Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 25 - Evidence

The Standing Senate Committee on Banking, Trade and Commerce met this day at 3:35 p.m. to examine the present state of the domestic and international financial system.

Senator E. Leo Kolber (Chairman) in the Chair.

[English]

The Chairman: The first item is our examination and report upon the present state of the domestic and international financial system. Our first discussion will be on border issues. We have with us, from the Railway Association of Canada, Mr. Burrows and Mr. Jones.

Mr. Bruce Burrows, Vice-President, Public Affairs and Government Relations, Railway Association of Canada: Honourable senators, good afternoon. Thank you for inviting the rail industry to share a few thoughts with you this afternoon, at this critically important time, about border issues and about our trading history with the U.S.

The message that I would like to leave with you this afternoon is an important one, and that is that security and trade facilitation, in our view, very much go hand in hand. That is a central theme throughout our brief. If there is any one message that we need to keep in mind, it is that one.

I will not speak to every aspect of the deck, but I will pick up on a few points that I would like to highlight.

First, we are the Railway Association of Canada. We represent 56 railway companies in virtually all parts of the country and all types of railways, such as the Class 1's, the large railways that are probably most familiar to you, being CN and CPR, and also a number of short lines. About 35 to 40 have been formed over the last five years. You may not be aware of that. We also have intercity passenger rail, which is essentially VIA Rail, the four main commuter railway companies across the country from Montreal, Toronto, Vancouver and now Ottawa, our most recent member, and the tourist rail operators. Together, they carry over 4.2 million carloads of traffic a year and handle over 51 million passengers.

September 11 was such a horrific day that I do not think we could ever forget it, even if we wanted to. That day is causing many of us to rethink both our border relationships and our family relationships. The border is important today from the trade perspective because we are definitely rethinking the level of our North American trading relationship and how we ought to manage that going forward.

Many of the issues people are talking about are not new. They existed before September 11. However, they are very much front and centre today as a result of September 11.

As for the impact, in the short term, the economic slowdown we saw emerging in the rail industry in the summertime is now being exacerbated by September 11. There is certainly the dire implication of tightened U.S. security at the border. It will have some potential for affecting our economic performance down the road, and there is a risk of potential loss of investment in Canada. This is, essentially, why so many people are focused on the border issues at the moment, apart from the pure security aspect and the personal security implications.

We have seen in the rail industry, over the past couple of years, a greater propensity for border inspections by U.S. customs, and that presents a number of operating and safety concerns for the operations of rail across the border.

On the financial side, most of our companies have reported third quarter results, and they are showing significant softening. I should point out that in some ways, the impact is rather less on rail than on other modes because of previous investments and best border practices that have been implemented over the last five or six years. Coincidentally, the industry has spent about $10 million on improved security at border points in putting cameras in tunnels. The major players of the rail industry have their own security police forces in place. We have implemented a number of key, centralized, high-tech modern management control centres, and a number of other supporting infrastructure enhancements, that have kept the system moving, to some extent, in spite of September 11.

VIA Rail's volumes, for example, are up 10 to 20 per cent on the passenger side, where people are now, as I like to say, "kicking the tires" to test out rail in the wake of September 11. These are people who would have flown before and now want to try out a more, in their minds, secure mode of transport.

I should also add that the smaller short-line railways in Canada will be particularly tested because of the economic slowdown. They are more vulnerable, because of their geographic restriction, to slowdowns and because they have a high reliance on one or two commodities. With their limited geographic reach, the slowdown may be particularly hurtful for them.

On the passenger side, we are at capacity in terms of extra equipment that can be put into a corridor movement like Ottawa to Toronto or Toronto to Montreal, and while there has been a little growth - as I said, 10 to 20 per cent - we have reached a ceiling there, and that is restricting the ability of companies like Via to move even more people.

On the security side, we operate on dedicated, private and controlled corridors, which is rather helpful. We have been also cooperating extensively with Customs, Immigration, Transport and other government officials since September 11, on both sides of the border. We have a memorandum of understanding with Transport Canada, which was signed in 1997. That memorandum of understanding deals with operations to address significant security concerns. We have put in place a number of measures to keep goods and people moving safely in the event of a security crisis.

We are also working closely with our counterpart, the Association of American Railroads, based in Washington, and we have set up a 24-hour command centre and taken other, similar measures.

As for considerations going forward, overall, we are recommending that government measures that might be adopted in the wake of September 11 be adopted in a collaborative fashion with the U.S., that they be reasoned and effective, and that any new spending on border measures distinguish between high risk and low risk, both in terms of people and of freight. If we focus on the high-risk movements, it will facilitate better movement of low-risk traffic, and that principle is quite significant.

We very much encourage the Canadian government to take a lead in ensuring that the flow of goods is not compromised. In some ways, the imperative expressed by the United States is weighted on the security side. To date, the imperative expressed on the Canadian side has been on trade facilitation. The two must come together, and we need to acknowledge that because security is so important, Canada is doing as much as it can to ensure the border is secure. In that way, the Americans will be willing partners in any measures that need to be undertaken to facilitate trade.

I will give you a few statistics on border trade. A majority of the goods flow in a southbound direction across the border, that is, Canadian export goods or in-transit goods from offshore are moving southbound to the U.S. Rail is handling 44 per cent of the surface movement of goods in a southbound direction.

We have about 12 main interchange points with the U.S. across the country and about eight railways that are involved in cross-border operations in Canada.

We are moving in a number of different directions to improve commerce across the border. We have spent a significant amount of money, time and effort on improving our electronic commerce capability and advance notification to customs officials of people and goods approaching the border. That information is all transmitted through EDI now. We have a very sophisticated and probably the best system in North America for pre-filing with customs for the vast majority of rail traffic. That has certainly improved customer service times, reduced train throughput times and minimized delays at the border, to the extent possible.

That is what has been done in the past. We do have concerns about what might happen in the future, and we are recommending a number of initiatives that fall under four areas. This is the rubric or theme of how we can better align customs policies to both ensure safety and improve trade facilitation.

The first of the four points is pre-qualifying low-risk freight and people. That will allow customs agencies to focus their resources on the higher-risk movements.

Second, move inspections inland and away from the border, to the extent that is possible, to destination points or origin points, where we already have facilities that can handle any increased inspections that may be required. Goods are secured, fenced and policed in 100 per cent-surveyed terminals. In our opinion, the best place to conduct customs or other inspections is away from the border. That will allow border flows to certainly not get any worse, and, we hope, improve.

Third, Canada has a competitive advantage in terms of moving in-transit European and Asian goods through ports such as Halifax, Montreal and Vancouver, goods that are destined not for Canada, but for the U.S. Ports, railway companies and all the other ancillary service companies associated with such movements all benefit by that traffic.

That traffic could easily switch to the U.S. by moving into a U.S. port. We must ensure that that business, which is vulnerable in light of September 11, continues to move. Our view is that we ought to set up - this is what I would call an "external" border approach - a system whereby we can process container imports and conduct uniform inspections at either Canadian or U.S. ports of entry on each other's behalf, so that we have a unified system of customs inspections at the first point of entry. Again, that should be away from the Canada-U.S. border.

Finally, we are advocating that Canada customs and U.S. customs combine forces to create a more integrated database and computer system that all the carriers, brokers, importers and exporters would use to file information pertinent to cross-border traffic for both customs and immigration purposes. That would both create cost savings and more clearly facilitate security and other, related inspections.

Mr. Jones will speak to a few more issues. Then we will quickly conclude and open it up to questions and answers.

Mr. Chris Jones, Director, Federal-Provincial Government Liaison, Railway Association of Canada: Rail emerged from the events of September 11 as probably the least affected of the different modes. We have a number of intrinsic advantages and we can do more. For instance, rail leaves small environmental footprints. It is about five times more fuel efficient than inter-city trucking and three or four times more fuel efficient than automobiles. We have a parallel network that can reduce both highway congestion and land consumption. We have dedicated corridors, as Mr. Burrows has indicated, that move into the U.S. and our network is largely privately funded and maintained.

We think there is a need for greater modal balance in Canada. We recently commissioned a report by KPMG on tax harmonization and equity. Essentially, their finding is that the total tax load on Canadian railways is about 6.5 per cent higher than that on U.S. rail and about 3 per cent higher than on the domestic trucking sector. We think this should be rectified so that rail can compete on a more level playing field.

The areas that we recommend the committee look into include: commercial road-user fees to reflect the true cost that commercial trucking vehicles impose on our highway system, which now is largely absorbed by the taxpayer.

The Chairman: Excuse me. I appreciate everything you are saying, but this hearing has to do with problems at the border. Does whether your taxes are equitable or not affect the border problem?

Mr. Jones: Insofar as there is a current bias in the system that encourages freight to move by truck, and we have seen what has happened at the borders post September 11.

The Chairman: You are saying government should do something to subsidize the railways?

Mr. Jones: No, we are saying that it should level the playing field so that there is a more reasonable allocation of modes for the movement of freight.

The Chairman: Go ahead, but I am not sure you are on the subject.

Mr. Jones: European governments are looking at the issue of green taxes. There should be incentives to use intermodal shipments, which are highly efficient and objective. We think Canada lacks a comprehensive surface transportation policy and it sorely needs one. We also believe that passenger rail could be put on a more even footing if the government provided more operational and capital funding for passenger commuter rail.

In conclusion, trade is critical to Canada's economic performance. Border security must be enhanced, yet trade must continue to flow, and more smoothly if possible. Rail is an important component, but we can do more with some policy realignment. Some of the initiatives we have outlined here can help to accomplish that.

Senator Tkachuk: I think what you were trying to say on the 3 per cent, which is the differential between your industry and the trucking industry, is that the more business uses rail, the more it will alleviate some of the burdens the trucking industry is currently facing at the border.

Mr. Jones: We are saying that if our tax load was on a par with the truckers, we would be able to offer more competitive rates and shippers would be tempted to use us more than trucks, or at least it would rebalance it somewhat, and thus lighten the load at the border.

Senator Tkachuk: You were talking about the tax load being 3 per cent higher; can you explain that a little more? What kind of tax is it? Are the truckers getting away with paying less tax, or is it because they get taxpayer-subsidized highways on which to operate?

Mr. Jones: We pay property taxes on our rights of way. Not only do we build, maintain and finance our right of way, but also we pay property tax on it. Of course, truckers do not pay property tax on the highways. It is things like that, essentially.

Senator Tkachuk: Do you have numbers on the financial effects, for the purposes of the committee, on your business of increased American security after September 11, as compared to before?

Mr. Burrows: We were affected for about two or three days by that increased American security at the border. Then we were able to get our operation pretty much back into a quasi-normal mode. As a result of what we had done previously, setting up an electronic interface with U.S. customs, for example, we were able to convince them that we could facilitate movement of goods across the border and meet their security needs. The direct economic impact of September 11 has been minimal. However, it has also kick-started the recessionary mode. We do not have a good handle - and probably will not for another month or so - on what that impact is, because it is somewhat broader.

Senator Tkachuk: In item 12, under rail-related border initiatives on page 7, you lay out four recommendations. How much will those save you?

Mr. Burrows: How much will that save us, or governments?

Senator Tkachuk: Both.

Mr. Burrows: I suppose we are talking about cost avoidance. Let me take one example, that of establishing an external border. If we were to combine inspections at Vancouver, first of all, we would advocate that the government, in conjunction with the port of Vancouver, put in place a system to gamma-ray and X-ray containers. That is, those containers would be scanned as they were brought into the port and transferred to rail. It would require an expenditure of $1.5 million at each facility to put in a gamma-ray machine.

There would also be some expenses incurred in combining inspection forces. The U.S. government would most likely have to send an inspector down to the port. They would have to spend some money to get an official in place. We would have to ensure that the computer systems linked up properly, so there would be some expenses there.

In terms of savings, we would probably save a good half-hour to an hour at the border, at the minimum. When containers are stopped at the border, in some cases, it can cause up to three or four hours delay in the train service, depending on how many containers must be inspected.

What is three or four hours' service time worth? It depends on the commodities and how time-sensitive they are. It is somewhat difficult to measure in terms of a dollar figure. However, there is no question that service time is a significant issue.

Senator Tkachuk: If a container comes into the port of Vancouver and is cleared for customs in Canada, you want a way to jointly secure it so that it can travel anywhere in North America without having to be inspected again?

Mr. Burrows: It would travel to its destination, which would be a designated inland terminal - Chicago, most likely.

Senator Tkachuk: Would that require harmonization of any laws, or could it be done under the present system? Do we have to harmonize specific customs laws to allow for this collaboration with the Americans?

Mr. Burrows: We are trying to examine that in more detail. Customs is looking at that as we speak. There is a similar practice in air transportation, whereby Canadian laws, in particular, have been amended to facilitate in-transit movement of people through airports in Vancouver. We are looking for an identical approach to goods moving through Vancouver, for example. My understanding is that the legislation is in place to do that, but there would have to be some regulatory changes, perhaps, to make that happen - for example, to accommodate U.S. officials on Canadian soil. It depends on exactly which model U.S. and Canada customs might decide to work under. There are different approaches: you could have a U.S. official doing an inspection for U.S. purposes, a Canadian official doing an inspection for Canadian purposes, and then the two of them comparing notes; or one official doing the inspection on behalf of both. The latter is probably the preferred and most efficient approach.

It may require, in the end, one official from each country literally standing side by side and doing the same inspection at the same time. It depends somewhat on which model you choose as to what regulations might have to be amended. It is all within the realm of possibility, given that it is happening in air transport now.

[Translation]

Senator Hervieux-Payette: In your presentation, on page 14, you talk about harmonization in the first and second points, you also talk about the cost of transportation, and in this cost of transportation, there is always the issue of the cost of waiting at the borders and the transportation time between the shipper and the receiver of the goods. I would like you to give us a more detailed comparison of this cost and to send us a table on the ability of railway transport to deliver goods within a time that competes with that of road transport. If I understand your presentation correctly, you say that if we had the same tax structure, we could compete better and reduce negative effects on the environment.

To speed up waiting times at the borders, would it be faster to prepare the customs procedure in advance, before crossing the border? Would preparation before the border solve the problem? Could you then compete with other means of transport? Perhaps this would be a way of solving the environmental problem.

[English]

Mr. Jones: Rail is certainly well positioned to handle long-haul movements of freight with flexible truck delivery at either end. To answer your question about "just-in-time," both Daimler-Chrysler and the Hudson's Bay Company, which are quite dependent on just-in-time delivery, have recently contracted with CP's Expressway service into the States. That is clearly a vote of confidence in our sector's ability to move these time-sensitive products to their markets.

We believe that if some of these tax issues were resolved and there was a little more equity in the system, more shippers would move their products into the U.S. through these intermodal services.

Senator Angus: I was not here for the opening remarks, but I have read the documents. This may have been covered by Senator Hervieux-Payette's general question about filing a document, but I am interested in the comparison between the trucking mode and the rail mode. Could you elaborate on the comparative economics of time and cost?

Mr. Burrows: Certainly. My colleague made reference to the intermodal roll-on-roll-off service that is operating now across the border. The auto industry is particularly sensitive to changes at the border because it is probably the best current example of a cross-border shipper.

That same type of roll-on-roll-off service is operating between Toronto and Montreal. It requires about an eight-hour time window to be competitive in that service. In other words, if you are shipping your goods out at the end of the day, you must ensure that they are available the next morning in the next city, be it Toronto-Montreal or Montreal-Toronto. Rail is now offering that service in that market. The customers are the truckers. From a cost perspective, the rail industry is a good example of cost competitiveness.

Senator Angus: Is it a combination of modes?

Mr. Burrows: Yes, it is. The truckers will only use if it is to their advantage, and they are beginning to do that. On both points, I would say that in the last five years, the rail industry has made tremendous drives toward being both cost and service competitive with the trucking industry.

In long-haul corridors, such as the three-day Vancouver-Toronto run, the traditional advantage for rail is that we have knocked off one day over the last two or three years. There has been a 25 per cent reduction in delivery time. That is, of course, very competitive with truck times, and from a cost perspective, it is probably about 20 per cent lower. Thus, it is both time and cost competitive.

Senator Angus: Is it correct that there has been a general trend, in the last five years or so, toward increased use of rail vis-à-vis other modes, especially in cross-border traffic?

Mr. Burrows: Just to be clear, my comments about increased use of rail post-September 11 refer to passengers, and that is not cross-border traffic. That is really increased passenger use of Canadian domestic rail vis-à-vis air transport. Cross-border is an interesting situation. There is not much rail movement across the border, but there is some.

Senator Angus: You are now talking about goods, as opposed to people. Is that right?

Mr. Burrows: I am still talking about the movement of people. There are not many people moving across the border by rail, but there are some. We are facing quite a problem in the Sarnia corridor, where Via Rail moves across the border and then the cars are transferred to Amtrak, which takes over hauling the train. For security purposes, customs requires people to disembark before the train goes through the tunnel. They are then being bused through and asked to embark at the other end. As you can well imagine, it is pretty inconvenient, and so we are trying to address that issue.

Senator Angus: Is that a temporary phenomenon?

Mr. Burrows: I expect and hope so. The other main border crossing for passengers is at Detroit-Windsor, which has not changed. The movement of people across the border is pretty minimal and does not constitute a big issue. When we talk about borders, we are really talking about the movement of freight, which gives rise to most of the issues.

In some intermodal corridors, the rail movement of freight such as auto parts has picked up somewhat as a result of September 11.

Senator Furey: I will follow up on Senator Angus's comments. When you talked about transborder crossings at Sarnia, you were talking about the movement of goods and people across the border, where the train is then picked up on the American side by Amtrak?

Mr. Burrows: It is Amtrak for the passengers.

Senator Furey: What happens to the goods?

Mr. Burrows: There are many different interchange points for goods. In some cases, the Canadian railways have rail operations south of the border. For example, Canadian National and Canadian Pacific continue to haul freight south of the border to certain destinations. In other cases, they interchange at the border with U.S. railways, where U.S. locomotives will pick up the goods and continue to pull the trainload. There is a mix of those activities.

Senator Furey: What are the ratios in that mix? Do you know?

Mr. Burrows: That is a good question. I do not have an answer for you, to be honest, but I could obtain the information and get back to you on that. My guess would be that it is probably about 30 to 40 per cent Canadian railways interchanging with a U.S. railway, and about 60 to 70 per cent Canadian railways interchanging with their own lines south of the border.

Senator Furey: Are the Canadian railways already established south of the border?

Mr. Burrows: Yes, that is correct.

Senator Furey: What impact has September 11 had on that?

Mr. Burrows: Do you mean on that interchange?

Senator Furey: Yes.

Mr. Burrows: As I mentioned earlier, in the first two or three days, the impact was quite negative. Then we got our operations pretty much back in order and returned to normal operations. We have seen an increasing trend, which started about one and one-half years ago, for U.S. customs to inspect more and more rail containers at the border. That is likely to be a continuing trend that we are particularly concerned about, and more so in the post-September 11 environment.

There has been an increased tendency to inspect rail cars, particularly containers with Asian or European goods on board, because the Americans believe they pose a risk. That is very much central to the four points that I spoke about. In particular, if we set up an external border approach, or what some like to call a "perimeter approach," that would help to address those movements and avoid all inspections at the border.

Senator Furey: How does that compare to the northern flow on our side?

Mr. Burrows: The flows are roughly two-thirds, maybe even three-quarters, southbound and one-quarter northbound. We are handling some American goods being exported through Canadian ports and back in the other direction. However, the majority of movement is in a southbound direction.

The Chairman: Thank you. Could you write me a letter articulating why the playing field is not level, and give us some numbers and suggestions as to how to make it level - raise, lower taxes - whatever that happens to be?

Mr. Jones: We would be happy to do that.

The Chairman: I will circulate that to the members of the committee.

Mr. Jones: We can provide you with a copy of the KPMG tax report.

The Chairman: Public policy that favours one industry over another creates difficulties. Explain to us why, if we made that recommendation, it would be fair. Thank you again.

The second part of our hearings today will be on equity financing. This should be the last series of witnesses before we prepare our final report on venture capital and equity financing. We will hear from three groups of witnesses this evening.

Ms Mary Macdonald, President, Macdonald & Associates Limited: Thank you. With me this evening is Mr. Kirk Falconer, our Director of Research and Analysis.

Honourable senators, I was here two years ago during the first round of hearings, and I appreciate the opportunity to provide you with a quick update. It would be helpful to walk you through some current information on the venture capital industry in Canada. By way of background, I will just say that my company is in the business of tracking the venture business in Canada. Our sole business is to try to marshal information on the players from coast to coast to coast. We have been doing this for 15 years. In the course of that time, we have trained most of the investors to report to us, in response to our ongoing surveying techniques, on the deals they have made. We have what we consider to be comprehensive and reliable data on the players in the industry, the amount of capital being raised, the amount of money being invested, where it is being invested, et cetera. It is from that basis that we have prepared a brief presentation today.

As I will speak in terms of numbers, the easiest way to tackle this would be to distribute a set of charts that we have pulled together. I would like to run you through the information in those charts by way of background. First, to set the stage, if you look at the typical growth profiles for small to medium-sized enterprises, it is important to understand that venture capital is a financing tool for a very small number of companies within the SME universe. It is targeted specifically at high-growth companies.

While it is obviously important that lower- and mid-growth companies have access to financing options, typically, those options are different from venture capital per se. That is an important distinction. Venture capital vehicles will typically be focused on a small number of companies. They have the potential to have dramatic economic impact, but it begins with choosing the good investment opportunities. The impact flows from their success, as opposed to treating it as a broadly based economic development tool.

If you look at the chart on quarterly investment activity, we were very surprised, at the end of the third quarter, to see that venture activity in Canada is holding up quite strongly. Total dollars invested in the first nine months of the year were just shy of Can.$4 billion, which was down only 15 per cent over the same period in 2000. We had expected a more significant decline. It speaks well for the structure of the venture industry in Canada and its investment strategies. They did not ride the big Internet bubble up, and as a result, they are not riding the big Internet bubble back down. Clearly, there are some real challenges in this economic environment, and I in no way want to understate those, but we are in a situation of reasonable stability.

That stands in stark contrast to the U.S. If you turn to the second page, you can see that investment activity in the U.S. has been in virtual free fall. In the first nine months, the total amount invested was down by 63 per cent year over year, and the number of deals was down by more than 50 per cent. We saw euphoria through 1999 and the first half of 2000. Then, obviously in response to the economic adjustments, the Internet adjustments, et cetera, there was a dramatic fall-off there.

When you compare the two sets of numbers, you can see that the industry is much more stable here. I would argue that that is very good news, in part because of the kinds of companies that have been financed. We have, unquestionably, seen a transition over the last five years in Canada to a venture industry that really funds many innovative companies. You can see that two-thirds of the money is effectively going into what we call "IT"; that is, information-technology-based businesses, ranging from networking and communications to software, electronics and semiconductors. It is very diversified across that group of sectors.

If we were to actually unravel the industry across the country, we would see that there has been very strong capability building over the last five years in particular, both on the venture capital industry side and on the company side, the receptors of that capital. There is also reasonable strength in the biotech sector. There has been a real shift overall towards technology financing.

If you look at the bottom chart on that second page, you will see a quick translation of our acronyms. We track the venture players by different types. We have corporate investors, the C's, shown in orange. If you work your way around the pie chart to the right, you will see "government-owned funds," which are primarily the Business Development Bank of Canada and a handful of government-owned funds in Quebec.

Then we have the institutional investors. A handful of very large pension funds invest directly. They tend to do larger merchant-banking style deals within the venture arena.

The LS slice is the labour-sponsored funds. The PI slice is the private independent funds, which are groups - typically partnerships - that raise their money externally from institutional and private sources. The FI slice is foreign investors, and the OT is other.

The foreign investors are primarily venture capital funds from the U.S. As you can see from this chart, they now account for almost a third of the money being invested. For the most part, it is being co-invested alongside Canadian venture players. The Canadian venture funds tend to be much smaller. Again, because we did not have the same degree of euphoria, we did not have the dramatic inflow of capital. Many of the Canadian players have built relationships with U.S. venture groups that have bigger funds and that co-invest with them. That, typically, then helps the Canadian companies to expand into the U.S.

Clearly, technology-focused companies will be selling into international markets by the end of their first year, and 90 per cent of their revenues will be coming from outside Canada. It is important to have that ability to expand into the U.S. market, and bringing in U.S. players can add strategic value. In this environment, it has also added very important capital value, in that without it, there would not have been enough money resident inside our existing domestic industry to satisfy the demand.

It is interesting, just as an aside, that while the venture industry in the U.S. has declined by over 60 per cent year over year, the amount of money those same funds have invested in Canadian companies has increased by more than 40 per cent. We are seeing a strong recognition of the quality of technology companies in Canada, of the growing capabilities on the entrepreneurial management side, and the increasing size of the relationships between some of those U.S. players and Canadian players.

It is important to keep the balance. From our perspective, we are always looking at the supply to ensure there are enough players out there who are prepared and willing to fund the deals that are representative of our high-growth companies and that warrant significant investment.

If we look briefly at the supply side, we can see that the pool of capital in Canada is quite diverse. A comparable chart for the U.S. would show that the private independent funds, which are the institutionally backed pools, are 90 per cent of the industry. In Canada we have a fair mix. If you were to roll back the clock to the early to mid-1990s, you would see that many of the institutionally funded groups were unable to raise capital. The labour-sponsored funds started to gain momentum through that early to mid part of the 1990s, at a time when capital was very scarce indeed.

Now they have become what I refer to as one of "the three legs of the stool." A stable industry in the Canadian context constitutes the labour-sponsored funds, the private independent funds and the corporate funds. Those three together make up the capital base and are the active players in the market.

In times of economic uncertainty, this diversity serves us quite well, in that we are not reliant on one source. For example, in the U.S., the pension funds are currently reeling from some of the economic impacts of recent times. They are pulling back dramatically on their commitments to venture capital funds. In the Canadian context, as that happens within one group, the other groups may be better positioned to continue to raise capital. You do not have everything tied to one source of capital.

You can see that the pension funds in Canada show modest interest. The bulk of the capital, over 50 per cent of the money, over the last five years has come primarily from individuals investing in labour-sponsored funds, and to a lesser extent, high net-worth individuals backing some of the private independent funds. We have seen entrepreneurs create venture capital vehicles with some of their former colleagues from successful entrepreneurial ventures. Individuals are critical to the flow of capital here.

Some of my colleagues, and people who have been involved with me in this business for the last 15 years, know that if I got going about the pension fund involvement, I could continue on for well in excess of my 12 minutes.

The Chairman: Do not do that.

Ms Macdonald: I will not do that. This is an issue that ranges from structure to education, and as a result, the institutional involvement in Canada is limited. Because of that, it is important that we have alternate sources.

I know that when John Eckert, the President of the Canadian Venture Capital Association, was before you, he raised that issue. As an industry, they are now trying to address that educational need and raise the awareness. That is a longer-term issue, and it will not turn itself around overnight.

I did think honourable senators would find it of interest to see the comparative situation if you look at the role that pension funds play in the U.S. We took the pension funds' commitments to venture funds and put them on two axes, on a 1 to 10 basis, so that if we had a relative contribution from the pension funds in Canada, those lines would be on top of each other. As you can see, in recent years, they have been far from on top of each other. There has been a significant gap in comparative funding interest. Again, it underscores the importance of multiple sources of capital.

Finally, on the second to last chart, you can see the figure for liquidity, which is our calculation of how much money is actually free and available for investment. It is terrific that we have an almost $20-billion pool of capital under management, but how much of that is actually still available to be invested in companies? When we started into 2001, our calculation was that that number stood at just over $4 billion. That is in an environment where the industry overall in 2001 invested $6.3 billion, which again highlights the importance of being able to attract investors from outside our own base.

In looking at this on the plane coming up this afternoon, I realized that the red line on that chart has not been annualized. That should be sitting at in excess of $5 billion. This chart tells you that there is certainly no overhang of money out there in terms of the liquid capital available for investment. In our view, there is a continuing issue around making sure that the supply of capital is adequate to meet the needs of our growing technology companies, particularly in this difficult economic environment.

In conclusion, with the current state of the economy, combined with the events of September 11, the economic environment is very challenging indeed. The companies being financed need more money to see them through this difficult environment. I sat next to a young entrepreneur on the plane. He was from Ottawa and had been in Toronto. They were trying to raise a third round. He said he could hear his fuse ticking, because this is a challenging environment in which to raise those additional funds. The ability of venture capital funds themselves to raise new funds will be limited, although I noticed an article in The Globe and Mail or the National Post this morning that suggested that the environment could be attractive for the labour-sponsored funds to raise more money.

The most important message that I want to leave with honourable senators is that stability of supply is the single most important factor. We have developed the entrepreneurial management talent in this country. We have developed the ability to see ourselves through difficult economic times. We have reached a point where we are attracting a level interest from what is recognized to be the leading venture capital industry in the world, for example, the U.S. investors. We have a solid and experienced base of venture capital funds in Canada. It is critical that the supply of capital available for them to invest is stable.

Senator Angus: Ms Macdonald, you spoke about how much liquid capital is available for investment in Canada. How do you measure that? You came up with a number of $4 billion that is waiting to be tapped. How do you identify and measure that?

Ms Macdonald: We track close to 200 sources of capital in our database. When we identify a fund, we determine how much capital they raise at the outset. If it is a private independent fund, as we call them - that is, the ones that are institutionally funded - they will ultimately invest 100 per cent of their money. We simply subtract how much they have raised from how much they have put out. The formula is more complicated in the context of the labour-sponsored funds, in that we take the prevailing legislation and regulatory environment in each province, subtract the percentage that must be held in liquid reserves, and calculate the difference. If a fund were mandated to hold 20 per cent or 30 per cent that would not be targeted at the venture side of their portfolio, then we would take the 70 per cent or 80 per cent, less whatever they have invested, and calculate their liquidity. We do that on an ongoing basis. The number is not absolutely perfect. Some of the groups notionally assign money each year. They do not necessarily make an announcement that, "We are putting $500 million into this category." There is fuzziness around the edges. However, I believe that in terms of conveying a sense of liquidity in the market, this is as accurate an estimate as we can come up with.

Senator Angus: Inasmuch as you have said that over 50 per cent of the money comes from high net-worth individuals and so on, are those the ones who have identifiable venture funds set up?

Ms Macdonald: Yes.

Senator Angus: It does not include angels or wealthy individuals.

Ms Macdonald: No. Those angels would be people investing in labour-sponsored funds, because those are virtually all investments. There are probably three or four investment funds in the $50-million range where a considerable amount has come from high net-worth individuals.

Senator Angus: I am interested in your statistics. The difference between Canada and the U.S. is magnified. Obviously, it is an entirely different ball game there to begin with. It shows the disadvantages our start-up and SME businesses face.

When we began the study, we interviewed a number of American VCs, especially individuals who ran these individual pools of capital. If I am not mistaken, in Chicago one day we asked, "Do you ever take fliers up to Canada? Would you go into Canada? Do you make your funds available up there? We are from there. There are all kinds of entrepreneurs and good situations." They said, "Are you out of your mind? There is no way." We asked, "Why?" They then told us how hostile the environment is here. I think they were being quite polite, frankly, in terms of not wanting to be specific. However, they gave us a clear message.

What would you say are the three or four main differences here that are impediments to money being available to entrepreneurs, to start up businesses?

Ms Macdonald: Do you mean the impediments within the Canadian market?

Senator Angus: Why is the market so unfriendly here, or what are the characteristics that make it unfriendly? I suggest it is a tax thing, a lack of incentive to reinvest. You get hammered with the proceeds. You cannot rollover profits. We have heard of a number of things. As someone who thinks clearly and who measures these things in an articulate way, I hope you can identify this concretely for us.

Ms Macdonald: The whole tax regime has been an issue. Many steps have been taken over the last two years. Certainly, the tone is much more positive now on the capital gains side and the notion of a rollover, and momentum has been created there. One of the big issues, historically, has been our pool of entrepreneurial management talent. We have been internally understating our own ability to build companies. That situation has started to turn itself around in the last five years. It has become more part of our culture. It sounds trite, but I think we are still trying to figure out how to celebrate our successes in that regard.

From a technical point of view, one of my biggest issues goes back to the supply side. Why do we have such a difference in attitude to institutional participation in the U.S. market? Granted, they have more pension funds and endowments, but it is part of the asset allocation process to include private equity. In Canada, it is not part of the culture in the top six or seven funds. The supply and demand became inextricably linked. I see that as being a key issue as well. With some of the U.S. money flowing into Canada, there is a growing recognition of the positives on the ledger in terms of our technology and our entrepreneurial management talent.

My focus is very much on this issue of attracting institutional investment. We have had a recent clean-up on the regulatory side that now allows U.S. pension funds to invest more readily in Canadian venture capital pools. About 18 months ago, a Boston-based venture fund that has been very active in investing in the Ottawa area was able to raise a $400 million fund from investors in the U.S., recognizing that they would invest 50 to 75 per cent in Ottawa companies, but a Canadian capital fund could not go to the same group of investors because there would have been tax implications if they had invested. That has been about two-thirds fixed, with one-third left to go. We need a regulatory structure that, to get the attention and the interest of people in an area that is somewhat outside the mainstream, must be made easy. We are moving in the right direction on that front, but we still have a way to go, both in terms of the tax environment and the institutional investors.

Senator Kroft: Following on Senator Angus's questions, I was struck by the dramatic figures you provided, in particular, the fact that there has been a sharp decline in the U.S. venture capital investment. As I understand it, the U.S. participation in Canadian investment is up sharply.

Ms Macdonald: That is correct.

Senator Kroft: That is an interesting observation and maybe connects with what you are saying. I should like to understand better why that is happening. Do you have any further explanation?

Ms Macdonald: There are a couple of things contributing to it. There is always a risk of being somewhat simplistic in this type of situation. The entire Canadian venture capital industry, because the funds have been significantly smaller, are typically more disciplined, for lack of a better word. They have put money out in smaller amounts.

You would have heard Canadian entrepreneurs complaining 18 months ago that Canadian venture players did not put enough money into their companies and that it was hard to raise enough money compared to their U.S. competitors, et cetera. The net result is that there is a good, strong discipline within many of the companies that have raised capital on how to manage themselves from round to round, whereas in the U.S., rounds were being completed at $30 million to $40 million for start-up companies, which does not encourage a lot of discipline up front.

We have seen the net result. There is a good base of companies that are able to sustain themselves through difficult economic environments. That is part of it. Obviously, the other aspect is the strength of networking in communications, particularly here in the Ottawa area. That has attracted a big portion of this.

Senator Kroft: Your numbers are bulked nationally?

Ms Macdonald: Yes.

Senator Kroft: We have received a good deal of information over the years about the uneven availability of venture capital funds in various parts of the country. I am interested in your three-legged stool example, in which the pension funds are a weakness in our system. You pointed to the labour-sponsored funds that have established themselves as one of the three legs of the stool. It is my understanding that that "leg" is an important mitigator of the regional distribution problem, in that the labour venture capital funds, by their nature, are more evenly distributed geographically. Is that true? Could you just deal with the problem of a lack of geographical distribution or availability?

Ms Macdonald: I will say at the outset, senator, that in venture capital, one of the issues that you inevitably face when you look at regional distribution is that where you do not have a critical mass, it will be much harder to stimulate venture capital activity. If you are talking about trying to pick the highest-growth opportunities, obviously the smaller your market, the fewer there are and the less ability you have to mitigate your own risk as an individual fund manager. By definition, you will not get an even geographic distribution, and that is also true in the U.S. Forty-eight per cent of the activity is in the Bay area and another probably 20 per cent is in the Boston area.

Having said that, I think now, as someone who has been watching this industry for 16 years, that we have seen a significant increase in the roll-out of capital across the country. I am actually really encouraged. It almost seems as if the different parts of the country are maturing at different points or in different generations. For example, five or six years ago, there was virtually no capital at all in all of Atlantic Canada. Now, three of the labour-sponsored funds have a presence there and some activity, and there is a local group, ACF Equity Atlantic, which is a joint venture of the four provinces, the federal government and the banks to create a dedicated pool of capital to try to stimulate more activity. That has unquestionably happened, in my view. It is a similar situation in the Prairie provinces, although activity is more limited. I observed in Atlantic Canada the ability to pool. The four provinces started to gain that critical mass, whereas if we had tried to do something independently - and I was involved in the creation of that fund - as opposed to collectively, it would have been more difficult.

That situation is slowly starting to be addressed. It will always be an issue to some extent. I simply say that I think it is important to recognize the issue and to think about solving it without trying to make venture capital economic development focused, because it just does not work that way.

Senator Oliver: Your company collects data, does measurements of businesses and so on. In your presentation, you said that one of the problems with venture capital financing in Canada is that we lack a pool of entrepreneurial management talent. I was wondering what you could do about that, what have you done, or what do you recommend? What should we be recommending to the government about that? What can be done about it?

Ms Macdonald: Again, I think I said that it was a huge constraint five years ago. It is starting to turn itself around. Unfortunately, time is one of the biggest agents in changing that situation. The last five years have made a huge difference. For several years, I have also thought that one of our largest, hidden and untapped assets is the number of expatriate Canadians who have gained experience elsewhere, particularly in the States, in the last 10 years. I am not quite sure what specifically you can do about it, but there is a huge opportunity for us to increase awareness amongst those Canadians of what has happened in their fields back here. There was a wonderful profile in The Globe and Mail, nine or twelve months ago, about an entrepreneur who had returned from California to run a company in Vancouver. He had only been gone two years, and he said he had no idea how much was going on in the technology field in Vancouver. People come back to visit family or get back in touch, but they are not coming back professionally.

There is a huge opportunity to think through how we can actually communicate some of the things that are going on, especially in this environment, when all of a sudden security is an issue, and people who are 42 with a couple of young kids are thinking differently today, if they are living in California, than they were even six months ago. Their stock options are worth virtually nothing, in many cases, so all of a sudden, they are not giving up nearly as much as they would have been 12 months ago. It is a wonderful chance to be a bigger fish in a smaller pond. There are a million and one reasons why we are in a great position today and can think about how to attract those people back.

I am on the board of the Innovations Foundation, which is the commercialization arm of the University of Toronto. One of the things I have started to talk about is how to link to the universities, which are getting better and better at keeping track of where graduates land, and hit those graduates up for fundraising. Is there an opportunity for some cooperation there between the government and the universities to actually get the message out that it is more fertile ground here, rather than just increasing the growth rate of the talent pool that is already here?

Senator Oliver: Returning to the fact that your principal occupation is to gather data and attract money for venture capital investments, you said at the beginning that in the first nine months of this year, you collected and invested nearly $4 billion.

Ms Macdonald: Invested nearly $4 billion.

Senator Oliver: Could you tell us about the breakdown of that? What would be the average amount of the investment? Where was that investment? Largely in Ontario or British Columbia? Do you have that data?

Ms Macdonald: I do. I do not know how much I can remember off the top of my head, but let me give you some impressions. We see some distinct patterns. The average investment was sitting at just under $5 million, with a significant variance in different parts of the country. It was higher, closer to $9 million, in Ontario, again in part because there is a lot of investment in fields like networking, fibre optics and photonics, all of which require a lot of money. It would be unusual to see a fibre optics deal that needs less than $20 million. In Quebec, by contrast - and you will hear more about that later this afternoon - there is more regionally focused activity and smaller transactions.

It is amazingly strong in British Columbia. In the first nine months of this year, more money went into B.C.-based companies than in all of 2000. They are strong on both the information technology side and the biotech side. In Atlantic Canada, there are fewer deals, and they tend to be smaller. That is not counter-intuitive when you look at the data. It matches the pool of expertise. Software companies typically need much less money than hardware or semiconductor companies. The centres of excellence and the schools of expertise drive the amounts of money.

Having said that, one thing that pushes down the averages is that, if you look at a fund like the Canadian Medical Discoveries Fund, Dr. Stiller will tell you that biotech companies need a lot of money. However, the amount of capital that an expert pool has to invest will obviously influence how much they actually put into individual companies. We have seen some downward pressure on the size of the biotech deals, partly because we have seen some downward pressure on the liquidity of the biotech-focused funds.

Senator Oliver: Who buys your services? Is it pension funds?

Ms Macdonald: I am happy to report that it is a reverse base, although never enough. We have our database online, and we sell to venture capitalists.

Senator Oliver: Are the venture capitalists your main customers?

Ms Macdonald: No, there are pension funds and technology companies - IBM, HP Systems - accountants, lawyers, et cetera, who buy our data because they want to know which companies are attracting the capital.

If you go to my starting point, which is that the 2 per cent of all the SMEs that have the greatest growth potential are the ones that attract the venture capital, there are many people who want to know, for different reasons, about those companies.

Senator Furey: I want to follow up on Senator Oliver's last question, as I am somewhat confused. Are you saying that the geographical pattern of venture capital activity generally follows the geographical pattern of economic activity, or are you saying that it does not?

Ms Macdonald: There is a link, in that you need the critical mass on which to build initially, and you need the accepted entrepreneurial culture. Those are two givens. If I can use an example, in Atlantic Canada around Dalhousie, we are seeing more interest in biotech deals. The size of the economy is not necessarily as important as where there is a real centre of excellence.

Senator Furey: What percentage of venture capital actually goes into start-up enterprises as opposed to those already established?

Ms Macdonald: In Canada the ratio is very high. Recently, it has been pushing 60 per cent. There is a new and exciting phenomenon, and Ottawa is a good example of it. Companies like Nortel or Newbridge are starting with a management team of experienced professionals who will put together $30 million or $40 million right out of the chute to start up and build a business. There is no doubt in my mind that three years ago, it was almost impossible to do that in Canada. The financing ranges anywhere from $200,000 right up to about $60 million. The spectrum is broad.

I love having a platform from which to reset some myths, because we all think that the Americans are much more entrepreneurial than we are. However, over the last two years in the U.S, almost two-thirds of the money has been going into expansion financings, while our experience has been the flip side of that. Part of the reason is that our venture industry is less developed and we have not built the same portfolio. Once you have done those early rounds, you have to continue to finance those companies through their growth path. That means that at some point, perhaps two or three years down the road, you will be doing expansion financings with a company that was a start-up when you first brought them into your portfolio.

The Chairman: Did you say that 60 per cent of venture capital in Canada goes into start-ups?

Ms Macdonald: Yes.

The Chairman: I have some information here, but I do not know if it is accurate. There is a paper called, "Venture Capital Financing of Entrepreneurship in Canada", in Halpern's Financing Growth in Canada, by Zott, Amit and Brander, University of Calgary Press, Industry Canada. On page 237 it claims that only about 35 per cent of venture capital is actually spent on start-up ventures, as opposed to concerns established before 1984. Does that make sense?

Ms Macdonald: It sounds like an old statistic. I do not know what their source would be. If we go back as recently as two years, 30 per cent of the money was going into start-ups. There has been a dramatic change over the last two or so years.

The Chairman: This was right at one time?

Ms Macdonald: Yes, absolutely.

Senator Oliver: What is a "start-up"?

Ms Macdonald: A start-up is a company that is not in full commercial production. They have yet to be established. A seed deal is made with a company that does not have a management team in place, is still at the R&D stage and has not beta-tested the product. Once they are actually ready to market and sell, then they are into the start-up phase. They will be close to commercial production by the time a venture capitalist becomes involved, except perhaps in the biotech arena.

[Translation]

Senator Hervieux-Payette: Ms Macdonald, about the pension funds you said that in the U.S. the proportion of funds invested in ventures was much smaller. In Canada, a pension fund benefits from tax privileges, should we not therefore insist on pension funds investing a minimum of 3 to 5 per cent in ventures? We have huge reserve funds invested in Treasury bills. I do not think that this is necessarily the best investment. Should we not have a policy whereby we insist that pension funds invest a small portion of their money in ventures?

[English]

Ms Macdonald: I was involved in an initiative six or seven years ago that led me to the conclusion that it is not a good idea to try to force people to do things that they have not decided are good things, because they find a way to do them badly or inappropriately.

I am absolutely opposed to mandating pension funds. Having said that, I am in favour of a concerted effort. The issue, in my view, is twofold: Step one is educational. Most pension fund managers intuitively think that venture capital is high-risk and that they have no business becoming involved in it with pensioners' money. Pension consultants, in this country in particular, do not see it as a legitimate part of the asset allocation process, although there are affiliates in the U.S. that automatically include it. The starting point, from the industry side, is to figure out how to raise that level of awareness and understanding so that private equity - whether venture capital, buyouts or mezzanine financing - is recognized as a legitimate part of the asset allocation process. A pension fund that has gone through that process will typically allocate 5 to 8 per cent of its assets to that category.

Secondly, because of the size of the pension funds in Canada and their absolute number, there are some structural issues that we need to get around. In the U.S., those pension funds pool the capital, though they may have only $2 million each to put into venture capital. They cannot justify building the expertise in-house to make the investments, and you would not want them to do it directly. They have what they call "funds of funds," or advisers who informally pool them together to manage those accounts on their behalf.

We have not created that infrastructure in Canada yet. When we divide the numbers by 10, it is difficult to determine how to do that economically. I strongly believe that we need to address the impediments that are stopping them from doing it, as opposed to telling them they have to do it.

As honourable senators may recall, in 1985, when I first got into this business, I was doing some research on pension fund involvement. The federal government of the day chose to introduce a provision in its budget such that for every dollar that pension funds invested in a small or mid-sized business, or appropriate fund, they could invest an additional $3 in their foreign property basket. All hell broke loose, because as they legitimately pointed out, there was absolutely no connection between the policy on foreign investment and the policy on small business investment. It did not lead to the expected results, and in fact it probably pushed things back, because it created a great deal of ill will in the process.

There is room for increasing government participation, but we need to do that from a constructive point of view - they need to understand why they should be there and there needs to be an infrastructure in place.

[Translation]

Senator Hervieux-Payette: Do pension funds that invest in ventures have a better growth performance?

[English]

Ms Macdonald: The venture capital performance would be one part of a pension fund - there would be the equity, the bonds and the venture capital. We, along with the Canadian Venture Capital Association, are trying to build, for the first time, some benchmark data on performance, although they are not available yet. Unfortunately, because of the long-term horizon, you cannot begin to measure it until the funds have been around for at least three or four years to build their portfolios and the returns. I am hopeful that early in 2002, there will be some data available to address that issue. That is clearly a key issue for the pension funds.

The Chairman: Thank you, Ms Macdonald.

I call the next group of witnesses to the table and welcome Mr. Patterson, Dr. Stiller, Mr. Delaney and Mr. Steplock.

Please proceed with a brief opening presentation, and then we will have questions.

Mr. Dale Patterson, Executive Director, Association of Labour Sponsored Investment Funds: Honourable senators, thank you very much for the opportunity to appear before you. Our plan over the next few minutes is to be short on presentation and long on the availability for questions. We have submitted to you a two-volume set of materials. The second volume is the reference piece, which I do not expect everyone to have read in detail. The materials are there for you to review and for your staff to look at.

I would like to request that our materials be officially entered into the record as part of our testimony before this committee. We have spent a fair amount of time preparing them. The first volume reflects a number of discussions that we have had in which we have tried to anticipate many of your questions and concerns.

First, I will quickly take you through the reference piece, which has two key elements. Under section 2, there are some selected fund summaries. These do not include all of our membership. They are summaries from a number of our funds that have addressed the questions that you have asked over the last weeks and months. The purpose is to give you a quick overview of our members.

We have also included in the document some selected testimonials. We went to many of our investing companies two years ago and asked for testimonials that described where those firms would be if it were not for labour-sponsored funds. The testimonials also spoke about jobs created, the economic development and the future. We have included those as well.

This was originally done two years ago so that Minister Martin federally and Minister Eves provincially could discuss the impact. Also included in the document is the Canadian Venture Capital Association presentation, the Business Development Bank document that was referenced previously, and an analysis by Ms Macdonald and her associates.

Our association was founded four or five years ago. Our mandate is to represent the member funds, which are based largely in Ontario. Of our 16 members, 15 of them are Ontario-based funds and one is in Manitoba. Our 16 members represent approximately 25 funds with about $2.75 billion under management.

These three gentlemen are presidents and CEOs of their respective funds. They are active on a day-to-day basis in the investment and management of their funds. These are the people on the ground from whom you want to hear. We will get to questions very shortly.

I wanted to reference two statistics: first, the BDB's eighth annual survey talks about employment increasing by 39 per cent per year in venture-backed companies. Between 1995 and 1999, these same firms increased sales by 31 per cent annually, exports by 38 per cent and R&D by 52 per cent. For the technology-intensive companies, the growth rates were greater: jobs increased by 54 per cent; sales by 50 per cent; exports by 56 per cent; and R&D by 52 per cent.

The other documents in the reference material I wanted to refer to are two economic development impact studies, one on Quebec and one on British Columbia. Those studies estimate that the tax costs to the government treasury are recovered in the space of 2.2 to 2.6 years.

The previous witness talked about investment size, but just to reiterate, institutional investors placed 96 per cent of their capital in deals of $5 million or more, and of those, 82 were deals over $20 million, with an average deal size of about $8.7 million. The labour-sponsored funds have 41 per cent of their deals in investments of less than $5 million, with an average of $1.6 million. That is a significant difference.

The conclusions are in our report, so I will not read them to you. We feel that we have fulfilled a number of the public policy objectives. We have three of our member funds represented and we will be more than happy to address questions and comments.

Senator Angus: Thank you, gentlemen, for coming. I believe you were all here when Ms Macdonald gave her presentation. Do you largely agree with what she said?

Mr. Patterson: Yes.

Senator Angus: Including the 60 per cent figure?

Mr. Patterson: The 60 per cent invested in the start-ups, yes.

Dr. Calvin Stiller, Chairman and Chief Executive Officer, Canadian Medical Discoveries Fund Inc., Association of Labour Sponsored Investment Funds: I think you can break that down further into start-up money and seed money. We are in the technology area, to a large extent, in terms of venture capital. One of the cries has been, and continues to be, "I cannot get bank financing; I have exhausted my family, friends and fools; and I have to find someone who will invest in this technology and listen to a convincing story."

Senator Oliver: That sounds more like seed than start-up, and that is what Senator Furey was getting at.

Dr. Stiller: That is a very important issue. There has been an extraordinary sea change in Canada with regard to seed funds that have been largely supported by the labour-sponsored funds and frequently in association with university-based funds. This is where a combination of fund sources, led by the management of a labour-sponsored fund, will essentially invest in technology.

The Canadian Medical Discoveries Fund now has about $40 million in seed funds, even though we do not invest more than $400,000 per seed investment. There is a high failure rate in that group, but the successes are spectacular. They transform the community and generate wonderful returns. It takes a huge amount of work. It is important to recognize that there is quite a spectrum, all the way from that seed, to start-up to expansion to then growth company.

Senator Angus: The $40 million that you mentioned you have in seed funds - where does that come from? Is that from individuals?

Dr. Stiller: I am talking about how the Canadian Medical Discoveries Fund, as an example, co-invests with other investors in seed companies. University Medical Discoveries Inc. and MedTech have a $7-million investment in Nova Scotia.

Those are funds that, in association with local entrepreneurs, seek to do the mentoring and create companies, if you will, or at least proof of principle, out of technology.

Senator Angus: For example, some doctors at a hospital somewhere in Canada have what they think is a pretty good idea. However, they do not have management skills and they do not know how to obtain money seed money to set up and exploit what could become a gangbuster. Is this your area; is this where you come in?

Dr. Stiller: It is one phase. I call it my "greenhouse" and we transplant those seedlings out into companies. We do not want companies to invest in that. We want projects. We do not want business plans; we want ideas.

The transformation within the research institutes, ranging all the way from Vancouver to the Maritimes, has been extraordinary.

Senator Angus: You talked about accomplishing your mission and the public policy goals that were set for you. I understood those were to create jobs and help structure new SMEs by providing professional advice and so on.

What would happen, in your view, to labour funds if the government decided to decrease or eliminate your incentives, the tax incentives in particular?

Mr. Ken Delaney, President and Chief Executive Officer, First Ontario Fund, Association of Labour Sponsored Investment Funds: It is fairly clear that it would be quite harmful to the industry. Depending on the magnitude, it could be potentially devastating.

There has been some tinkering with the incentives. Initially, as you well know, the government started out with a 40 per cent combined tax credit, with 20 per cent for each side. There was a general consensus that this was perhaps a little too generous. There were some examples of funds raising large amounts of money and getting ahead of themselves in investing it.

The next step in the evolution of the program was to reduce the tax credit down to 15 per cent at both levels. The maximum investment that an individual could make was reduced to $3,500.

The pendulum swung too far the other way. We all had some years when it was very tough to raise money. After we began to demonstrate our ability to place the money and make an impact on the economy, the pendulum swung back into the middle. The tax credit was maintained at 15 per cent and 15 per cent, but the maximum investment was increased to $5,000 per year.

At that level, the program is quite sustainable. We are all very happy with it.

Dr. Stiller: I will follow-up with an observation, because a national experiment has actually been done in this area. Canadian Medical Discoveries Fund is a national fund. I was on the executive of the Medical Research Council when the question arose as to why, if we had good science, did we not have a good private sector. I was asked by the executive to do something about it. That is why the fund was created.

We are a national fund. We believe we need to go into every university, hospital and research institute in this country. We do not get matching tax credits in Alberta and Newfoundland. We cannot sell it there.

Senator Angus: Why?

Dr. Stiller: The federal 15 per cent is not enough. I know that 15 per cent is not enough. I do not know that 20 per cent or 25 per cent would be. However, 15 per cent is not enough. You just cannot get Canadian investors to invest with a 15 per cent tax credit.

Senator Angus: The man from Newfoundland is over there. He will fix that, I am sure.

Senator Furey: How about 30 per cent?

Senator Angus: Following up on that general question, in view of other things that have been said here, what is your collective response to the criticism that the labour funds are getting an unfair advantage over other VC funds and providers?

Mr. Patterson: I think that you will find that the crowding out is not evident. Look at where we are investing. It is quite different from where the other VCs are investing.

Senator Angus: Your statistics are very stark - the $1.6 million versus the $8.7 million and so on. People who take the trouble to come here and grind away for their own advantage level that kind of criticism. That is fair ball. What is your rejoinder? Help us.

Mr. Delaney: Mr. Patterson's comment about crowding out is important. From a public policy perspective, we want to have the three legs of the stool about which Ms Macdonald spoke. I can imagine one of the other two legs thinking that if supply of capital were tightened, they might get better pricing. Therefore, they have a vested interest. They can select, with less competition, from among a stagnant number of investments. I do not think that that is good public policy or good for the country. Being that third leg is very important.

The thing that really sets us apart from them is the fact that the government is a key stakeholder. With 15 per cent from the province and 15 per cent from the federal government, that effectively makes you 15 per cent shareholders in the funds. You get to place demands on us that you do not necessarily get to place on everyone else.

The average investment from a member of the Association of Labour Sponsored Investment Funds is $1.6 million, while that of a non-member is $8.4 million, and that is because of the government role. Every jurisdiction has its own agenda and its own set of rules. However, in Ontario where we operate, we are required to put a certain percentage of our money into businesses below a certain size. There are certain kinds of investments and activities that we cannot undertake. That is a very big difference.

Not only are we an important part of the overall venture capital industry, but we fill certain gaps that would not be filled if it were not for the program.

Senator Angus: In other words, it is apples and oranges. It is not an unfair advantage or unlevel playing field. You have a specific mandate. You are carrying it out and they are not even in that space. Is that an oversimplification?

Mr. Delaney: There may be some overlap, but certainly there are segments that we are in and they are not.

Dr. Stiller: I must say that it is a healthy overlap. We seek co-investors, as early as we can and as many as we can with the deepest pockets possible.

Some of them do not like to participate upstream with these tiny fish with which we are working. They like to see them get through the rapids first before they are prepared to put their hooks in the water.

We are trying to build Canadian companies. I wear my Canadianism on my sleeve without apology, as the Americans do their stars and stripes. We are here to build Canadian companies, and we do not want to be the hewers of wood and the drawers of water in the knowledge economy.

We do not want technology involved with intellectual property to disappear across the border in the valise of some lawyer, God bless them. We want to develop it here.

Senator Angus: This is music to our ears, doctor.

Dr. Stiller: When I was growing up in Saskatoon, venture capital was called "vulture capital." They were the tough guys and girls.

Senator Angus: That is one of the problems. That is why you guys are so important.

Dr. Stiller: However, we pride ourselves on the fact that the scientists and the young people who make the discoveries, who have the ideas, who are prepared to put their families' money and their own sweat into it, end up with a larger ownership in the companies that we help to start than do the Chicago-based venture capitals; and God bless them, too, because we want them to come in after the rapids.

Senator Angus: Let us deal first with the lawyers. A lawyer who appeared before the committee the other day began his presentation by saying, "I am just a poor lawyer." At the end, he said, "They are not interested in a high-priced lawyer like me." We were confused.

Senator Kelleher: I am sure you were.

Senator Angus: We are undertaking two studies at once, but they have a healthy degree of overlap. One is on the availability of capital, be it venture capital, seed money or other money, for small and medium-sized Canadian businesses. We are also looking at the economic consequences or impact, if any, of September 11. During the testimony, we heard that there is another factor at play - the "R" word - and the economic downturn.

Speaking to the Canadian nationalism point, Dr. Stiller, one witness said that he has seen the biggest consequence in the tech industry, where there had been this great boom. There was heavy investment and there were many start-up companies, particularly here in the Ottawa Valley. There were good ideas, but they were thinly capitalized. Thus, the fat guys across the line are waiting with suitcases in hand. The minute the knot tightens, those guys come in, buy up the companies and head south with our good ideas. Should we be taking that into account? Is that a serious situation?

Dr. Stiller: It is a serious situation. I spent two and one-half hours in a meeting this morning dealing with this very issue of who will feed on whom, and can we get a real North American global vision and some ice in our veins and see if we cannot pull off the reverse?

One of the issues is our capital market. We have a serious problem in that companies that we have started up are weakly capitalized and are floundering out in the capital markets. They desperately need capital to continue. There is no flow out in the Canadian market and those enterprises are low-hanging fruit for the U.S. companies to come in and pluck.

You have not asked us what changes we need, but I believe that we need to understand that our junior capital markets are really venture capital markets. We should look at them in a different way than we have historically.

Senator Angus: That is the key.

[Translation]

Senator Poulin: Ms MacDonald mentioned that investments in the development of start-up enterprises were about 60 per cent. To ensure the country's economic development, would it be preferable for this percentage to rise or remain stable?

[English]

Dr. Stiller: We need it to be maintained in absolute amounts; we need the pool to grow. That is one of the issues I was talking about in terms of these junior capital markets/venture capital markets. Those little companies out there may be $50 million or $60 million companies, but they really need venture-like capital injected to sustain them and to avoid takeovers. As a percentage, it is too high, but the total pie is too small.

[Translation]

Senator Poulin: What suggestions or recommendations could you give us to improve the environment?

[English]

Dr. Stiller: Where do I begin? I will make a comment about Canadian genes. We are rather risk-adverse in comparison with the kind of "wild west" American genes.

We need an environment that encourages moving beyond strip bonds or treasury bills as legitimate investments. Ms Macdonald has been saying for some time that we need to encourage our pension funds to participate as real players in this field. That is the single most important thing that we can do to meet Minister Martin's goals on venture capital at the international level, the percentage of R&D and growth in the technology areas.

[Translation]

Senator Poulin: In one presentation, we heard that corporate investors, thus pension funds, had decreased from 23 to 14 per cent. How do you explain this decrease?

[English]

Dr. Stiller: I do not know. I would be interested to hear Ms Macdonald's comment on that.

Senator Furey: I take it from your comments that you are in full agreement with Ms Macdonald, and that there has been almost a reversal on the amount of venture capital put into early-stage investment in the last two years.

Dr. Stiller: Yes.

Senator Furey: What percentage of your investment would be in equity and what, if any, in debt?

Dr. Stiller: You are asking me about our fund as an example?

Senator Furey: Yes.

Dr. Stiller: They are all equity-like arrangements. It is equity. We will put money into a convertible debt arrangement, but it is, in essence, equity; it is not secured; and we are not allowed to be head of banks or anything like that.

Senator Furey: What kind of vehicle do you use for this? Are you using limited partnerships or just straight share take-backs?

Dr. Stiller: We use straight share take-backs.

Senator Furey: What allowances do you make for your management of the business?

Do you insist on having your own people involved in the management of the business?

Dr. Stiller: Not in the management, but we insist on being on the board. We do a significant amount of recruiting for these companies. When there is a vacancy at the management level, we certainly get involved in the idea of repatriating these expatriate Canadians or reaching into some of our non-life-sciences areas and bringing other people in.

Senator Furey: What percentage of your investments on a venture basis - that could be a year, two years, five years - do you think would be written off?

Dr. Stiller: The venture capital rule is generally 1 in 10 - 1 in 10 will be a home run, 1 in 10 will be a strikeout and the rest are bunts, one, two and three bases. Approximately 10 per cent are written off. We are not at that level, but Ms Macdonald says that lemons ripen early and pearls take longer, and we keep looking for our pearls.

Mr. Delaney: I would like to add one comment to the discussion about 60 per cent of the capital going to start-ups. We all must recognize that that could easily shift. Dr. Stiller's point about the total quantum being the important number is right. Some of those start-up businesses will be quite successful and then they will move into the commercialization stage and will need more money. With the given pool of capital that we have, it is entirely possible that the next time we look at that number, we will see a shift. The reason for that is that we are working with those earlier-stage companies and helping them to grow.

The Chairman: Are you telling us it is cyclical?

Mr. Delaney: That depends on the nature of our portfolios.

Sometimes, moving into commercialization does eat up capital. You cannot count on other sources there either, because in the earlier stages of commercialization, especially in a market such as this one - post-September 11 - you still need venture capitalists to provide that development-stage capital.

Senator Furey: Are you saying that late-stage investments, in expansion or acquisition or turnaround or working capital, are included in the statistics that you derive from early-stage investment? That is a separate thing, is it not?

Mr. Delaney: Yes.

Senator Furey: You are not including that to get the 60 per cent?

Mr. Delaney: No.

Senator Kroft: We hear comments about the difference in entrepreneurial spirit between Canadians and Americans. We have heard it described today in a number of ways. I was wondering about the investor side. Obviously, the profile of the investor in the labour-sponsored funds is different from that of the investor in the traditional venture capital fund, by definition of the size of the investment.

I will lay out a thesis for you: You have larger numbers of people with smaller investment amounts. If one of our objectives is to make Canadians more understanding of and interested in risk investment and create opportunities for that, one would think that, just numerically, there would be more people involved in risk taking and becoming knowledgeable about that subject. With that backdrop, what do you do to create this opportunity? What connection is there between the investors and their investments? What chance do they have to follow or become part of this risk-taking process?

Mr. Delaney: I actually think that is one of the beauties of the labour fund program. It really gives people a window onto a realm of economic activity that they otherwise would never have. Our fund actually tries to market our product to our sponsors, so we get feedback all the time. We have not collected the data, but we have anecdotal evidence that people are now interested in investing generally. This was sort of a first step. It is difficult to say how an individual becomes involved. We are a $65 million fund with 16,000 shareholders. The only way we can communicate with them is through our newsletters and materials. They do see what we do, and at least anecdotally, we see people becoming more interested in investing.

If one public policy objective is to increase the propensity of Canadians to take risks and make those kinds of investments, I think the labour fund program is a very important part of that.

Senator Angus: What you have been telling us is really interesting, gentlemen, particularly in this post-September 11 environment, with the recession and so forth. The funds such as the ones you represent are key to our economy. It is critical that you be there. I would like to ask a process question.

As you know, there are hundreds of these companies out there. They are looking for money, everyone is saying there is not a nickel to be had and so on, and they are conned into using one of these broker houses. There are some that handle smaller-sized deals. Wood Gundy and RBC only deal with the larger ones. How do you market your funds? How does the company that needs the money find out about you?

Mr. Delaney: Most of us rely to some extent on intermediaries.

Senator Angus: There is a role for a broker in there.

Mr. Delaney: It can be lawyers or accountants. We try to get the word out. Then in certain communities, in certain sectors, we develop a reputation, as well as giving an indication of what kind of capital we can provide. We actually get some reference letters from some of our investor companies willing to state on the record that we add value beyond just capital, and away we go. Certainly, we have to build our own networks with accountants, lawyers and various forms of intermediaries to maintain a good flow.

Senator Angus: You heard Ms Macdonald say there is "X" amount of money presently available for investment. There is a legitimate little business looking for money. I can cite about 10 right now. We are all privileged because you come here, we hear all about your funds, we get the association literature and Ms Macdonald's statistics, and I am running to the phone. This is legitimate marketing by you folks to the potential clientele out there - wearing your Canadian maple leaf, doctor.

Dr. Stiller: We have the reverse problem. I would like to change my name and get an unlisted number. It is not that people do not know us or cannot find us. They actually feel they own us. We have a strategic partnership with many universities and hospitals, as well as the Canadian Institute of Health Research. I would love to see a strong kind of local entrepreneurship and mentorship develop in Canada, with angels who bring more time than money. We have a huge waste of talent in this country of individuals who are old, like I am, but who could give tremendously to these companies that are springing out of our hospitals and universities.

I would say that our most precious resource is time, finding the time to spend with those little companies to grow them. You will find that venture capitalists invest very close to where their headquarters are, where their people really are. They do not go a long way away.

I like to say that we should be as accessible as the Internet or the telephone. We have a responsibility to the taxpayers of Canada. I consider them to be shareholders in my fund. They are 30 per cent to 35 per cent shareholders. I have a responsibility to do two things. First, I have a responsibility to give them a return on their investment. We give a complete return on investment in about 26 months. Second, in the same spirit, I need to build Canadian enterprise. We make ourselves very available.

Some of these ideas should never get family, friends and fools' money because they will not go anywhere. They need the mentorship too; they need someone to say, "Nice idea, but it will not work." Then there are those who need to be able to get the money, along with the mentorship, that will grow something legitimate. We try to do both.

Senator Tkachuk: There was a discussion about tax credits in Newfoundland and Alberta. Does Alberta have a problem attracting venture capital? In other words, would it make any difference if Alberta were to give a tax credit?

Dr. Stiller: I can only say that in the life sciences, I think they underperform. They have some of the best science in the world. When Peter Lougheed created the Heritage Fund, it invested in the best scientists. It is a terrific provincial resource and they have fantastic science. They have underperformed significantly in the commercialization of medical discoveries in Alberta. They look around and say, "We are doing quite well." When I look at it, however, on a per-million-dollars-invested basis, or per hundred Ph.D.s, I think they are underperforming.

Senator Tkachuk: Do you have any statistics on that you could forward to us?

Dr. Stiller: Yes.

Senator Tkachuk: It would be interesting to see if Alberta really is underperforming or whether business is having trouble attracting venture capital without the venture funds. In other words, if you did not exist, would it really matter?

Dr. Stiller: That is a very good question. We will look at those statistics. We will look at Newfoundland and Alberta and we will give you the numbers.

The Chairman: Gentlemen, thank you for being with us. It has been very informative.

Honourable senators, we have a submission from the Crocus Investment Fund, which has $500 million in capital deployed in and around Winnipeg. They just want it entered into the record. Honourable senators, might I have your permission to do that?

Hon. Senators: Agreed.

The Chairman: I now call on the representatives from the Fonds de solidarité. We have Fernand Daoust, Maurice Prud'homme and Guy Versailles.

Before you proceed, gentlemen, we would like to hear about the size of your fund. I believe it is the largest in Canada.

[Translation]

Mr. Fernand Daoust, Special Advisor to the President, Solidarity Fund QFL: Mr. Chairman, you were told I would make a very short presentation. I am going to try to do that as quickly as possible so that we can discuss the problems you wish to raise with us.

I would like to begin with a quotation from a study conducted quite recently, in April 2000, by the Centre de recherche sur les innovations sociales dans l'économie sociale, les entreprises et les syndicats. This is a group made up of university researchers, who look at social development.

In 1983, the idea that a labour fund might provide venture capital for Quebec businesses was regarded as unthinkable for both unions and employers. In this light, the project was a radical innovation and even opened up the way to innovations whose development implied a long learning process. [...] If this innovative project was able to receive the approval of the public authorities so quickly, it is largely because it suggested linking the collective interest, that of the workers, with the general interest, that of economic development in Quebec, not to mention the individual interest of future shareholders. [...] the Solidarity Fund may be regarded as a radical innovation [...] The cohabitation of unionists and financiers as administrators, managers, em ployees and even volunteers creates a matrix for such ongoing innovations, hence the expression of "creative tensions" put forth by most of our key informants.

This may be a bit academic, but I think it conveys quite well the importance of such innovation which we qualify as extremely original and which was launched in 1983.

Let me remind you that the law that gave rise to us provides that this fund will have major missions that are described in considerable detail in an act passed in 1983 by the Quebec National Assembly. I am going to review them very quickly and then comment on them.

This fund relies on public savings and the solidarity of the Quebec population with a view to investing in Quebec businesses and thus contribute to their development, and create, maintain or preserve jobs. Secondly, to promote the training of workers in economics so as to enable them to increase their influence on the economic development of Quebec. Thirdly, to stimulate the Quebec economy through strategic investments that will benefit workers, along with Quebec businesses.

I would like to make a few comments on the way we have succeeded in ensuring that the mandates we were given by government are fulfilled with facts and figures.

I know that we have distributed some documents to you, which you will have a chance to consult, but I would like to review some of the statistics in these various documents. Today's fund - and as of June 30, to be even more precise - had about half a million shareholders contributing to it in the traditional ways, either by means of payroll deductions in businesses or by lump sums paid into the fund. For a good number of them - no doubt the data could be determined with much greater accuracy - this is the first investment that these shareholders have made in a business. The average amount invested by shareholders in this solidarity fund is about $9,000. Not $9,000 at once, of course, since it is limited to $5,000 a year, but that is the average amount among shareholders overall.

The number of jobs created, maintained or preserved as of June 30, 2001, was 93,026. We are talking about direct, indirect and induced jobs, whether by the fund as such, regional and local funds, or specialized funds. Since we cannot read this entire document, which is quite long, I would ask you to consult it to find out what we mean by funds: the fund as such, the big solidarity fund, the regional funds and the local funds. I would like to give a few details concerning job creation and investments that have been made. I want to mention that this fund as such, whose head office is in Montreal, makes investments. And this is entirely to be expected since it is our role. The Solidarity Fund has set up, in Quebec's 17 economic regions, regional funds that are funded by both the Solidarity Fund and other financial institutions. The Quebec government covers a large share of our operating expenses. Perhaps we will have a chance to talk about this a little later if you ask us some questions.

So there are 17 regional funds: through the regional municipalities, we have set up 86 local investment funds in groupings of municipalities in Quebec which play a large role in drawing attention to economic problems and to problems of job creation and investments in businesses.

The regional funds make investments in businesses through contributions ranging from $50,000 to $750,000. Beyond $750,000, the Solidarity Fund itself, through its head office, makes investments throughout Quebec. In the regions, the investments are between $50,000 and $750,000. The 85 local funds, which we call "solid," handle start-ups, expansion and re-investment, and investments begin at $5,000 and may go as high as $50,000.

There are a lot of data to testify to the unbelievable success of these regional funds, these local funds and the Solidarity Fund in general. I talked to you about the jobs created by these funds overall in Quebec, about this presence both throughout Quebec and in the regions and localities.

I would like to say a couple of words very quickly about the fund's training activities. I mentioned to you that we had a mandate to create, maintain and preserve jobs, but we also have an economic training mandate.

From July 2000 to June 2001, 445 courses were given to 7,000 participants in businesses, in the locations of in charge of this fund in several areas, and obviously in many settings that I will not describe to you since you have these details in our annual report.

I am going to conclude by saying that this fund has made a considerable change in the attitudes in Quebec towards economic development, labour relations and the role of the major socioeconomic partners.

The presence of the fund in all Quebec regions, with boards of directors involved in the realities of civil society in these regions or localities, the fund's training activities and these investment activities have doubtless - here there is no ambiguity - created an awareness of economic development, which has grown among us, and which enjoys very large notoriety and very large credibility.

I think it is important to say that if the Quebec Federation of Labour, which was behind this fund, thought it was a good idea for such a tool to be created, it is because it felt that without economic development, without businesses being able to enjoy normal economic health, the problem of jobs and job creation would experience difficulties. Our obsession is jobs: job creation takes place with economic development. Economic development is no doubt dependent in many cases on investments of this type of venture capital.

Senator Poulin: Messrs Daoust, Prud'homme and Versailles, thank you very much for your outstanding presentation. I admit, Mr. Chairman, that Mr. Daoust answered all my questions in his presentation.

My first question was about the regions. I come from northern Ontario and I asked Mr. Delaney my question a little while ago concerning the relationship between the First Ontario Fund and the regions of northern Ontario, eastern Ontario and western Ontario. In the 17 regional funds and the 85 local funds, what is the percentage of amounts of money in investments overall?

Mr. Maurice Prud'homme, Group Vice-President, Partnerships, Solidarity Fund QFL: I think that it is not so much the percentage that counts as the work we have done in terms of democratizing venture capital and access by entrepreneurs in the regions to venture capital. Let me explain.

That represents some $300 million dedicated out of the $4 billion in fund assets. At present, there is not one entrepreneur with a viable business proposal in Quebec, who cannot apply to our network. That is the importance. We have given access, we have made access to the fund easier. We have got closer to the entrepreneurs and the ideas. We have also trained people and we continue to train people, not only to invest, but to sustain the development of businesses, whether very small or medium-sized. We help businesses to develop because that is our job, and my colleagues said this earlier, it takes a lot of time from venture capital investors to help businesses. I usually say that when we make out a cheque to an entrepreneur, our work is just beginning and will last from five to eight years. It is a long-term endeavour. This is what we have done with the regional funds and the solid funds.

Mr. Guy Versailles, Vice-President, Communications, Marketing and Public Relations, Solidarity Fund QFL: It must also be said that as money is required, additional sums are going to be invested. Each of the 17 regional funds receives $6 million tranches, and as soon as one tranche is used up, we add another one. At present, several of our regions are now at $24 million, the fourth tranche, which is significant when you think that these funds were only created less than five years ago.

Senator Hervieux-Payette: Often, I think that even with great notoriety and great credibility, you still need performance. When you calculate the performance of the investment fund, do you calculate the return on the net investment, that is, after the employee has received the tax benefits or before? This of course would not produce the same results. When you prepare your reports, do you provide two calculations?

Mr. Prud'homme: The law prohibits us from giving the official return with tax credit. The return for Solidarity Fund shareholders represents the gross cost.

Senator Hervieux-Payette: That does not make a good impression. When we compare it to other funds, we may get a smaller figure and in the ranking of fund performances, I am sure that that affects your calculations.

Mr. Prud'homme: Our shareholder understands that. And when we conduct surveys about our shareholders' interests, one of their first interests is to know that the money invested benefits from a tax credit, but is reinvested in Quebec. That is also important for developing employment in Quebec.

Senator Hervieux-Payette: When you mention that you support businesses, do you support them with technical assistance from employees of the Solidarity Fund or do you just rely on people on the board of directors?

I have some entrepreneur friends who do business with you and often, and this is their complaint, the person is not very familiar with their sector. Obviously, if you have three accountants in a biotech company, they may be very nice and they know how to count, but the problem is that they do not know anything about the board of directors they are on. How do you recruit for boards of directors? How many women do you have on the boards of directors?

Mr. Prud'homme: To answer your first question: how do we solve the problem of representation on the board of directors and how do we help our entrepreneurs in our partner businesses? First, we definitely always try to specialize, and that is what we have been doing for three years, the teams that are involved. Like me, you know that there are many areas of activity in the Canadian and Quebec economy, and to create specialized teams for each area of activity, that takes a critical mass, for it to be cost-effective and efficient. As the fund assets grow, we can improve our employees' specialization in some very specific areas. In the past ten years, we have had at least five or six new areas of activity that have developed. The specialists and venture capital people need to be given time to become specialized and acquire experience. Notably, in biotechnology, it may be recalled that it was ten years ago that the first investments were made in Quebec, it was in 1990, 1991, when the Solidarity Fund initiated this new area of activity. We are constantly working on improving the quality of our personnel through training both inside and outside our walls.

As for the choice of representatives and the membership of the board of directors, choices are often made according to the size of the business. This choice is going to justify having outside representatives who represent the Fund but who are not Fund employees. The factors we take into account are often the size of the business and the availability of people whom we consider to sit on such boards of directors. We know that the younger the business, the harder it is to find outside board members for the company because there is the risk of legal action arising and we try to make up for this with effective insurance, but it remains that it is harder to find board members. It must not be forgotten that our performance will be the business's performance. It is in our interest to have the best possible board of directors and to ensure complementarity between the members of the board of directors and the members of the business's management. As far as possible, we try to maintain a balance with the resources at our disposal and the business's needs.

With regard to the representation of women and the choice of women on boards of directors, in the past three years, the Solidarity Fund has developed a bank of female board members. We try to enrich this bank each year. There is certainly the issue of availability, training to have women available. I remind you that at the Solidarity Fund, close to 50 per cent of account directors are women. This also improves the venture capital sector. These are the new arrivals in the sector because ten years ago, women were absent from this industry.

Senator Hervieux-Payette: One of my concerns, both with the Caisse de dépôt and with you is confidentiality. For instance, if you have developed great expertise in biotechnology, you cannot send this person who represents you to all boards of directors of businesses with competing products. What is the policy of a fund like yours for a person who has good command of an area to avoid being, if they sit on or follow a business, detrimental to another business in the same area in which you are also an investor?

Mr. Prud'homme: We have to take into account the earlier experience of some employees we hire. This becomes increasingly complicated, and increasingly, in the new technologies, it is a new problem, a new fact we have to take into account when the time comes to sign a proposal deal at the beginning and then manage it. This is forcing us more and more often to use outside administrators and, contrary to what we had in the industrial sector in which we could give or assign the same outside person four or five different boards of directors, now, we are going to have to limit them to one or two boards in different areas, even if it is the same category of activity.

[English]

The Chairman: Thank you, gentlemen. That was a very good presentation.

On behalf of our committee, I will direct the Library of Parliament to redo the study. I think Senator Tkachuk will agree to having members of our staff oversee the process and all honourable senators will then get a draft copy.

The committee adjourned.