EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 24, 1996

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[English]

The Chairman: Could we come to order?

The finance committee of the House of Commons is very pleased to have this many people from the venture capital world with us this afternoon.

We have with us Mary MacDonald from MacDonald & Associates; Jim McCambly, chairman of the board of Working Ventures Canadian Fund; Mr. Earl Storie from VenGrowth Investment Fund Inc.; Cal Stiller, chair and chief executive officer of the Canadian Medical Discoveries Fund, along with Timothy McCunn; and Mr. David Levi from the Working Opportunity Fund of British Columbia.

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Next, we have,

[Translation]

from the Solidarity Fund, Quebec Federation of Labour, we have Fernand Daoust, who is the vice-president, Canadian and International Affairs, and Pierre Laflamme, first vice-president, Economic Development and Strategic Investments.

[English]

We have Ken Delaney, the president of the First Ontario Labour-Sponsored Investment Fund; Sherman Kreiner, president and CEO of the Crocus Fund of Manitoba; and lastly Mr. John McEwen from the Workers Investment Fund of New Brunswick.

We welcome you and look forward to your presentations.

Our format will be perhaps leading off with two to four minutes and then briefly we'll go to questions. We'll make sure you all get enough time to say everything you want to. You'll each have maybe 30 seconds to sum up. Would that be okay?

Ms MacDonald, perhaps we could start with you.

Ms Mary MacDonald (President, MacDonald & Associations Ltd.): Thank you, Mr. Chairman.

I'm sorry; I probably should have distributed these in advance, but I brought some pictures with me.

The Chairman: I'm sure that's because you realize that's the only type of thing I can understand.

Ms MacDonald: My friends from the venture capital industry here wouldn't recognize me if I didn't have pictures and charts with me.

I appreciate the invitation to come today. I'd simply like to set the stage as to where the labour-sponsored funds are sitting in the venture capital industry today and some of the activity levels of the industry as a whole. I won't drag you through these charts in significant detail; I'll just quickly flip through them.

The first chart demonstrates that the growth of the venture capital industry is being driven by the labour-sponsored funds. You can see the large chunk that runs up over the years. The industry as a whole had $6 billion of capital under management at the end of 1995, or really March 1, 1996, and about half of that was being managed by the labour-sponsored funds. So they've become a critical player.

If you flip to the second chart you can see that individuals, primarily through investments in labour-sponsored funds, have become the primary source of capital for the venture capital funds in Canada. It's very important to understand that this isn't a cause and effect situation.

Other sources of capital, particularly institutional sources, left this marketplace in the late 1980s for a variety of reasons, including a number of structural reasons, and have found it difficult to see their way clear to re-enter. Because of that, the only alternate source of capital has been the individuals.

One could say, given where we sit now and the number of companies that are successful in securing financing, that the federal government should feel proud of its foresight in having launched this program and having ensured there is an adequate supply of capital in place today, which we can now see wouldn't have been there otherwise.

If you flip to the third chart you can see this situation is not specific to any one province. In fact the labour-sponsored venture capital funds are a strong or dominant force in virtually every region of the country, and therefore the stability of the supply of venture capital is very closely linked to the stability of the labour-sponsored funds themselves.

The fourth chart treats the industry as a whole. I was just able to get a number late yesterday, so it's not included in this chart, but you can see the total investment activity of the venture capital industry in the first half of 1996. A total of 260 financings were done, involving $411 million. That's remarkably close to the activity level that was achieved for 1994 as a whole. So we're seeing very dramatic growth.

The number I was able to get late yesterday was that the labour-sponsored funds accounted for 47% of those disbursements. We were here last year talking about this large pool of capital and, relatively speaking, the smaller level of disbursements. There's a very close match now between the role of the labour-sponsored funds as a source of capital and the role they're playing in the industry as a deployer of that capital, which I assume is something you will be pleased to hear.

You can also see from this chart that the activity is diversified across the full spectrum. A lot of smaller transactions of less than $1 million are being done, and also larger transactions are being done, which are important from the perspective of technology companies, given the capital needs they have.

The final chart is simply speaking to the technology focus, which I know has been a priority of this government. As you can see, there's been a very obvious and steady trend upward throughout the 1990s by the industry as a whole towards technology investing. In the early 1990s no more than 30% to 40% of a much smaller base of activity went to technology companies, and by 1996 we're seeing close to 80% of disbursements finding their way into Canadian technology companies.

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I think the bottom line of these numbers demonstrates that individuals have become the most critical source of capital, or most critical to the supply venture capital, and that obviously the labour-sponsored funds are the key piece of that.

A lot of changes have been made in the last 12 months, both federally and in the province of Ontario, that will impact the new capital coming in going forward. I think it's very important from a policy perspective that we now see some stability in the market, create an opportunity for the dust to settle, and see what the impact is on supply.

Clearly, I think we're looking at a situation where we have a group of funds that are making a very important contribution to the venture capital activity in Canada. Thank you.

The Chairman: That's a very felicitous report, Ms MacDonald. As you know, in the last couple of years we've been slightly worried about what was going to happen. I think members of the industry were as well. It's very encouraging. Thank you.

Jim McCambly, welcome back, sir.

Mr. Jim McCambly (Chairman of the Board, Working Ventures Canadian Fund Inc.): Thank you, Mr. Chairman. I'll try to heed your direction and keep my remarks short.

First of all, I guess everyone would be aware that the Working Ventures Canadian Fund was the first fund established outside of Quebec. It started in 1990. We're up and operating in all provinces, but we have a matching tax credit in Ontario, New Brunswick, Nova Scotia, Prince Edward Island and Saskatchewan.

I'll give you a notion of new offices we have opened. In Ontario we have the main office in Toronto, one in London and one in Ottawa. We have one in Saint John, New Brunswick, one in Saskatoon, Saskatchewan, and we have just opened an office in Halifax, Nova Scotia. We have just under 150,000 shareholders and shareholder equity of about $860 million.

As a comment on the speed of the investments we're enjoying, the total invested over the total time is $246.5 million in over 100 companies. The total investments approved but not closed is an additional $11.3 million in another 9 companies.

In the last year, until the end of August, we had invested $120 million, which is averaging $10 million a month. More recently, we've been hitting closer to $15 million, even sometimes $20 million a month as money that would go out or be approved. Of course, you can't depend on any given amount in any given month, but it is a very high level.

In Atlantic Canada we've put out $7.85 million. In Saskatchewan we've put out $21.1 million, which is, again, unheard of in terms of distribution to areas of Canada that otherwise don't see much venture capital investment.

The direct employment, originally 8,300, is now up to 9,900. Actual sales are $1,570,000,000; exports, $632 million out of those annual sales; and research and development at $99.8 million, which is, I think, very significant.

I want to spend the balance of the time I have on an issue that really is very important. We're looking for ways to be able to improve the ability of our fund in the labour-sponsored arena. There's an issue that has been brought to the attention of this committee and the department over the last two or three years. That basically is talking about some harmonization issues, particularly with the province of Ontario, but it is to change from what we would call a ``cliff'' model of the national regulations into a ``rolling clock''.

One of the most critical areas that requires that change is the investment pacing rules, federally. The current federal rules operate on the basis I refer to as the cliff model. Under this model, we must have invested 60% of our shareholder equity by the day following the end of the fund's taxation year. The consequence of not meeting this requirement is that the fund faces penalty taxes. In contrast, Ontario has a system of requiring 50% invested after 10 months and 70% after 22 months. We are very much interested in getting this situation changed.

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I might remind the committee that in drawing this to your attention before, we were very pleased that some action was taken by the Department of Finance, but the goalposts were moved in terms of the date of application; it was delayed. In fact, although we're very grateful for that, it may have made matters worse, because last year we raised an unprecedented amount of money, about $350 million. So the effect of the cliff model is that our requirements of $200 million currently will jump to about $430 million as of March 1, 1997.

The whole notion of going to a rolling clock is something that will allow us to continue to invest. The situation we find ourselves in is that we have accelerated investment faster than anyone has done in Canada, to my knowledge. We now have over 30 investment professionals that are managing, doing due diligence, and creating the opportunity to put this money out into new risk capital, into businesses with growth potential.

However, as we move to achieve the target that has been established in the cliff model I refer to, we cannot take any new money - we've stopped sales, by the way. Any new money we would take in would be adding to the penalty, until such time as we have gotten to the complete limit of the amount we are require to put out, and if we do that, then we will have no new money to put out. So we really need to have some consideration of change we have been requesting for two or three years, to look at a different method.

We're not objecting to having our toes kept in the fire in terms of investment. We want to get this money out just as quickly as anybody, but the notion of that precipice, if you like, saying that everything must be done as of a given date, as opposed to allowing new money to come in and be circulated and get out into the investment arena, is something we feel is absolutely essential for this committee to give consideration to. It is not something that is of concern just to Working Ventures, or to the Canadian Federation of Labour as a sponsor; it must be of concern to the government. I think we are achieving the kinds of goals that the government wants to achieve in job creation, in activity and economic stimulation of the country, so it's in all of our interests to make sure we're able to do this in the most effective manner.

I'll let it go at that and be happy to answer questions later.

The Chairman: Thank you very much, Mr. McCambly.

Mr. Earl Storie, from VenGrowth Investment Fund Inc., please.

Mr. R. Earl Storie (Chief Executive Officer, VenGrowth Investment Fund Inc.): Mr. Chairman and committee, I appreciate the opportunity to make a presentation here.

Perhaps I'll give a bit of background on VenGrowth. VenGrowth is one of Canada's most experienced venture capital management firms currently active today. We're a small team, basically five managers and some support staff, representing over fifty years of experience in managing five venture capital funds.

We have invested over the past 13 years on behalf of pension funds, foundations, life insurance companies, wealthy families, foundations and the labour-sponsored investment fund, over $100 million in small and medium-sized businesses in over 60 companies.

VenGrowth Capital Management, the manager of the VenGrowth Investment Fund, the labour fund, is basically an Ontario-based fund. VenGrowth Investment Fund was formed under the federal legislation; however, we raise all of our money in Ontario. Accordingly, all of our current investment activity is in Ontario. We're sponsored by the Association of Public Service Financial Administrators, who are based here in Ottawa.

VenGrowth Investment Fund was formed in December 1994, so basically it has two years of capital raising under its belt. In the first year, March 1, 1995, we raised $31 million. In March of this year we raised a further $50 million, for a total of $81 million.

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In terms of investment activity, of the $81 million on hand as of today, we have invested $32 million and we have committed to three additional investments totalling $13.5 million. Accordingly, as of today we have invested and committed - and these committed deals should close by the end of November - a total of $45.5 million.

In terms of looking at what we've actually invested, the $32 million is 40% of our capital, or in terms of the 80% eligible investment criteria, we are 50% invested today in little over 14 months. Actually, the average term of the capital is something less than probably one year, in that $50 million of the $80 million was just raised in March of this current year.

In terms of capital that we have invested and committed and will have closed by November 30 at the latest, in effect we will have invested $45.5 million of the $81 million, or 56.2% of our capital. In terms of percentage of our 80% eligible investment criteria, it will be a total of 70.2% at the end of November.

We feel that obviously the LSIF at the Ontario level, or the labour-sponsored venture capital corporations, are an integral and, hopefully, permanent portion of the capital base in Canada, in particular focusing on small and medium-sized businesses. I think Mary MacDonald referenced the importance of the labour-sponsored funds activity.

With respect to funding the equities of small and medium-sized businesses in Canada, you can see from the numbers I referenced that we're very busy, we have a very strong deal flow, we see a real need out there, and I would suggest that careful consideration be given to any sort of further changes to this legislation prior to assessing the economic benefits, which are very positive that flow from this activity.

The average life of our investee company, in terms of having the use of our funds, is less than six months. So it's a bit early to really determine what are the economic benefits from our current activity. We think that maybe a year from now we'll be able to provide harder data. But we do know on a sampling basis that the employment, the sales, the increased R and D, product development and economic activity from these investee companies that we have in our portfolio are very substantial. Thank you.

The Chairman: Thank you very much, Mr. Storie.

Calvin Stiller from the Medical Discoveries Fund.

Dr. C. Stiller (Chair and Chief Executive Officer, Canadian Medical Discoveries Fund Inc.): Thank you for allowing us to come back and report to you, who we believe represent a significant shareholder in our fund. We take the approach that we have two shareholders: our 50,000 shareholders who invested an average of $4,000 apiece and the taxpayers of Canada. We feel a responsibility and are delighted to come back and report here on an annual basis.

The Canadian Medical Discoveries Fund is a public-private partnership between the Medical Research Council of Canada and the shareholders. You may remember that last year we had just begun with $15 million and had invested $10 million of that. This year we raised $170 million. We have invested or approved just under $70 million and we believe we'll be in the region of $90 million by the end of the year.

We don't claim to be the only impact on investment in the biotech and life sciences in terms of venture capital. Mary MacDonald has reported on the increase in venture capital investment in Canada. A subset of that, from her figures, is that in the area of life sciences and biotech and pre-CMDF launch, the investment was $60 million a year. Last year it was $132 million and this year, up to June, it was $105 million, so there has been almost a doubling compounded annually since we began.

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We have done something this year that I think the committee would find of interest. We've created an incubator company called University Medical Discoveries Inc., which funds as little as $20,000 for the pursuit of patent, for proof of principal, or for building a prototype, up to $250,000, and incubates that in a real way.

I have to tell you parenthetically - and I will comment on this later - that in order to do that we had to go through a minefield of regulations. I'm sure they were well-intended, but they were designed in the vacuum when this legislation was first put in place and the regulations applied. They now serve as a regulatory hurdle, consume additional time, and delay a significant number of our investments.

Our intention is to create these at the local level, where these individual companies are true incubators that take Canadian discoveries and move them out into the community to create free-standing companies.

We have had discussions with the Department of Finance in this regard and have found it to be candid but very responsive. A good working relationship has occurred with a number of the representatives of the funds, and between our solicitors and Lise Parent in the finance department.

I'm going to ask Mr. McCunn in a minute to just outline those things, because I think you'll hear them as recurring things. It comes down to harmonization and simplification but maintaining the spirit of this legislation.

I echo the comments of Mr. McCambly and Earl Storie that enormous change has occurred as a result of your recommendations coming through to the budget this last year. We don't know what the impact of that is going to be. We haven't gone through this next year.

We want to protect the shareholders. Our primary concern here is to make sure we don't make changes that ultimately, in their perturbation, hurt the shareholders. Hold the manager's feet to the fire. That's good and proper. Measure the output. Determine what the societal and economic benefits are, but let's make sure we go slow in terms of any further changes.

I'll just make the last comment that a new fund will be launched by Talvest that has the same imprimatur of the Canadian Medical Discovery Fund, only with NSERC, NRC and the Canadian Space Agency. So it is designed not on health but on non-health technology to create the same kind of excitement in transfer and optimism in our university research-based/government laboratory-based endeavours to create high value-added jobs for Canada and end the old formula of ``we discover, they exploit, and we buy back the product''.

I'd like you to give just a couple of minutes if you would, Mr. Chair, to Mr. McCunn from Scott & Aylen to comment on those issues.

Mr. Timothy McCunn (Lawyer and Partner, Scott & Aylen): Thank you, Mr. Chair. My name is Tim McCunn and I'm a partner with Scott & Aylen here in Ottawa. We act for four different labour-sponsored funds and I'm here at the invitation of one of them - the Canadian Medical Discoveries Fund.

We've done about 25 different investments, and over that time we've had many discussions with officials in the Department of Finance, both here in Ottawa and in Toronto. I would like to outline for the committee today that there are really two issues as far as we're concerned with respect to the Income Tax Act and the rules in the Income Tax Act. They are, number one, flexibility, and number two, harmonization. You've already heard that last word twice today.

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The objective is simple. We propose changes that would reduce the transaction costs to the funds, reduce the delay -

Mr. Stiller: You could read that as lawyers' fees.

Mr. McCunn: Primarily lawyers' fees. I know the fund's objectives are to create employment, but probably not for lawyers. My partners probably wouldn't like to hear this, but because of the rigidity of the rules and the lack of harmonization, you get a lot of lawyers' time and a lot of accounting time on these deals. They're private placement deals and the transaction costs are self-defeating. The money should be spent by the company, not on legal fees and accounting fees.

Reducing the delay is the second objective. The deal should be done quickly. Time is money, of course, and that's important.

The last objective is to reduce uncertainty. Everybody would like to operate with a degree of certainty. Again, uncertainty increases costs to these funds.

As for the solutions we have put forward, as Dr. Stiller has mentioned, we've had discussions with people from the Department of Finance. The person leading the discussions is Lise Potvin, not Lise Parent. And Len Farber and Simon Thompson of the Department of Finance have been extremely cooperative, helpful and open-minded. We've also had discussions with officials at the department of finance in Ontario.

We are putting forward a list of six or seven of these issues that are harmonization simplification proposals, all of which we think would not be offensive and are really common sense. As Dr. Stiller mentioned, when they designed the legislation, obviously they didn't and couldn't appreciate everything that might happen.

Lastly, the main thing - and I don't propose to get into the details of some of these things unless you want me to - is that there should be a process in the federal legislation that allows somebody to go and ask for an exemption from a particular rule as long as the transaction meets the spirit and the intent of the legislation. The Ontario legislation has this and the federal legislation should have it. It at least allows some flexibility, without having the legal counsel and the accountants jumping through many hoops to try to design something to fit within the parameters of the legislation.

The Chairman: Thank you very much, Mr. McCunn.

Mr. David Levi, from British Columbia.

Mr. David Levi (President and Chief Executive Officer, Working Opportunity Fund of British Columbia): I'm going to let Fernand make our opening comments. I'll be happy to answer questions.

Mr. Fernand Daoust (President, Administrative Council of the Solidarity Fund of the Quebec Federation of Labour): Mr. Chairman and honourable members of this committee, on behalf of my counterparts from the Working Opportunity Fund of British Columbia, David Levi, from the Crocus Fund of Manitoba, Sherman Kreiner, from the First Ontario fund, Ken Delaney, and from the Workers Investment Fund of New Brunswick, John McEwen, thank you for inviting us back this fall as part of your pre-budget consultations.

Mr. Chairman, since I am acting at this time as the spokesman of five funds, including the Quebec Solidarity Fund, I will, with your permission, of course, take more than four or five minutes, maybe ten minutes, to make the opening statement.

As we did last November, as a group we took the decision to make a joint statement to your committee because we share certain convictions about the nature and the role of labour-sponsored investment funds. These principles reflect the original intent of labour and of government in setting up such funds. We felt then and we believe today that these principles deserve repeating.

In preparing for today's meeting I thought it might be useful to briefly describe exactly what we mean by venture capital. This will help clarify the uniqueness of labour-sponsored venture capital corporations.

Venture capital is not a loan. Venture capital corporations are not lending institutions or banks.

Venture capital is investment capital, money that is put into a business as equity. It is patient capital because the ventures it supports are usually businesses that require time to develop into profitable enterprises. Venture capital involves some fair degree of risk, in that it is invested in businesses that are not yet proven or in sectors that are fraught with special challenges and problems, or in businesses that are in danger as a result of the many pressures of the changing economy. It is active, not passive.

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At the very least, venture capital investors expect to have a seat on the board of the investee company.

Venture capital is not forever. The primary objective of venture capital investors is to make a fair rate of return by eventually, and profitably, disposing of investments.

Labour-sponsored investment funds are venture capital corporations, but with special features. A true labour-sponsored fund is in fact as well as in name sponsored by a recognized and legitimate labour organization. It is capitalized by a large number of individual shareholders making small investments, mostly ordinary working men and women. These investors are encouraged to invest in labour-sponsored funds, thanks to the federal and provincial tax credits, in exchange for committing their money for relatively long periods, usually from eight to fifteen years.

In addition to achieving a fair return on its investments, a labour-sponsored fund is obliged, by the very legislation that allows it to operate, to meet certain social and economic goals. These goals vary from fund to fund. They usually include job creation or protection, regional economic development, employee ownership, worker participation in the business of the investee firm, and employee training, often in business and financial management. Many of the funds have a social audit as part of the criteria for investing in a firm: things such as sound environmental practices, commitment to health and safety, and equitable employment practices.

I think it is worth reminding ourselves why government decided to agree to labour-sponsored funds with the tax credit. Venture capital is recognized internationally as a vital component in developing new, high-risk, but high-potential sectors of the economy. But Canadian venture capital markets at the national, regional, and provincial levels needed to mobilize new sources of equity financing, targeted at companies that might not otherwise get the level of financing required to grow and develop. New sources of capital meant new investors. The labour-sponsored funds offered an opportunity to attract a large number of brand-new investors to the venture capital market. The key was tax credits, federally and provincially.

Has it worked? Yes, Mr. Chairman and members of this committee, it has. Taken as a set, the labour-sponsored investment funds today account for more than one-third of the venture capital available in Canada. In some regions, notably the Atlantic provinces, labour-sponsored capital represents almost the only source of venture financing. Without this pool of venture capital in the labour funds, hundreds of Canadian enterprises would not have access to adequate levels of financing to fuel their growth and development and the economy.

A key public policy objective of governments in legislating labour-sponsored funds was job creation and job protection. Unemployment and employment insecurity are long-standing realities in our economy. Labour-sponsored funds are supposed to promote job creation and preservation as part of their legislated mandates.

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I said last year that we believe all labour-sponsored funds should be accountable on this score. If unemployment is one of the biggest problems of today's economy, then labour-sponsored funds should be part of the solution. This is one of the reasons we exist.

Are we delivering? Yes, Mr. Chairman and members of this committee. I will leave it to the representatives of the other funds to tell their own stories, but my friend Sherman Kreiner from Manitoba's Crocus Fund will forgive me if I mention his wonderful success story.

His fund facilitated an emergency worker buyout of a company that was on the point of being sold to a huge multinational, which had every intention of shutting down the Manitoba plant. The result? Two hundred jobs saved, and by the end of this fiscal year the Crocus Fund expects to have investments supporting some 1,800 jobs and will have created 450 new jobs and directly saved another 225.

[Translation]

Mr. Chairman, committee members, the Solidarity Fund which I represent is the oldest of the funds. We were established in 1983 and have been raising capital and investing in Quebec companies for more than 13 years, as compared to the younger funds, many of which are still in the capital development stage.

So we have a vast number of facts and figures to illustrate how effective Solidarity has been in creating jobs, and protecting jobs, and contributing to regional economic development.

Since 1983 the Solidarity Fund has injected more than $1 billion into small and medium-sized enterprises in Quebec, as per our mandate. Amongst other accomplishments, the Fund has thus contributed to the preservation, the protection, or the creation of some forty 42,806 jobs as of June 1996.

Before I conclude, I think it is crucial to remind Members of this Committee that our organizations are not a homogeneous set of financial institutions. Although the provisions of the federal Income Tax Act apply to all labour sponsored funds, it is absolutely critical to keep in mind that each of our funds was established and operates within the context of provincial legislation.

In other words, that our mandates, our terms of reference, our accountability, and our focus are defined by our provincial economic, social, cultural and political realities. It is critically important to remember this fact. This diversity is what makes our funds relevant to and successful in our environments.

So you have the Crocus Fund, for example, set up in Manitoba with a particular emphasis on promoting worker ownership and development of a stronger venture capital market in the province. The Working Opportunity Fund in British Columbia concentrates much of its investment in new growth sectors with high value-added employment opportunities.

The part of First Ontario's mandate that is unique, relates to investments in restructurings and turn-arounds, employee-owned companies, and co-ops. And the brand-new Workers Investment Fund in New Brunswick aims to concentrate on job protection in businesses undergoing a temporary crisis situation.

And in Quebec, where the whole concept of labour-sponsored investment funds began - and we do not wish to be pretentious when we say this - the Solidarity Fund is today a major player in the development and growth of the Quebec economy.

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Our recent focus has been on establishment of a network of regional and local funds - and we will be talking about this later, because I think it is highly important - with the goal of spreading the investment philosophy - and the investment capital - to the grassroots levels of our economy, making smaller sized-investments in smaller sized-enterprises that contribute so much to the health of our communities.

[English]

Given time and patience and understanding of the true nature of labour-sponsored funds, the younger funds in other provinces will come to the same level of investment strength and diversification as Solidarity in Quebec. Changing economic realities and challenges demand new approaches, partnerships, and solutions. Labour-sponsored investment funds are a fascinating blend of financial instrument and public policy tool. They represent a new era in labour-management relations and are unique in the world, Mr. Chairman, to the point where Solidarity has named me vice-president for Canadian and international affairs in order to respond to the growing demand for information about this uniquely Canadian creation.

The funds have a challenge and a responsibility, too. There are very clear principles and characteristics underlying the concept of these funds. I ran through them very briefly at the beginning of my remarks, and we would be happy, all of us, to expand on any of them during our discussion today.

If those principles are adhered to and respected by all the parties - the funds themselves, the legislators that give them a legal status, and workers and management in the investee companies that benefit from the equity financing - then the success of this important innovation in venture financing is assured. Thank you, Mr. Chairman.

[Translation]

The Chairman: Thank you very much, Mr. Daoust.

Are there any other presentations, or can we begin questions?

Mr. Bélisle.

Mr. Bélisle (La Prairie): As you were saying, Mr. Daoust, labour-sponsored funds originated in Quebec, specifically with the Quebec Federation of Labour, which you are representing today. These funds are a very interesting concept, given the economic situation that we have been going through over the past several years. Today you are appearing before the committee on behalf of five labour-sponsored funds. The concept has spread to other parts of Canada in recent years. I would just like to stress that this is an excellent example of the economic partnership that could be established between Quebec and the rest of Canada.

Mr. Daoust, you maintain that these labour-sponsored funds should be forced to be accountable in a very specific way. Are you referring to some kind of social accountability, whereby the return on investment would not be calculated just in terms of return on capital, but also in terms of jobs maintained or created? I suppose we would have to have ratios to measure performance or return.

Mr. Daoust: Yes, certainly. But I should mention some other things. Such funds have been set up nearly everywhere in Canada, and as you rightly pointed out, they are base on the innovation that we pioneered in Quebec. I said that a few moments ago, and I'm saying it again, and I hope I'm not being pretentious at all. Our concern is that the principles underlying this concept, which sparked all the discussions that we have had in Quebec, must not be distorted in any way.

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In our case, these basic principles are found in the Act which established the Solidarity Fund, which was passed in June 1983. Perhaps it would be useful to read out these principles, although I do not wish to burden you with a long quote. Under the legislation, the Fund pursues a number of major objectives. Unfortunately, I only have the English text of the act, so I have to refer to it.

[English]

It is quite important that we are reminded from time to time of the main functions of the fund. We have to live with these principles and put them into motion.

The main functions of the fund are, first, to invest in Quebec undertakings and provide them with services in order to create, maintain and protect jobs.

The second function is to promote the training of workers in economic matters and enable them to increase their influence on Quebec's economic development. Later on, maybe, Pierre Laflamme could elaborate on what we mean by training workers in economic matters. For us it is of major importance nowadays. Workers, wherever they may live in this country, should be much more aware than they are now of problems in economic matters within their own undertakings or enterprises and in the economy as a whole. It is one of the reasons why these funds were created, why the Quebec fund was created, and why we get this 15% in crédits d'impôt now.

The third function is to stimulate the Quebec economy by making economic investments of benefit to Quebec workers and undertakings, and to promote the development of Quebec undertakings by inviting workers to participate in this development by subscribing shares of the fund.

These are the principles that we have to follow and that we follow closely.

[Translation]

I am going to repeat this statement, because I think it is fundamental: these funds were set up in Canada on the basis of a number of major principles, and various levels of government, including the government of Quebec, the government of Ontario and the federal government, allow tax credits for investments in these funds, and these major principles must not be distorted in any way.

Of course, we must bear in mind the specific characteristics of each part of the country, each culture, and the economic problems of each area. We constantly reiterate this point. I believe that these funds do have a mission, and they must carry it out. They must be accountable.

I'm pleased that we were able to appear before your committee today to tell you what has happened in terms of job creation and the return on all the efforts that have been made to invest in companies that are at the cutting hedge of technology as well as in our major projects for the future.

Mr. Bélisle: Mr. Daoust, you say that the principles underlying these funds must not be distorted. When the federal minister of Finance reduced the tax credits from 20% to 15%, he said that some funds had reached their cruising speed, such as the Solidarity Fund of the Quebec Federation of Labour, which you represent, and that this reduction would not cause them a great deal of harm.

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At that time, we warned that emerging funds, such as the CNTU's Fund and those being created in other provinces would be hit quite hard, because they were just getting customers and they were starting from scratch. Don't you think that this kind of reduction will affect the very principles that you are following?

Mr. Daoust: As you can imagine, we were not overjoyed to learn of this decision taken by the federal department of Finance. And to put it delicately, I would say that the Quebec Minister of Finance may have followed suit somewhat too quickly.

This decision could dampen the growth of these funds. If their growth slows, this is bound to cause problems sooner or later. More specifically, I would say that the various levels of government, namely the government of Quebec and the federal government need to let these funds know what their major orientations are and must allow them to enjoy a great deal of stability.

These funds should not fluctuate according to the vagaries of all sorts of different policies that might be in the pipeline of different jurisdictions. We have to be able to know what's coming up for a period of time that should be longer than just three or five years, we have to be able to plan at least for ten years down the road. We have to know exactly what's coming up because the money is invested in businesses, it is patient capital. It's a funny word, it's a little bit the jargon used by experts and technicians in that field. This venture capital, to which we very often refer as development capital, is committed for seven, eight or ten years. And it is in a way locked-in in those businesses. That's what we want and wish, and we are very upfront about it. So in order for venture capital to be sufficiently available in a country like ours, other sources have to be tapped.

So, to answer your question, we no doubt were terribly shocked and we have said so. We thought that the decision made no sense. Here we are, investment funds like the Solidarity Fund, trying to make a big effort in order to change attitudes and values within labour relations in Canada, and this is no doubt one of the characteristics of the funds that I have mentioned, and all of a sudden a very tight tax policy is being implemented that puts at risk all the chances of expansion for those funds.

I don't want to take up too much time, but I would like to mention that people who put their money in those funds are not big players. For the Solidarity Fund, of which the total value amounts to $1.7 billion, the average number of shares per member is 314. Can you imagine 314 shares, with each share at averaging $18.95? This is just a little bit more than $5,000, not each year, but since the Fund came into existence 13 years ago; $5,000, for the so-called tax credits. Some people seem to be very worried about those tax credits. Should we not rather worry about the huge profits made by banks, and then try to get a bit more from that side? Let's be careful and not weaken funds with such laudable objectives and intentions.

.1630

[English]

I must excuse myself, Mr. Chairman, for the lengthy answers to these questions.

[Translation]

The Chairman: Thank you very much, Mr. Bélisle and Mr. Daoust. Mr. St. Denis.

[English]

Mr. St. Denis (Algoma): Thank you, Mr. Chairman, and thank you all for being here.

I've been on the finance committee since right after the last election. I'll start out by saying I was somewhat disappointed in the early years of this mandate vis-à-vis the labour-sponsored venture funds. But I find myself much encouraged today just to witness what I think is a growing sensitivity to the need to get on with the job of jobs within the funds. I know there were start-up difficulties. To find ways to invest dollars, starting from scratch maybe only five or six years ago, was not easy.

At this time I want to thank the Working Ventures Canadian Fund Inc., represented today by Jim McCambly, for being responsive to a number of constituents who needed to speak to somebody senior in the operation about their investment. I appreciate this growing sensitivity. That you're on national television and the public is hearing about what you're doing is very important and proves this open pre-budget process is good for everybody.

I would like to ask a question of anyone who would wish to answer, but maybe in particular Mr. McCambly. We know you had to put the brakes on receiving new dollars into the fund because of the effort needed, and in the meantime you had to get more dollars out and invested. To what do you attribute the pace at which dollars go out? Is it that there just aren't enough investments out there right for investment, perhaps because the proponents haven't developed their proposal to a point where it can be properly analysed? Anybody can answer this next one. Is it the expertise any fund has on the investment side that enables it to have the capacity to analyse the volume of investment proposals coming in so you can make decisions? Is it limitations on board time? What is it that prevents a more rapid pace of investment?

This is not to blame anybody. Are there brakes in the system that, in addition to regulations of a more infrastructure nature, are preventing a more rapid pace of investment out in our communities, particularly in northern Ontario, which is my home area?

I would appreciate, Mr. McCambly, if you have any other comments on this point.

Mr. McCambly: I think it is a very good question. I think there is significant change occurring in this area. First of all, I believe, as I've said for some while, one of the biggest handicaps to people seeking venture capital money is the lack of understanding of the necessary preparation for getting a good business plan together. There are people who want money who can't even really tell you what they want the money for, how much they want, what they're going to spend it on, how they're going to make a return or what kind of return they'll make. All of these things, including who the competition is, have to be screened out in every kind of investment.

What I have seen over the last few years is really quite an awakening on the part of entrepreneurs, people who would like to not only start but expand businesses, and people who have come to our fund - there have been thousands - and maybe been turned away. They come back another day, having taken a new look at what it is they're to do.

There was much questioning, and I guess we've had it in previous years in this committee, about whether there is too much money chasing too few investments and all this kind of thing.

I'll tell you another factor I think is very important in terms of creating more active growth businesses in Canada. If honey attracts flies or whatever, when there is a pool of money available and people come to know there are people interested in equity investment in what they believe is important and in what they would like to build and develop, it creates more people and it creates a bigger pool of people, a bigger amount of deal flow and people who are interested in doing things.

.1635

You heard what has happened with medical discovery. It's doubling every year.

One of the reasons I was so motivated in creating labour-sponsored venture capital was that I was appalled at the notion that somebody who might create jobs and wealth in Canada had to go to the United States to get things done. I think that is turning around in Canada, and in spades. I'm not saying we're doing it all, but I do think a huge difference has occurred just in the last two to five years. People are becoming aware that venture capital is very useful for them to get into the possibility not only of creating an enterprise but more importantly of expanding that enterprise.

There is one other thing we have experienced, and that is in getting involved in some businesses that have been operating. We find we are adding a need for them really to pay attention to their business, because they have a new partner. It's good for them. It's good for us, but it's also good for them. Our looking after the interests of our shareholders serves a very strong purpose for the entrepreneur and for the businesses that are in the field. It's all coming together to prove useful to everyone.

The Chairman: Mr. Levi.

Mr. Levi: About how rapidly we're able to put the money out, it has a lot to do with the fact that hidden behind all this you've enlarged an industry by threefold or fourfold. That's the venture capital industry itself. We have new institutions that are being created and we have new numbers of people. When we started our fund five years ago, I was the only employee. Today we have 25 employees, 6 of whom do nothing but investments all day, every day.

There's a simple formula people argue about in the industry, whether it's four or five. For every investment manager we have, they will manage four or five investments. They spend up to 20% of their time with each company every day. It may break down differently over the week, but on average.... These are experts in helping companies grow. So we don't provide just capital, we provide experience at the same time.

It has taken us four or five years to build to six people in that department. We have the capacity right now to handle 25 investments. We're adding another one next month and we will add another one at the beginning of the year.

That's happened amongst all the funds. It's the main reason why it has taken, for example, Working Ventures as long as it has to be able to invest. They had to build a staff of 30 to be able to invest the kind of dollars they're investing. The same thing is true with Solidarity and all the funds. It has taken time for us to build the infrastructure.

The fact now is that we all have significant infrastructures, and we are all going to be able to invest at a very dramatic rate. This year we put out two and a half times in investments what we did last year.

In British Columbia we have a cap on the amount we're allowed to raise. This year it's $40 million. Very rapidly in the next couple of years we're going to get ourselves in a position of being able to put out more money than what we're actually taking in.

So I think from the committee's and the government's perspective as a whole the issue of how rapidly we're investing is going to start to disappear, because we now have the infrastructures in place to do that. The key factor here is to make sure there's enough inflow of cash for us to continue to invest.

I wanted to comment on the question from Mr. Bélisle. He said the government has embarked - and I'm sure you'll hear it from others - on a bit of a high-risk strategy. They dropped our tax credit by 25% - from 40% to 30%. It was matched across the country quite rapidly, so I think it's fair to say right now it's a 30% regime across the country. Nobody is really sure how many people are going to buy at that level. The problem we all have now is that we need the cashflow, because we now have the infrastructures to put this money out.

.1640

The second thing to keep in mind - and you don't realize it at the beginning when cashflows slow down - is the reason we are all able to invest as rapidly as we are, which is significantly different from the pension fund investors who used to be in this marketplace, is we know we are going back into the market next year, the year after and the year after. Based on that knowledge, we invest more money today than we would normally.

In our fund we've invested about $50 million and we have outstanding commitments for $60 million. Our fund today is $125 million in size. If we were not able to raise money next year or the year after, we would cease doing any new investments as of now, because we would require the $60 million that remains to reinvest in the companies we have already invested in. We will invest probably three or four times in each company as they grow, before they become bankable companies, where they can go to a bank.

We're way early in the stage, so the key for us and the risk in the reduction of the tax credit is not that we won't fully invest our funds; it's that we are going to more than fully invest our funds by normal venture capital standards, because we believe we're going to continue to raise money. If we are not able to raise money, what will happen is the same thing that happened in the venture capital industry seven or eight years ago, when most funds stopped doing new investments because they had no incoming cash and they were conserving that for the investments they'd already made.

This is a very important factor in our growth. It's critical that we continue to know we will grow, or we will not be able to continue with the same schedule and pace of investment that we have. For all intents and purposes, the Working Opportunity Fund is more than fully invested. Even though we only have $60 million of our $125 million invested, under normal venture capital rules, we would stop investing now if we were not receiving any more money.

Because we know we're going to get $40 million next year, we continue to invest, and we will then use that new money to reinvest in our old companies. So this is a critical point when you're looking at the speed at which we invest and the importance of the ongoing tax credit.

The Chairman: Dr. Stiller, briefly, and then Mr. Delaney.

Mr. Stiller: I just want to reinforce two points that have been made. One is pragmatics, which David has outlined clearly, which is the nature of the venture capital investment industry. The other is the awakening of Canada to entrepreneurship, to venture and to risk-taking. I call it the ``Oh, that's how you do it'' experience.

Hewlett and Packard started a phenomenon in Palo Alto. Silicon Valley didn't happen overnight because some major multinational came in and invested a lot of money. Two entrepreneurs left the university, went into their garage and started a venture operation, and the lights began to come on in the minds of individuals at Stanford University, who said ``These are individuals who are as noble as they always were, who are as nurturing to the community as they always were, and they're creating value in jobs and profit. Oh, that's how you do it.''

We're seeing that happen all across the country, whether it is in Ottawa, Halifax, Victoria, Toronto or Edmonton. We see these young companies coming out of the university, and the scientists are saying ``We're as good as they are. Oh, that's how you do it.''

There's a priming occurring across this country, and I give credit to the Fonds de solidarité and to the funds within the provinces and Working Ventures, which have planted the seeds of entrepreneurship, enterprise, risk-taking and venture. We're about six or eight years behind the U.S., certainly in the areas of science and technology and medicine and biotechnology, but believe me, the tachometer is racking up, and arithmetic will become geometric growth.

We anticipate that we can invest somewhere between $75 million and $100 million a year as things stand now. We're going to limit our fund intake this year to $100 million in reflection of that, but I see an extraordinary group of opportunities coming up, and I suspect the limit will be higher in a subsequent year. I'll tell you that just to look after the second and third tranches, as David and Jim have pointed out, one would have to do that. I hope that's an answer.

.1645

The Chairman: Thanks, Dr. Stiller.

Ken Delaney, please.

Mr. Ken Delaney (President, Workers Investment Fund (Ontario) Inc.): Thank you.

I don't want to repeat what others have said. I think people have made the point that in some cases, some funds have raised a little more money more quickly than they expected. There was an issue of building infrastructure to get it out, but I want to supplement some of Dr. Stiller's comments on this issue of priming the pump.

For some of us who have some particular targeted investments, this is actually a big issue. Of the funds here that have actually raised money, we're the newest kids on the block. Last year was our first opportunity to go to market for a full year. We've raised $14 million, we've now made our first investment, and we're looking at several others. The ones that are easier for us to see right now are the ones that I'll refer to as more traditional areas in which venture capital has been in place for a while, such as acquisition financing, traditional expansions, and some start-ups in the high-tech area.

Part of our investment mandate is to try to push the envelope and to begin to provide some risk capital into some other areas. In our case, as Fernand mentioned, we're trying to develop some deal flows in co-ops. At this point, it looks like agricultural food processing is where we're going to see some action there.

We want to push the envelope on worker ownership. Some of those opportunities may come out of privatizations that are occurring, and some of them may come when plants are being closed. But in these areas on which we want to focus, some of which are very community-based, it's going to take us longer to prime the pump in those areas. As Dr. Stiller pointed out, there are certain sectors of the economy in which it doesn't occur to people that these kinds of things are possible. We feel quite confident that many opportunities are there, but it's going to take a little bit of time to prime the pump.

My final comment is that I'm glad the issue of investment pacing was raised. I know this has been a big issue for all of you and for government generally over the past few years, so I do want to say that with respect to Ontario, where I think a lot of the concern was in the past, I believe the provincial government has taken steps to solve the problem. The investment pacing rules in Ontario now are quite aggressive, but we feel quite confident in our ability to meet them.

If you don't know what the current rules are, they currently say that beginning next year, you have to place 50% of the money that you raise in any particular RRSP season by the end of that calendar year. That is very aggressive pacing, and I think everybody here - and other people to whom I have talked - has taken steps to plan to be able to get it done. But as this industry matures and as the funds rise to those particular challenges, I think you will find that we will absolutely meet the test of getting the money out and of playing the kind of job creation role that the funds were originally intended to play.

Mr. St. Denis: Thank you very much.

The Chairman: Thank you very much, Mr. St. Denis.

Ms Brushett, I know you had some questions.

Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chairman.

I'm very pleased to see your progress since last year and to have you all back here before us one more time.

Recently I chaired a round table session with Atlantic university researchers. We were looking at how to take scientific research from the laboratory and into commercial application. One thing that came out of this session was that there's plenty of venture capital - and I think that's obvious from your remarks today. There's no shortage of money and there's no shortage of research. The problem is how to find those entrepreneurs and how to link them in order to get the process developing. I know that's your problem in investing and in placing this money in a somewhat secure or progressive fashion that will mature into job growth and research that's viable in this country. So I want to ask you what you are doing from your side of the equation there, because I am working with the private sector in this area of developing this vehicle to get entrepreneurs linked through the research.

Mr. Stiller: That's directed at me?

Mrs. Brushett: Yes, and by the way, I'm glad to see you're doing more in the Atlantic provinces, too.

Mr. Stiller: We're working vigorously at that. I've recently spent two days in Halifax and in Newfoundland.

.1650

The amount of technology there that's international competitive and could be commercialized is surprising. I've been selling it across this country that there's a lot. What amazes me is that there's more than I thought there was.

The fact is that many of them are either single-product or very early. Frankly, what you need to do is either to patent them or to proof-of-principle or build a working model and move that through those early stages so they merit a free-standing investment. If you will, you plant the seeds of a garden you are going to harvest by putting into a significant stand-alone corporate endeavour.

To that end, we will be replicating what we finally got the regulations to allow us to do, a University Medical Discoveries Inc. equivalent in the Maritimes, which is on the ground, at the bench, every day in the hallways, creating the virtual corporations that allow that nurturing and bringing-out. At the same time it will tie into the national network, because often, of course, that technology becomes internationally competitive if you can take a piece from over here and bring it in and marry it. Some very interesting and exciting things are occurring in that regard, and I know there's an intent with the new fund, not in relation to health but in other areas of technology, where there's some excellent technology in the Maritimes as well, which they intend to do.

Mrs. Brushett: So in essence you're going to develop your scientists into entrepreneurs. Or will you try to link entrepreneurs to the scientists?

Mr. Stiller: There are some scientists who shouldn't become entrepreneurs and there are some scientists who couldn't become entrepreneurs. It's important for us to figure that out fairly early on, because there's a certain phenotype there and there's a genotype, and we don't yet really have a gene discovery to find out which of them has the enterprise gene along with the fiscal-control gene. They have to be connected.

Some of them actually cross the hall. We create a virtual corporation, whereby we have an academic laboratory that a portion of that work is directed towards and of which the results are owned by the company that has been formed and that sits alongside. We're working very much in the research park area to try to find physical incubator sites where these scientists can move back and forth.

Then there are other ones where we take, I would say...like the design in Toronto on which Working Ventures participated with us. They were so excited...and they had things far enough along that they felt they needed to get out of there. But we didn't want them to go very far away, so they went 200 yards. They went into an office building and converted a bunch of offices to laboratories. I don't know how many people coming in the front door know there's a scientific laboratory on one of the floors. It's a terrific company.

My response to all this is that there's no single answer as to how to do it. You have to be flexible. You have to understand the fundamental principles involved. You have to be prepared to reward those partners.

Partners that have been tremendous in this regard, though historically they were very reluctant, are in fact the universities. Where we're creating equity participation in these companies, they are going to have income come back, growing at the kind of rate we hope it will grow at. They are going to have income come back in and support the fundamental scholarly activities of the university.

Mrs. Brushett: Would it help if, for example, we did a trade fair and let any scientist who is working in any realm, whether it's biochemistry or genetic research or whatever, be there to present and just give a smidgen of what his research is and let the rest of the entrepreneurs throughout the world come and visit this world fair; to link entrepreneurial companies to a smidgen of research and do it as a world trade fair?

.1655

Mr. Stiller: We actually do many mini trade fairs all the time. We go in and we have the scientists come in. We give them 20 minutes, and they give us a summary ahead of time. I tell them if they speak for 19 minutes, they get one minute of advice; if they speak for 10 minutes, they get 10 minutes of advice. We're finding a big take on those.

As Jim has pointed out, to some of those who are there we say, ``You don't have anything here that's commercially interesting in the form that you're going in, but what about this? Here's the phone number of somebody who is currently working on something very similar in Newfoundland or in Vancouver. Why don't you get together and come back to us?'' We're doing that all the time.

The Chairman: Mr. Laflamme had something to add.

Mr. Pierre Laflamme (First Vice-President, Economic Development and Strategic Investments): I wanted to respond to the fact that you have to get entrepreneurship into the schools, starting as soon as possible, so that when young people come to be scientists or have this more pointed education or technical knowledge, they will still have the drive to accomplish things. In the meanwhile, you have to get entrepreneurs to have an appetite for technological discoveries or these other things. When you mix the two, you can get the culture going on.

I would just like to emphasize what we did in the biotechnology area, where there was a lot of clinical research in the Montreal area, but no specific companies starting up. When we started this first fund, which we called Biocapital, we were alone in that, but a few years later, after a few investments.... We sort of attracted those first companies from elsewhere in Canada, to have the entrepreneurs coming in and starting; that's how you do it. You get the image and then the critical mass.

We are now at the third fund of the Biocapital type, and we now have only 30% of that fund, because people are coming in and building up the strategy. When you have those funds you can also attract scientists. You have scientific committees that sit, and they find out how the companies start up and grow, and then they have the link. They go to the laboratories and to their colleagues and they bring them in, and that's the nice thing. You can put this up and make a company with that and create jobs. That's what I feel.

Mrs. Brushett: Thank you very much. I appreciate that. I think it's a challenge to us, to turn our medical profession, our scientists, and everybody into a little bit of an entrepreneur to manage the fiscal responsibility of the country. Thank you.

The Chairman: Thank you, Mrs. Brushett.

Mr. Nunez.

[Translation]

Mr. Nunez (Bourassa): Sorry for being late. I was in the House taking part in a debate on the future of Montreal. I welcome the representatives, managers and executives from those different labour-sponsored funds. I have worked with the QFL, and I would like to salute my friend Fernand Daoust, who went through a difficult time after some automobile accident, as well as Mr. Laflamme.

I'm a strong supporter of those labour-sponsored funds, and I will be present on Saturday at the annual meeting of the QFL Solidarity Fund. You are probably aware of the fact that the Bloc Québécois was very active in the House fighting the tax credit reductions introduced by Minister Martin in his last budget.

I have two questions. In order to have a broader view of the whole situation as far as labour-sponsored funds are concerned, could your two representatives give us more information on the CNTU Investment Fund which, for some reason unknown to me, is not represented here today?

My second question pertains to a report to be published in L'Actualité, with some very telling figures and statistics according to the magazine. It is said that the number of investments since 1988 has been on average 350 yearly, whereas on the other hand the assets have multiplied by 8.

.1700

In addition, last year, the Fund invested in 55 out of the 377 ventures submitted, which amounts to one venture out of seven. Is there a lack of ventures, or is it that they are not really acceptable? Could you explain that to us, as we will probably discuss this a lot in the weeks or days to come?

Mr. Daoust: If I understood your first question correctly, you are asking what was happening with the CNTU's Action Fund. They are just starting out, as you no doubt know, with labour-sponsored funds, as they're called. I personally do not have any information at this point in time about the money that they may have collected, but I do think that basically the CNTU's Action Fund's goals are just about identical to those spelled out in the Incorporation Act at the Solidarity Fund.

Furthermore, as you know, in Quebec it is the National Assembly that decides through legislation that an identical fund to that of the Quebec Federation of Labour or a fund based more or less on the same principles, will be created. I cannot tell you anymore because I do not have the information that you have requested. I will have to ask them.

In answer to your second question, I do not want to make too long a statement.

The Chairman: Not too long.

Mr. Daoust: Yes, that's right, Mr. Chairman.

I do not want to give more publicity than I have to that article, which in my mind at least, is no doubt one of the most incompetent articles that I have ever read in a newspaper about a financial institution such as the Solidarity Fund. It is full with mistakes and packed with insinuations; this is what you would call yellow journalism. As far as we're concerned, it is very unfortunate that some newspapers would carry such an article.

That having been said, in terms of the article on the issue you raised, I think that your question was really about the fact that there hasn't been enough projects or applications.

Mr. Nunez: And why several projects have been turned down.

Mr. Daoust: Pierre Laflamme will be able to answer that question.

Mr. Laflamme: Since the very beginning, the Fund has kept statistics on the number of applications that it received. The number of applications that you are talking about are the number of applications that were approved or that led to an investment.

What the article points out is that now, instead of financing one application out of twelve, we provide funds for one out of seven. It also points out that the demand seems to be stable; that is to say, that we have been receiving the same number of applications each year, and this has been the case for a few years now.

I'll talk about the last number first. Obviously, with the development of networks, local funds and regional funds, much of the demand that the fund initially dealt with is now being dealt with by the SOLIDE, for example, within MRC's or our regional funds. We are beginning to work together in order to obtain a more complete picture of demand as a whole. We feel that it is on the increase.

I think that Mr. McCambly and other members said that because of the quality of the applications that we are currently receiving in Quebec, where venture capital and entrepreneurship have been developing for 13 years now, we have been able to fund one project out of seven, because we have a much more significant demand.

.1705

This may vary depending on the period we are going through. If the economic times are very hard, then there will be more applications that will be made for recovery or for the maintenance and salvaging of jobs. In a growth period, there will be more applications for start-up funds. So there may be fluctuations.

Mr. Nunez: There has been progress, because you went from 12 to 7.

The Chairman: Thank you, Mr. Nunez.

[English]

Mary MacDonald.

Ms MacDonald: If I could just add one comment to that, I think it's particularly difficult for people in your position with the sort of requirements imposed on you as politicians to kind of ``hold the line'' in some respects on some of the underlying goals.

Mr. Daoust outlined at the beginning of his opening statement that venture capital is quite different from debt financing, loans, and financing instruments that take security. It's clearly very high-risk.

The ultimate payback to the country, I believe, comes from being true to your objectives of finding those companies that, with equity investment and support, can grow faster than most companies. It's not for every company. The same would hold true in the research situation, where some percentage, well below 100%, ultimately have the potential to be commercially viable in the case of research, or high-growth companies in the case of the companies that approach venture capitalists. It's important to resist a notion of entitlement for all companies and to focus on that subset that really can make a contribution.

I would just add, jumping the gun a bit, that every year we do an economic impact study, sponsored by the Business Development Bank, that looks at all the venture capital funds in the country, including the labour-sponsored funds, and goes to the companies they finance and looks at the rate at which they grow. While the bank hasn't released the results yet, it looks like even with the maturing of the process - and investee companies that are now in many instances three, four, five, six years old are still growing their job base at an average annual compound rate of 25% a year, and the technology companies in that sample are growing their job base at 40% a year.

That to me says it's worth holding the line and making sure that this money goes into the companies that ultimately have the potential to grow at that rate. It creates a problem for you in some respects, for those that don't have the potential and get turned down, but I think it's really worth holding the line and focusing on those situations.

The Chairman: Thank you, Ms MacDonald.

Mr. Duhamel.

[Translation]

Mr. Duhamel (St. Boniface): I have two questions.

[English]

The first one is there has been some reference to regulatory burden that I've not heard. I've had to step out once or twice; perhaps it was explained, and if it was I'll look at the testimony for what the solutions are.

Number two is I've not heard today a whole lot said, if anything, with respect to the tax provisions. Are you happy with the way in which you are being treated? I would assume that might be the case, since there has not been a whole lot of commentary on this.

I guess the overall question is, briefly, what could the Canadian government do with respect to those two issues?

Mr. Stiller: Well, let me just comment if I can, Mr. Chair. There is something about something that has been done, that you can't do anything about, that not commenting on is not a commentary on.

Some hon. members: Oh, oh!

Mr. Duhamel: I got that - I think.

Mr. Stiller: The issue of the reduction of the tax credits is done. I'm not sure it was the right thing to do. I understand what you were trying to do, but I tried to point out last year, and I point out kindly today, that the government should just think about the long-term impact on the shareholder and the impact on the industry, tighten the screws on the areas that really determine performance and don't hurt the shareholders. That's all I'm saying.

So a lot of consultation, a lot of thinking about it, is important. We don't know; we'll find out in five or six months whether in fact you have kicked the stuffing out of this industry or whether you have modified it in terms of the amount invested. We'll see. I don't think you can test it until we've jumped off the diving board and come up again; we'll tell you how cold the water is at that time.

The Chairman: Tim McCunn, you're the one who raised the issue of harmonizational simplification proposals that you're putting forward, and you'll be giving us a brief on that?

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Mr. McCunn: Yes. We have a list that we've prepared. We've been talking to people in the Department of Finance about a list of things that can be done for harmonization. The key solution in our view to reduce the regulatory burden is to get some measure of harmonization across the country.

CMDF is a national fund, so we're dealing with federal rules and provincial rules. I can just say that the provincial rules are more difficult, more of a problem and more of a regulatory burden than the federal ones. But the one thing they do have that you don't have federally is this ability to apply and get an exemption.

For instance, there's this idea of flexibility. There's the ability to apply and get an exemption from some of the rules so that as long as it meets the spirit and intent of the act, they'll let you do the transaction.

The Chairman: I have a comment from Mr. McEwen and Mr. Levi. Mr. McEwen.

Mr. John McEwen (Chairperson of the Board, Workers Investment Fund (New Brunswick) Inc.): Thank you very much.

Actually, we're the newest kid on the block. We're replacing Ken's fund right behind him.

Before I make a few remarks, I'd like to go on the record and publicly express our appreciation to this committee for the hearings they gave us over the last couple of years. That played a significant role in our development. We were able to convince politicians in New Brunswick and federal politicians from Atlantic Canada that this was a worthwhile thing to do.

We didn't have to wait for central Canadians to come down once again and take all our money and do something else with it, other than what we should be doing with it. I think it's fair for me to put on the public record that this committee played a significant role. We are now in the start-up phase and hoping that we can fulfil that obligation we've imposed upon ourselves. It's one that this committee has helped set out for us.

On the regulatory side, I believe - this is the route we took in New Brunswick - the New Brunswick Federation of Labour went to the provincial legislature to ask for legislation. We have legislation in New Brunswick. We are one of two provinces that have specific legislation for a fund, which means the politicians in New Brunswick have direct influence.

It's not general legislation, as with the federal one and those in other provinces; it's specific for our fund. So it imposes upon us a certain requirement to fulfil our own obligations that we set out before the politicians as being ones that we would fulfil and take very seriously.

We believe that the pure regulatory side.... In New Brunswick, we have one individual who looks after securities questions, so that when Avenor, Abitibi and all these people put new issues out, they rubber stamp them or pursue them. But one person can't do a meaningful job on it. I'm not downgrading that individual. I'm just saying that the job he does is not one that.... Nevertheless, there are regulations in place, and what we need is a national securities commission.

The Chairman: Hear, hear.

Mr. McEwen: We cannot survive any longer without something of that nature.

The other area that was raised was the tax break. We're really concerned about that because we're the newest kid on the block. Every year in that Peanuts cartoon, Lucy holds a football. She says to Charlie Brown not to worry while she holds the ball and he kicks it. He says no, no. It goes through different frames until he's down. She does it every year: just before he kicks it, she hauls it away.

Please don't take the football away; we want to kick it. Thank you.

The Chairman: Earl Storie had a brief comment.

Mr. Storie: This is just a very brief comment on the tax credit cuts. I think it's important to keep the investor's interest in mind here. This is where it all starts.

I think we heard earlier from Dianne that perhaps we should be doing more in terms of funding new developments out of universities and other scientific bodies. These generally are very long-gestation kinds of developments.

I think the tax credits are there not only to compensate for the risk of venture investing, but for tying up your money over a long period of time. As you cut accordingly, when you cut the credits, you're creating a disincentive for investors willing to tie up their money in long-tail, long-gestation, scientifically oriented ventures.

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As a result of your tax credit cuts, I think there is going to be a dramatic impact in terms of the flow of funds into this industry, in particular, into some of the earlier stages of really worthwhile ventures evolving out of universities.

Thank you.

Mr. Levi: I just want to talk briefly about the regulatory framework and this harmonization issue.

Speaking from a provincial funds perspective, I'm not sure what the changes are that you're asking for. Speaking from a provincial perspective, one of the things, in our view, that's made this program work so effectively is that each province has been able to make designs specifically for their province within the spirit of what federal legislation has set out.

But there are significant differences. Frankly, in a lot of cases, certainly historically and even now, they're significantly higher. In the case of British Columbia, we have to invest 80¢ for every dollar we raise rather than 60¢ federally and 70¢ at the Ontario level.

The comment I would make is that if you're looking at harmonization, then you should be talking to not only the provincial jurisdictions, but also the provincial funds to make sure there isn't an adverse impact on the provincial funds.

It's critically important for the support of the provincial governments, which put up half the tax credit, that they get funds that are appropriate for their provinces. It's also critically important for us in the way we were designed.

The Chairman: Thanks, David.

Sherman Kreiner.

Mr. Sherman Kreiner (President and Chief Executive Officer, Crocus Fund, Manitoba): I was going to make those same comments. I want to concur with those comments. I want the committees to understand that in the other provinces that have funds - this is outside of Ontario, which just imposed provincial regulations for the first time - there is a history of regulation. Those regulations, in many cases, are quite stringent, but in each case they were initially tailored to the requirements of the provincial economy.

At least in our case - I think this would be the case in several of the other provinces - there is ongoing consultation with the provincial government around both changes in the deal flow and the economy to continue to craft those regulations and requirements to meet the specific needs of our local economies.

The Chairman: Thanks, Mr. Kreiner.

Lastly, Mr. Delaney.

Mr. Delaney: I just want to comment quickly on the tax credit issue.

We don't raise money from institutional investors; we raise it at the retail level. To the individual investor, we are a risk-oriented, illiquid investment. Consider the reduction in the maximum investment, the reduction in the tax credit, plus the extended period over which the tax credit will be allocated by financial planners to subsidize or encourage the investment. We estimate that the cost to government and the impact in the market will be such that it probably reduces the cost to the government by more than 60%.

I think it is a big hit. We don't know what it is going to be like. Certainly any further cuts would make raising money impossible. I'm quite hopeful that this is not being contemplated.

The Chairman: Thanks, Mr. Delaney.

I'm not sure really where the industry is coming from in a certain sense. Let me set forth my concern.

We offered probably the most generous tax incentive package I have ever seen in my life to encourage individuals to invest in these labour-sponsored venture capital funds, which in turn were mandated to do very important things for us by investing in various parts of the country in the venture capital area.

Initially, if those tax credits went through an RRSP, the government was putting up about 90% of the investment or more and the individual was putting up about 10% or less, depending on the marginal tax rate.

In the past two years, the industry has been before us saying that they have a problem. They haven't been able to invest the huge amount of funds that have flowed in. They therefore had the problem of possibly losing their tax breaks. The funds that were there that had already been collected and for which the investors got these huge tax credits and deductions were going to be taxed.

We recommended as a committee that you should be given the time to catch up and get your funds invested before penalties were imposed upon you. How many labour-sponsored venture capital funds are there in Canada? You could tell me, Ms MacDonald.

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Ms MacDonald: I believe the count is 17.

The Chairman: How many of them will suffer tax penalties because they have not yet been able to meet their investment requirements?

Ms MacDonald: At the federal level there's possibly one. Provincially, we won't know until the end of the year.

Mr. Levi: There are none at the moment.

Ms MacDonald: The Ontario count is questionable with the new legislation coming in, so there could be funds in Ontario.

The Chairman: So you say there may be one that will suffer tax penalties for not meeting its investment obligation?

Ms MacDonald: There is one today.

Mr. Levi: Mr. Chairman, only one fund to date has fallen behind on its investment schedule, and there is a variety of reasons for that. But if you look across the country, in terms of meeting the investment schedule and getting the money out, all funds to date have met the requirements with the exception of one.

The Chairman: I can see there have probably been some very anxious moments for some of those funds to get that money out, and maybe this isn't prudent. Maybe we are forcing you, through our rules, into making some improvident investments because you have to get there.

I assume this is why Jim McCambly was suggesting that rather than have the cliff model we go to a rolling model so you're not under that pressure to invest by a certain date after the end of the year. The fund could have come in during that year. Maybe it should be that you must reinvest a certain percentage within a 12-month period, as opposed to by the end of the year. Is that what you're suggesting basically?

Mr. McCambly: That's true. By the way, we are up to date for 1995 now.

The Chairman: That's amazing. You were so offside. I congratulate you. That's wonderful.

Mr. McCambly: Sometimes it's a problem you've been looking forward to.

The Chairman: Will you be giving us some details on how this rolling model will work?

Mr. McCambly: Absolutely. I want to respond to Mr. Duhamel's question, too, in that sense.

The staff of Working Ventures - and I've been involved in it as well - has been working with the federal department officials - some of whom are in the audience tonight - and also particularly with Ontario, to talk about these areas of harmonization that are important.

There is nothing more important, in my view, than the rolling clock. Everyone in this business knows that when you have money coming in only once a year within a three- or four-week period, you need some time to get that money out. In time, we will need to be more diligent about making sure we are able to get out the money that's coming in and govern ourselves accordingly.

We'll give all of those items that have been listed, and many others that are very important but not so important, to all of your committee members and everyone involved. Hopefully it will be something that is not only of our making but also supported by virtually all of the people in the ventures field. I think to a very large extent you would find support from the people who are very experienced in this in the bureaucracy because they've been very well in tune with it.

The Chairman: Mr. Levi.

Mr. Levi: I just wanted to respond to a comment you made about the combination of our tax saving and the RRSP tax saving.

I think it's particularly important to note that if you are an individual, you can get a fully government-guaranteed GIC and a 50% tax credit using that same formula. So we're competing against a fully guaranteed instrument for 50%. Now we're trying to convince people to lose the guarantee, lock up their money for anywhere from three to five years longer than they would in a guaranteed instrument, have no guaranteed rate of return, and what we're offering them now is a 30% tax credit. I think it's important in the calculation to remember we're competing against GICs that are already receiving the tax credit. This year when the sales numbers come in, you're going to find a lot of people will simply choose to take the GICs.

The Chairman: It's interesting that last year your problem was getting the funds invested. Only Calvin Stiller really had a bit of a problem getting enough funds, I thought. Then we suggested maybe he could get some of Jim McCambly's excess funds. This year your concern is that you might not be able to get the funds. That might be as a result of the tax cut, or the cut in the credit that was there.

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Mr. Stiller: It's a combination of the cut and the longer hold -

Mr. Levi: And the $3,500 maximum.

Mr. Stiller: - and the $3,500 maximum. It's all of those things.

What motivates an individual to make this investment is a whole series of determining risks and motivations.

Mr. McCambly: Excuse me. There's one other item you have to mention. That's the four-year cut-off if you decide to take any money out. One of the objectives is to get Canadians who previously were averse to taking a risk to put money in a risk area. If they take any money out, they're then barred from putting further money in for four years. That's a big factor.

The Chairman: On behalf of all members, I want to say I think we should be very proud of what you people have been able to do. It's a great success story. I never looked on it as an incubator for entrepreneurship, but it probably is doing that sort of thing.

I know some of you are beating the university laboratories with paid help to help these people discover the fact that they might have inventions. Maybe the tax penalty at the end of the road, which made you get your money invested, has made you extremely diligent in seeking out new ways to help Canadians become entrepreneurs and create wealth and jobs here.

I find it very exciting. For my own part, I think I want to work with you. If the tax cuts prove punitive by hurting the ability of this industry to help all Canadians, I would want to reconsider that. I think we should work with you on whether harmonization and other things

[Translation]

can be improved. The work of our committee would be a lot easier if we could discuss all these problems with one person who would speak on behalf of the whole industry. If possible, you could appoint Mary MacDonald or another spokesperson. It would greatly help us if you could work with our team to help us draft our report.

[English]

In the name of all of our members, thank you very much, and good luck in the future.

Mrs. Brushett: Could you ask Mary MacDonald if we could have a copy of that BDB report?

Ms MacDonald: It's being released in about ten days. I'll ensure the committee has copies.

Mr. McCambly: By the way, our annual report comes out next week. I'll give you all a copy of that too.

The Chairman: Thank you.

The meeting is adjourned.

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