Proceedings of the Standing Senate Committee on
National Finance
Issue 2 - Evidence - Meeting of March 3, 2009
OTTAWA, Tuesday, March 3, 2009
The Standing Senate Committee on National Finance met this day at 9:33 a.m. to examine the Supplementary Estimates (C), 2008-2009, laid before Parliament for the fiscal year ending March 31, 2009.
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: I call to order this meeting of the Standing Senate Committee on National Finance.
[Translation]
Honourable senators, this morning we continue our examination of the Supplementary Estimates (C), which were sent back to this Committee last week. Supplementary estimates serve two purposes.
[English]
First, they seek authority for revised spending levels that Parliament will be asked to approve in an appropriation bill that would typically follow these supplementary estimates. Second, they provide both houses of Parliament with information on changes in the estimated expenditures to be made under the authority of statutes previously passed by Parliament. That is for information purposes only.
[Translation]
Last Wednesday, we received an overview of the supplementary estimates prepared by officials of the Treasury Board Secretariat. This morning, we will hear representatives of Agriculture and Agri-Food Canada and Industry Canada.
[English]
Our first panel this morning is from Agriculture and Agri-Food Canada. We welcome this morning Pierre Corriveau, Assistant Deputy Minister, Corporate Management; Andrew Marsland, Assistant Deputy Minister, Strategic Policy Branch; Greg Meredith, Assistant Deputy Minister, Farm Financial Programs Branch; and Susie Miller, Director General, Food Value Chain Bureau.
I would like to thank you very much for being here. It has been some time since we have had your particular department appear before us and we thank you for coming on short notice to help us focus, primarily, on Supplementary Estimates (C). We noticed some funds were asked for by your agency in Supplementary Estimates (B), which we handled a few weeks ago. There may be some who might want to ask about that, as well.
Andrew Marsland, Assistant Deputy Minister, Strategic Policy Branch, Agriculture and Agri-Food Canada: It is our pleasure to be here to respond to any questions that the committee may have. If you agree, my colleague, Pierre Corriveau, will give you a brief overview.
The Chair: Yes, that is how we usually do it.
[Translation]
Pierre Corriveau, Assistant Deputy Minister, Corporate Management, Agriculture and Agri-Food Canada: Mr. Chair, we are here to answer your questions concerning the Supplementary Estimates (C) of the department for the fiscal year ending on March 31, 2009. The department's Main Estimates for 2008-2009, as approved, were $2.5 billion. Last June they were increased by $291 million in the Supplementary Estimates (A). Last week, the Supplementary Estimates (B) was approved, thus adding a further $90 million to our estimates.
Today, the Supplementary Estimates (C), laid before us, represent a net increase of $125 million, bringing the total departmental budget for 2008-2009 to over $3.1 billion.
[English]
The major elements of the Supplementary Estimates (C) are as follows: In terms of statutory elements, there is an increase of $2 million for the Canadian Cattlemen's Association Legacy Fund; for the voted appropriations, $289 million is funding for the transition of the Ontario flue-cured tobacco producers; an additional $58 million is for Growing Forward, a new agriculture policy framework. These sums are offsets by funds already available in the department that will be re-profiled into future fiscal years and a technical adjustment.
My colleagues and I welcome your questions and comments.
The Chair: We ought to have the page of the supplementary estimates. It is probably in here in two different places. Typically, we would see it as a listing for the schedule 1 or 2 that goes to the appropriation act when we receive that for the supply bill. However, page 88 forward is the particular area for Agriculture and Agri-Food Canada. That notice is for honourable senators who have their Supplementary Estimates (C) with them. There are various listings that start at page 88; the department appears and then the Food Inspection Agency appears as a separate entity on page 91.
Senator Mitchell: Thank you very much for being here. I have two sets of questions. They are not too long, though.
There was a $1.1-billion fine levied against tobacco companies and apparently the subject of a plea bargain, if I can use that word, related to the smuggling of cigarettes some years ago.
I have two questions about that. First, is that $1.1 billion being brought into general revenue and, therefore, representing a one-time source of revenue, which would have particular implications, as you can appreciate, on the deficit that is mounting? Second, do you know offhand why no executives of those tobacco companies were charged after defrauding Canadians of more than $4 billion?
Mr. Marsland: I apologize, but I am not really in a position to answer questions about the settlement. I guess that is a question for the Department of Justice and the Canada Revenue Agency. Our involvement in the tobacco file is simply in relation to the transition for those producers who wish to exit the industry. I do not have any first-hand knowledge of the settlement.
Senator Mitchell: We should and will write to the Canada Revenue Agency.
Regarding agri-food, one of the oft-levied criticisms is that ethanol is burning food. I have argued against that for a number of reasons. One of them is now very apparent: the development of new technologies that avoid the burning of food.
A remarkable example of that in Eastern Alberta has been developed by two brothers whose name is Chrapko. I think their firm is Highmark Renewables. It is a remarkable project in that they use feed wheat to ferment the ethanol. They cook the manure to create biogas, which creates the electricity to assist in the process. The fibrous material left over can be used for landfill or fertilizer.
It is not creating net carbon and it is not using edible or human food. They want to build six of these plants, but they require $750 million in financing to do that. I think they are looking for debt, not equity.
Are you aware of that project? What are you doing to advocate for projects like that, and why is it that in this stimulus package, that kind of project is not being considered? It has three advantages: it creates jobs of the future, not just for the future; it assists in solving an environmental problem; and it creates a technology that we could sell around the world.
Mr. Marsland: Perhaps I could begin by talking generally about the government's renewable fuel strategy, in which Agriculture and Agri-Food Canada plays a part. The strategy has four elements, as you are probably aware. The first is the regulations establishing mandates for minimum levels of renewable fuels. In fuel, that is 5 per cent ethanol by 2010 and 2 per cent biodiesel by 2012, subject to some testing of the technology.
The second element is the ecoAgricultural Biofuels Capital, ecoABC, project, which is run by Agriculture and Agri- Food Canada. That provides assistance in equity financing for the establishment of the types of plants you identified; it appears in the Supplementary Estimates (C). Under that project, up to $200 million is available for projects with up to at least 5 per cent farmer participation.
The third element is Natural Resources Canada's ecoENERGY program, which provides production subsidies.
The fourth element, which is germane to what you are referring to, is the investment of up to $500 million in new forms of technology that use cellulosic and others types of approaches to produce renewable fuels. There are a number of projects under way on that.
I am not aware specifically of the project you identified, but a series of projects is under development under the ecoABC program. We have had something like 45 applications for that. Clearly there are many opportunities for new technology.
I am not aware of a specific program that provides debt financing for these types of projects. As I say, the ecoABC program is focused on equity support.
I cannot really comment on the stimulus package and what it did or did not include.
Senator Mitchell: I am glad I brought it to your attention then. These are very serious business people; they are very successful. They sold their computing business in the mid-1990s for enormous amounts of money. They are not fooling around. This is not a technology that is kind of a hobby. They have a plant that is now doing it.
A fourth advantage that I forgot to mention is that they built it next to a feed lot. The feed lot has enormous amounts of manure, which creates huge problems with water tables, runoff, rivers, and so on.
I wonder if I could leave you with this thought, if you, in your position, could advocate for greater attention to those kinds of things: $500 million of a $34-billion deficit, of a huge commitment to infrastructure, is not particularly significant in an area that is of the future.
Mr. Marsland: Certainly.
Senator Callbeck: My first question is on the Canadian Food Inspection Agency. On page 10, we see where there will be savings of $17 million coming out of that agency. Are you in a position to give us information as to where that $17 million would come from, what programs would be affected?
Mr. Marsland: Again, I apologize, senator. We represent Agriculture and Agri-Food Canada; the Canadian Food Inspection Agency brings forward its supplementary estimates separately from us. We are not in a position to comment—unless you are, Mr. Corriveau? I apologize.
Senator Callbeck: In other words, there is no one here to answer questions on that agency?
Mr. Marsland: No.
Senator Callbeck: All my questions were focused on that.
The Chair: We will hold those questions; do not lose them. We will see if we can find someone from the Canadian Food Inspection Agency to come chat with us. Did you have any questions of these witnesses with respect to Agriculture and Agri-Food Canada?
Senator Callbeck: As I said, the questions I had thought about were on the agency, but I will look through this now, so perhaps in the second round.
The Chair: Before we go to further names on my list, I have one question with respect to your news release. If a news release comes out of Agriculture and Agri-Food Canada, are you able to comment on that, or is that some other department that might have handled that for you?
Mr. Marsland: We can comment on that.
The Chair: In that news release, it says ``Government of Canada Delivers Real Action for Tobacco Farmers and their Communities.'' The date is August 1, 2008. It comes out of Delhi, Ontario, which must be a tobacco-growing area. You went down there to make the announcement. It says there was $15 million for community development; that was announced in this August 2008 press release, but I do not see it in the supplementary estimates. Are you able to help us with that? Have you forgotten about that portion or will we see that later? Is it tucked into something else?
Greg Meredith, Assistant Deputy Minister, Farm Financial Programs Branch, Agriculture and Agri-Food Canada: The $15 million that you are referring to will be a community development fund, which will be targeted specifically to those communities in that region — Delhi and Southern Ontario — that are affected by the tobacco transition program. The work that is going on right now is in consultation with community leaders to frame up what that $15 million would best be used for, so we are not ready to launch the program just yet. You will not see it in the estimates until it is framed up and the details are secured and until the authorities are in place.
The Chair: Do you still intend to proceed with it?
Mr. Meredith: Absolutely.
The Chair: That is what, six months ago? Sometimes when the public hears these news releases, people anticipate that this is happening or is likely to happen fairly soon. In this instance, the project still will happen, but you are just not certain when; is that right? Can you give us an estimate as to when the community development aspect will take place?
Mr. Meredith: I would expect in the coming fiscal year we will see the details. In the past six months, the real effort has been to do the due diligence necessary to make sure that we target that money where the communities need it, so there has been a great deal of consultation on it.
Senator Ringuette: I would like to clarify, first of all, that this community fund will be created. Do you have any time frame? We are already looking at eight months ago that it was announced, so what is the time frame? Will that fund be created in your department?
Mr. Meredith: I cannot give you a specific time frame for the launch, but it will be in the near future. The administration of the program will be through our Rural and Co-operatives Development Secretariat, which is part of the department, and which reports to the minister through the deputy. We will be administering it through our rural secretariat.
Senator Ringuette: In the last budget, two additional regional development agencies were created for Ontario. Is the tobacco region that we are talking about within one of these two regional development agencies?
Mr. Marsland: I believe it is in the area covered by the Southern Ontario development agency proposed in the budget, but there are vehicles we could deliver these funds through, which were run through FedNor and active in that area, the Community Futures organizations. We are currently in discussion with groups in the area to see the best way of delivering these to Southern Ontario.
Senator Ringuette: I find it somewhat bizarre. FedNor already exists. However, one of the mandates of these regional agencies to be created is to look at community economic development. At a time when the government is saying it will do a strategic review of programs and try to eliminate red tape, why would you duplicate an existing community development program?
I do not understand the logic. I understand that you are dealing with communities affected by the reduction in tobacco production. In regard to economic development outside of the agriculture sector, I am not too sure that your department has the expertise.
Mr. Marsland: That is a fair comment. We are not typically in the business of community economic development.
By way of context, the $15 million identified was part of an announcement for transaction assistance to tobacco producers in a concentrated geographical area in Southern Ontario. When it was announced in August, it was felt that the overall package required some community economic development assistance to help communities dependent on tobacco to find alternative economic means.
As you identify, we clearly are not the experts in community economic development, which is why we are working with existing agencies in those areas — including, I believe, non-profit organizations such as the Community Futures corporations — to deliver this targeted assistances in specific areas. I am not sure whether that answers your question, senator, but that is our objective in delivering this. We will use our vehicles to work with agencies on the ground that have the expertise and knowledge of the region to hopefully make a difference in economic development.
Senator Ringuette: I appreciate what you are saying. You said this $15 million was part of a package announced for the targeted area and the tobacco issue. What other funds are part of the package, from which program, and are they still on the back burner, that is, not being effectively delivered eight months later?
Mr. Marsland: The main element of the announcement was approximately $288 million, which I think is in Supplementary Estimates (C), to provide transition assistance to tobacco producers who wish to exit the industry given the significant declines in demand over recent years. It is a quota system run by the Ontario Flue-Cured Tobacco Growers' Marketing Board. The approach is to pay those producers who wish to exit $1.05 per pound of quota. We are at a stage now where we have been in negotiations with the board. I believe the board has sought interest on the part of producers. If the period in which the producers can express interest has not closed, it will close within a matter of days. We expect that to be wrapped up by the end of the fiscal year. The process since August has been one of engagement with the board to establish the parameters of how the money will be paid.
Senator Ringuette: Has the other part of the package announced in August been delivered?
Mr. Marsland: I believe the amounts will be established and paid by the end of this month.
Senator Ringuette: Within Supplementary Estimates (C)?
Mr. Marsland: The authorization is in Supplementary Estimates (C), if that passes, and the amounts will be paid out.
Senator Ringuette: Do you know which farmers will be benefiting and the amount of quota by which they will be reducing their production?
Mr. Meredith: Yes. A process is in place administered by the Ontario Flue-Cured Tobacco Growers' Marketing Board to licence or to pay out existing quota holders, if they choose that path, of course. Producers have until March 23 to submit their expressions of interest. The board will adjudicate the licensing to determine the legitimacy of applications. The payment will be $1.05 per pound. That process should be complete by the end of March.
Senator Chaput: In regard to the community development fund, do you have an idea of the kind of initiatives this fund will be helping? For example, will it be research, grants or infrastructure? Are the initiatives community-oriented? Will the communities come and tell you their needs?
Mr. Meredith: I would hesitate to give you details until they are finalized. We could commit to come back to the committee in writing once those details are if place to ensure that the committee is aware of the structure and how the program will roll out.
Senator Chaput: If I understand correctly, it is not in writing yet. You are developing the criteria.
Mr. Meredith: Yes, that is correct.
Senator Gerstein: Could you give us some indication of how you view the level of cooperation between your department, the province and the tobacco industry in dealing with this issue?
Mr. Marsland: As things stand, the level of cooperation is quite high. To give you some background, the marketing system currently in place operates under provincial jurisdiction. I do not recall the name of the provincial legislation, but it is established through their marketing structure. The province has agreed to unwind that approach and replace it with a licensing system. The licensing system will be run by the industry, the Ontario Flue-Cured Tobacco Growers' Marketing Board. To make this happen requires a great deal of cooperation, and that is in place.
Senator Gerstein: You view the cooperation as very high. Has Ontario committed to the program at this point?
Mr. Marsland: They have committed to the regulatory efforts to make it happen. They are not cost-sharing in the program.
Senator Gerstein: They are not cost-sharing in the program?
Mr. Marsland: No.
Senator Eggleton: There is a logical follow-up question to that. Are they operating or funding a separate program?
Mr. Marsland: Not that I am aware.
Senator Eggleton: Therefore, this is entirely federally funded.
The Chair: In the announcement, there was an indication that Ontario would be participating and contributing 40 per cent. The figures given in the news release referred to a federal government contribution of 60 per cent. Are you telling us that has changed?
Mr. Marsland: By way of background, agriculture is a shared jurisdiction. We have established a general approach to funding agricultural programs whereby the federal government provides 60 per cent and the province provides 40 per cent. The main business risk management programs operating to support reductions are on a federal-provincial basis funded on 60/40 basis.
I believe the announcement talked about $1.05 being the federal portion and invited the province to participate at the 40 per cent level, but the province has not done that yet.
The Chair: So that I might close this part on the tobacco farming area, at page 90, $289 million appears under voted appropriations for funding to facilitate the transition of Ontario flue-cured tobacco producers. Vote 10 total is $288 million rounded off, and there is $1 million under vote 1, which is the administration.
Mr. Marsland: That is correct.
The Chair: Agriculture and Agri-Food Canada is asking for an additional $1 million to administer this program, and the grant is $288 million, totalling $289 million.
Mr. Marsland: That is correct.
The Chair: That is in the Supplementary Estimates (C). At page 88, vote 10c is ``The grants listed in the Estimates and contributions . . . .'' Is that all for tobacco, or do the grants include other items?
Mr. Corriveau: Vote 10c includes other items for a total of $691 million.
The Chair: Yes, the figure is $691,552,117 million in grants.
Mr. Corriveau: That includes contributions.
The Chair: Can you estimate the portion that is related to tobacco?
Mr. Corriveau: It is included in there.
The Chair: What portion of $692 million for the year thus far relates to tobacco grants?
Mr. Corriveau: It is $288 million as seen at page 90.
The Chair: Were there any payouts prior to the Supplementary Estimates (C)?
Mr. Corriveau: No. Until they are approved, you cannot make the payments.
The Chair: At page 90 under Funds Available, it says, ``Less: Spending authorities available within the Vote . . . $215,336 million.'' What was the $215 million that you had available that you do not have to ask for?
Mr. Corriveau: If you look at the note below, you will find that there are two major items. One is the re-profile fund — departmental funds that will be re-profiled in future years — and the other is a technical adjustment on one of our votes.
The Chair: This is granting contribution money.
Mr. Corriveau: Exactly.
The Chair: You are not taking it out of operations.
Mr. Corriveau: No, this is the same vote.
The Chair: You have taken money out of other grants and contributions in the amount of $215 million to put into this particular program. Is that the way I should read it?
Mr. Corriveau: It is an aggregate amount such that $215 million is not targeted to tobacco per se. It is the difference between what is being asked for and what is available.
The Chair: Are there any questions in relation to that aspect before we move on to something else?
Senator Ringuette: Yes. Could you define what you mean by ``will be re-profiled in future years?''
Mr. Corriveau: They are amounts that the department is unable to spend this year. When you receive our Main Estimates for the next fiscal year, you will see that some of those funds that were not used this year will be included in our Main Estimates for next year for a number of programs listed in the small font detail.
Senator Ringuette: Are you doing carry-overs?
Mr. Corriveau: Yes, if you like to put it that way.
The Chair: You are asking permission of Parliament to carry forward.
Senator Ringuette: Not exactly, because it will be in the Main Estimates.
The Chair: Yes, but until the Main Estimates and the supplementary estimates are passed, they do not have authority to spend it.
Mr. Corriveau: Absolutely.
Senator Ringuette: I am sorry, but we are dealing with Supplementary Estimates (C). They are asking for money under vote 10 to be spent this fiscal year. Amounts not spent this year will be carried over to the next fiscal year and be included in the Main Estimates. Therefore, you are saying that when this committee receives the Main Estimates, we will see an amount included that has already been approved from this fiscal year.
Mr. Corriveau: We will ask permission to spend.
Senator Ringuette: You are asking for it in the Supplementary Estimates (C).
Mr. Corriveau: From a different angle, the $336 million is a request for new money. However, because we have $215 million available in the department, we are asking only for the difference between $336 million and $215 million, which is $121 million. How the $215 million gets managed into next year will be in the Main Estimates process.
The Chair: Following through on a specific example helps us to understand these supplementary estimates better.
Senator Di Nino had a supplementary on the tobacco industry.
Senator Di Nino: I will ask my supplementary and then move to my main question before we run out of time.
The Chair: We have 25 minutes remaining.
Senator Di Nino: Most of the $15 million for community development, if not all of it, is designed to assist the tobacco-growing area surrounding Delhi, Ontario, which is the centre of the tobacco-growing industry in Canada. Is that correct?
Mr. Marsland: That is correct.
Senator Di Nino: I totally support the good and just reasons the Government of Canada decided, in cooperation with the Government of Ontario, to discourage the growing of tobacco across the country. However, being the main growing centre, those areas were pretty hard hit. The farmers had made major investments in that industry, so this funding is in effect compensation assistance for a decision that was taken by the two levels of government to phase out, for health reasons, this particular industry. I want to ensure that people watching or listening to these proceedings at four o'clock in the morning understand what this is all about.
Mr. Marsland: Obviously, there have been a number of policies in place to discourage tobacco consumption, which has had an effect on the production of tobacco in Canada. Producers have continually faced a significant decline in demand for their product.
Senator Di Nino: I am not sure where it started, but either the farmers or one level of government said that in a transition period we should compensate these farmers, which we do in other parts of the country for other reasons. That is what all of this assistance to the farming community is about. Is that right?
Mr. Marsland: Essentially, the assistance is to help them with the decision to transition out of tobacco production on their farms.
Senator Di Nino: If they do not make the transition and they continue to grow tobacco, they will not receive any of this money. Is that right?
Mr. Marsland: That is right.
Senator Di Nino: Mr. Meredith, a question was asked about where the $15 million is being spent, and your answer was a little vague. You said you would rather not discuss it until the program is finished. While that may be so, can you give us some idea of where this $15 million is intended to go? Maybe you could talk about the process of how you are establishing the recipients of this community development fund.
Mr. Meredith: I apologize for the lack of details. It is not out of a lack of desire to share.
Senator Di Nino: I do not want the details. Help us understand what this money is for. Community development could be digging wells or it could be building a rink. What is this $15 million intended to do in those communities?
Mr. Meredith: Broadly speaking, it is to help those communities that have been affected by the downturn in demand for tobacco growing to transition successfully to other community economic development opportunities.
As Mr. Marsland mentioned, we are working with the community development experts in that area to determine exactly where those funds should be going. I apologize for the lack of details, but we are more than willing to share them once the program has been framed and the authorities are in place.
Senator Di Nino: What is the process? Is there a call for a submission of ideas and thoughts, or is it just two people meeting to say, ``Let us recommend this''? How do we reach a conclusion on where to put this money?
Mr. Meredith: I think it is fair to say that those aspects of the program would be part of the design of the program. If there were a call for proposals, a definite process would be in place, as well as a definite set of criteria for assessing those proposals and a definite set of criteria for assessing eligible groups that could apply.
Senator Di Nino: How far are we in the process?
Mr. Meredith: I would say we will have the program in place early in the new fiscal year.
Senator Di Nino: I tend to agree with the implied criticism: this was announced in 2008 and we are talking about it maybe being in place in early 2010?
Mr. Meredith: It would be in place the coming fiscal year, 2009-10, which would start April 1.
Senator Di Nino: I am glad you clarified that. It will be early in the fiscal year.
Mr. Meredith: Yes.
Senator Di Nino: It is imminent. Is that what you are saying?
Mr. Meredith: I would say early in the new fiscal year.
Senator Di Nino: Thank you.
Senator Gerstein: I have a supplementary. It sounds like we are hooked on tobacco. If a farmer accepts this transition funding, does he make a commitment to stay out of the tobacco-farming business for a particular period of time, or can he return to it?
Mr. Meredith: Once the quota holder on the date of record, which I believe is March 20, makes a decision to accept the transition money, which is $1.05 a pound per quota pound, he is undertaking not to return to the industry. He can still farm and be employed in the tobacco industry, but he cannot farm tobacco.
Senator Gerstein: Is there a specific period of time in which farmers might change their minds?
Mr. Meredith: No, there is not.
Senator Gerstein: It could be six months, a year or a season, correct?
Mr. Meredith: The commitment is without an end date. The commitment is to transit out of the industry and not produce tobacco in Canada.
The Chair: Senator Di Nino, could you move on to something other than tobacco?
Senator Chaput: I have a short supplementary that has to do with the community development fund again. It is not included in Supplementary Estimates (C); it is not here. Can you start dishing out the monies to whatever groups if it is not included in this estimate, or will we find it in the other budget?
Mr. Meredith: No, we cannot. Without the authorities of a voted estimate, either a supplementary estimate or in the Main Estimates next year, we would not have the authority to spend the money.
Senator Chaput: If I understand correctly, then, there is no way that money can be spent in the next six to nine months. Everything is so slow.
Mr. Meredith: I understand. Once the authority is secured through our own Treasury Board and through Parliament, the monies could be spent.
Senator Chaput: Yes, that is what I thought. However, that could mean a few months, as a rule.
Mr. Corriveau: It is a possibility.
Senator Chaput: Thank you.
Senator Di Nino: I will switch to page 91, the voted amounts. I would like some clarification on two specific areas: the contribution to enhance the safety and security of Canada's food systems, a very topical issue, and the contribution support of the private sector risk management partnership program, which I think would be somewhat related; risk and safety usually go together. Can you give us some idea as to what those two are intended to achieve? What are we spending that money on?
Mr. Meredith: Please forgive me; I would have to confirm, but we did have an extra demand for food safety on farm and food safety system development this year. That occurred in what we call the continuity year between our Agricultural Policy Framework, APF, which is a previous five-year agreement with provinces, and the current agreement, which is Growing Forward. There was a continuity or transition year, and during this transition year, we needed additional funds for the development of internationally recognized systems for on-farm food safety, post-farm food safety, and for implementation of those systems on the farm and on processing plant premises.
Senator Di Nino: I understand that from the title. What does it really mean? What are you talking about when you say ``systems to ensure food safety''?
Mr. Meredith: The overall program engages national commodity groups in a fairly well-structured process. There are three phases. In the first phase, the commodity group will develop a system that it feels adheres to international standards on a farm or a premise. Those international organizations will work with our sister organization, the Canadian Food Inspection Agency, CFIA, to certify that the system is up to that standard, and then they will work with farmers and with processors to assist in the implementation of those systems, either on the farm or on the premises. The assistance could take the form of training, information and communication, or subsidy to assist the farmer to implement those systems.
Senator Di Nino: Are we talking about ensuring that the place is clean? Are we talking about ensuring that the products used to produce whatever it is they are producing are safe and not poisonous? Are we talking about ensuring that the machinery is properly maintained and cleaned on a regular basis? Are we talking about ensuring that when we provide food for the cows to eat, their food does not contain any contaminants or poisons?
It would be nice for the people who are watching this at four o'clock in the morning to know what we are talking about as opposed to technical systems and so on. We are spending their money; I think we should give them a better idea of what we are talking about.
This is a very serious issue, as we have seen, not only in our country but around the world, and it is because the systems broke down somewhere along the line. Therefore, it is not the systems we are looking at.
Tell us what it is we are doing to make food and the production of food as safe as possible so that, when consumers buy it, they can feel relatively safe that they can feed it to their children without them becoming sick.
Mr. Meredith: That is a good question. I think it is fair to say that Canada has one of the safest food safety systems in the world. The systems and standards we are talking about would, in most cases, actually exceed Canada's current standards.
The intention there is to use those high standards of food safety to position our farmers and processors with a competitive advantage against those who do not have such systems. It is really an economic driver, trying to ensure that our producers are able to respond to a very high standard of food safety. I will ask my colleague, Ms. Miller, to provide some additional detail on what that means.
Susie Miller, Director General, Food Value Chain Bureau, Agriculture and Agri-Food Canada: I will use the example of the pork industry. Starting about seven or eight years ago, the pork industry associations started actually going onto farms and looking at all the places along the production chain where there could be incidents that would impact on food safety, starting with things like feed.
With feed, it could be medications, water or any of the adulterants or toxins that might get into the system that would not necessarily be caught by an impact on the animal itself. If an animal is sick, you remove it, but this is about having more security. The idea of a hazards analysis and critical control point is to go through all those steps in the production process to determine where accidents or incidents could happen, and put control measures in place so that they are checked on a regular, ongoing basis and the potential for those incidents is removed.
For example, there are records on times if farms have to use antibiotics or any kind of vaccine. There is a recording process for ensuring that all the needles are accounted for, and there are recommended practices like shifting to plastic needles so that there is no possibility of glass.
As an example of what has happened on the hog side, working with the processors, 95 per cent of the hogs that are slaughtered in federally registered establishments do come from farms that have their food safety quality assurance. Our contribution is to the associations to develop these systems, to test them, to encourage their members to implement them and also to be able to provide some funding for the individual producers to adopt a particular safety practice that they may not have had the capacity to do.
These are not regulated. They are all voluntary, but there is an approach by the industry to do what it can to ensure there are consistent practices across the country.
Senator Di Nino: Are the inspectors federal or provincial?
Ms. Miller: For these on-farm food safety systems, because they are not regulated, the individual farms are not inspected to see whether they follow regulations. However, my colleague, Mr. Meredith, talked about the three phases; the first phase is the development of the program, the second is the implementation and the third is the auditing or verification. CFIA works with these commodity organizations to set up things like audit protocols, so that, for example, each of the farms would be audited initially on an ongoing basis to see that they did follow through with the practices that were outlined.
There is also overall auditing to determine that the systems are effective at preventing incidents. Nothing is perfect; it is all based on experience. That is where CFIA comes in, in terms of giving credibility to the program per se, but the actually auditing is done by third parties. CFIA oversees the audit protocol to ensure the systems are followed.
The Chair: Senator Di Nino, you now have used up 14 minutes of our time. Can I put you down for round two?
Senator Di Nino: If we are taking time, we should take time all over.
The Chair: I am doing that. If there is some suggestion I am not running this meeting properly, let me know. Most senators who speak take five or six minutes; you have now taken 15.
Senator Di Nino: I think you and I would have a disagreement on that, but that is okay.
The Chair: The next senator on my list is Senator Eggleton, and I understand he had the Canadian Food Inspection Agency.
Senator Eggleton: Yes, my question has to do with listeriosis and the current issues here. Do you have any involvement in these issues or is it totally the Canadian Food Inspection Agency?
Mr. Marsland: No, we do not.
Senator Eggleton: We will deal with it when CFIA is present.
The Chair: Your steering committee has made a note that you are interested in meeting with the Canadian Food Inspection Agency, and we will do that at a later stage. We have five minutes left in this round. I have senators Callbeck and Mitchell and Senator Di Nino in the second round. Senator Callbeck did not understand that CFIA was not here, so she has now reconfigured her questions for the group that is here.
Senator Callbeck, could you ask all of your questions and then we will see if they can be answered in the time remaining?
Senator Callbeck: My question relates to page 88, with regard to the transfers. On the adjustments to appropriations, there are millions of dollars listed here and there is an explanation in this book for them. However, for the transfers — the $3,610,000 — I do not see any explanation. That obviously was transferred out. What programs were affected with that transfer?
Mr. Corriveau: The explanation of the transfer is located on page 90. Basically it is for two transfers. One is to the Canadian Food Inspection Agency. About halfway down page 90, if you look at the big titles — ``Voted Appropriations,'' ``Funds Available,'' and ``Statutory Appropriations'' — the transfer list is indicated right there. You will see it.
Senator Callbeck: That is where they went.
Mr. Corriveau: That is the debit to the department.
Senator Callbeck: Right, but what was affected in the department in order to take that amount of money out of Agriculture?
Mr. Corriveau: These funds were basic transfers under the Growing Forward policy framework. I can let my colleague explain the details of that.
From an accounting point of view, there is a debit of $3.6 million. Because CFIA is part of the same portfolio, if you go back to page 89, under the Canadian Food Inspection Agency there is a credit of $1.3 million. It would probably be the same; the difference of $2 million would be shown also in the Health Canada credit, in order that the books balance from the finance point of view.
Senator Callbeck: I understand that, but this money came out of Agriculture and Agri-Food Canada, so what programs were affected?
Mr. Marsland: These were anticipated transfers. Perhaps I can go back and provide you some context.
Under our broad, comprehensive agricultural policy framework, which is being replaced with the Growing Forward policy framework, we aim to do a number of things. There is a broad range of activities under certain themes.
These two relate to specific areas. One is that when we consulted with producers and farmers across the country, they said some of the issues that impinge on our competitiveness relate to things like the approval of veterinary drugs and the approval of health standards, which are within the ambit of Health Canada.
To respond to that, we provided resources to Health Canada so that that department could speed up its approvals of veterinary drugs, health claims and so on. We are not involved in the regulation of that, but in response to what we heard from farmers across the country, that this was an important issue for them, we sought and obtained resources for Health Canada to beef up its review process and speed up the process, so those inputs were available on a timely basis to produce those.
CFIA is in consultation with the sector in another area on transfers. One of the themes of the Going Forward framework was a sector to proactively manage risk. Under that theme were issues such as traceability. This is to assist CFIA in establishing the standards for bio-security systems. They have veterinary experts. If you are seeking to control issues such as avian influenza, you need systems in place to isolate the premises to prevent the spread of disease. That is a transfer to CFIA, because they have the expertise to work with the industry to develop standards for bio-security systems.
The Chair: Our time for this panel is up. I had hoped Senator Callbeck would get all of her questions in before we got a response. However, Mr. Marsland, I have three senators on my list who did not get a chance to ask questions. Would you be prepared to receive written questions?
Mr. Marsland: Of course.
The Chair: It would be good if we could deal with it in written form rather than asking you to come back another time. In the meantime, on behalf of the Standing Senate Committee on National Finance, thank you for being here and for the good work you are doing. We ask you to continue to do that.
Mr. Marsland: Thank you.
The Chair: Honourable senators, in our second panel, we welcome three witnesses from Industry Canada.
[Translation]
John Connell is Director General, Small Business Policy Branch, Industry Canada. Nathalie Poirier-Mizon is Director, Canada Small Business Financing Program Directorate, Industry Canada, and Steve Watton is Manager, Economic and Policy Analysis, Industry Canada.
Welcome. With no further delay, we give you the floor.
[English]
John Connell, Director General, Small Business Policy Branch, Industry Canada: Thank you for having us today. It is a pleasure to be here. I have been the director general of the Small Business Policy Branch at Industry Canada for five years. I started out with a branch of approximately 30 people, and that expanded to 115 people and now 120 people with consolidation in the branch. I have been responsible for policy development for the program you are interested in over that entire time and have had operational responsibility for the program during the last two years.
I would like to highlight three things about the Canada Small Business Financing Program and then I would be happy to take your questions.
First, this is a long-standing program of the Government of Canada to assist small and medium-sized businesses in Canada. The program had its origins in the Small Business Loans Act in 1961 and it has been offered continuously since that time. The program was reviewed by Parliament in the mid-1990s and that resulted in the Canada Small Business Financing Act of 1999.
Second, the program objectives are about providing financing to small and medium-sized businesses that would not otherwise obtain financing. A key objective is incrementalism. We have done studies in the past and determined that up to 75 per cent of the loans are incremental; that is, the small business would not have obtained the financing or, alternatively, they would have obtained it on less favourable terms and conditions. We find that much of the financing is provided to start-ups, to youth-owned enterprises and to other entrepreneurs that we know have a higher risk profile for banks and other lenders. Therefore, they fit within the parameters of this particular program.
A second program objective is cost recovery. We try to balance the two. The lender pays a registration charge of 2 per cent of the loan amount. Moreover, annual administration fees are charged to financial institutions to participate in the program. We do not cover all the costs, but we try to balance that. We feel that if we sought 100 per cent cost recovery, there would not be any incrementalism left in the program.
Third, I would emphasize that it is a very complex program. It is a loan-loss sharing program. The authorities are entirely found in the Canada Small Business Financing Act and the Canada Small Business Financing Regulations. We do not receive annual appropriations for the program. Rather, all losses — which are the costs — are paid directly out of the fiscal framework pursuant to the authorities found in the legislation.
The program is offered on a partnership basis with participating lenders. This includes all of the chartered banks. The role of the lenders is to make credit decisions under the program. Essentially, we have 13,000 points of service across the country for the program. They make the credit decisions; they register loans with Industry Canada; they pay fees on the ongoing portfolio of loans we have from them; and then, if they run into difficulties, they make a claim to Industry Canada. We will assess that claim, ensure consistency with the legislation and the regulations, and pay it if we are satisfied that all requirements under the legislation and the act have been met.
A group of about 20 people is at the department constantly looking at the program, including whether it is serving its purpose. A small policy group looks at gaps in the marketplace and whether we can be doing more under the program. However, the bulk of staff are actually administering the program, looking at loan registrations and claims.
I understand there are questions around the increase in costs of the program pursuant to Main Estimates tabled in 2007-08 and supplementary estimates since then. I would be happy to explain that increase but would want to do so in respect to specific questions you may have on that.
The Chair: Thank you. We have about 40 minutes for questions. I would ask each of you to think of your fellow senators when you have the floor.
Senator Mitchell: I will make my four questions as brief as possible. First, I asked the previous witnesses whether they were aware of an Alberta company called Highmark Renewables, which has built a plant that produces ethanol in a closed circle: Highmark Renewables uses non-food wheat products to ferment the ethanol and cooks manure to create a biogas that produces the electricity for the process. The final outcome is a fibrous material used for landfill or fertilizer. It is a perfect industry of the future, given that it works effectively and uses manure from the feed lot next door that ultimately would normally taint water tables and rivers. Are you aware of that project and that they received $750 million in funding to build six such plants? These are serious and successful business people. This is not someone's hobby to develop an impractical idea.
Second, whether or not Canadians are involved, a carbon market will develop out of what President Obama is doing. With their province's cap and trade system, Alberta farmers have sold offset carbon credits for $6 per tonne to Alberta companies that are required to reach a cap and cannot do it yet. Have you heard of that? What are you doing to assist large and small businesses and farms to understand and prepare for the tremendous potential that will exist when President Obama puts in place a cap and trade system? Are you advocating to ensure that Canadians will be able to purchase those credits, so that we are not sending money to the U.S. markets?
Third, could you explain why Genome Canada's research funding was eliminated entirely and its operating grants all but eliminated entirely? Perhaps you could qualify that.
Fourth, what assistance is there for Aboriginal entrepreneurs? Are you aware of or working with former Prime Minister Paul Martin, who has made this a huge priority and has amassed a relatively large foundation in support of it?
Mr. Connell: Thank you for the questions. I am not aware of Highmark Renewables, but perhaps my colleagues at Industry Canada are aware of it, in particular those who more closely monitor climate change policy.
With regard to how this company received funding in the amount of $750 million to build six plants, the maximum loan amount under the particular program I referred to is $250,000. Under Budget 2009, that will increase to $500,000, which such a company would not look to.
The other instrument for which I have some responsibility is the Business Development Bank of Canada, BDC. Budget 2009 contains provisions for the BDC under Business Credit Availability Program, BCAP. The government has indicated that it will provide up to $5 billion in financing to both the BDC and Export Development Canada, EDC. This financing will come from the financial crowns over the five-month period in which BCAP is applicable. Whether that would be a source of funds, I could not say, but it would be worth approaching the BDC or the EDC. I cannot speak to the business plan or its appropriateness for private sector financial institutions at this time.
Carbon markets are beyond my area of responsibility at Industry Canada, and Genome Canada is handled by the science and innovation sector.
Senator Mitchell: I see it here.
Mr. Connell: I would be happy to connect you, senator, with those officials.
On your question about assistance for Aboriginal entrepreneurs, I would reference our program, some of which is to assist Aboriginal entrepreneurs. As well, the BDC has targeted financing for Aboriginal entrepreneurs. Industry Canada had a program that was later transferred to Indian and Northern Affairs Canada. Aboriginal Business Canada offers dedicated financing to Aboriginal entrepreneurs and is set up specifically in that way.
Senator Mitchell: Could you find out how much was in that program under Industry Canada before it was transferred and how much is in it now under INAC?
Mr. Connell: Yes.
Senator Mitchell: I find it difficult to understand how you can say that the development of carbon market companies would be outside your realm, because many of those companies are small and would welcome funding in the amount of $250,000. If you are not aware of carbon market companies, then I would strongly encourage you to become aware of them, because this is a market and a business of the future. If you are not aware of this business and it is not within your purview, who is aware of it and within whose purview is it?
Mr. Connell: We can certainly connect you with the officials who have more knowledge than I have on this topic. I take your point on the particular program, but this program is of broad general application. For example, we will have aerospace companies, auto companies, wholesalers, food and accommodation, and others benefiting from this program. I have always said that being the director general of the Small Business Policy Branch is a tough job, because 98 per cent of business establishments in Canada are small business enterprises. In my branch of the department we try to offer general conditions of support for small businesses, but it is left to other departments and ministries to drill down and find the particular needs of the various sectors. We try to do that within the branch, but it is difficult to develop deep expertise, which does exist within the organization that I operate.
Senator Mitchell: For example, you can evaluate an aerospace company, which would seem to be complicated, and so few of those would actually be benefitted by $250,000. Yet, and I do not want this to sound as aggressive as it might sound, you would not choose companies that could develop carbon credits. I do not understand the difference.
Mr. Connell: I would not suggest to you that I have any more expertise in an aerospace company than I would have in a company specializing in climate change technology.
Senator Mitchell: However, you support aerospace companies.
Mr. Connell: We also support environmental companies. There is no distinction within the program itself in terms of eligibility requirements and who can apply. The program has a general application that is demand-driven. If the banks find that you do not fit within their risk profile, they will refer you to the program.
[Translation]
Senator De Bané: Ms. Poirier-Mizon, you are the director of the financing program. I am not familiar with this program, which Mr. Connell outlined for us and I am still having trouble understanding. Among the multitude of programs that exist for small business, where does this one fit in? How many businesses last year took advantage of this program? Who operates this program? Is it lending institutions first and then you? I have trouble figuring out exactly where you it fit in in relation to the other operators and programs. Mr. Connell spoke of increment, but in relation to what?
There is the Business Development Bank of Canada, there are other programs at Industry Canada and various other provincial agencies. There is Développement Québec, the Western Development Fund, ACOA in the Atlantic; there are a great number of them. I would like to know what is special about this program, how many took advantage of it last year, and so on. From the way Mr. Connell spoke, he was clearly addressing people who are familiar with the program; personally I am not familiar with it. I would like you to take a few minutes to tell me about this program.
Nathalie Poirier-Mizon, Director, Canada Small Business Financing Program Directorate, Industry Canada: Indeed, the Canada Small Business Financing Program is one of a number of programs offered by the government. What is special about it, as Mr. Connell explained, is that it provides a loan guarantee. It is a program in partnership with private financial institutions. It is a loan guarantee program to cover expenditures based on assets, not on working capital expenditures.
This is a program in partnership with the private sector; the financial institutions deliver the program, Industry Canada administers it. So the lenders are responsible for making the decision to give a loan or not, we are not responsible for that. We intervene to ensure departmental responsibility in the event of default.
Senator De Bané: How many of these businesses took advantage of this last year?
Ms. Poirier-Mizon: Each year, there are some 10,000 small- and medium-sized enterprises that take advantage of this program, accounting for borrowed sums worth $1 billion a year.
Senator De Bané: I see. And that is on top of what other sections of the department, provincial governments and other agencies do for the private sector, for small businesses, right?
Ms. Poirier-Mizon: Yes, because there are other agencies that will have different criteria from ours. We concentrate first on the domestic market, on Canadian businesses.
Senator De Bané: What is the maximum size of business eligible for these loan programs so that their assets can be guaranteed by you?
Ms. Poirier-Mizon: Their annual income must not exceed $5 million a year; these are the eligibility criteria.
Senator De Bané: Mr. Connell said that a few years ago you had over 100 people in this branch and now there are far fewer.
Ms. Poirier-Mizon: I am going to refer the question to Mr. Connell because I have only been director of this program for a few months, I am not familiar with the background of the branch.
[English]
Senator De Bané: You have alluded to the workforce in that directorate having been reduced substantially over the last five years, no?
Mr. Connell: No, not at all. We have increased. We began with about 30 people.
Senator De Bané: I see.
Mr. Connell: A number of responsibilities were added within the program, including a program called Canada Business. Therefore, in fact, we have stayed the same with this particular program. It has been stable at about $1 billion a year in financing over the last five years.
Senator De Bané: What is the percentage of failures in which you had to disperse and honour the guarantee that you had given?
Mr. Connell: We call them ``cohorts of loans.'' Over the five-year period that began 2004-05, there was about $5.1 billion in financing under the program; of that, the net cost was $194 million. The net cost is the cost of claims, which were approximately $478 million, less the administration fee and less the registration charge.
That is not what we call a ``net present value base,'' because those costs are assumed to occur in the future. When the loan is made, we are forecasting how much of that will go bad.
Senator De Bané: I am not a financial wizard like Senator Di Nino. What is the Government of Canada's exposure? Is it $100 million over five years?
Mr. Connell: If we talk about liability under the program, it is the cumulative lending that is done under the program over time. The maximum liability under the act is $1.5 billion, and I think we now stand at approximately half that: $750 million to $800 million.
Senator De Bané: Over the last five years, how much have the Canadian taxpayers had to pay for those small businesses that have unfortunately failed?
Mr. Connell: If we lose with these cohorts of loans, then over a five-year period I would say the net cost to the program is $138 million.
Senator De Bané: Has that allowed you to guarantee up to $5 billion over the last five years?
Mr. Connell: Yes, that would have been for $5.4 billion in that one.
[Translation]
Senator Ringuette: I wish to continue discussing this program.
[English]
What is the percentage of loan guarantees to the financial institutions in this program?
Mr. Connell: The program offers a loan guarantee of 85 per cent on the first loan that the financial institution makes under the program. On the second loan, it is 50 per cent, and on the third loan, 10 per cent. It is ongoing like that.
For each lender we establish an account; a major lender like the Bank of Montreal will have a particular account with us. Once they are beyond those two loans, de facto, we are guaranteeing 10 per cent. We would not pay any more than 10 per cent on the amount.
Senator Ringuette: You would not do so on the third loan for a particular small or medium-sized business.
Mr. Connell: That is right. There is a cap on claims we will pay that effectively limits it at 10 per cent. In Budget 2009, it was proposed that that be increased to 12 per cent to encourage additional lending by the major banks and other financial lenders, to encourage them to take on greater risk, really, in terms of that basket of small business loans they have at this time of global financial crisis.
Senator Ringuette: I certainly understand the trend here. In your portfolio, there are the first loan, the second loan and the third loan. How much of the volume would be in the first loan period, the second loan period and the third loan period? Could you identify that for us?
Mr. Connell: The overwhelming majority are in the 10 per cent category. My understanding is that when the Canada Small Business Financing Act was passed, there was interest in encouraging very small financial institutions and lenders to participate in the program. To encourage that, it was established that for the first loan we would pay up to 85 per cent, the second 50 percent, and so on. However, to all intents and purposes, for the larger lenders, the cap is actually the main control on the government's liability for claims made.
Senator Ringuette: Would you be able to provide us with that differentiation?
Mr. Connell: Certainly.
Senator Ringuette: Because this is a partnership program with the financial institutions of Canada, and we agree to guarantee 85 per cent and then 50 per cent and then 10 per cent, is there also an agreement in regard to the interest rate?
Mr. Connell: Yes. The maximum interest rate under the program is prime plus 3 per cent.
Senator Ringuette: Could you provide the specifics of that to us in writing?
Mr. Connell: Yes.
Senator Ringuette: It is very interesting, prime plus 3 per cent. If a financial institution decides to go to prime plus 5 per cent, 6 per cent or 10 per cent, what do you do?
Mr. Connell: They are limited. For a loan made under this program, the maximum interest they may charge is prime plus 3 per cent. The 3 per cent is to include the administration fee charge as well, and that is prime plus 1.75 per cent. De facto, they are at prime plus 1.75 per cent.
Senator Ringuette: Do you consider prime plus 1.75 per cent or 1.25 per cent to be a reasonable rate for this program and your partnership with the Canadian institutions?
Mr. Connell: I think it depends in part on the times, where we find ourselves with the economy. Certainly, if you were to ask that question of a major lender, they would consider it inadequate. They would probably say they could expand use of the program if they were allowed to charge a higher interest rate. They will not use the program to the maximum extent because they do not find it profitable to do so. Given the opportunity to take on riskier clients and to price the loan accordingly — that is, a higher interest rate — they would choose to do so.
For us, it is just a balancing act. Given the guarantee offered by the Crown and given that we are standing behind the lenders, we are saying they need to offer a reasonable interest rate to the small business client.
Senator Ringuette: Do you have anything to say regarding whom they agree to loan to and on what basis, considering the situation of the business and so forth?
Mr. Connell: Only as prescribed in the legislation and the regulations. As Ms. Poirier-Mizon said, it is asset-based financing only. It is not a program for working capital.
Senator Ringuette: The BBC would compliment you on that.
[Translation]
The Chair: We now have Senator Chaput, from Manitoba.
Senator Chaput: I understand that you are operating within a law and that a law has its limitations. But, by virtue of the fact that you support small- and medium-sized enterprises in Canada, these businesses are really, I would say, the backbone of our country. We are in a very difficult economic situation, as everyone knows. And these businesses are very often found in rural areas, remote areas, the most vulnerable ones.
I was wondering whether you had the authority — I am going to use this word — to think in terms of prevention and perhaps to recommend or suggest a new program. Why could we not go and see what is happening with small- and medium-sized enterprises, try to identify which ones are having a harder time than others, and come up with a new one- time program, maybe for two years, that would help them right now, with funds that could be disbursed very quickly, before they go bankrupt? Do you have the authority to think like this in terms of prevention or is this not at all part of your mandate?
Ms. Poirier-Mizon: As far as the law is concerned, we must do a complete examination of the program every five years. The next one must be done by 2010. With a view to this examination, we are actually looking to see whether there are things that could be amended, changed, improved to better meet the needs of small- and medium-sized enterprises and the market. Still, we do realize there is an urgent need, we recognize that. That is why, under the last budget, measures were announced to try and meet certain requests made of us by players for some time now.
Senator Chaput: Can you give me an example of the measures announced?
Ms. Poirier-Mizon: It is the increase in the maximum loan amount granted. Before the budget, the limit was close to $250,000 but, when the new budget comes into effect, the limit will be increased to $350,000 for loans related to leasehold improvements, and for most loan categories, this will rise from $250,000 to $500,000 for loans in the real property and immovables category.
So we will have two levels now. This was to reflect the cost of inflation. Because we heard the players complaining that $250,000 was no longer very realistic, that it was not enough.
Senator Chaput: So do we have the economic profile of our SMEs in Canada? Is there some way to say that, in certain provinces, certain regions, the difficulties are greater than in other regions? Do we have a profile we could work with? And who would be responsible for looking at this profile and perhaps coming up with some recommendations that might help SMEs get through this economic period?
Mr. Connell: I think that would be Industry Canada. There are also regional people, like Canada Economic Development in Quebec City and the Atlantic Canada Opportunities Agency. They have received $2 billion out of the 2009 budget, for a community adjustment fund. They are now committed to preparing programs and seeking Treasury Board approval to introduce new programs.
Senator Chaput: So, when you review the law, they might have some recommendations for you. But none of that deals with the immediate situation, does it?
Mr. Connell: No, it is for now.
Senator Chaput: It is for now? All right.
[English]
Senator Callbeck: Do you want me to list my questions?
The Chair: Everyone is respecting his or her time nicely, but whatever style you prefer is fine. I have been watching and it is about eight minutes to each person.
Senator Callbeck: I will ask the first one and then I will list several questions I would like answers for later.
You mentioned it was very complex. I am glad to hear about the five-year review that takes place. You said it will take place in 2010. Will small business people be involved with that review?
Mr. Connell: Yes.
Senator Callbeck: How?
Mr. Connell: They were last time. There was a comprehensive review of the cohort that ended in 2003-04. We had consultations with small business associations such as the Canadian Federation of Independent Business.
We do stay in touch with them and other associations on an ongoing basis about the program. For example, we are working with them at present to increase awareness of the program among small businesses.
Senator Callbeck: Was Mr. Manley the minister at the time of that review?
Mr. Connell: No, Mr. Emerson would have been the Minister of Industry at the time.
Senator Callbeck: Yes, that is right.
Obviously, you analyze these loans registered with you. Could we have a list of how the loans break down? You say small business is $5 million or less. How many businesses that have revenue of $5 million, $4 million, $3 million, et cetera are getting loans? I would also like to see a breakdown for how many businesses in each province have a loan registered under the Canada Small Business Financing Act.
Three years ago I was involved with the Prime Minister's Task Force on Women Entrepreneurs. Everywhere we went we heard about the difficulty women have obtaining financing. Is it possible to provide a breakdown on how many of these loans have gone to women entrepreneurs, as well as those other breakdowns for the past five years?
Mr. Connell: Yes, we will be able to provide that. I do not know whether the gender of the business owner is indicated for the purposes of this particular program. I remember the work of the task force very well, and when I arrived at Industry Canada, I met you and others on the margins of that. I recall that the Business Development Bank of Canada committed $20 million for a new subordinated financing fund in support of women entrepreneurs at that time. Moreover, your work led to the creation of new women's entrepreneurship centres in Toronto and Montreal. It is something we reviewed.
We also have the SME Financing Data Initiative regarding small and medium-sized enterprises. It is a regular survey of small business financing carried out by Statistics Canada. There is a demand survey every three years and a supply survey every year. We did an analysis of access to financing by woman-owned businesses. I would be happy to share that analysis with you as well.
The Chair: You can give any undertakings to our clerk and he will distribute them to all members of the Senate. That is the way we normally function.
Mr. Connell: We have a background deck on the program that we would be happy to leave behind today.
Senator Di Nino: I would like to suggest that the program is a good one. As my colleague mentioned, although it has been a long time, I was involved with the industry for many years. Notwithstanding that losses are a little higher than they normally would be in banking institutions, I think it is well worth it for the economic activity derived from this. I wanted to make that comment.
Does the administration fee cover what it costs to administer the program or a portion of it?
Mr. Connell: When we calculate cost recovery, it does not include program costs in the branch. They would be in the order of about $2 million per annum to run the program, which includes evaluations, staff salaries, and so on, from a total program cost of roughly $40 million per annum.
Senator Di Nino: That is not bad. The due diligence and loan assessment is done by the bank. You are not involved in that in any way whatsoever, are you?
Mr. Connell: No.
Senator Di Nino: I listened very carefully to your prime plus 3 per cent charge. Is it correct that the bank is getting prime plus 1.7 per cent?
Mr. Connell: It is 1.75 per cent, yes.
Senator Di Nino: Other than the first loan, where you are covering 85 per cent through insurance, would it be fair to say that the banks would not lend money to most other borrowers at that lower rate?
Mr. Connell: I am sorry; I do not understand the question.
Senator Di Nino: Well, 1.7 per cent over prime is a very favourable rate to get for a small business through this program. Even when you are only covering 10 per cent of the loan, that is a large benefit to the small business community.
Mr. Connell: Yes, it is.
Senator Di Nino: It is probably worth it for them to pay the administration fee.
Mr. Connell: They pay the registration fee. The 2 per cent is paid by the small business, although the business can add that to the loan and finance it under the program. We have said over the years that this is a benefit to small businesses. A major objective of the program is to put in place conditions under which they can grow and compete in an increasingly competitive world.
Senator Di Nino: Other than the statistics on loan losses, has there ever been an opportunity to do an evaluation of the program to see what kind of benefit the Canadian economy has received through this? If so, can you share that with us?
Mr. Connell: We certainly can.
Senator Callbeck referred to the comprehensive review. That is when we carry out comprehensive evaluations. We are going through that process now. The current lending period ends at the end of this month, and the Minister of Industry will be required to initiate a review of the program and table it in both houses of Parliament by the end of 2009-10. As part of that, you will see our evaluation work.
Prior evaluation work shows that the program has had, as I said, a strong, incremental effect. We have also looked at the jobs, revenue and tax implications for the federal government of those sets of businesses that have received the loans and have compared those results to typical small businesses that have not received the loans. We were able to isolate positive job results and other impacts of the program. We would be happy to share those older evaluations with you as well as the comprehensive review to come.
Senator Di Nino: Thank you. I think that would be interesting.
I am sure you are welcoming the 2009 Budget provisions of an increase from $250,000 to $500,000 and other conditions in certain cases. You made a comment that leads me to believe we should revisit the maximum ceiling the program establishes for the banks, particularly in the second, third and subsequent loans. The banks are reluctant with the conditions we place on them, or are not as aggressive in making and attracting these loans because of the low rate. Should we revisit that? It is a policy issue, but I would simply like to get an opinion from your side.
Mr. Connell: It is a policy issue. I think it would be an excellent matter to pursue in the comprehensive review.
Senator Di Nino: I appreciate that. Thank you.
The Chair: To clarify a point made by Senator Di Nino, let us assume that the lender is making its third loan to a particular small business. By statute, you are only entitled to guarantee 10 per cent.
Mr. Connell: The guarantee provision says 85 per cent, but then in the liability of the minister and the accounts for particular lenders, that will continue to say 85 per cent for the first loan, 50 per cent for the second, and 10 per cent for all additional loans. That is in the legislation. I would be happy to refer you to that.
The Chair: If 10 per cent is guaranteed, for the other 90 per cent, does the entire amount of the loan have to be at prime plus 3 per cent or the prime plus 1.75 per cent that the lending institution gives?
Mr. Connell: All loans are subject to prime plus 3 per cent.
The Chair: The entire amount of the loan?
Mr. Connell: That is right.
The Chair: Even though, if the loan goes bad, the institution will receive only 10 per cent.
Mr. Connell: Exactly.
The Chair: That is the point Senator Di Nino was making. We did not get many of those loans coming to you for a guarantee then, I would think.
Mr. Connell: We are still doing about 10,000 loans — about $1 billion — per annum. The banks would say there has been some decline. In the late 1990s, lending was at about $1.3 billion to $1.4 billion, if I am not mistaken. The banks will reference profitability of the product as a reason for declining use. As well, they will reference administrative burden, the ease with which they can use this particular program. We are constantly balancing the need to extend lending under the program, on the one hand, with our need for appropriate accountability, including pursuant to the Financial Administration Act, on the other hand. You will see a reference in Budget 2009 to regulations that are currently being finalized. They were pre-published in the Canada Gazette on February 7, 2009, and will go some way to help to reduce the burden of the program.
For example, in the past we have rejected claims for reasons of inadvertent errors committed by the financial institution, but we will no longer do that. There will be new provisions in respect of appraisals. We are making some efforts, but the fact is that the banks operate in an electronic world. At the Department of Industry, for purposes of this particular program, we are still on paper, including for claims. We have been given legal advice that to pay a claim, we must be satisfied under the Financial Administration Act that all the terms and conditions are met. We do that by ensuring that the paper supports the financing in the first place. We are in that kind of world.
Senator Di Nino: I want to put something on the record that might be useful: the prime rate today is at 1.5 per cent.
Mr. Connell: Yes.
Senator Di Nino: What is a commercial bank prime rate?
Mr. Connell: I believe it is 2 per cent or 2.5 per cent.
Senator Di Nino: For the record, it is nice to see that. Under this program, if someone borrows $250,000, which could be $500,000 once we pass the budget implementation bill, their loan rate will be 5 per cent.
The Chair: Is the $500,000 in the budget implementation bill or in the Main Estimates?
Mr. Connell: The increase in the maximum loan size is in the budget implementation bill.
Senator Di Nino: I tried to do my homework.
The Chair: I misunderstood. We have two senators left who have not had an opportunity to ask questions.
Senator Nancy Ruth: I was pleased that Senator Callbeck asked her questions around women, loans and capital. I am curious about the scrutiny of loans, which is not your job, so to speak. When you guarantee 85 per cent in the first loan, there is much higher risk, and yet you have no mechanism to do that.
Mr. Connell: None. We rely entirely on the credit decisions of the private sector.
Senator Nancy Ruth: That seems to be working, else they would not be able to come back. Do the markets determine their success?
Mr. Connell: In terms of the broad program results that we described, it seems to work. I am not sure there is any analysis on small lenders under the program and whether they are defaulting on the 85 per cent, but I do not think that is happening.
Senator Nancy Ruth: There is no analysis.
Steve Watton, Manager, Economic and Policy Analysis, Industry Canada: There is financial analysis. The financial institutions are supposed to do their due diligence on the loans before granting them. They have to respect the legislation and the supporting regulations. When a claim is submitted to Industry Canada, we go through those files in quite high-level detail to ensure that the legislation and the regulations were adhered to.
Senator Nancy Ruth: If they find that is not so, what happens?
Mr. Watton: We adjust or reject the claims.
Senator Nancy Ruth: What percentage of claims is rejected?
Mr. Watton: It is a small percentage, possibly about 3 per cent to 5 per cent. It is a fairly low rate.
Senator Nancy Ruth: Thank you.
The Chair: Our next questioner is deputy chair of this committee, Senator Gerstein, from Toronto.
Senator Gerstein: I commend you, Mr. Connell, on the program that you manage, and I commend you and your colleagues for the most articulate answers that you are providing today.
Do the guarantees that you provide to the financial institutions come grouped by the institution? It is not individual loans, is it? Is the guarantee to the total basket of loans that a financial institution holds?
Mr. Connell: Yes. When they register a loan with us, it will be registered in their particular account with us. As they build up those loans over time, we track their maximum liability.
Senator Gerstein: The liability of the total basket?
Mr. Connell: Yes.
Senator Gerstein: That is what I assumed.
The Chair: Mr. Connell, you indicated in your opening remarks that you are prepared to answer questions with respect to loans and losses. We noticed an amount in Supplementary Estimates (B) and another significant amount in Supplementary Estimates (C). Would you like to comment briefly on that? Is this extraordinary? Because of the economic downturn, are you seeing a higher percentage of defaults?
Mr. Connell: I would be happy to comment on that. These forecasts are made according to methodologies that Mr. Watton has more expertise in than I have. It is a constant forecasting of loans that could have been made anywhere from four years to 10 years ago; and that is how they are falling into arrears and are needing to pay now. That is why it is a bit of a tricky process.
In this particular case, two major factors were driving the increase in the costs under the program. The first one was the behaviour of a particular major lender. We do not have such changes in behaviour built into our forecasting model. This particular lender decided to take on more risk and to try to use the program in innovative ways. We found that approximately $20 million in the increase in costs was attributable to that lender. They will hit their cap at the end of this fiscal year, I believe, so we will cap any further payments that can be made to them. They had much higher exposure, relative to the others, to start-up enterprises, to financing for leasehold improvements and to the restaurant food services sector. We know that those three variables put them into a higher risk area. They were trying to take some risks and support small businesses in those areas pursuant to the objectives and parameters of the program, but they ran into increased claims, and they are paying on that as well.
The second factor was that we modified the variables in the model according to the changing economic situation, knowing that they would be at higher default. Part of the increase in the supplementary estimates was driven by that as well.
The Chair: Are there questions?
Senator De Bané: Excuse my ignorance. On page 147, one line says, ``Funding for proposed payments to lenders in respect of claims for loans made under the Canada Small Business Financing Act'' with an increase of close to $10 million. The line below shows a decrease of $800,000. Why are there two lines, one an increase and one a decrease, in the same program?
Mr. Connell: We have three programs that are still alive, if you will, at Industry Canada. One is the old Small Business Loans Act, which was discontinued in 1999. Yet, we still have loans on the books under that program. The second is the program described today. The third is a small business leasing pilot program that was discontinued a couple of years ago. Therefore, you will see three separate entries in respect of those.
The Chair: That is a good clarification. I presume that because two programs are no longer operating, you will slowly have a reduction in the number of claims.
Mr. Connell: That is correct.
The Chair: Are there questions? Seeing none, on behalf of the Standing Senate Committee on National Finance, I thank our witnesses for appearing today and for their work on behalf of Canadian small business.
(The committee adjourned.)