me?

Ms. Marie-Josée Thivierge: We've discussed the point you're raising at length with the Office of the Auditor General. The lenders are making the credit decisions, and one of the things we will be looking at is how to ensure due care. What we mean by due care is making sure that the lender has all the information needed to make a solid, valid credit decision.

We have in the last couple of years changed some of our instructions to lenders, our lenders guidelines, to ask specifically that they exercise due care, that they use the same lending practices they would use for non-SBLA loans. If they're prepared and have a loss rate way below 1%...as they administer their loans that they ask for some fundamentals such as business plans.

When we register a loan, we do not ask that all the loan documentation be forwarded. The program was structured so as to encourage lenders to make more loans; accordingly, the lending decisions are theirs. We ensure simply that all the statutory requirements of the act and the regulations have been met.

One of the things we've now added to our work plan for the review as a result of the AG's recommendation is amending the regulations or looking at other administrative procedures to ensure that due care and the proper loan documentation is provided at the time the credit decision is made.

• 1620

Mrs. Elsie Wayne: So you are saying that since the Auditor General's report, in going through it and reviewing it, you are making changes.

For instance, I noted that in paragraph 29.52 of his report, the Auditor General observed that the department does have in place some systems and procedures to forecast loan default levels; however, he said that the department does not carry out such analyses on a regular basis of owed-loan portfolios.

My question is does the department intend to develop a more comprehensive monitoring system? Have you done that since this report came out, or is it your intent to do that?

Ms. Marie-Josée Thivierge: In fact, the first forecasting model to monitor lending and losses on the program was developed in 1994. Some 18 months later, we found that what was happening out there was not quite in line with how the model had been developed.

Therefore, in late 1996 we commissioned a study to update the forecasting model in order to better assess and look at the future. Given that loans are repaid over a ten-year period and lenders have an extra three years to submit a claim—that's a long way ahead—we said let's build into our forecasting model a mix between program parameters, i.e. loan size, the type of assets financed, and so on. Let's also look at economic indicators, such as unemployment rates or bankruptcies, and so on. And let's bring a third factor, which is the historical loan loss pattern.

We have had that study, and we're in the process of implementing that new forecasting model.

Mrs. Elsie Wayne: Thank you very much, Mr. Chairman.

The Chairman: Thank you, Mrs. Wayne. Mr. Solomon, eight minutes.

Mr. John Solomon (Regina—Lumsden—Lake Centre, NDP): Thank you, Mr. Chairman.

I have a little briefing book here that I brought, and I have a couple of questions I wanted to raise.

These are just a couple of follow-up questions for my colleagues. You made reference to a loan loss rate of between 5% and 6%. Is that 5% to 6% of a portfolio or of the numbers of loans?

Mr. Peter Sagar: Typically, that has been over the life of the program. I think Marie-Josée can give you some more detailed numbers on the performance recently. It's over the whole mass of loans made.

Mr. John Solomon: My question is this: is that 5% to 6% of dollars?

Mr. Peter Sagar: Dollars.

Mr. John Solomon: Okay, that's fine. Thank you. I thought that was what it was, but I wanted it clarified.

With respect to the AG's report where it lists questionable numbers on the number of jobs that the SBLA has created over the years, how serious is that? Is there a large discrepancy? Is there a really accurate way of measuring that?

If so, what would the real numbers be? Would they be closer to what the Government of Canada, Industry Canada, has provided, or would they be closer to your analysis?

Mr. Denis Desautels: Mr. Chairman, if I may, there's quite a range of estimates in this whole area. There have been some numbers published by Industry Canada. There have been other numbers available that we refer to in our chapters that are quite different from these other numbers.

The point we're trying to make is simply that this is a very soft area. I think whenever we use those numbers, members of Parliament should be cautioned that they are soft. Therefore, they should be aware of that and keep it in mind when they're assessing the performance of a particular program.

In this case, it's the SBLA. As you are aware, we've raised similar concerns with other programs as well, including some of the regional development programs and the infrastructure program. It's a difficult science, and at best, some of those numbers are quite soft. In our view, they should be supplemented from time to time by some kind of harder economic analysis.

Mr. John Solomon: Thank you very much. You identified some issues that I think are quite important. The SBLA was abused. An individual borrower received a total of much more than the maximum amount. A $4 million figure comes to mind from the report.

Is “borrower” defined in regulation or in legislation? How stringently are the banks and institutions provided with these regulations? Has somebody broken the law here, or is this an accident?

I address that to whoever can answer that. I'm not sure who can answer that.

• 1625

Ms. Marie-Josée Thivierge: One of the things we put on our list of things to do, as part of the review about a year and a half ago, was to look at the way the legislation is written. In fact there are few definitions in the legislation that refer to “borrower”, “business enterprise”, and so on, which could be clarified.

That being said, we've always and consistently—or anyway since 1995, since I've been with the administration—issued in our lenders' guidelines as well as in all our notices to lenders the fact that the concept is $250,000 maximum per business enterprise. That ties into what kind of business you are in. What we're trying to avoid here is that two numbered companies, for instance, each get $250,000 to operate the same grocery store.

Mr. John Solomon: That's allowed now under the provisions?

Ms. Marie-Josée Thivierge: It is not allowed, and we've clarified that, but questions have been asked by borrowers about whether or not there is any room for misinterpretation. We feel there is not, and we've said so in our lenders' guidelines. We've also said so in our notices to lenders. We've also said that to borrowers as they call up the administration to find out. But in order to make sure the question is never raised again, as part of the regulatory review, we will make sure the wording is very clear and cannot be misinterpreted.

Mr. John Solomon: What's the penalty for that sort of abuse?

Ms. Marie-Josée Thivierge: Full rejection of the claim.

Mr. John Solomon: Was the $4 million approved or rejected?

Ms. Marie-Josée Thivierge: We have no claim on those loans.

Mr. Serge Croteau: Those loans are still outstanding.

Mr. John Solomon: The loans are still outstanding on it?

Mr. Serge Croteau: Yes.

Mr. Kevin Lynch: Just to clarify that, the Auditor General went to the lenders and, in a random sample, looked at a number of loans that had been registered, but they had not gone into default and therefore have not been filed with the small business loans administration. So these are not ones that have been processed by the administration. They're ones the Auditor General's team looked at in a random sample of lenders who registered.

The guidelines to lenders are to tell them not to do that, and if they were to do it and they were to come into default, we would not pay that claim.

Mr. John Solomon: My follow-up question to that is probably close to that answer. If the financial institutions happen to, for example, charge more for loans than they should under the legislation, what kinds of penalties are we looking at? Do we just say, “Gee, don't do that again”, or do we find them and call them on the carpet? What sort of response does the department have for that?

Ms. Marie-Josée Thivierge: The legislation is very clear. In the law it says the minister is liable if they have met all of the conditions and is not liable if they have not. Therefore, if one of the conditions is not met, i.e., if they charge fees they should not have or if they make a loan that's greater than $250,000—if any statutory requirement is not met—the minister is not liable, and therefore the claim is declined.

Mr. John Solomon: Thank you.

I have two very short questions, if I might, Mr. Chair.

One pertains to the institution you've identified, Auditor General, as one that's abusing the system on a regular basis. Can that institution be named? Do you have the name of it?

The Chairman: Mr. Desautels indicated to me that if he's asked about the actual institution, he has a statement to make in that regard.

Mr. Desautels.

Mr. Denis Desautels: Mr. Chairman, our examination of financial institutions and files within financial institutions was carried out with the understanding that we would respect the confidentiality of the files we've looked at, so I would like to respect that.

Mr. John Solomon: Thank you.

I have a final question, Mr. Chair, if I might impose. I apologize for taking so long, but I do have a lot of paper here. And I've read it all, too.

Some hon. members: Oh, oh!

Mr. John Solomon: I have. I have. That's what I spend my nights doing.

In spite of some of the problems you've identified and that others may have identified with respect to the SBLA, would you recommend cancelling the SBLA or would you at this point recommend that it continue pending the review and improvements?

• 1630

Mr. Denis Desautels: Mr. Chairman, as you know, we always stay away from policy. These are policy decisions, whether to continue or not. What we've seen out of this program is that as the program is defined right now, it's generally well run, with a minimum of costs.

What we're suggesting is that there be more precision to the objectives of the program, not so much in legislation but in terms of how it's administered and in terms of an arrangement between the departments and Treasury Board as to the objectives of the actual program. We think there's lots of scope for being a little clearer on the objectives of the program. Given what I've just heard, I'm quite confident that this will happen.

Mr. John Solomon: In summary, Mr. Chair, might I just make a comment?

The Chairman: Your few questions did run into eight minutes, but I think I'll allow you a small extra one since we don't see you here very often.

Mr. John Solomon: Thank you, Mr. Chair.

In summary, what I'm getting at is that the SBLA program is worth while keeping with respect to assisting small business in general, but it obviously needs either a perennial or a regular review to improve it and keep it tighter. Is that a fair conclusion, without getting into policy?

Mr. Denis Desautels: Again, I don't want to get into policy. My position is quite clear; I think there's a need to be clearer and more precise on the ultimate objective of the program and I think that's perfectly achievable.

The Chairman: I think we'll refer Mr. Solomon back to the briefing book.

Mr. John Solomon: You should see my briefing book for Question Period.

The Chairman: Mr. Casson.

Mr. Rick Casson (Lethbridge, Ref.): Thank you, Mr. Chairman.

Since you've increased the amount of money available, the defaults have gone up and I suppose that is a cost. The amount of money that's been loaned out to people who don't really qualify takes some more money out of it. Do you have any idea how many legitimate small businesses are coming forward to seek money and are turned away? Are there any? Is that what this $1 billion is for, to take care of everybody who comes forward?

Mr. Kevin Lynch: We haven't hit the lending ceiling. As long as potential borrowers meet the guarantee guidelines from the 1500 financial institutions that administer the program, they have the capacity to be registered now. If we did not extend and if we did not increase the lending limit, there is a very strong chance that we would hit that limit over the course of the next year and then there would be small businesses that would not have access to the capital that the SBLA program provides to them.

Mr. Rick Casson: Do you think if there were a limit and the financial institutions knew that, they would be a little more careful in who they qualify? If they're going to be giving it out to people who don't qualify under the act, there's nothing there to stop them from doing that. If they give a bad one and the next one is a good one, they're going to get it. It seems to me there should be something there to make them toe the mark a little more.

Mr. Kevin Lynch: I think what is there is the guidelines. They participate in the program because it's good for them and I think the program works for everybody. It works for the government, it works for the financial institutions, and it works for the boards.

If you're arguing that some sort of cap would encourage differential behaviour, think of the fact that we have 1500 different third-party lenders. How in the world would you take a cap and distribute it across 1500 lenders and across geography?

The beauty of the program is that it's very decentralized. We set out clearly what the criteria are. One thing I think we've set out and that the Auditor General indicates is that we have to increase the clarity of some of those lending criteria and increase the awareness of those 1500 lending institutions so that they make sure their loan officers follow that. That's what we will look at in the course of the review, taking into account the suggestion that the Auditor General has made.

Mr. Rick Casson: I have a question for the Auditor General, then. I think you've led up to this. With what you've recommended and some of the problems you see, are you comfortable that the department is in fact addressing most of these areas?

Mr. Denis Desautels: I'll ask Mr. Flageole to answer that.

Mr. Richard Flageole (Assistant Auditor General of Canada): We reviewed the detailed response from the department, and again there's an appendix at the end. I think we're fairly satisfied that the department intends to review every issue we raise in the report. There are additional issues that will be looked at by the department. So we have good expectations for that review, which is going to take place over the next couple of months. When we do our follow-up audit, we will have a very close look at how they respond to the recommendations we've made in the report.

• 1635

The Chairman: Thank you, Mr. Casson.

Mr. Pagtakhan, you have four minutes.

Mr. Rey D. Pagtakhan (Winnipeg North—St. Paul, Lib.): Thank you, Mr. Chair.

To the Auditor General, the presentation from Industry Canada indicated your conclusion that seven jobs have created $1 million of incremental loans, taking into account the discount factors that you included in that estimate. Industry Canada indicated 36 jobs per $1 million of loans using the same discount factors. Are you persuaded by the presentation of figures by Industry Canada?

Mr. Denis Desautels: As I answered earlier, a range of estimates around job creation are available within Industry Canada itself, in fact, so my point is that it can be anywhere within that range. There's a certain softness to this kind of estimate, and whenever we use those estimates in our discussions of these programs or when parliamentarians review the programs, they have to be used with some caution, and that's the point we were making.

We're not trying to argue that one figure is correct and theirs is wrong. The point we're making is there's a range and it's soft. So whenever you're using those figures, you should be aware of that softness.

Mr. Rey Pagtakhan: I would like to return to the administration fee that has been charged and that you deem is contrary to the act. I would like a clarification. Apparently the administration of the fee was started by way of program change in 1995, according to the report.

When that change was made—and I ask this of Industry Canada—does it mean that at that point it was legal, or was the change made contrary to the act itself?

Mr. Peter Sagar: There was already a 2% registration fee in the program. What was introduced in 1995 was a 1.25% annual fee on the borrowers, which should serve to increase incrementality, because borrowers are paying more for these types of loans than they might for other types of loans.

Mr. Rey Pagtakhan: So the change was within the law?

Mr. Peter Sagar: It's within the law, absolutely. The amendments gave the minister the right to create this fee.

Mr. Rey Pagtakhan: To the Auditor General, then, for clarification, the statement that it was illegal was before 1995?

Mr. Richard Flageole: I think we're talking about two separate things. The member is referring to the annual 1.25% administration fee, which is charged to the lender and paid to Industry Canada. What we are referring to in our report are additional fees that are charged by the institution in addition to the 1.25% to the borrower.

Mr. Rey Pagtakhan: Over and above.

Mr. Richard Flageole: Those might be fees, for example, to open a file, registration fees, or whatever. Those are different from the fees allowed under the program.

Mr. Rey Pagtakhan: You indicated in your presentation that this overcharge was because the package included, other than SBLA, also non-program loans. This is my reading of paragraph 29.64 on page 29-17 of the report. Do I understand that it would only be legal if the fee were charged on the SBLA component, but not if it were charged on the non-program component? Am I correct?

Mr. Richard Flageole: The departmental officers may want to add to this, but I think the act is fairly clear that the institution cannot charge additional fees on top of the 1.25%. What we are referring to is that in some cases, we looked at what we can call a package of financing, where fees were charged not directly on the SBLA portion but on the other aspect of the package.

• 1640

We believe, again, that this is against the intent of the legislation. So that's the view we took on that. I don't know if people from Industry Canada would like to add additional comments.

Ms. Marie-Josée Thivierge: The legislation is very clear that the only two fees that may be charged by a lender under the SBLA for an SBLA loan is the registration fee and the annual administration fee. Any other types of fees such as file openings or assessment fees, which banks very often charge on regular loans, are prohibited under the SBLA.

Mr. Rey Pagtakhan: Can they be recaptured?

The Chairman: Mr. Pagtakhan, I'm afraid your time is up. But I would just like to get clarification on a point you've asked about, the fact that this 1.25% annual fee that is charged is included in the interest rate.

It's not a fee that's charged directly to the borrower as a fee, but is built into the interest rate. Am I correct in saying that?

Ms. Marie-Josée Thivierge: That's correct. Under the SBLA, the fee of 1.25% is included in the cap of 3% on top of prime.

Mr. Rey Pagtakhan: Mr. Chair, could the chair ask whether in fact the amount can be recovered from the lending institutions.

The Chairman: Okay, well, let's go ahead, and answer the question—

Voices: Oh, oh!

The Chairman: —just for everybody's edification.

Mr. Rey Pagtakhan: Thank you, Mr. Chair. With the discovery of the “not good” practice, to say the least, has an attempt been made to recover the fees that were charged and were not in compliance with the law? Has an attempt then been made to have these refunded to the institutions?

Mr. Kevin Lynch: Maybe I can answer that. We don't have access to this specifically. This comes from the Auditor General's audit of files.

What we've indicated to the lending institutions is that if they do not follow the clear regulatory process, we will not pay on any claims filed. So in a sense, there is no guarantee if they break those rules.

Mr. Rey Pagtakhan: Thank you, Mr. Chair.

The Chairman: Thank you, Mr. Lynch.

Mr. Myers, you have four minutes.

Mr. Lynn Myers (Waterloo—Wellington, Lib.): Thank you, Mr. Chairman. It seems to me that job creation is an important benchmark in assessing this kind of program.

I was a little confused in terms of the Auditor General's 1995-96 annual report, where it noted that 37 jobs per million were created, and then there was a recent study saying 7 per million. I was trying to look through this—you just handed this to us—and it seems to me now that there's a new category: 2.4 jobs per business improvement loans.

Do you have a handle that would compare apples to apples in terms of what had been suggested in previous reports?

Mr. Kevin Lynch: Thank you. I'd like to emphasize the same point the Auditor General made, which is that precisely forecasting jobs is not an exact science. I think he's referencing that point.

The presentation we gave notes that, first, the job numbers we report are ones that are part of the filing by borrowers with the lending institutions at the time. They're not based on a forecasting model of the department.

We did engage a private sector company to do a range of economic forecasts. The Auditor General cites one of those, applies a discount factor for non-incrementality, and comes up with a number of 7 jobs per million, compared to the 37 jobs per million reported in the annual report. He just notes there that one has to look at the 37 in the context of the many estimates.

Because of that variation we engaged a survey company to go out and do a 700-sample, ex-post survey, and ask what job creation happened after the fact? With that we found that, applying the same factor for non-incrementality that the Auditor General had, we came out with roughly 37 jobs per million. That is pretty close to what was reported by the borrowers when they filed their reports.

So again there's no exact number, but the range may not be as large around the reported number as some of the econometric studies would suggest. But there's no absolutely precise number.

Mr. Lynn Myers: And to my question: in this report are there estimates of jobs per million?

Mr. Kevin Lynch: In that report we provide several numbers of jobs per million. We give you the jobs per million reported by the borrowers themselves. That is 37 per million.

We give you the estimate from the econometric study the Auditor General refers to, with the discount factor—7 per million—and we give you the result of the survey we did, which is 36 jobs per million.

Mr. Lynn Myers: And that's stated in there.

Mr. Kevin Lynch: Yes, it is.

• 1645

Mr. Peter Sagar: Now, you're looking at the annual report, which typically states the number of jobs per loan made in the table. That's the way the SBLA has constantly reported it.

We created the 37 jobs per million of lending to be on a comparable basis with the Auditor General's number by calculating the average loan size, divided into a million, then multiplied by the number of jobs per loan.

So it's just over 15 loans per million dollars of lending, times the 2.4, and that comes out to 37 jobs. They're actually the same numbers, but it's not in that form in the annual report.

Mr. Lynn Myers: I noted that. It took a different.... That's why I asked if it was—

Mr. Peter Sagar: It's the same basis, but it's a slightly different form.

Mr. Lynn Myers: Thank you. I want to go to the criticism of the Auditor General with respect to the annual reports, and that is that they're more operational in nature, more statistical.

I noted in paragraph 29.80 that there were some criticisms with respect to how it should be reported. Your response seems to try to determine that there are ways in which you're now moving to correct that.

I wondered if you thought that you had totally answered those criticisms.

Mr. Kevin Lynch: Well, I'm not sure we've totally answered the criticisms. I guess what we've said to the committee is that on the list of issues we're going to work on in a comprehensive review....

We have put the various reporting, forecasting and other issues on that list to go through. We'll work through that in terms of our ability to forecast, and our ability to calculate the jobs, and the managerial and other accountabilities surrounding the program. So we put that on the comprehensive review list.

I listened to the Auditor General's staff. They weren't saying that we've solved all those, but I thought I heard them say that we've put the list of issues they raised in the report on the list for the comprehensive review. We believe we've done that, and we will be working through those issues over the course of the comprehensive review.

With respect to the issues involving making lenders aware of their obligations under the statutory requirements of the act, we did that in 1996 with the various new notices to lenders that my colleagues mentioned. So we've started with some of those in terms of information out now. We've now engaged a number of analyses, which are part of the items the Auditor General's required. The rest will be part of our comprehensive review.

Mr. Lynn Myers: Are those changes reflected in this new annual report? Are any of them reflected there?

Mr. Serge Croteau: I can answer that question. When we received the report from the AG, we were almost at the completion stage for this annual report. We did make some changes, though.

We very much expanded on the administration side of the program. We put things in context so that those who read this report will realize what occurred in 1992-93, and between 1993 and 1995, and would understand better the large increase in the cost of the program, as it is reported in the report.

We also have added one table, the industry sector table, that gives the split among every industry sector. That was not there before.

Those are only small changes that could have been made on this report at the last minute. We're now working on next year's report, and we will improve it further.

Mr. Lynn Myers: Thank you very much.

The Chairman: Mr. Mahoney, you have four minutes.

Mr. Steve Mahoney (Mississauga West, Lib.): Thank you, Mr. Chairman. I have a question on the issue of the jobs and the financial benefit.

When all these different figures come out, are they strictly figures that relate to the companies that are given loans, or is there any kind of a cumulative effect, or a tracing effect, as to how it might benefit, say, people they do business with, and thereby create other jobs?

Mr. Kevin Lynch: These are direct job creation. It is what the borrower is citing that she or he will do in terms of incremental hiring because of the lending.

Mr. Steve Mahoney: The numbers they will be hiring?

Mr. Kevin Lynch: Yes.

Mr. Steve Mahoney: I have a question for the Attorney General...that is, the Auditor General. I gave you a demotion there, sorry.

A voice: Is it a demotion?

A voice: Oh, oh!

Mr. Steve Mahoney: As I recall reading, your report at some point suggests that due to the change in the economy and the fact that we tend to be moving more to a service-based economy, we should look at some changes in the terms of what the loans are granted for. My understanding of this program is that the loans are basically given for hard assets—real estate, I believe. I know that equipment, furnishings, leasehold improvements and things of that nature that you can attach a value to are currently part of the criteria.

• 1650

What do you mean when you say it should be changed more to the service sector? Are you suggesting we get more into debt financing, rearranging debt or lending for softer services?

Mr. Denis Desautels: Mr. Chairman, we feel the program could address new needs in the economy. We talked earlier about knowledge-based industries, KBIs. They don't need credit to invest in hard assets as much as a manufacturing concern does. So there are new industries that have new needs. I think that could be addressed by this program.

We also have in mind forms of financing other than borrowing from the bank and buying the asset. Leases make more sense in some situations, so there are situations like that as well. These developments have happened over the last couple of decades and are a lot more popular today. I think a number of these issues could be factored into an analysis of the program at this point to make sure that it responds to today's needs.

Mr. Steve Mahoney: If we're going to talk about leases, I think you might want to expand the list of financial institutions you do business with to include leasing companies. However, I would be concerned that the lack of ability to recover would increase dramatically if you moved away from making loans where you could seize the equipment—the bank could—and resell it.

Do you follow my concern? We have to be able to attach some kind of value if we're putting the taxpayers' money at risk. The concerns I hear from some members on this committee and in the House is that ordinarily many of these loans would be given by the financial institutions anyway, so they don't need the SBLA. I don't agree with that, but I would be concerned that if we got into less financing of hard assets, our default rate would increase and our ability to recover would be more difficult.

Mr. Denis Desautels: I think these are valid concerns that have to be taken into account when looking at all of the options for this program in the future. But if I may offer one opinion on this, I think you can have as much security backing a lease for a specific piece of equipment as you would through a direct loan. So I think that kind of risk can be managed by the program if that's what is decided should be the future course.

Mr. Steve Mahoney: Thank you.

The Chairman: Mr. Grewal, four minutes.

Mr. Gurmant Grewal: Thank you, Mr. Chair.

I want to follow up on the question asked by my colleague Mrs. Barnes. She asked some questions about the criteria for granting loans such as knowledge-based industry, capital leasing, working capital or to review the whole program. The answer was that you are moving, you are reviewing, or you are doing it.

We know that the Auditor General has highlighted problems. For example, the program has been shown to be ineffective and inefficient, the incremental cost had a problem, the terms and conditions of the loan had some problems, and the risk analysis is not reviewed annually or is not done the way it should be. There are no provisions for loan losses mentioned in the annual report that we got. The program management and the delivery mechanism has problems. The list goes on and on, whether it is the accounting system for costing techniques or third-party transactions and administrative fees, inadequate reporting to Parliament and on and on.

In 1994 the industry committee of the House of Commons asked for a review. We are now in 1998 and your answer is still that you are doing something, you are reviewing, you are continuing. Why has this not been done until now? This program is 36 years old and it has been shown that the system has not been running the way it should be. Why are you still answering the question in the present tense? Why was it not done four years ago, ten years ago or six years ago? How do you respond to that?

• 1655

Mr. Kevin Lynch: First of all, there were very large changes to the program in 1995. Part of the forecasting and the large increase in the loan loss impact is coming from the very dramatic changes in 1993 and 1995, which flowed from the discussions in the industry committee.

I think we went through a lot of change in 1995. Having had some experience with that change, the Auditor General has made some helpful suggestions about where we might look for ongoing changes, as have lots of private sector representations that we've had. So I wouldn't portray it as not having touched this program since 1961, I would portray it as another stage in looking at it.

I have a point on the knowledge-based industries and the economy. I don't think it's fair to say that companies borrowing under the SBLA are not knowledge-based enterprises. If you look at the lending in the report, 70% of it is for equipment. If we look at our analysis of small businesses in the country, they are falling behind in their use of computers, LAN systems and other informatics. We shouldn't think that knowledge-based industries are just high-tech. We have to make all industries and sectors in the Canadian economy more knowledge-based, and I think that is not inconsistent with the way the program is presently structured.

The Chairman: Mr. Laurin, four minutes.

[Translation]

Mr. René Laurin: Bill C-21 tabled in the House contains two main elements: first of all the program has been extended by one year: secondly, the ceiling of guaranteed loans has been increased to 15 billion dollars. Am I to understand that during the extended year, we will guarantee loans to the tune of 4 or 5 billion dollars?

Mr. Serge Croteau: This year, we will be lending approximately 1.7 billion dollars.

Mr. René Laurin: And what do you foresee this amount to be during the year that has been added on?

Mr. Serge Croteau: We expect the amount to be about the same. We gave ourselves a margin of about 300 million dollars in case economic activity is a bit stronger than foreseen and so that things don't get too tight before the program is renewed.

Mr. René Laurin: Meaning that the guaranteed loans could be as high as 2 billion dollars: 1.7 billion dollars plus a margin of 300 million dollars, that makes 2 billion.

Since it is suggested that the government guarantee additional loans of 2 billion dollars and given the remarks by the Auditor General, what guarantee can you give us today that these 2 billion additional dollars will not be managed the same way that the money was managed under the former program? Will these 2 billion dollars be subject to the same comments from the Auditor General?

In other words, is there a risk that 30 to 40% of this 2 billion dollars will go toward loans that people could have obtained from the private sector? Will you improve the way that you monitor loans issued by chartered banks or other lending institutions to ensure that the latter are in fact following up on reimbursement properly?

I am now referring to the comments made by the Auditor General. Can you give us any guarantee today that things will change, at least during this transition year?

Mr. Serge Croteau: Right now we are in a position to correct all of the administrative deficiencies pointed out by the Auditor General. This also includes our ability to improve expenditure forecasting.

The legislation, with the exception of the two amendments you mention, will remain unchanged for the forthcoming year. Accordingly, the lenders are basically going to continue applying the existing legislation, with the exception of the legislation deadline and the ceiling for the guaranteed loans. There will be no major changes to the nature of the program during the forthcoming year. By extending the program for a year, we will be able to implement a new bill that will change the program at the end of the year.

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Mr. René Laurin: So why didn't we simply freeze the ceiling for the loans without adding an additional 2 billion dollars? Since we are not sure about the way that these operations are monitored, would it not have been wiser to refrain from raising the ceiling, and instead to operate within the confines of the approved maximum limits, using the money from reimbursed loans and waiting for corrective measures to be taken to improve the program? It is now being suggested that we spend an additional 2 billion dollars and that this amount will be spent the same way. Two billion dollars is a lot of money.

Mr. Serge Croteau: You suggested that we use the reimbursed money. The law has not been designed like that; reimbursements do not result in additional spending capacity. For instance, we currently guarantee loans to the tune of 6 billion dollars whereas our ceiling is set at 14 billion dollars. These two aspects have no direct relationship with each other and the money that is reimbursed does not give us increased financing capacity.

M. René Laurin: I don't understand...

[English]

The Chairman: Thank you, Mr. Laurin.

Mr. Grose, four minutes.

Mr. Ivan Grose (Oshawa, Lib.): Thank you, Mr. Chairman.

I'll start with one of my little homespun stories. In my former life I was in business and I went to a bank for a loan. They said they couldn't see a way to do it but you could do it through the SBLA. That means you're taking higher-risk loans, so you're going to have higher losses.

When you get the paperwork from the bank with their opinion on it—obviously they thought I was eligible for that kind of loan—do you pass judgment on it or just accept their judgment?

Mr. Kevin Lynch: We accept their judgment as long as they follow the statutory requirements.

Mr. Ivan Grose: Do you ever revisit that loan before it's paid off or there's a claim made on it? Or do you just trust the bank to do that?

Mr. Kevin Lynch: That's correct.

Mr. Ivan Grose: That's risky, I think.

There's another thing that bothers me. When you relate jobs created to any program, I get an itchy feeling. There was a famous case a few years ago where an American company came to Canada through some government agency or other. They got a loan for a large amount of money, and a grant as well, and said they would provide 350 jobs. They set up to make blue jeans. They did very well and paid back the loan. Everything was marvellous except for one fly in the ointment. The guy down the road who had been making jeans for 40 years went broke and laid off 350 people, so we were no further ahead.

I get antsy every time we talk about creating jobs. In a certain market, if there's only so much room and someone else goes in.... It may be me. I make a better product, my price is right, I'm a nice guy and I take over the market. So really you haven't created anything. I'm not saying we shouldn't have this plan, but to lean on jobs created—I don't like the feel of it.

Mr. Kevin Lynch: I'm not suggesting, and I don't think the Auditor General was either, that we over-rely on the job numbers, but the small business sector is the fastest-growing sector of the economy. The great majority of jobs are created in the small business sector. It accounts for 87% of net job creation. So if access to capital is a key issue in trying to help the small business sector grow, which is what they say, then I'm not pessimistic about the small business sector's ability—if you provide access to capital—to in net create jobs. So it's not a zero-sum game as you suggest.

Mr. Ivan Grose: Thank you very much.

The Chairman: Thank you, Mr. Grose.

Mr. Harb, for four minutes.

Mr. Mac Harb (Ottawa Centre, Lib.): Thank you.

I'm quite encouraged by what I have heard from the department in terms of their response to the Auditor General. I hope they will take the comments of the Auditor General to heart and deal with them.

I have a question about table 3, particularly when we talk about period 12. We made loans from 1993 to 1997 for close to $11.2 billion, and the losses were $206 million. Is that correct?

Mr. Kevin Lynch: Yes.

Mr. Mac Harb: Are these losses for the period 1993 to 1997 or are they for previous years?

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Ms. Marie-Josée Thivierge: The outstanding loans are a combination of all loans that have been made since 1980, and the losses paid in the given year are also on loans that were made as far back as 1980.

Mr. Mac Harb: No. How many years is the $206 million for?

Ms. Marie-Josée Thivierge: It goes back to all loans that were outstanding, so it goes up to period eight. The $206 million that was paid that fiscal year was against all loans that were outstanding in that year and went into default.

Mr. Mac Harb: Up to 1997.

Ms. Marie-Josée Thivierge: That's correct, inclusively. At that time it happened that we had loans that went as far back as 1980.

Mr. Mac Harb: When a business is in default, at what year of the operation are they in default? Is it normally the first year, the second year, or the third year?

Ms. Marie-Josée Thivierge: There have been a few studies that indicate normally loans will default between year three and year five of the business cycle, but our experience to date under the program is that roughly 94% of all loans were repaid and those businesses—

Mr. Mac Harb: If we were to look on page 10 at the loans made between 1993 and 1997, you have more or less doubled or tripled what you loaned in the previous years. Based on that, do you think the loss will increase or stabilize over the next three years?

Ms. Marie-Josée Thivierge: Our experience so far is that the program has an average loss rate of about 5%.

Mr. Mac Harb: Historically it's 5%.

Ms. Marie-Josée Thivierge: That being said, our early indications for the 1993-95 period is that those loss rates may be slightly higher. In the document we've tabled—not the annual report, but the other document—on page 17, figure 9, it shows that our experience so far in loss rates for the post-1995 loans is very limited. Those loss rates are very low as they stand.

For the 1993-95 period we also have not received enough claims to establish what the final loss rate will be.

Mr. Mac Harb: I have a final question, Mr. Chair.

On page 11, when you talk about the different sectors that benefit from your program, you don't have a category for the high-technology sector. Are you considering having in the future a section specifically for that so we will know what percentage the high-technology sector is getting?

Mr. Serge Croteau: Yes. This is definitely something that will be revisited. These classifications are rather old and will be adapted to today's economy.

Mr. Mac Harb: Thank you very much.

The Chairman: Thank you, Mr. Harb. I have a few questions of my own.

I was concerned to find out that the only time Industry Canada interacts with a loan application is when it is bad and turned in by the lending institution, that there is no audit policy by Industry Canada to visit the lending institutions to find out that the loan program is being administered according to the law. Why is that?

Ms. Marie-Josée Thivierge: That's the way the program is structured. The act and the regulations provide that the administration gets involved at two stages in the lending process: at the time of the registration of the loan, and when a loan goes into default and the lender submits a claim.

That being said, we've looked at our rejection rates at the time of loan registration. The rejection rate is 7%.

When we receive claims, about 40% of the claims submitted are either rejected or adjusted according to the way the loan was administered, whether it was in compliance with the act and the regulations and whether there are things that should have been done. We don't at the moment do site visits or sample audits of loan files simply because it is not one of the things allowed under the act and the regulations.

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At the time the claim is submitted, we do a number of verifications. We ask for supplementary documentation, which results 40% of the time in rejection or reduction of the claim amounts being paid.

The Chairman: There's about $14 billion or $15 billion outstanding, of which the government has a potential liability of around $1.3 billion to $1.5 billion in total through the guarantee. To wait until the loan turns bad before you look at the rationale and some of the reasons....

The Auditor General has pointed out that there are some pretty poor credit assessments and that lending institutions sometimes increase their revenues by charging fees, which they're not allowed to do. It would seem to me remiss on your part not to do on-site visits to ensure the loan is being administered by the lending institutions. You depend on that.

Mr. Kevin Lynch: At the moment that's not part of the regulatory structure of setting up.

The Chairman: Don't you think it would make common sense to have it as part of this process?

Mr. Kevin Lynch: I think it's certainly one of the issues we will look at during the review; however, the logic behind the current system was that the lending institutions have established lending procedures, they have auditors, and they know what the statute requirements are. As part of that overall function there was a sense that a government audit in addition to their own audit would be a potential burden. It also would impose additional costs.

One of the advantages of the system, as my colleague mentioned, is that it's a relatively inexpensive system to run. To run a large site audit for the registration of the loans would change the COPS profile.

It's one of the issues, Mr. Chairman, we'll look at in the course of the comprehensive review.

The Chairman: I'm not talking about auditing every file but about sample audits, a typical audit, to ensure that the institutions are on their mettle.

What does the Auditor General feel about on-site audits to ensure that the loans are being administered? These are the good loans, which the department doesn't see at this time.

Mr. Denis Desautels: Mr. Chairman, our opinion is that Industry Canada should ensure somehow that it maintains some right of access to the lending institutions so that they could exercise that right if they had indications that certain institutions weren't meeting the spirit and the letter of its own directives. We therefore feel there should be some possibility of access, which could be exercised when certain risk factors are identified.

The Chairman: For example, it's been pointed out—and I know it's a very soft number—a large number of the loans granted would have been granted anyway without the SBLA guarantee.

I'm thinking an audit provision might reduce the situation...so that many of the loans under the SBLA program could be granted by the lending institution without the SBLA being involved. Would a site audit program help to reduce this overlap, Mr. Desautels, in your opinion?

Mr. Richard Flageole: Mr. Chairman, I think the on-site audit would probably be directed more toward compliance with the legislation, compliance with the intent of the legislation. Whether the department would like to use this to measure incrementals I think is a fairly wide question, which would deserve very careful consideration. Normally that would be done through economic or other types of studies.

I think the point we're making in the chapter should be given consideration to make sure they have a right of access and exercise it on a risk basis. I think that's the main message we have.

The Chairman: Thank you.

Looking at exhibit 29.1 on page 29-8, you say the percentage of financing permitted for equipment was increased from 80% to 100%. What would have been the motivation behind that? These are the types of changes that caused a huge demand for the SBLA program, and at the same time we see a very significant increase in the amount of write-offs. Now you've pulled it back to 90%, but was it ever prudent decision-making to finance 100% of an acquisition?

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Mr. Kevin Lynch: I can't comment on that. It was a policy change that Parliament put in place, and the government and Parliament changed those regulations in 1995.

The Chairman: So you're saying the opposition should be more scrupulous.

Mr. Rey Pagtakhan: Maybe.

The Chairman: I have one final question on that point. Improved Reporting to Parliament by Industry Canada makes virtually no reference to the SBLA program. I would have thought that with a potential of $1.3 billion to $1.5 billion liability, there would have been something in Improved Reporting to Parliament about the SBLA program.

Ms. Barnes.

Mrs. Sue Barnes: Thank you.

I'd like to put myself in the position of one of these 1,500 banks as a lender. Say I didn't comply. I would think it would be a pretty strong deterrent, not that I'd get a penalty on my claim on non-compliance, but that I'd get a complete denial of claim. I think that's a pretty strong deterrent, so I'm not so sure that having more intrusive mechanisms is a good idea when we're asking 1,500 institutions to help us deliver this program and we don't have the comparable bureaucracy inside our own government, which would have to be replicated if they weren't there. That's just my own personal opinion; I think it's a strong deterrent.

I do want to go back to the history of the SBLA program, because my colleague from the Reform, Mr. Grewal, raised that there had been no changes. It's important for Canadians to understand exactly some of the major changes that happened, and I go back to 1992. I know you have it in your report on pages 2 and 3.

I heard this litany of complaint: “Everything's bad. Why didn't you fix it?” What happened in 1993 is there were significant incentives, in a sense, that made it better for the banks to do these types of loans and better for the consumers to go out there and get these types of loans. Because of that, what exactly happened to the program? What types of increases happened because of the Conservative government's changes?

Then I'll go on a little further, obviously, as a follow-up, and ask what did we do in 1995 and how did that change in the context of lost loans and how we're having to deal with it now and have dealt with it in 1995?

First of all, what happened in 1993 because of the 1992 amendments?

Mr. Kevin Lynch: Thank you very much.

In the documentation we tabled, called “A Presentation to the House of Commons Standing Committee on Public Accounts”, if you look on page 12, we try to present just that. Both the changes in 1993 and the subsequent changes in 1995 really are quite major for tracking this program.

If you look at the graph in figure 3 on page 12, you can see the dramatic run-up. This is a program that averaged about $500 million a year in lending for a long period of time. There were small changes over the period 1961-93. Then there were very large changes, going to 100% coverage, a larger amount, and larger firms. You can see that dramatic increase in the amount of lending. It went from $0.5 billion dollars to over $4 billion by the time we got to 1993-94. And you can see that below, we provide graphically what the changes were that led to that.

Mrs. Sue Barnes: And what happened to loan losses because of that?

Mr. Kevin Lynch: If you look at figure 5 on page 14, you'll see how after a lag of two to three years, you get a very large increase in loan loss claims, partially because the absolute size of the program increased dramatically, and partially because the parameters changed and increased the inherent risk of the program for that two-year period.

Mrs. Sue Barnes: So really by 1995 the program had about eightfold growth?

Mr. Kevin Lynch: That's correct.

Mrs. Sue Barnes: Some changes that our government put into effect tried to put it on a sounder financial footing. How will the loan losses that came from before affect us into the future, and do they now?

Mr. Kevin Lynch: They certainly will. The period for a loan is 10 years, so the outstanding claim from the 1993-95 period will be around for quite a substantial period of time. This is one of the reasons it's difficult to construct a forecasting model. In a sense you have a period of time that in fact bears no relationship to the previous 20 years of the program, but that's the data you have. That's one of our problems in coming up with a modelling formula. Because of the 1993-95 lending, we will likely have large loan losses for a period of time.

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Most importantly, though, is what will happen to the post-1995 lending under the new rules. We believe the loan losses will move down towards more historical levels. That will bring the program into self-sufficiency over time, but it will take a period of time to sort out the implications of 1993-95 as we look at the new data coming post-1995.

The Chairman: Mr. Pagtakhan would like to ask a few.

Mr. Rey Pagtakhan: Given the comprehensiveness of your recommendations, Mr. Desautels, what is your view as to the sufficiency of the resource allocations starting in the department to deal with your recommendations? Do you think they are adequate?

Mr. Denis Desautels: Well, that's a hard call to make. When we look at the number of people in Industry Canada who are working in this area, it's not a big number. I would say it's quite minimal. From what we can see, I think it allows them to carry on the day-to-day administration of this program, but as we noted—and maybe this came out today—it's difficult to have the time and the resources to do some of the broader analyses that might be required in this type of program.

I don't know; it's hard for me to answer. The deputy minister might have a view on that, but it looks to us as being minimal in terms of resources to run that program.

Mr. Rey Pagtakhan: The last question relates to the fact that they have taken their responses now; you have seen them and you have heard them. In light of the corrective measures they have started on and will continue to do, are you convinced that in fact those measures will be sufficient to address the problems you have uncovered in your audit?

Mr. Denis Desautels: At this point I'm generally pleased with the department's response to our findings and our chapter. I note a commitment to address the issues we raise quite thoroughly. It doesn't look superficial. It looks as if they plan to go into a fair bit of detail to do that.

I also think the timing on all of this is both a challenge and an opportunity. I think timing is fairly tight in order to come up with a complete review in time for members of Parliament to be able to have it for the next time they look at this. Also, because Parliament is so interested in the issue, I think it's an opportunity to bring about certain changes that will make the program even more useful to small business.

Mr. Rey Pagtakhan: Assuming continuance of the program based on that assumption, when do you envision will be the most opportune time to do the next audit on your part?

Mr. Denis Desautels: We usually go back a couple of years, about two years after the initial report. In this case I'm not sure that would be quite appropriate. I think we may need to leave the department a little more time. The legislative process will have to take its course, first of all, and then I think the department would have to be given a bit of time to implement whatever new legislation might come out of that. The two-year timeframe this time might be too short. I think we may have to wait a little longer. I'm quite prepared to discuss that with the committee depending on how things unfold.

The Chairman: Thank you, Mr. Pagtakhan.

Mr. Grose asked a question of me. I had mentioned that there was a cap of the government's liability of around $1.3 billion to $1.5 billion based on program exposure at this point in time. While the maximum guarantee is 85% to 90% of the lending based on when the loans were granted and the changes in the legislation, am I correct in saying there is an absolute cap on the amount of government exposure?

Ms. Marie-Josée Thivierge: That's correct. The legislation provides for some fairly sophisticated formulas to in fact cap the amount of maximum liability by the minister. It's based on those formulas that are found in the act that we came up with the 1.4 number for the $6 billion loan outstanding.

The Chairman: Mr. Grose, do you have anything to add?

Mr. Ivan Grose: I'm still confused. The government's exposure is 90% and the bank's is 10%, is it not? Or is it the other way around?

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Mr. Peter Sagar: The formulas work on two bases. One is that we share 85% of the losses on any given loan. For large lenders we share roughly 10% of the total portfolio, so even if 50% of their loans go bad we cap our loss payments to them at 10% of their total portfolio.

Mr. Ivan Grose: But what is it on an individual loan?

Mr. Peter Sagar: On individual loans it's 85%, but if they get a bunch of bad loans we cut them off at 10% of their total portfolio.

Mr. Ivan Grose: That's good. Thank you very much.

The Chairman: Thank you.

There is one final point, and I kind of raise this. The year 2000 is rapidly approaching and the Treasury Board report would suggest that you're still working and trying to resolve your computer problems regarding the Y2K problem. I'm looking here at Industry Canada. You haven't fully completed the awareness process, the inventory process, the scoping process, or the design process. Are you going to be able to meet your targets for January 1, 2000?

Mr. Kevin Lynch: We believe we will.

The Chairman: Thank you.

We'll turn to the Auditor General for some closing remarks.

Mr. Denis Desautels: Mr. Chairman, I think I'll pass on closing remarks because Dr. Pagtakhan's question gave me the opportunity to express some overall reaction to the response of the department.

The Chairman: That allows us to wrap up this meeting early.

I have a couple of announcements. There is no meeting next Tuesday. As you are all aware, the Minister of Finance is bringing down a budget, so that takes precedence over the public accounts committee.

Next Wednesday is our informal meeting for the briefings by the Auditor General. At 3.30 p.m. there is a delegation from the Parliament of Sri Lanka, and for that meeting the clerk will send out the announcement as to the location. Then at 4.30 p.m. we have the informal briefing by the Auditor General's staff. Next Thursday, February 26, is the meeting on chapter 27, “Ozone Layer Protection: The Unfinished Journey”.

Thank you all. The meeting is adjourned.