EXECUTIVE SUMMARY

This report addresses the need for cost-effective and cost-efficient ways of delivering business-oriented government programs to the public. To achieve these ends, government must ensure:

• that policy goals are clear;
• that the mandates of the agencies it employs to deliver its programs are clear;
• that they do not waste public resources through needless duplication of efforts within government; and,
• that the government and the private sector act in a complementary fashion whenever possible, with government doing what it does best while encouraging the private sector to do what it does best.

With these goals in mind, in the fall of 1995, the Standing Senate Committee on Banking, Trade and Commerce studied the broad issue of how the federal government's financial institutions, the Export Development Corporation, The Canadian Commercial Corporation, the Business Development Bank of Canada and the Farm Credit Corporation, currently function in relation to the private sector, and to one another. In addition, the Committee also looked at the operations of the Atlantic Canada Opportunities Agency, the Federal Office of Regional Development (Quebec) and Western Economic Diversification. The Committee focussed on these agencies because of their importance to the Canadian economy overall, and to small business and exports in particular.

The Committee's overall conclusion is that there is an important role for the federal government to play when the private sector fails to meet the needs of worthy business ventures. In other words, government must respond when gaps exist in the system. To this end, the government needs to employ a number of strategies to fill these gaps. However, when these strategies lead to unnecessary overlap and duplication among different government agencies, or to competition with the private sector, the resulting inefficiency hurts everyone.

Western Economic Diversification, for example, currently defines its role as a window of single access to other agencies and programs. Clearly, something is wrong if the system of government programs has become so complex that we require a separate agency to help businesses find a program that meets their needs.

Accordingly, the Committee undertook its study with the aim to determine if Crown financial agencies operated efficiently, and if they were adequately responsive to the needs of Canadian businesses. In addition, the Committee wanted to know if the activities of these agencies complemented or competed with the private sector. Unfortunately, this information, critical to permitting effective public accountability of the Crown financial institutions, does not currently exist. To remedy this situation, the Committee recommends that these institutions develop methods of identifying gaps in capital markets and also provide data that will enable policy makers to monitor them and understand the extent to which they are filling gaps.

This issue of whether these agencies are filling market gaps, or whether they are competing with the private sector, is particularly important considering the fact that the government has recently broadened the scope of many of these agencies, encouraging them to become self sufficient. While the goal of self sufficiency is worthy, it raises an interesting issue here. The only way to become self sufficient is for these agencies to go after profitable businesses that the private sector now services, do a much better job at screening the higher risk loans, and/or reduce exposure in the high risk sector. These agencies, however, were established to support ventures that do not have access to financing in the private sector.

A mandate of self sufficiency may encourage greater operating efficiencies, but it also has the potential to diminish interest in these types of businesses by encouraging Crown financial institutions to compete directly with the private sector for the business that carries a higher return and more acceptable risk.

In fact, some Crown financial institutions are shifting away from the high risk or low profit market gaps that they were supposed to fill. Some institutions, that the Committee looked at, are even spilling over into traditional private sector activities in search of profits. Competition for clients among Crown financial institutions is another disturbing trend. Clearly, harmonization and consolidation that would organize each agencies' activities in a way that would eliminate this wasteful behavior are essential.

To this end, this report recommends the merging of the Export Development Corporation and the Canadian Commercial Corporation, and the merging of the Farm Credit Corporation and the Business Development Bank of Canada. Further, the Committee recommends phasing out regional economic development agencies; they should not exist independent of Crown financial institutions when institutions such as the Farm Credit Corporation and the Business Development Bank of Canada target the same market as regional agencies. If there are regional economic development programs funded at the federal level that do not involve direct business related services, then provincial agencies are best able to deliver such programs.

The reorganization of these agencies also addresses the overlap and duplication issue; maximum efficiency can be achieved by placing all the institutions under the aegis of a single integrated Crown financial corporation to deliver government policies and programs. This move will increase the accountability of these agencies to Parliament (with a five year review of the mandate), save on administrative costs, and eliminate the extensive overlap that now exists. It will also make it easier to determine whether the agencies are competing with the private sector, and to stop such competition.

The Committee recognizes there may be strong opposition to these recommendations, particularly from those concerned about the loss of a government agency dedicated to their particular needs. However, there is no sound reason that farmers, to take one example, should worry about being served by an agency whose focus is on small business development. Farmers are businesspersons and deserve to be treated as such. Indeed, much of the current work of the Farm Credit Corporation is devoted to assisting farmers who want to launch "past-the-farm-gate" small businesses. Similarly, there is no reason that exporters cannot be served by an agency whose interests include facilitating overseas contracts, and also helping businesses increase their exports.

To those who would argue against the end of independent regional economic development agencies, there are two points to be made. First the clear focus of the regional agencies is now assistance to small and medium sized businesses, exactly what Crown financial institutions do. Second, since Crown financial institutions can leverage their paid-in capital, the implication of transferring funds from the regional agencies to the paid-in capital of Crown financial institutions is that there will be an expanded availability of funds, a multiple of the funds transferred.

About whether or not Crown financial institutions should be self reliant, they clearly should be encouraged to move in this direction. However, if these institutions cannot avoid deficits while fulfilling their mandates to support ventures that the private sector is avoiding, it should be up to Parliament to decide whether it should make funds available to make up the deficits.

A reorganization is timely. Currently, the federal government is committed, by its most recent budget, to undertake a review of those aspects of tax law that most affect the creation of jobs, an example being the payroll tax. The budget also announced many initiatives that will result in further expansion of the activities of the Crown financial institutions studied by the Committee.

While this proposed review of the tax system has encouraged the Committee, the Committee feels strongly that what is also needed is a careful look at the effectiveness with which government delivers the multitude of business-related programs. The Committee views, with considerable misgivings, further expansion and overlap of the many programs designed to promote business development in Canada without a clear definition of an overall objective, an overall strategy and a truly effective system to monitor these programs.

Crown financial institutions do have an important role to play in the encouragement and development of small and medium sized businesses. For maximum benefit, the aim has to be to let the private sector work to its fullest potential with Crown financial institutions assisting only those businesses that cannot get financing elsewhere. Government agencies have to stick to their role of identifying and filling gaps in the marketplace - gaps that the private sector is unwilling to fill. They need the funds, the resources, and a mandate that is unequivocally clear, to let them do this important job and the proposed reorganization in this report meets these objectives.