INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 30, 2000

• 0909

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order, pursuant to Standing Order 108(2), consideration of business lending to small and medium-sized enterprises.

• 0910

Everyone should note you have in front of you an agenda that identifies two different sets of witnesses, from the Department of Industry and Statistics Canada. We're going to hear from the Department of Industry first on the pilot projects for small-business lending, then we're going to move to Statistics Canada. So we're going to hear the presentation and have questions, then we're going to hear the second presentation and have questions.

We have with us today, from the Department of Industry, Mr. Serge Croteau, the director general, programs and services; Robert Dunlop, the director general, small business policy branch; and Peter Webber, manager, small business financing policy. I understand Mr. Dunlop has an opening statement for us.

Mr. Robert Dunlop (Director General, Small Business Policy Branch, Department of Industry): Thank you very much, Madam Chair and members of the committee. We're very pleased to be with you here today. Our goal is to provide an update of the work we've done on three major projects recently, which Madam Chair has outlined.

To begin, I'd like to provide you with a brief overview of the work undertaken on the two pilot projects under the Canada Small Business Financing Act. One is mandated to extend the CSBFA loan program to the voluntary sector. The other is to extend the program's guarantees to capital leasing.

Draft pilot project designs are being developed for the consideration of the minister, and we'd like to share our work to date with the committee and answer any questions you may have about it.

After I complete my remarks, Madam Chair, perhaps we could have members' questions specifically about the pilot projects. Then, as you said, we could turn our attention to the third issue, the SME financing data initiative.

[Translation]

Turning to the pilot projects, Madam Chair, I thought that before beginning the presentation that some context on the core program would be useful. I won't go into too much detail given this committee's involvement in the development of the new Act and regulations during the Comprehensive Review of the Small Business Loans Act in 1998.

The Canada Small Business Financing Act, which was officially launched April 1, 1999, is a risk sharing program that facilitates access to asset-based debt financing for small businesses. Over the past six years, it facilitated access to about $14 billion in lending through over 200,000 small loans. Financial service providers deliver the program on behalf of the Government and are responsible for the credit decisions. As key partners in this program, they were extensively involved in the consultations on the redesign of the new core program, the training phase prior to launch and the eventual delivery of the new CSBFA.

The main parameters relating to the program include the following:

eligible borrowers are for-profit, small businesses operating in Canada with revenues of less than $5 million. Charities and farm related businesses are excluded from the core program;

there are 1,500 lenders under the program, offering 13,000 points of service;

interest rates are capped at prime plus 3 per cent;

borrowers can access up to a maximum of $250,000 in guaranteed lending under the program and personal guarantees are capped at 25 per cent of the original loan amount; and

the government shares eligible losses with financial service providers at a ratio of 85 per cent to 15 per cent.

[English]

Borrowers are charged registration and administration fees of two percent and one and a quarter percent respectively. These fee revenues are used to cover the costs of the program. Since 1995, the goal has been that fees should balance out the claims paid over the life of the loan portfolio.

The CSBFA does not provide a subsidy, but is meant to give access to small businesses that would not otherwise be eligible for loans. The users of the program are disproportionately start-ups. For 1998-99, 47% of the value of the loans made under the program went to start-ups. A large proportion also went to firms with between one and three years in business. These are classes of borrowers that traditionally have difficulty getting access to capital.

Since we came before you last, in February 1999, concerning the regulations for the new act, our first priority has been the implementation of the new program. We've worked with the lenders to develop a training package for loans officers. Next we oversaw the launching of a new program in April which required a complete overhaul of systems and a great deal of work with lenders.

• 0915

Given the extensive changes made, we had to monitor the use of the new program carefully at the beginning to see if any anomalies cropped up. Fortunately, so far we haven't discovered any requiring any changes.

We began detailed work on the two pilot projects that were set out in the law in the fall of 1999. During this committee's hearings on the new act, members expressed an interest in these pilot projects and a desire to be involved in their design from an early stage, so we're very pleased to join you here today.

[Translation]

The pilot projects have been mandated to have similar objectives as those of the core program. They will test whether they meet a need of the target groups - whether it be small businesses or members of the voluntary sector. Each pilot project is mandated to be independently cost-recoverable over the life of the loans or the leases guaranteed under it. This means that there would be no cross-subsidization by the core program. Pilot projects should also exhibit a high degree of incrementality.

[English]

During the review of the core program, industry committee members supported the inclusion of the requirements to ensure an appropriate level of due diligence. In our work we've been very conscious of these concerns as well as the concerns of lenders regarding administrative burden. Our goal is that the pilot projects will be no less stringent than the core program in terms of due diligence and administrative tools such as the use of audits.

If we turn to the specifics of the project design, starting with the designs,

[Translation]

our thinking to date on the design is outlined in a report that has been tabled with the committee entitled Canada Small Business Financing Act, Developing the Pilot Projects.

[English]

This is the Cerlox binder version that we provided to the committee.

[Translation]

This document provides a summary that includes every major program parameter and how we currently think that it might be adapted for the pilots. I would bring Members' attention particularly to the section beginning on page 6

[English]

—and that would be page 6 in the English version—

[Translation]

that provides an overview.

[English]

I would like to remind members of the committee that we are midway in the policy development process related to these pilot projects. We've completed one round of consultations and are developing options in preparation for a second.

Our goal is to seek decisions in the fall. Our job is to develop options and to make recommendations, but at this point nothing has been decided.

Along with the research on the pilot projects, we undertook the first of what we see to be three sets of national consultations with stakeholders, meeting with over 80 organizations in Toronto, Montreal, Calgary, Ottawa, Winnipeg and Halifax. In addition, we've provided material to a number of organizations by mail and received written comments as well.

We are looking to the committee members for feedback on ideas contained in the reports. To aid in the members' review is another publication we've distributed, called Assessing New Opportunities, which outlines research and consultations results as well as the issues that we feel are key in the development.

[Translation]

With respect to the voluntary sector, out thinking about the proposed voluntary sector pilot project design more closely resembles the core program. However, this pilot is not without its design challenges.

For the purpose of the pilot project, the voluntary sector could be defined as registered charities and incorporated not-for- profits with maximum revenues of less than $5 million. We will also likely recommend the exclusion of political parties. This definition is key to the overall approach to this pilot project as there are many ways to look at what organizations are voluntary in nature.

Our research has shown that the incorporated not-for-profit sector covers types of organizations that may not traditionally be associated with the social benefit aspect of the voluntary sector, like, for instance, trade associations. There is evidence, though, that this group contains a critical mass of our target clientele and we would like to test this element in the pilot project.

• 0920

We think that this pilot project could be delivered by the same lenders as the core program with the corresponding parameters in effect. We believe that keeping it simple will help the ability of the 1,500 lenders to use the pilot project and should improve take-up on their part. The downside of this simplicity would be that some of the parameters, such as the fees, are seen as barriers to uptake by some members of the voluntary sector.

The pilot project would permit new lending for five years but loans could be for terms of up to 10 years. Our current estimate of activity is $500 million in guaranteed lending over the five years of the pilot projects, or $100 million per year. This level of activity is, of course, dependent upon a number of factors.

A key risk control parameter is the contingent liability ceiling and is calculated for a specific period, usually five years. This determines the Government's maximum exposure to claims. This overall contingent liability is the aggregate of the Government's exposure to each individual lender. Once a lender has hit its ceiling, no more claims are paid to that lender for that period. We will establish separate contingent liability ceilings for each pilot project. Further information will be sought from lenders during the consultations to finalize the contingent liability formula for the pilot projects.

Results of early consultations indicated that members of the voluntary sector had concerns regarding the potential usefulness of this pilot project to meet their financing needs. Our goal is to develop an option that will serve the voluntary sector, be incremental and cost recovered. This will be investigated further in consultations this summer.

[English]

Regarding the capital leasing pilot, this is very much new territory for us as well. The core program has had 38 years of experience in lending, but none with respect to leasing. During the review of the SBLA, it was determined that there was a potential gap in this market, especially for smaller firms with less than two years of experience seeking financing in amounts of less than $100,000. Our goal is to test the existence of this gap and the applicability of the CSBFA to fill it.

Our research and consultations with members of the capital leasing industry have shown that it is quite different from their lending counterparts. Some of these differences include the fact that a lease doesn't usually require an upfront payment, interest rates are fixed and tend to be quite a bit higher than for lending, decisions on financing requests are processed rapidly, and the security arrangements are generally simpler.

As a result, our preliminary thinking is that we should recommend an increase in the financing rate to 100% but balance this change with a reduction in the guarantee rate.

We would also likely recommend that the purpose of financing would be restricted to new equipment only—and this would include everything from computers and office equipment to tractor-trailers—and that there would be a need for a higher maximum interest rate. This is a key point and obviously will be a key area of our research over the next months. Our research has indicated that a maximum interest rate and a range of the government long bond rate plus 8% might be appropriate, but again, as I said, that's one of the areas we have to study in depth.

The firms in the leasing industry are largely unregulated in comparison to the group we deal with on the lending side and are composed of a few very large companies that do about 90% of the business and a large number of smaller companies that do about 10% of the business.

The concept of due diligence is very important. Research so far has indicated that due diligence practices in the leasing industry are quite a bit different from those in the lending industry, and we will be seeking further information on this as well.

• 0925

The capital leasing project will likely be delivered by members of the Canadian Payments Association, lessors approved by a Canadian rating agency and, as with the core program, other organizations designated by the Minister of Industry. Small businesses that are currently eligible to use the core program will have access to the capital leasing pilot project as well. We're not recommending a mix of the pilot projects, so voluntary sector organizations will not have access to the capital leasing pilot. We're just doing that to try to keep things simple.

To control the government's exposure to any one borrower, we would also likely recommend that the $250,000 maximum to a borrower or related borrowers under the core program be applied to the pilots as well. This means the small business could have a combination of loans and leases guaranteed under the program, only to a maximum of $250,000.

Securitization is another reality of the capital leasing industry. It's described in detail in the documents we've provided for you. At the moment, our proposal is to allow the pilot project to use securitization. But this recommendation is dependent on a number of technical issues we have to address over the summer.

Given what we conclude to be a higher potential demand for the guarantee under this pilot project, we're estimating leasing activity to be $2.5 billion over the five years, or an average of about $500 million a year. While activities under the two pilot projects will be accounted for separately, the total activity under the two pilot projects will be $3 billion over the five years. This activity will be tracked very closely, and if the actual activity varies from the estimates, we will have to examine the parameters of the project again.

In conclusion, Madam Chair and members of the committee, the documents you have in front of you provide a summary of the work we've done to date on this issue.

[Translation]

Once comments and suggestions from the committee have been incorporated into the draft designs, we intend to take the proposals out to consultations. These are scheduled to begin in June and will include lenders, lessors, small businesses, industry associations and members of the voluntary sector. Many of these stakeholders are the same for the three projects we are discussing here today, so our challenge is to manage the consultations in a manner that minimizes the burden on all parties. The results of these consultations will inform the options that are given to the Minister of Industry.

[English]

It's our goal to have draft regulations completed by the end of this summer, for tabling in the House of Commons, this committee, and the Senate in early fall of this year. You will be able to provide input on the worked-out versions of the regulations at that time as well. If the regulatory approval process is completed by the end of the calendar year, lenders will have 90 days to prepare for an April 1, 2001, launch.

A performance evaluation framework will also be developed this summer. It will act as a guide to program administration in the evaluation of the pilot projects. As results are available, they will be included in the annual report of the program, along with the information on the ongoing activities of the core program.

This completes my opening statement. I'll be very pleased to answer any questions the committee may have.

The Chair: Thank you very much, Mr. Dunlop. I will just remind committee members again that we have two different areas we're going to be discussing today. First we're going to be discussing the different pilot projects, as has been outlined by Mr. Dunlop. Then we'll have opening statements again and talk about the SME financing data initiatives.

Mr. Penson, please.

Mr. Charlie Penson (Peace River, Canadian Alliance): Thank you.

I guess I'm just having a little trouble. I gather there are two areas you want to operate in. One is loans to the voluntary sector, and the other is leasing to small companies. You have identified a gap where they have trouble leasing equipment.

Mr. Robert Dunlop: That's correct.

Mr. Charlie Penson: I see you've had consultations with the leasing industry. What are they saying about that gap?

Mr. Robert Dunlop: Peter, do you want to comment?

Mr. Peter Webber (Manager, Small Business Financing Policy, Department of Industry): The gap they have identified is in those firms with less than two years of experience in business seeking leases of less than $100,000—what they call small-ticket leases.

• 0930

Mr. Charlie Penson: Are they telling you they can't service that group?

Mr. Peter Webber: Yes. They find that the risk and costs are too high for them to service that area, so they just deny leases to firms in that section. One might note that is also the sector of the small business community served by the CSBFA.

Mr. Charlie Penson: So if the private sector doesn't want to take that risk, why should Canadian taxpayers take it?

Mr. Peter Webber: The purpose of the pilot project is to test to see if this market can be served on a cost recovery basis. If it can, it will be included as part of the core program.

Mr. Charlie Penson: How will you determine that in your pilot? I understand you want to get this thing rolling fairly quickly. Aren't you going to need a few years to really determine if there's a cost that has to be written off if it doesn't work out?

Mr. Peter Webber: The design of the program is based on the core program, which is also designed to be cost-recovered over the life of the financing instruments issued, i.e., loans or, in this case, leases. The expectation is that the pilot will operate on the same basis.

Obviously that is part of the testing we will be undertaking through this pilot. We're developing an evaluation framework so we can determine, as we go along, whether it's working.

Mr. Charlie Penson: In regard to the loans to the voluntary sector, again, isn't it going to take a few years of experience to know what you'll be facing in terms of losses?

Mr. Robert Dunlop: The pilot is designed so they will each run for a period of five years after they begin, at which point a decision will have to be made on the success or failure of the pilot, and whether it should it be included in the core program. The idea is that we will have five years to evaluate exactly what you've outlined—whether it's meeting those needs.

Mr. Charlie Penson: Just so I understand it better, you won't be going into a general program until your five-year pilot is complete.

Mr. Robert Dunlop: That's correct. That's how it's set out in the act. A decision will be made at that five-year point after the beginning of the pilot.

Mr. Charlie Penson: How much will the total exposure to taxpayers be during that five-year period?

Mr. Peter Webber: For the leasing pilot project, the contingent liability for all the leases we're projecting—the $2.5 billion—is $318 million in contingent liability. For the voluntary sector, it's about $115 million.

Mr. Charlie Penson: How did you arrive at that?

Mr. Peter Webber: That's based on the contingent liability formula contained in the current act. It is referred to as the 90-50-10 rule, which limits the minister's liability to any large lender or lessor to about 10.6% of their outstanding portfolio.

Mr. Robert Dunlop: I should stress here as well what contingent liability means. It means that if every loan and every lease were to go into default and there were no recoveries on them, that's the maximum the federal government would pay. So it doesn't include recoveries, which are generally substantial, and it also doesn't include provision for the fees that are collected. So it's the maximum possible exposure.

Mr. Charlie Penson: Is that consistent with the draw that would come out of the consolidated revenue account?

Mr. Robert Dunlop: It is net of the fees collected and recoveries made, in the event of default of individual leases and loans.

The Chair: Thank you very much, Mr. Penson.

Mr. Lastewka.

Mr. Walt Lastewka (St. Catharines, Lib.): I think the last point Mr. Penson raised and your explanation, Mr. Dunlop, is probably the one area that is so misunderstood, the fact that under your program, the amount of money that is loaned out is not totally at risk because it backs up into so much per lender and so much per envelope and so forth. To me, as we go through these pilots, that's an area we need to have explained very clearly, because people have a great misunderstanding in that area.

• 0935

There are a couple of areas I wanted to expand upon. The capital leasing pilot is an area where I have been trying to get myself a little more more updated. What I understand from small businesses, even those that are in business for more than two years, some five, and those that have been on the border or have been making some profit and so forth, is that the leasing companies are being very hesitant to assist those companies to go into the next phase of their business. As a result, they're being caught using old equipment and stuff like that. As a result, they're not keeping ahead of the business.

I'd be very interested to hear from you some of the problems that the leasing companies are having. What is the area we're trying to fix here, not only on the companies under two years, but the other problems that the leasing companies have brought forward? I'd ask for your comments on that.

Mr. Robert Dunlop: This gets to the general philosophy behind the program. This is very much in line with something noted in this committee's report on productivity, which is the observed reluctance of Canadian financial institutions to price to risk. There is more of a tendency to have credit rationing with lower risks as opposed to pricing higher for higher risks. We see this particularly in the area of start-ups and young firms, but even in the case you raise of some other firms that are on the point of expansion.

If the credit providers judge that the level of risk is beyond their normal tolerances, the tendency is to reject it. The idea of this program is to extend the area on the risk curve where they're willing to make the loan and therefore expand the market. The idea behind it is that by providing a partial guarantee only, the onus is still on the provider of the credit or the lease to choose credit risks with a reasonable expectation of a payback, because otherwise they're exposed to part of the loss as well.

The idea is not to cover every person who's been turned down for a lease or a loan, but to extend the market a little bit further and hopefully catch firms that normally there's an interest in, such as start-ups, and perhaps ones that are going into expansion and that therefore are considered to be higher risk than the financial institution or leasing institution would normally like to take on.

Mr. Walt Lastewka: I notice you didn't go into British Columbia for your initial work. Will you be going into British Columbia in your other pilots in feedback areas? This way we cover all the regions of Canada.

Mr. Robert Dunlop: The reason we didn't go into British Columbia this time was that prior to the comprehensive review of the Small Business Loans Act, when we were looking at issues such as extension to the voluntary sector, we had done a focus group on the voluntary sector in Vancouver.

Mr. Walt Lastewka: Oh, okay.

Mr. Robert Dunlop: So this time we focused on other areas. Again, we'll be covering that part of the country as well with our written....

Mr. Walt Lastewka: Thank you very much. My questions are for the next session.

The Chair: Thank you very much, Mr. Lastewka.

[Translation]

Go ahead, Mr. Brien.

Mr. Pierre Brien (Témiscamingue, BQ): With respect to the second pilot project involving equipment leasing, are you not just a little concerned that the financial sector is not assuming more risk? It's no secret that if it doesn't commit to this sector, sooner or later, the government will step in and assume a share of the risk. Basically, the message being conveyed to the financial sector is that if it doesn't commit to a business, the government will ultimately step in and assume some of the risk in its place.

Mr. Robert Dunlop: Our hope is that if the pilot project satisfies the requirements, the financial sector will be left with the impression that some activities can indeed be profitable. Our goal in providing financing is not to provide an incentive to financial institutions for participating in the program, but rather to show that with a partial guarantee, a number of profitable activities can be conducted in this sector of the market.

• 0940

Mr. Pierre Brien: I understand. You're saying that it is theoretically possible to get involved in this market and to turn a profit. Therefore, for a period of several years, there will be some risk associated with the development of this market. Normally, the banking sector should be confident enough to realize that there is a business opportunity to be had here. Why doesn't it step forward and make a commitment on its own? Why hasn't it done analyses similar to those of the government?

Mr. Robert Dunlop: Perhaps you should put that question to bankers. We're basing ourselves on our observations of the Canadian market and on the cost of the risk on this market, a cost which, as we pointed out in our brief, differs from that in other countries.

Nevertheless, we believe that if financial institutions charge a higher interest rate, profitable activities can be carried out in this sector of the market. If successful, the program will show this to be the case.

Mr. Pierre Brien: You're saying that this higher interest rate would be in the range of the long bond rate plus 8 per cent. Is that correct?

Mr. Robert Dunlop: That's a very provisional arrangement. It's very important that we set an interest rate that does not result in additional profits for financial institutions. They've always preferred to restrict their activities to their normal operations and not to extend them to include the program.

A higher rate may be to the advantage of businesses. However, the rate should not be so low as to discourage them from participating in the program. Over the course of the summer, we will try to strike a balance. We've proposed an 8 per cent rate because according to our research and consultations with the experts to date, that's the level that seems to be appropriate.

Mr. Pierre Brien: I have one final question for you. In our region, Community Futures Development Corporations provide loans in sectors where banks are reluctant to do so. Another player is the Business Development Bank of Canada. Why have you decided to look to the banking sector? Why did you not link your pilot projects with the Corporations or with BDC? Why have you opted instead for traditional banking institutions with a view to ensuring additional development under the SBLA?

Mr. Robert Dunlop: The program has been operating for almost 40 years and provides access to 13,000 points of service across the country. It's not limited to the regions where these particular services are available. It applies everywhere.

The other reason is tied to the program's origins. Initially, the program was designed to help new businesses establish relations with financial institutions. Often, the program is responsible for a business' first contact with a bank or credit union or with the first loan obtained. That was the plan initially.

The Chair: Thank you very much, Mr. Brien.

[English]

Madam Jennings, please.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Merci.

I have a couple of questions.

First, if the pilot project in fact works and it can be shown that it can be profitable, that costs can be recovered, then why would not the traditional lenders simply begin providing financing to that market where there has been a gap identified? It appears that here in Canada our traditional lending sources are risk-averse. So rather than create a program, taking into account the higher risk and costing it to the client, they're simply saying, no, we're not going to touch it.

• 0945

So I don't have a problem with our government saying we think there is a way to structure a financial loaning program in such a way that you can capture part of that market and you can still make money on it. Basically you're treating the lending field as, say, a little child that you're trying to tell, yes, you can ride the bike; we're going to put the trainers on for you and once you learn how to ride the bike with the trainers, we're going to remove the trainers and you go off by yourself. We're going to give you the safety helmet, the hand pads, the elbow pads, the knee pads, the whole bit and we're going to hold the bike in the back until you get comfortable with it. To me, that's what the pilot project should be.

If in fact the goals that are set are achieved—and this means that, one, we've identified and proven that there is a gap, and two, that the need of that gap can be filled by structuring a program in this way and that it can in fact make money—then at the end of the five years I don't see why we should remain involved. The traditional lending associations should be able to take that bike and drive off with it. That's one.

The second question is in terms of the performance evaluation framework. I sit on the public accounts committee. I've seen so many reports from the Auditor General indicating that the performance evaluation frameworks that have been put into place for different projects in programs from different ministries is completely inadequate. My question to you is, has there been any discussion with the Auditor General, or are you intending to involve the Auditor General in the process of developing that performance evaluation framework? If you're not, once you have your ideas firmed up, you might want to bounce it off the Auditor General, because that office does have experience in evaluating performance evaluation frameworks.

My third question is, who are the members in the voluntary sector you've consulted with, and why that particular group?

Thank you.

Mr. Robert Dunlop: Thank you.

I will deal with the first question first. The first thing I should say is that in working on this program over the years, I've developed a tremendous amount of respect for the competence of the financial sector. They know what the risks are. The risks they have in their normal portfolio are lower than the risks they have in the portfolio with us, and they can make the distinction. They're very good at what they do.

The question you get at is a behavioural one: why do they aim to serve the part of the market that's least risk, and are perhaps a little more reluctant on the higher-risk part of the market? Again, I think it's difficult for me to answer. We're just responding to what we observe.

Ms. Marlene Jennings: I'm going to interrupt you for a second. I think it's been shown over and over again that it's part of the Canadian culture. The issue is, is there a way whereby we can change that culture so that the government does not have to create programs that are ongoing over 20, 30, or 40 years, a way whereby they can actually attempt to change that behaviour?

The clients you've identified—that same market exists in other countries, and they don't necessarily have the government programs, because their financial markets and industry have in fact developed means to address that market and to make money.

Mr. Robert Dunlop: I think if the market was really functioning well, you wouldn't need government intervention in those areas, and to the extent that government interventions could identify opportunities, one would hope there would be a private sector response to them. And you could almost make the same argument about the role of the Business Development Bank, which again has the role of providing higher-risk lending. In recent years it's been quite successful, turning a profit and paying a dividend; so that would indicate there is a market out there for that type of lending. If we're able to demonstrate it, some entrepreneur or some other company should be able to find a way to make money doing it. So it's very much an interest of the project to demonstrate that.

On the issue of the evaluation framework, we did submit the evaluation framework of the core program to the Auditor General and it would be our intention to do the same with this one. We'd also be bringing that before you in the fall, hopefully with the Auditor General's comments on it by that time. That's very much the case.

• 0950

I'd ask Peter to answer the question about our consultations with the voluntary sectors. He's the one who went across the country.

Mr. Peter Webber: We met with a fairly representative cross-section, but there are 177,000 voluntary sector organizations. We met with charitable organizations in the social services sector, in community economic development, and in social development; organizations like the YM-YWCA, the United Way, organizations that support the homeless and troubled teens—a fairly broad cross-section. But with 80 organizations, even though we had the assistance of the Coalition of National Voluntary Organizations to help us select them, as you can imagine, you cannot draw from that a scientific sample. But we did get some consensus of views and I think in that sense it was helpful as a first round.

Ms. Marlene Jennings: You understand that chances are an organization like the YMCA wouldn't be using this, because they're so well established and in terms of their financial solidity they can go to the regular banks and get those less risky loans.

Mr. Peter Webber: Actually, we found they were very helpful in providing us with information drawn from their network of community partners. So they acted as a voice for people we weren't able to reach.

Ms. Marlene Jennings: Thank you.

The Chair: Thank you very much, Madam Jennings.

Mr. Penson, you have another question?

Mr. Charlie Penson: Yes, it's really coming out of what Madam Jennings was getting at, I think, which is why are the banks not offering these services, and why are the leasing companies not? Has it ever occurred to you folks over at Industry Canada that you're being used a bit as suckers in this whole process? Why would that be—

The Chair: Mr. Penson.

Mr. Charlie Penson: Excuse me, I'm asking a question.

The Chair: We prefer to keep the language parliamentary here as well.

Mr. Charlie Penson: That is fine, it's parliamentary.

I'm asking you if you are being suckered in this process, because it occurs to me that the banks love this deal. Why wouldn't they? These many organizations you have, such as the Business Development Bank and the Small Business Loans Act, pick up all the high-risk area. The banks tend to take the gravy. By Industry Canada and other government organizations being involved and, I suggest, being used in this process, the banks don't have to look at this area. They don't have any pressure from the community; the government picks it up—and, by implication, taxpayers.

Look at the Small Business Loans Act. It went from $32 million a year in write-offs in about 1993-94 to hundreds of millions of dollars. When you ask the banks about that, the banks will tell you that the first 18% essentially is supplied by the Small Business Loans Act, the high-risk money. For a restaurant, as an example, what does the bank take for collateral and what does the Small Business Loans Act take? They'll tell you that the decor is the stuff they use the Small Business Loans Act to provide, because the bank won't touch that. The hard assets they'll take.

It seems to me that we are being used in this process, and if the government got out of the business, the banks and the lending institutions would have pressure on them to pick up some of this. If they won't, people will have to find other sources. People do start businesses up without any bank loans or government help, by the way. So that's my observation to you.

Mr. Robert Dunlop: Sir, I can't answer the question about the basic policy of the program.

Mr. Charlie Penson: I understand that.

Mr. Robert Dunlop: I can answer about what we're trying to design and how we're trying to avoid an abuse of the taxpayer, and that's what our mandate in designing elements is once we've been given the policy direction. Obviously there's a concern in any guarantee of potential abuse.

• 0955

In this program, and in this general approach, the idea is that the government is providing a partial guarantee on the value of the loan. So a financial institution couldn't lock in its profits. Financial institutions will not make money, if we've designed the program correctly, on loans that go into default or leases that go into default. And because of the 90-50-10 rule, if a financial institution has a consistent practice of putting very high-risk loans into the CSBFA portfolio, it would quickly come to its limit on total exposure.

Mr. Charlie Penson: Yes, I agree, Mr. Dunlop. But we do have some history to look at. We have some other organizations to look at to see what kind of exposure they've had. I suggest to you, the Business Development Bank, the Small Business Loans Act.... Look at it. What's happened there? Hundreds of millions of dollars of taxpayers' money is being used to write off bad loans. I suggest to you that maybe—this is probably not so much for you as it is for government in general—we shouldn't be going down this road.

That's my point of view and our party's point of view, but I understand that if you have directives from government to do it, you have to look at the alternatives. I understand where you're coming from, but I'm just saying it seems to me that it's a bad approach and one that is going to cost Canadian taxpayers. Otherwise—

The Chair: Mr. Penson.

Mr. Charlie Penson: —it seems to me that the banks and the leasing companies would be picking up that business if there were going to be no competition.

The Chair: I think, Mr. Penson, we've already had this debate, actually, at this committee when we passed the SBLA, and we're here to discuss the objects of the pilot project.

Mr. Charlie Penson: Madam Chair, a point of order.

The Chair: Yes, Mr. Penson.

Mr. Charlie Penson: You'd like to go back to what happened in 1993. This committee is now operating in the year 2000, and I'm suggesting—

The Chair: No, I'm not going back to 1993. I'm talking about 1998, the review that you were a part of.

Mr. Walt Lastewka: What's your point of order?

Mr. Charlie Penson: Just be quiet and I'll get to it.

Mr. Walt Lastewka: Get to your point of order.

The Chair: Mr. Penson.

Mr. Charlie Penson: I'm being interrupted by the chair. That's why I can't complete it.

Mr. Walt Lastewka: Rightly so. You're not putting the point of order. What's the point of order?

The Chair: Mr. Penson.

Mr. Charlie Penson: You don't want to hear it, obviously.

The Chair: All I'm saying is they can't answer policy decisions, and my point was that we had a policy debate at this committee. We are here to discuss the pilot projects and what the future of that is, and to have input into how they operate and how they'll work, not to go back—

Mr. Charlie Penson: You have your point of view, I have mine.

The Chair: You're entitled to have your point of view, but we're not here to debate the policy of it today.

You talked about the gap that the pilot projects are aimed at....

Mr. Pickard, you had questions first.

Mr. Jerry Pickard (Chatham—Kent Essex, Lib.): Yes, thank you. Madam Chair, Mr. Dunlop, I apologize for coming in late, and possibly you've covered the point I was wondering about.

But Canada is not alone in dealing with financial institutions and trying to smooth the way for business to operate, businesses that are vulnerable in certain stages. And you pointed that out very well. But how do states in the United States, or countries in Europe, or Australia or other countries that have similar structures to those of Canada handle this type of loan? Do we have any research or background that would indicate that it is being handled in a better way than it is in Canada, with our financial institutions?

Mr. Robert Dunlop: I'll answer the first part of the question first.

We have looked at the international experience. Most developed countries have programs along the lines of the Canada Small Business Financing Act, but they're all quite different. The United States has a program that provides a similar kind of guarantee. The difference is that officials review each loan application and make a decision, yea or nay. So it involves a huge amount of administration and a great deal of time. So a small business goes to a bank in Kansas City, an application is made, the application is then sent to officials in—I think St. Louis is where they have their headquarters. Officials go through it and decide yea or nay, provide the guarantee and then the loan is given.

My recollection is that their program in the United States is about the same size as the Canadian program. So it's smaller. And that probably reflects the fact, as many people observe, that with a much larger number of financial institutions and a greater willingness to risk, there isn't as much need for this kind of thing.

Most European countries also have a loan guarantee program. They tend to be much more complicated than ours, involving private-public partnerships providing guarantees for certain classes of loan.

The one element that seems to be distinctive in Canada is the cost recovery element. Our mandate is that over the life of a portfolio, the fees we collect cover the claims that are paid. That seems to be the major Canadian innovation. So we have looked at that, and there are different models attacking different things based on the markets and the market realities in those countries.

• 1000

Mr. Jerry Pickard: So I can assume that your view of other countries in relation to Canada is that they have the same values. Government does have a role in certain circumstances with regard to promoting businesses that may not have the cash background security that some other well-established businesses may have.

Secondly, I wanted to touch on the Business Development Bank structure in Canada. It has been suggested that the Business Development Bank is losing millions of dollars. It's my understanding that this is not the case, that we are on a cost recovery basis with the Business Development Bank, the same as with Farm Credit, the same as with all other government-sponsored groups that are working with business.

Mr. Robert Dunlop: Yes. The BDC has been consistently profitable since 1995. I believe their last year's profit was in the range of $32 million. They've been returning an equity of about 6% or 7% and paying the government a dividend in recent years.

Mr. Jerry Pickard: Thank you. I just wanted to clarify that for the record.

The Chair: Thank you very much, Mr. Pickard.

Mr. Dunlop, you talked earlier about how the pilot projects are based on perception of the gap in the marketplace. Do you know if your research can indicate the size of the gap specifically?

Mr. Robert Dunlop: Peter, do you want to answer that one?

Mr. Peter Webber: It is difficult to quantify a gap. What we have heard, as indicated earlier, is that there are leases of less than $100,000 and leases to firms with less than two years of experience. But there must be more than that, because the research did indicate that leasing companies typically reject about 25% of lease applications. Those may be some of the firms that Mr. Lastewka was referring to earlier. Part of the reason for having an evaluation framework is to test and try to quantify that gap through the pilot project and through the consultations.

The Chair: Do we have any idea or any kind of estimates on what the demand expectations will be for the program? Are we going to have enough money in the system? Are we going to find ourselves trying to ration the program?

Mr. Robert Dunlop: The program is set up in such a way that we wouldn't be able to ration it. If the demand outran the estimate we'd made in the fall, we'd have to go back and look at the limits that were set. There's no easy way of rationing a demand-driven program like this.

We did do an estimate on potential demand, and it was based primarily on the proportion of financing that small businesses do, the experience with the loan side of the program. We applied those parameters to leasing and came up with the estimate of $2.5 billion over the five years. As you'll see in the next part of our presentation, the issue of solid data about small business financing is not really there at the moment, as you well know, and these are issues that we're going to have to learn as we implement.

The Chair: But you've given us numbers of $2.5 billion. What if there's oversubscription?

Mr. Robert Dunlop: The limit could be changed through an appropriations bill. Given that the limit is for five years, if we were to find that the program was working well but demand was higher, there would be that period to make the adjustment.

The Chair: Okay. I don't have any other questions on this topic.

The one other thing is that the committee may want to put some more detail to you on this. In the documentation you provided, you talk about a number of studies or reports that you've done. One in particular that would interest us is the one from PricewaterhouseCoopers. If we could get a copy of that to take a further review of that, it would be great.

Mr. Robert Dunlop: We'd be very pleased to provide that to you.

The Chair: Mr. Pickard.

Mr. Jerry Pickard: One question just slipped into my mind. When we talk about programs, usually it's a total exposure. I'm wondering if I could just ask about that $3.5 billion again. If the $3.5 billion is out, obviously that's total exposure. But when there are paybacks, those paybacks reduce the exposure, and yet in finance oftentimes it's still cumulative. So is that $3.5 billion the maximum number of dollars that will go out in the program, not at any one time but from day one to year five?

• 1005

Mr. Robert Dunlop: Yes. It's $2.5 billion for the capital leasing side and $500 million for the voluntary sector side, for a total of $3 billion for both pilot projects. That figure is the total amount of money that financial institutions could provide, on which we would provide the guarantee. It wouldn't be government money that's out there. It's private sector money that's out there.

This is always very complicated. This isn't a program like other programs because it's a guarantee. The government's exposure....

Mr. Jerry Pickard: Maybe I'm not getting it.

Mr. Robert Dunlop: Okay.

Mr. Jerry Pickard: If part of it is repaid by two years, because it's a five-year program, half of the loan might be repaid.

Mr. Robert Dunlop: No, you can't use it again. It's a measurement of the total.

Mr. Jerry Pickard: Thank you. That's clear then. I appreciate that.

The Chair: Thank you very much, Mr. Pickard.

We're now going to move on to the next topic, which deals with the small and medium-sized enterprise financing data initiative.

Mr. Dunlop, I understand you're going to stay for this part. Mr. Webber and Mr. Croteau, we want to thank you for being here this morning. We're going to suspend for about 60 seconds while we change witnesses. Thanks.

• 1006

• 1012

The Chair: I call the meeting back to order.

We're very pleased to have a number of individuals join us at the table from Statistics Canada. We have Mr. Albert Meguerditchian, director general, prices, international trade and financial statistics; Mr. Jamie Brunet, project chief, small business and special surveys; and Mr. Ed Hamilton, project chief, industrial organization and finance division. And remaining at the table are Mr. Dunlop and Mr. Webber.

I understand Mr. Dunlop is going to begin.

Mr. Robert Dunlop: Thank you, Madam Chair. We're moving to the second of the major projects we're working on this summer.

Our goal in this presentation is to inform members of the committee of the progress to date in defining and implementing the SME financing data initiative. The results laid out in the report of the same name that we've provided to members of the committee reflect our initial thinking on the results of the first rounds of consultations we've had with stakeholders.

[Translation]

This first round of consultations focussed primarily on the broad principles which Industry Canada, together with its partners Statistics Canada and the Department of Finance, propose to use to govern this ongoing initiative. Substantial progress has been made. Our objective in presenting this update is to sketch the outlines of how we expect the initiative may look once all consultations have been completed. However, the plans that we are presenting today should not be viewed as firm commitments, but rather as initial impressions stemming from the consultations held to date.

Perhaps I could provide a little background on the SME Financing Data Initiative before we go into the details. In 1996, the government commissioned the Task Force on the Future of the Canadian Financial Services Sector, the MacKay Task Force, to examine public policies affecting this sector. In 1998, the Task Force concluded, among other things, that there were inadequate data for it to make any recommendations regarding SME access to financing and that this inadequacy was a considerable handicap to effective public policy making. Therefore, the Task Force recommended that the government undertake a concerted effort to improve the quality and the quantity of information about SME financing.

[English]

The government responded in 1999 by giving Industry Canada, Statistics Canada, and the Department of Finance a mandate to work together to undertake a comprehensive program of information collection and analysis that would report on the state of financing of Canadian SMEs. Statistics Canada and Industry Canada have the primary lead on the implementation of the project, and we share management with our colleagues from the Department of Finance.

As we made clear in the consultation document that we also circulated to you, we've set out several ambitious objectives but have remained open to explore ways about how they may be achieved. Other parties have ideas about what is useful and practical and how it can best be collected.

The first round of consultations took place earlier this year—we began in February—and was focused primarily on the proposed broad principles. Over 40 organizations were invited to the consultations and close to 30 participated. We met with organizations in Vancouver, Quebec City, Toronto, Montreal, and Ottawa. In addition, we contacted a number of university researchers who have a great deal of interest in what information is available.

There was general support for the initiative, I believe, and a general agreement that there is need for this kind of information. A number of stakeholders also felt the initiative was timely, given that the information system changes required to meet the Y2K challenge have now been completed.

• 1015

Some of the key issues raised included the potential length and complexity of the questionnaires, the complexity of the requested data elements and their definitions, the availability of information at a local level, and the possible compliance burden.

We're working now to address these concerns; however, the greatest challenge initiative remains the compliance burden that data providers may have to face. We're attempting to strike a balance between the requested data, their usefulness, and the burden that they would impose on those who would provide the information to us.

[Translation]

These technical issues will be further discussed in the second round of consultations, which will be taking place this summer. This round of consultations will give us the opportunity to present stakeholders with an adapted research plan, subsequent to the first round of consultations and feedback from members of this committee. This second round will also provide the forum for stakeholders to respond to the details of the proposed plan, and to provide us with ideas as to how this initiative can be more efficiently and effectively implemented.

The data collection program that we developed - and took to consultations - builds on the earlier efforts of the Canadian Bankers Association, but expands the scope and coverage to include all types and suppliers of SME financing, including both debt and equity suppliers, as well as most financing instruments used by SMEs.

As we have worked through the details in the last few months we have come to realize just how large and complex this is.

[English]

The proposal we've been working on includes Statistics Canada surveys, which we refer to as the baseline surveys, as well as specialized surveys and studies that would be conducted by Industry Canada and/or Statistics Canada. These baseline surveys would include both the demand for and the supply of financing.

The idea is that the baseline demand and supply side surveys would answer fundamental questions surrounding Canadian SME financing. Basically these questions are the following: How much financing activity is there? We track it over time, hence the use of the term “baselines”, so we have an understanding of it over time. What types of instruments are being used? What is the financing being used for, and if there are inconsistencies between demand and supply, why is that?

While the baseline demand and supply surveys would be comprehensive in scope, they may not provide sufficient depth of understanding of specific issues; for example, the attitudes and perceptions of SME owners towards financing providers, or to use another example, access of financing of aboriginal entrepreneurs. There's a wide range of issues this committee has considered over the years that wouldn't be addressed in the baseline surveys per se, which we'll be covering with special research work.

Therefore, the proposal is that these baseline surveys be complemented by specialized studies. We're proposing that the supply side baseline surveys be conducted annually, and that the demand side baseline surveys be conducted every three years. The idea with this two-pronged approach is that the issues that cannot be dealt with in one baseline survey can be dealt with in the other. We can draw a complete picture of the activity in the sector.

[Translation]

One area where we hope committee members will provide feedback is in the prioritization of the topics which will be researched in the specialized surveys and studies mentioned earlier. Some ideas are outlined on pages 11 and 12 of the report.

[English]

or in the English version on pages 11 and 12.

[Translation]

SO far, we have identified priorities for the first year only, and tentatively at that. The issues we have identified for the first year, as indicated in the report we submitted, are: SME attitudes about the availability of financing; the roles informal investors play in the financing of SMEs; the Canadian IPO market; and the Canadian venture capital market.

However, as indicated in our report, we foresee that many other issues will be of interest, and for which we would like feedback to help us determine priorities. These include SMEs' use and perceptions of informal investments, availability of micro- credit financing and electronic means of financing.

• 1020

[English]

With respect to timing, our first stop is a pilot demand side survey. We expect the results of this pilot to be released in the fall of this year. We will report these partial results due to the pilot nature of this survey to this committee.

We will continue regular reporting of data developments as they are made available throughout the process. The first set of full results, including both a complete demand and supply side survey, are expected to be available in the fall of next year. The results of Industry Canada's special surveys and Statistics Canada special surveys and studies would be published as they become available.

We hope this initiative will give financing providers the information they need to gain a more comprehensive understanding of their clientele and enable them to design products and focus business strategies that better meet market needs. For the SME community, this initiative should bring a better awareness of financing options as well as an improved supply of financing to meet their needs.

Finally, for policy-makers this information will facilitate the assessment of whether or not SME financing needs are being addressed by the market and also to gauge the effectiveness of government policies and programs. I note that we're using, as the model, the work done by the CBA, and we recognize very much that the roots of that work is in the work of this committee over the years.

This is very much an initiative flowing directly from the work of the committee some years ago. We very much appreciate that and your views on how things are going and whether or not we're headed in the right direction.

Thank you, Madam Chair.

The Chair: Thank you very much, Mr. Dunlop.

Madam Jennings.

Ms. Marlene Jennings: I think it's a great initiative and I'm looking forward to following the information that comes out of the studies you're able to publish.

One aspect of financing for small and medium-sized businesses that has concerned me since I've been a part of this committee is the issue of access to financing for owners who are of ethnocultural origins. The aboriginal side is one the government is already very sensitive to, and it has set into place different programs and policies. The traditional lenders are also working very closely with aboriginal communities in order to ensure better access to financing.

As a result of some of the questions I had posed to CBA back in the fall of 1997, the first time I was present when they tabled their annual report, they then in a future study included a question asking for identification of the SME owners in order to be able to judge whether or not there was a difference in the access, or at least the perception of access. There was clear data that there was a real perception problem, whether or not that perception existed in reality.

I'm concerned that the studies you will be undertaking will have that component to be able to also provide that kind of information and track it, both the perception and the reality. This would allow us to identify if there are gaps, what are those gaps, what is the problem, and is it just one particular community, or is it across the board, etc.?

I know, for instance, that because of some data that the provincial government and the federal government undertook back in the late 1980s, early 1990s, they set up a development corporation called Matthew Da Costa. It primarily provides loans to black business entrepreneurs, because there appeared to be a gap in access to financing for that particular community.

That's basically the only point. I don't have any questions, other than to ensure that this aspect does become an integral part of your studies.

Mr. Robert Dunlop: Absolutely. Our sense is that questions like that are probably best dealt with as a specific example. If we can find a very creative researcher who can get at those questions from both the supply and the demand sides, that would be more useful for us than trying to get a general question in the surveys that Statistics Canada would do every year. We'd have every intention of doing that and using the most creative approach we can to get answers to those kinds of questions.

• 1025

Ms. Marlene Jennings: Except that, for instance, the issue of self-identification is very important, and you might want to contact Mr. Wally Boxhill, who helped developed the question used for the employment equity program of the federal government, at least in terms of identification for blacks. He has a considerable amount of expertise, and he works for the government. I can get you his coordinates. That's one.

Secondly, if you don't have that self-identification in the baseline studies, then no matter what kind of specialized study is done afterwards, it will be difficult to make that comparison with the baseline studies. So it's very important.

I'll give you an example: the census. The 1992 census had a self-identifier. Under that census, the Canadian black community in Canada, Canadians of black origin or of African origin, was deemed to be approximately 240,000. In Montreal, through McGill University, we did a whole research project in which the definition was tightened up, and then using the 1992 census data we came up with a figure of 540,000. That means there was under-reporting of 40%.

So you really need to look at the issue of definition and the possibility of including self-identification in order to ensure you're getting accurate data. That can be a basis for comparative studies and that.

Mr. Robert Dunlop: We'll definitely look at that and report back to you.

Ms. Marlene Jennings: Thank you.

The Chair: Are there any other comments? Thank you, Madam Jennings.

Mr. Lastewka.

Mr. Walt Lastewka: Thank you, Madam Chair.

I like the intent of the survey, and I hope we will be able to understand our SME market a little bit better. I just wanted to make sure we were partnering with.... I think you did mention the Canadian Bankers Association have provided input?

Mr. Robert Dunlop: We've been working very closely with them in the first round of consultations, yes.

Mr. Walt Lastewka: What about the national credit unions?

Mr. Robert Dunlop: We've contacted them as well.

Mr. Walt Lastewka: The Chamber of Commerce and the CFIB group?

Mr. Robert Dunlop: Yes.

Mr. Walt Lastewka: One of the areas I come from—and you and I have talked about it many times—is that the process of access to capital is where we have our big problem. There's a lot of capital, but how to get there?

The five major banks give loans of $50,000 and under to SMEs on credit rating alone. One of the banks just moved that up to $100,000. Are the credit bureaus, the credit rating services, part of this study?

Mr. Peter Webber: Well, actually we haven't consulted them directly in the first round, but the first round was really around general principles, and we felt the financial service providers and the users would be the most appropriate for that. But the intermediaries of that sort, such as the credit bureaus and other kinds of intermediaries, will need to be consulted in the second round, when we get down to the cases of the technical details and how they can be represented. So we can certainly include them in the second round of consultations.

Mr. Walt Lastewka: The reason I bring this forward is that in every financing workshop I've done with SMEs, the major discussion has switched over to credit rating and the lack of knowledge by individuals and small businesses on credit rating. If the first $50,000 is always based on credit rating, it's no wonder we have a problem at that level.

So I wanted to make sure the credit rating bureaus are involved with that, because SMEs can very quickly say they have a problem getting a loan, and as soon as you ask them one question, “How is your credit rating?”, that is the end of the conversation. We need to capture the whole understanding of it.

I wanted to make sure that was done. Thank you, Madam Chair.

The Chair: Thank you very much, Mr. Lastewka.

[Translation]

Do you have another question, Mr. Brien?

[English]

Mr. Pickard, did you have any questions?

Mr. Jerry Pickard: No.

• 1030

The Chair: From our perspective, we don't have a lot of questions on this issue at this time. We look forward, though, to your finalizing your consultation process and coming back to us in the fall. We hope that not only will we have wonderful statistics to work from, but we'll also start to see some progress and changes in small and medium-sized business financing once we have a much wider range of statistics available for all people to make decisions—not only for the government, but obviously for the industry and for the banks and everyone who does that lending out there.

We appreciate your being here today.

Mr. Robert Dunlop: Thank you very much.

The Chair: The meeting is adjourned.