Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 10 - Evidence - October 21, 2010
OTTAWA, Thursday, October 21, 2010
The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:30 a.m. to undertake the 10-year statutory review of the Business Development Bank of Canada as required by the Business Development Bank of Canada Act.
Senator Michael A. Meighen (Chair) in the chair.
[English]
The Chair: Before starting, I wish to introduce the senators who are present now: the distinguished deputy chair of the committee, Senator Hervieux-Payette from Quebec; Senator Moore from Nova Scotia; Senator Harb from Ontario; Senator Ringuette from New Brunswick; Senator Oliver from Nova Scotia; Senator Massicotte from Quebec; Senator Greene from Nova Scotia; and Senator Nancy Ruth from Ontario.
We will be continuing our review of the Business Development Bank of Canada Act. Our order of reference for this study states the following:
[Translation]
That the Standing Senate Committee on Banking, Trade and Commerce be authorized to undertake the 10-year statutory review of the Business Development Bank of Canada as required by the Business Development Bank of Canada Act. That the Committee submit its final report no later than December 31, 2010, and retain until January 30, 2011 all powers necessary to publicize its findings.
[English]
Today we have two hours to hear from two blocks of witnesses. Our first group of witnesses will discuss a special examination report of the Business Development Bank of Canada completed in April 2009 and released by the Office of the Auditor General of Canada.
With us to speak about this special examination report, we are honoured to welcome again to our committee Sheila Fraser, Auditor General of Canada; and Nancy Cheng, Assistant Auditor General. They will be accompanied by Louise de Martigny and Gérald Daly, two associates of the accounting and management consulting firm Raymond Chabot Grant Thornton. This firm worked with the Auditor General's office on the 2009 report.
I welcome you all. We thank you for agreeing to appear before our committee this morning. I understand you might have an opening and statement. I ask you to proceed and then I hope you will be open to questions from senators.
Sheila Fraser, Auditor General of Canada, Office of the Auditor General of Canada: We thank you for this opportunity to discuss our 2009 special examination of the Business Development Bank of Canada. As the chair has mentioned, I am accompanied today by Nancy Cheng, Assistant Auditor General. We conducted this audit jointly with Raymond Chabot Grant Thornton and are also accompanied by two partners of that firm.
Under Part 10 of the Financial Administration Act, we conduct annual audits of the financial statements and periodic special examinations of Crown corporations. Some of these audits are conducted jointly with private sector audit firms.
[Translation]
A special examination is an important mechanism of accountability for Crown corporations, the objective of which is to provide an independent opinion on whether the corporation has reasonable assurance that assets are safeguarded and controlled; financial, human and physical resources are managed economically and efficiently, and operations are carried out effectively.
Any major weakness in a corporation's key corporate systems and practices that could prevent it from achieving these objectives is reported as a significant deficiency. The frequency of special examinations, as determined by the Financial Administration Act, is now at least once every 10 years. Our examination of BDC covered the period from January to September 2008 and we issued the full report to the corporation's board of directors in April 2009.
BDC has implemented a number of large initiatives resulting from measures announced in the 2009 and 2010 budgets, including the Economic Action Plan. Those initiatives were implemented after the special examination was completed. Therefore, they were not included in our audit.
We are pleased to report that we found no significant deficiencies in BDC's systems and practices during the period covered by the examination.
The corporation has sound systems and practices in areas such as governance, strategic planning, human resources, and financing activities.
[English]
BDC's strategies take the government's priorities into account and are based on analyses of the economy, developments in the Canadian small- and medium-enterprise sector, trends in that sector's financing and in private equity, as well as financial and operational constraints. Work force planning and succession planning processes are effective, and BDC has properly coordinated and communicated major initiatives and changes in its financing business processes.
Although we found that the corporation has done well in many areas, we also reported on other areas where it could benefit from improving its practices. BDC needs more comprehensive indicators of performance to evaluate the effectiveness of its consulting strategy. The two key indicators that it uses, client satisfaction and client retention, do not provide appropriate information on the contribution made by the corporation's consulting services to small and medium enterprises over the long term. Also, while BDC has improved its strategic planning for information technology, it lacks performance indicators, an overall IT security policy and cost/benefit analyses for some of its IT projects.
We are pleased to note that BDC agreed with all of our recommendations. It has developed an action plan and progress is reported regularly to the audit committee. BDC has indicated that progress has been made in addressing the key findings. However, we have not conducted an audit to verify actual implementation.
Mr. Chair, this concludes my opening remarks. We would be pleased to answer any questions committee members may have.
The Chair: Thank you very much, Ms. Fraser.
You say that "BDC's strategies take the government's priorities into account." What exactly does that mean? Does it refer to the mandate as set out in the governing legislation, or does it refer more to the day-to-day priorities of the government of the day?
Ms. Fraser: It is related to their public policy mandate and how that is to be fulfilled, as well as communication between the minister and the board and how that should be carried out.
The Chair: What I am getting at is that the act states, "The purpose of the Bank is to support Canadian entrepreneurship by providing financial and management services and by issuing securities or otherwise raising funds . . . in support of those services," with particular consideration given to the needs of SMEs. If the BDC were not respecting the mandate, would you have picked that up?
Ms. Fraser: Absolutely, yes.
The Chair: One can take from your audit that they are doing what the act says they are to do?
Ms. Fraser: That is right.
We have criticized certain Crown corporations in the past for not sufficiently defining their public policy role and for not having adequate communication and discussion with the ministers on how to fulfill that role. I understand now that there is a letter that is given from the minister to the Crown corporation outlining some of the direction, particularly as concerns public policy issues.
The Chair: The chief executive officers told us yesterday that they had a record of paying a dividend to their shareholder, the Government of Canada. Would you examine whether or not there was too much emphasis on dividend payment and too little emphasis on the granting of loans? Is that something that would have come out in your report?
Ms. Fraser: Potentially, it would. In the past, and I believe it was with BDC in the previous special examination, we have criticized them for not sufficiently articulating their public policy role. If we were to see that BDC's only objective was profit measures and paying a dividend, we would certainly raise the issue of where their public policy role was because they are not a bank of the private sector. They should have defined other objectives that would meet that public policy role. We found in this case that they have. We would have raised that as an issue. I do not know that we would have said what would be an appropriate level or what they should be, but we would have expected the board to do that.
Senator Moore: You asked an interesting and fundamental question. How did you determine that they were meeting their public responsibilities and mandate? What did you look for: the number of applications, applications approved, volume? How did you quantify the result to determine whether they were meeting the reason for which they were put in place?
Ms. Fraser: I would refer the senator to our special examination report. In paragraphs 39 to about 43, we note that they have developed performance measures specifically related to their public policy objectives, such as developing business survival rates of start-up clients.
We mention as well that they have specific operational targets for types of loan, for example, on Aboriginal banking or young entrepreneurs. They have established for themselves with the board a number of performance measures that they believe illustrate how they are fulfilling their public policy role, which was not there previously, so we have given them credit for going through that analysis.
Senator Moore: Did you look at a historic result list beyond the short period during which you conducted the examination?
Ms. Fraser: No. We would have simply looked to see whether they have done this work, whether they have established indicators and whether they are following up on them. We would not have done any assessment of the trends in the indicators or even if they were the appropriate indicators.
Senator Massicotte: This is probably the most important point for the review of the BDC and the most critical purpose we have. The chairman referred to the words in the act — to help small- and medium-sized businesses. You say it does satisfy that mandate and you would have caught it.
I would go back further. I suppose that the reason this legislation was so drafted is they did an analysis and said there is a vacuum in the marketplace; private enterprise does not satisfy those needs, and therefore the government must create a Crown corporation to satisfy those needs. Given our market-oriented economy, we believe government should only get involved to set the rules and satisfy voids.
Do we have empirical evidence stating, particularly in the case of venture capital consultants, that there is a void in the marketplace and that the government and Canadian taxpayers must subsidize this role because it is in the economic interests of the whole country?
Ms. Fraser: That is an interesting question that would be very good to discuss with the corporation. As I mentioned in my opening comments, we did have a criticism regarding performance measures for consulting. They have issues like client satisfaction, but that does not really say what the results are. Are you getting value for money for this? There should be performance measures that track the longer term and the effect that it is having for small businesses and the economy more generally, going back to that public policy perspective. The corporation needs to do more work in that area to be able to demonstrate to Parliament and to Canadians that this is worthwhile and it is fulfilling the public policy role.
Every Crown corporation should be very clear about how it is meeting a public policy role. Otherwise, why does it exist if the private sector can do it? We have been stressing in many of the special exams we have been doing that where those public policy roles are not well defined and there are not measures to indicate that, we think it falls upon the board of directors. In the previous special examination, we raised that issue. We are pleased to see they have begun to articulate that more clearly, but there are still gaps.
Senator Massicotte: I am sure you appreciate that when an organization itself is doing the analysis, there is a natural slant; it is human nature. We all want to grow and be bigger, better and more important, so I assure you the result will be positive when it comes to BDC. However, you as auditors have an independence and credibility, and it would be neat if you made assessments on those arguments for the sake of Canadians.
Ms. Fraser: Our mandate is quite clear that we do not do evaluations. We can only look to see if the organization itself has put in place measures to assess their effectiveness, and one would expect those measures to be objective. We can look, obviously, to see how well they are doing in assessing it, but we cannot conduct those assessments ourselves. I think that a 10-year review is obviously a great opportunity to do be able to ask those questions of a corporation.
Senator Kochhar: The BDC is paying pretty hefty dividends back to the government, which is a good thing, but that is not really part of their mission. Their mission is to help small- and medium-sized industry by increasing the risk factor. Instead of giving so many dividends back, do you think they should be taking the higher risk factor to help more small- and medium-sized businesses?
Ms. Fraser: As you know, the office is cautious to comment on policy, and the mix or balance between profitability and the risk that the corporation assesses is clearly a policy decision.
The Chair: Senators, if we have questions that did not occur to us to ask the BDC, we can always ask them to come back. That may or may not be necessary.
Senator Harb: I have had the distinct pleasure of working on a committee with our Auditor General, and I know that she is tough, fair, credible and reasonable, and she normally never compliments incompetence. The BDC should take a lot of pride in what you have told us this morning. I want to thank you.
Have you had a chance to see the suggested items that BDC wants to propose in terms of changes to the act?
Ms. Fraser: I think many people would be surprised to know that receiving an opinion without a significant deficiency is not a common practice in Crown corporations. Many do have significant deficiencies. This is a very positive report on the management of the corporation.
I do have the document that they prepared, but we have not done any analysis, nor do we have any comment on the issues they are requesting to be reviewed.
Senator Harb: Was value for money part of what you looked at in terms of what they are trying to do?
Ms. Fraser: It was in the sense of whether they have indicators to measure their own performance, how the board oversees that and how it assesses the performance of the corporation. We ourselves do not do any evaluations on effectiveness.
Senator Harb: In paragraph 6 of your brief, you state:
The Corporation has sound systems and practices in areas such as governance, strategic planning, human resources, and financing activities.
The BDC came to us yesterday, and one thing they asked was to improve on governance. You are saying they are doing a good job, but they seem to be going beyond the call of duty in asking for more improvement to governance. The improvement they are requesting is a change to the act so they will be able to give the board of directors the ability to delegate power to its committees. Some of my colleagues raised questions about that. Will this improve or take away from governance? Was this something that your report tackled?
Ms. Fraser: It was not something we looked at specifically. We looked more at the questions of the competency of the board, how board appointments were made, the information that the board would receive to carry out their oversight responsibilities.
I may be incorrect in this, but my understanding is that the law is quite prescriptive in the delegation that the board can make, only to an executive committee, whereas most boards today would have a number of committees, such as governance, HR and audit. The normal practice for most of those boards would be to delegate to various committees, so this was a way to modernize the act.
Senator Ringuette: In paragraph 10 of your brief, you say:
. . . while BDC has improved its strategic planning for information technology (IT), it lacks performance indicators, an overall IT security policy, and cost/benefit analyses for some of its IT projects.
Yesterday, BDC told us that they had $1.2 billion in venture capital invested in 450 high-tech companies. Is that the link that you are implying in paragraph 10, that there is a lack of cost-benefit analyses for the investment done in those high-tech companies?
Ms. Fraser: This is really about BDC's own internal information technology. When they do projects, they need to do better cost-benefit analysis internally. It was not related to their investments.
Senator Ringuette: Investment in SMEs?
Ms. Fraser: No.
[Translation]
Senator Massicotte: Thank you for being here this morning. Your role is very important. This is not necessarily an easy topic because the role of the business and the need relative to the market must always be determined.
When you look at the recommendations, they say they are satisfied with the role provided for under the legislation and they want to increase their authority and power. Earlier you answered that you had not examined that aspect, but since you have a very good understanding of the business, I want an opinion on those topics. You are very competent and very skilful. We constantly talk about that, with all the praise you received. I would like to discuss certain recommendations with you.
Earlier you commented on the need for committees on the board of directors. An argument can be made for modernization. The board can often delegate authorities. I get the impression that is not the case.
However, as regards the additional tools, this brings back a memory for me. BDC and EDC were recently questioned about their specific role of promoting the Canadian economy, a very important and highly justified role, in my view. When they testified before us, they explained that those powers were temporary because there was no expertise in that area. I found that somewhat amusing: when something is temporary, it often becomes permanent. One of the authorities they are seeking concerns new tools. They are talking about making loans to trusts. That is not threatening. It should be allowed, but I believe that, in this way, they are seeking a power, after obtaining a temporary authority; they want to have permanent discretion in this role. Do you have an opinion on that aspect? Why does the Business Development Bank of Canada want more permanent discretion?
According to the information we have received, the market in Canada has recovered quite well. Is there a reason to give the Business Development Bank these tools?
Ms. Fraser: Mr. Chair, we cannot comment on that subject. The corporation must clearly explain the need, and then it is up to parliamentarians to decide whether or not the mandate should be amended. We did not conduct a study on that, and it would be inappropriate on our part to discuss it.
The Chair: Do you want to try another question?
Senator Massicotte: Yes, I expected that answer. Indeed, in your report, you say you are very satisfied with the controls and you note a few deficiencies that they should examine, particularly in the area of consultation. You made no comments on venture capital. Do you have any comments on that subject? Are the criteria adequate?
Ms. Fraser: Our colleagues who examined that subject will answer that question.
Gérald Daly, Associate, Raymond Chabot Grant Thornton: With regard to the matter of venture capital, when we did our work, the Business Development Bank of Canada had just reassessed its venture capital position and had just received an important study report on how to do that. At the time we did our work, the Business Development Bank of Canada had already put in place some of the recommendations of the report in question and was implementing others. It was much too early to be able to comment. That is why you have no specific comments on the success of those changes in the report.
The situation may be different one year later, but, at the time of the report, little was said apart from what they put in place. We cannot say whether that worked or not.
Senator Massicotte: You are talking about the Mackenzie report?
Mr. Daly: No, that is another report that dates back three years.
Senator Massicotte: Mackenzie is the more recent.
Mr. Daly: We did not examine it because that was not part of our mandate.
Senator Massicotte: Yesterday we were told that the Mackenzie report revealed a large number of deficiencies in their practice in the Canadian market, and that will be corrected. That will be beneficial in future, and that will indeed be done. Our reaction is somewhat cynical because we heard the same thing regarding the review six years ago.
You said there was another one three years ago. I assume it was good, but no, because they continued to lose money, $100 million or more in 2008, I believe? That is not an alert for you?
Mr. Daly: I cannot comment on the financial loss because we did not work on that. We realized that the best practices had been proposed to them. They were put in place. A better practice makes it possible to work better but does not guarantee success.
Senator Massicotte: They are working well, but the results are good for nothing.
Mr. Daly: They are working well.
[English]
Senator Moore: To follow up on what Senator Massicotte was asking, you do not look at the losses; is that correct?
Mr. Daly: We did not examine the losses that occurred after.
Senator Moore: After your 2008 period of examination.
Mr. Daly: Right.
Ms. Fraser: We are aware of the financial results because we audit the financial statements each year. However, the fact that there are losses is not necessarily a bad thing. It depends on the mandate that they are trying to fulfill, the risk. Again, it comes back to whether they have adequately defined their public policy role and the role they should be playing in the market in establishing the performance indicators.
Senator Moore: They went up substantially the next year, so I thought you would have flagged that and wondered why.
Do you look at the capital base of BDC, whether they have sufficient paid-in capital?
Ms. Fraser: Again, that is really a policy decision of government. I know that this is one of the issues they are suggesting be revised, but we have not looked at the adequacy of that.
Senator Moore: They are looking for the ceiling for paid-in capital to be removed altogether. As I said yesterday, I am kind of old fashioned. I think that when they want to spend the public's money, they should come to Parliament to seek a sum and justify why. Do you think they should be given a blank cheque in that regard?
Ms. Fraser: Again, that would be a decision for you to make.
Senator Moore: I made my decision. I want to know what the auditor thinks.
Ms. Fraser: I have some sympathy for their position in that they are currently very close to the limit in the act. Should there be another need to inject capital, the process to change the act can be long. I think if there were to be another economic action plan, they would then need to modify their act in order to increase the limit. I can understand that as being a concern. Whether or not a limit should be established is really a decision to be made here. Each time capital is injected, of course, they have to go through a whole process.
Senator Moore: We passed the legislative part very quickly, through both houses, recognizing the times and the economic needs. That went through in a matter of weeks. It is interesting that yesterday, when they gave the breakdown of when they put the money out and how much, most of it was put out this year. I found that surprising. It was not 2008 or 2009; it was just this year.
I realize you are not involved in the policy part, but thanks for your indications.
The Chair: Is there a general practice among Crown corporations? Do you know of Crown corporations where there is no limit, or do they generally have a limit?
Ms. Fraser: My feeling is that they would have a limit. We have not done a study on it, but my impression is they would have a limit.
Senator Gerstein: The Business Development Bank of Canada Act describes the criteria that must be used in order for them to offer a loan or a guarantee to a client. I understand that the first criteria of offering a loan is whether that person is engaged or is about to engage in an enterprise in Canada. That is crystal clear. The bank came before us and asked to change their mandate, the act, to suggest that it would denote a benefit to Canada. That is not so crystal clear.
I suspect that that is very much a policy issue. However, from an audit point of view, I would be interested in how an auditor looks at a situation from the perspective of something that is crystal clear to one that is not so clear?
Ms. Fraser: The senator is very correct that this is an issue of policy. It is a very good question. How would the corporation, or perhaps Parliament, articulate what is a benefit to Canada? That would be the question the auditor would ask. What are your criteria to establish what is a benefit to Canada, and how do you know if something is a benefit to Canada? If that were not clear, the auditor would certainly raise a question about some of the activities that would be going on.
Senator Gerstein: That was a very helpful answer, I might say. It leads me to your report.
When a business sees an opportunity, I am sure time is of the essence in most cases. I suspect that in many cases a loan delayed might as well be a loan denied.
I am interested in paragraph 9 of your brief where you say:
BDC needs more comprehensive indicators of performance in order to evaluate the effectiveness of its consulting strategy.
Do you have any thoughts in respect of indicators they might have as to how or how long it takes to process a loan? Could things be done to speed up the process? Are there any indicators at all that you are aware of? You refer specifically to the consulting strategy, and I am interested in the process of getting a loan approved.
Ms. Fraser: I will ask Ms. Cheng to respond.
Nancy Cheng, Assistant Auditor General, Office of the Auditor General of Canada: The senator is referring to the consulting indicators. They are the non-financial activities, so that is not when they actually would provide term loans, for example. That is when they provide the management capacity. As an entrepreneur grows, one of the lines of business that BDC engages in is to provide that management expertise. That is different from the letting of loans. What you are talking about falls under finance activities, the loan-lending activities. They do have detailed processes and policies in terms of when loans should be let and the delegation to the different levels so that these processes are not held up forever.
One of the problems with small businesses in terms of engaging with large institutions is you have to get approval at a fairly high up level. That often causes delay, and small businesses need cash flow to move forward. BDC is cognizant of that fact.
Part of their regular activities is ongoing surveys to understand needs. When we were doing our special examination, they were actually going through some business engineering. They were looking at their business processes to see how they could expedite loan lending without necessarily jeopardizing the commercial aspect, because they have to be self-sufficient as well.
If you look at their line of business, they are in a well-established business whereby they know what they are doing. Over the course of time, you can see their loan portfolio grow and their loan loss provision has been pretty stable, which we can see from our financial audits. They know how to assess and manage risk, and they price according to that risk.
Senator Gerstein: That is not my question. When you talk about forever, forever can even be past next week. That may be forever to someone looking for a loan approval. I am not suggesting one approves a loan in days.
My question is: Do you look at indicators of performance whereby you review and comment on the time it takes for a loan to be approved by BDC, and do you view it positively or negatively?
Ms. Cheng: That is the aspect that Ms. Fraser talked about, getting to the evaluation of how well they do their business. The focus of the special examination is how they do their business and the measures involved. They do have measures in their financing activities so that they can track and see how long it is taking for loans to be let and whether that is reasonable.
Senator Gerstein: Do you comment on that at all? Do you have any reaction? Do you think it is a little long, a little short?
Ms. Cheng: No. We comment on the fact that they have processes to monitor and that they do review that.
[Translation]
Senator Hervieux-Payette: In fact, I have three questions, but I am going to combine the first two to speed up the process.
First, I would like to know whether, in your evaluation, you looked at and compared other development banks of other countries. Second, I would like to know the role of Raymond Chabot as opposed to that of your office. What is the role of each of the two entities?
Ms. Fraser: First, we did not conduct a comparison with other, similar banks. This is really an assessment or review of the processes of the Business Development Bank of Canada.
As for our roles, we are joint auditors. In the auditing of financial statements, both entities sign the opinion. We plan the mandates together. We share the work. This is really a joint effort by the firm with the Office of the Auditor General. We have joint mandates in four or five Crown corporations. That has been the case for a very long time in a number of mandates. I think it works well. We share at times different types of expertise, and we divide up the work roughly evenly. The opinion is obviously an opinion of both parties.
Senator Hervieux-Payette: My last question is related to activities.
Some contractors apparently criticize, saying that the bank is too conservative — that is a somewhat immoral word here — with regard to the level of risk they are prepared to accept for small and medium enterprises. Perhaps we should say small rather than medium-size enterprises because the medium-size businesses came a few years ago.
Yesterday it was explained to me why they had 23 funds in which they were investing $330 million in venture capital. A portion of those funds is not administered directly. Did you examine that?
I am not questioning the fact that they did not make a lot of money or that they did not achieve a return because that is not expected in this field.
I would like to know whether the fact that a portion of their equity — it is not they who manage, but rather outside funds where they invest together — increases their performance.
That somewhat reflects that Senator Kochhar said about paying a dividend; it is clear that, if they took more risks, perhaps they would pay fewer dividends. Does the measure you take tell us that they acted as a good parent would on behalf of Canadian citizens? Are they too rigid in their lending arrangement? Is there a subjective aspect to this?
That is why I am asking the question. Ultimately, how do we answer people who say: "I submitted my file and these people are asking for the moon; I am a small business; I cannot meet these criteria." In your view, when you looked at files, are they really so similar to those of the major banks that, to all intents and purposes, the major banks could do the work?
Ms. Fraser: As I mentioned earlier, this is really a decision by the board on the role the bank should play with regard to their public policy and the balance that must be struck between the level of risk they assume and profitability. Obviously, they have certain expectations of the Department of Finance and certain expectations with regard to their financial performance.
We do not comment on whether the balance is appropriate or not. Did they strike one? Did they clearly define the role together with the performance indicators that we would expect to see in a Crown corporation? As we all know, if it was simply a financial indicator, there would be no reason to have a Crown corporation. The private sector can do it.
So they have quite a specific mission. The idea is not to complement the private sector. They must clearly define that mandate. We note that they invest specifically in businesses or in funds; that, once again, is a decision that the board of directors and managers of the corporation must make; it is not for us to comment on that.
The only thing that we can say is this: did they do a good job of evaluating those methods? Are they well aware of the risks and terms and conditions? Apart from that, it is really a decision by the administration.
Senator Hervieux-Payette: So you did not study where they had put money in the funds?
Ms. Fraser: Not to question the model of mechanism that they should use, no.
The Chair: For clarification purposes, if the bank or another institution that you are auditing had made an investment outside its mandate, would that result in a comment on your part?
Ms. Fraser: Absolutely. And in a case like that, we would especially question the corporation's governance. How is it possible that an investment like that can be made because there will obviously have been a deficiency somewhere.
The Chair: For example, if an investment had been made outside Canada, an investment in a business located outside Canada, would that result in a comment by your office?
Ms. Fraser: Yes, we would have noted something like that as well even in our financial audit.
[English]
Senator Greene: The period of your examination was January 2008 to September 2008, two years ago or more. That was at the tail end of one of the longest and strongest economies we have had in a long time. Conditions were changing then, but now we know that they have indeed changed. We are in a different economy than we were during the time when you did your report.
I am happy to note that this is a very glowing report of the BDC. However, at the same time, we are beginning to hear a lot of frustration from business regarding the BDC and its practices.
I will ask you a hypothetical question. I know it is not fair, but I will ask it anyway because I think it is a most important question. We are in a different economy now from the time covered in your report. In your assessment of the tools uses by the BDC, its measures and processes, are they up to the requirements of a changed economy? Should they be different?
Ms. Fraser: Mr. Chair, I suspect the senator knows what my response will be.
The Chair: He lives in hope.
Ms. Fraser: We really cannot answer that question unless we were to go in with a completely different kind of review than even the special examination that we did. It would have to be a review of the effectiveness of the corporation, which our mandate precludes us from doing.
The only thing I could respond to is that in this special examination, we found that the governance practices were sound. One can take some comfort from that. If you have very strong governance and sound practices, and the board is engaged and is getting good information, they should be asking those questions of management to ensure that any required changes are being recognized and dealt with. Beyond that, I would hesitate to comment.
Senator Greene: All I am trying to do is to account for the fact that we had a very good report from the BDC and we have a glowing report from you. At the same time, we are beginning to hear a lot of dissatisfaction from BDC's customer base. I am just trying to marry up those two things.
Ms. Fraser: It might be useful for the committee to have the corporation explain how they assess risk, how they make those lending decisions and how they define their public policy role. Have they increased the level of risk they are willing to accept in these economic times?
I suspect that there will always be potential clients who are disappointed that they were refused. Is it reasonable and is the bank aware of that? Has the bank done anything to change their practices, or are they continuing the way they always have? It may be worthwhile to have that discussion with them.
Senator Greene: When we have the BDC back, we will ask you to come back as well.
Ms. Fraser: That might be a little unfair.
Senator Oliver: A number of senators have already asked about performance indicators, and you had a section in your comments today about it. You singled out two things that BDC was doing.
First, they were determining whether their clients were satisfied, which is quite a subjective thing: "We have given you a loan and you said on the phone that you liked the way we did it." The second thing was client retention: "Were we able to retain this client after we gave them a loan, or did they go to some other lender?" Both of those are kind of subjective. There should be something more objective. You used the word "comprehensive," that they need something more comprehensive.
In other audits you have done, what do other corporations do in terms of more objective performance indicators, moving away from subjective things such whether the client is satisfied?
Ms. Fraser: If I may clarify, this was only for the area of management consulting services, not for lending services. We expected to see some indicators as to how their activities in consulting have helped these corporations to maintain, grow or strengthen over time. It is up to them to better assess.
The senator is right: Simply asking whether they are satisfied with the services they received is not enough. They have to show some concrete results from the services they have provided. Is it an increase in profitability perhaps of these corporations? There are some objective indicators that they could use. Do the corporations continue on in business? Are they sustainable? Many of these corporations are fragile. Those could be some of the indicators that they could use.
I hesitate to mention others, but I am sure they could look to other financial institutions in the federal government that would have indicators that could help them.
Senator Oliver: They could have comprehensive and objective indicators.
Ms. Fraser: Yes, they could help them in determining this.
The Chair: Does anyone wish to ask one more short question?
[Translation]
I would like to thank you, Ms. Fraser and the members of your internal and external team, for being here. You are always an interesting and instructive witness for us. I believe your evidence this morning has greatly assisted the committee in conducting its business.
[English]
For the second part of today's meeting, I am pleased to welcome Jean-Michel Laurin, Vice-President of Global Business Policy for Canadian Manufacturers & Exporters.
[Translation]
I will let you make your presentation.
Jean-Michel Laurin, Vice-President, Global Business Policy, Canadian Manufacturers & Exporters: Thank you, Mr. Chair. I will be making my comments in English, but I will be pleased to answer questions in either official language.
[English]
Thank you for inviting me to appear before the committee on behalf of CME to take part in the 10-year legislative review of BDC.
Before I begin, I would like to say a few words about the association that I have the privilege of representing. Canadian Manufacturers & Exporters is Canada's leading trade industry association and the voice of manufacturing and global business in Canada. Our association represents more than 10,000 leading companies across the country. More than 85 per cent of our members are small- and medium-sized enterprises representing every industrial sector and every sector of export activity.
Manufacturing remains the single largest business sector in the Canadian economy. It is a $500 billion business across Canada, down from $650 billion the year prior to the recession. Companies that make things in Canada account for 13 per cent of Canada's total economic output. Manufacturers still employ 1.8 million Canadians in highly productive high-paying jobs. They pay one third of the taxes levied on Canadian businesses. Their contribution is critical for the wealth generation that sustains the standard of living of each and every Canadian.
However, the business of manufacturing encompasses much more than those companies that make things. Manufacturers consume close to half of the resources grown and extracted by Canada's farming, fishing, forestry, mining, and oil and gas industries. Manufacturing accounts for one third of the output of Canada's utilities sector. It consumes 30 per cent of the value delivered by business management, engineering, technical and software services. In fact, every dollar of value created by Canadian manufacturers generates $3.25 in total economic activity in Canada.
The manufacturing sector is also the home of Canada's innovators — the sector whose business it is to find solutions to their customers' problems. Manufacturers account for three quarters of business investment in R&D in this country, and more importantly from an innovation point of view, they are responsible for bringing over 85 per cent of all new products to market.
We agree with BDC that Canada's challenge is to generate more innovators and more businesses focused on solving customers' problems in new and improved ways. That is the role of manufacturing and ultimately what sustains prosperity in a 21st century economy.
Manufacturers have to be innovative because they are at the forefront of global competition. Manufactured products represent two thirds of the value that Canada derives from the rest of the world in our goods and services exports. Manufacturing is also a highly integrated sector with approximately 50 per cent of Canadian production exported to or through the U.S. and approximately 40 per cent of imports coming from the U.S. market.
CME is pleased to participate in these consultations because BDC is an invaluable business partner to our members. You could also say that manufacturing matters greatly to BDC. In fact, I believe that CME accounts for close to one third of their business activity.
It is timely that the 10-year review is happening now as we emerge from the greatest recession we have encountered since the Great Depression and as manufacturers and exporters rev up for recovery.
As our members say, if companies are doing the same thing today that they were doing 10 years ago, they are in trouble. If manufacturers intend to do the same thing 10 years from now that they are doing today, chances are they will be out of business.
Clearly, it cannot be business as usual for anyone in manufacturing these days. Canada's manufacturers will succeed as long as they continue to create jobs for both customers and investors in this fast-paced, high-risk global economy. No company can base its competitive future today on low labour costs, nor should they try. As well, Canadian industry cannot compete on high volume production that the advantages of market scale and high rates of capitalization offer.
Canadian manufacturers do have a competitive edge in their flexibility and ability to respond rapidly to changing customer demands, to specialize and customize production for niche markets, and to add value through the quality and services they bring to solving their customers' problems. These competitive strengths will become even more important as we look at current and future market trends.
In a world of intense global competition where products and services literally become commodities overnight, companies have to differentiate themselves and their products in order to compete for business and to grow. Rapid advances in technology are changing production capabilities while at the same time opening new business opportunities around the world. Customer expectations are changing. Environmental and social sustainability are becoming standard operating practices for business. As more and more constraints are placed on energy and carbon consumption, even large-scale manufacturing companies will have to become more specialized in terms of their products and production processes.
In order to compete and grow in light of these new global market realities, manufacturers in Canada need to focus on the rapid development and commercialization of new products. They need to adopt flexible, automated, integrated and reconfigurable technologies and production systems. They need to be lean to focus on what their customers value and to eliminate wasteful non-value-added activities. They need to be fast because time is the currency of the 21st century. They need to see their business no longer as one of getting product out the door but as one of using their capabilities to provide customer solutions. They need to do all of this better, faster and at lower cost than anyone else on the planet. That is a pretty tall order, but it is what successful manufacturing companies are doing day in and day out in Canada.
The reality is that production itself is becoming a smaller component of the value being added in the business of manufacturing. Today, value is also generated by the knowledge and the services that go into solving customers' problems. Value is created and money is made in product development, engineering, design, quality control, process and materials management, logistics, distribution, supply chain management and customer service. Let us not forget the critical component of business success — financing.
Increasingly, business success depends on finding the right partners to execute your business strategy and deliver value to clients. In other words, we need competitive business services providers that are responsive to changing market conditions and that are globally competitive. Access to competitive financing is one of the factors that are key to the success of our members, especially small- and medium-sized manufacturers.
Manufacturing is a capital-and technology-intensive business. It is also a business that requires you to be fast, responsive and highly innovative. We need financial services providers that can keep up with changing market conditions and work in partnership with companies to help them execute their business plan by providing financing solutions that can, for example, enable them to take advantage of opportunities selling and sourcing products around the world.
BDC plays an essential role and provides indispensable services to small- and medium-sized manufacturers and exporters across Canada. Our members that do business with BDC generally like doing so because BDC has shown an ability to be more flexible in the terms and conditions associated with their financing to small- and medium-sized manufacturers.
To quote one of our SME members in Ontario:
Four years ago, we made the largest business investment in our company's history — we purchased land, built a factory, and bought new machinery. The vast majority of the financing for this came from BDC. We chose them not because they were cheapest in terms of rates — in fact, they were NOT the cheapest — but because of their flexibility on the overall terms of the lending package. We may not have been able to do everything we needed to do if it weren't for BDC's willingness to work with us and accommodate our needs the way they did. There is no way that we could have executed our plans without BDC's support.
The recent recession has shown that BDC can be responsive to changing market conditions within the limits of their mandate and the capacity they have from the government. They were constantly looking for new solutions to address business issues and have shown an ability to be nimble and work with industry, for example, by setting up a purchase order financing program in a very small time frame.
As the nature of manufacturing is rapidly changing and as investing in innovation, new machinery and equipment, and selling and sourcing internationally become critical business success factors, we need service providers such as BDC that have the flexibility needed to continue to support small- and medium-sized manufacturers effectively. It is also important that they be able to respond to new needs that might emerge over the next 10 years.
For example, an increasing share of our members are looking to grow by investing abroad, either to buy market share or by taking over struggling competitors or by setting up operations in foreign markets. It is important that those manufacturers that value their business relationship with BDC can continue to count on their support as they move forward with their plans.
Moreover, BDC provides other important services to small- and medium-sized manufacturers and exporters, and manufacturing entrepreneurs, generally speaking. On the venture capital side, BDC plays an important role, and we need them to have the ability to have a greater risk appetite. They should also have the flexibility needed to innovate, for example, by setting up consortia of companies so they can better access professional and advisory services or help match companies with supply chain opportunities either here in Canada or in international markets.
It is also important that BDC be able to provide financing at competitive rates. Despite the government's efforts during the recession, and despite the fact that credit conditions have somewhat improved over the last year, access to financing, especially the cost of financing and the conditions associated with financing, remains an important issue facing our members, regardless of which institution they do business with.
I will end my comments here, and I am pleased to answer any questions that you may have.
The Chair: Thank you very much, Mr. Laurin. I will put you down in the category of a supporter of BDC.
Senator Ringuette: I was very happy with your example of an entrepreneur that bought land and built a manufacturing facility in Canada, creating jobs in Canada, and the help they got from BDC, because essentially that is their purpose and current mandate. They are suggesting that their mandate be expanded to include Canadian dollars invested in foreign countries through this Crown corporation. How would Canadian manufacturers, your membership, react if placed in a situation where a Canadian manufacturer was requesting X amount of dollars to create jobs in Canada and another manufacturer was requesting X amount of dollars to create jobs in another country? What would be your reaction?
Mr. Laurin: I do not think it is an either/or proposition. I think that is a misconception.
Senator Ringuette: BDC has a cap on the amount of dollars that they have available to lend to Canadian SMEs.
Mr. Laurin: We ask our members, through surveys and meetings we have with them, if they are looking to invest as we come out of the recession and, if so, what their plans are. We are hearing from many companies that the opportunities for investment are sometimes in Canada. The example I gave is of a company that invented in Canada. However, in many cases they are saying that if they want to compete and win in their industry, they need to be able to serve their customers around the world and be able to beat the competition not just in Canada but the competition in United States, Asia, Europe and all over the world.
Many companies are looking to buy competitors in the U.S. I hear that a lot. They are looking to acquire companies in the United States. The recession was tough on manufacturers in Canada, but in many cases it has been even tougher on U.S. manufacturers. Our members are saying they want to acquire companies and market share in the United States or in other parts of the world, and they will not be able to sustain the jobs they have in Canada unless they are able to do that. Otherwise, their competitors elsewhere might buy up the companies and get the market share.
When you are investing in another country, whether the United States, China or somewhere else, usually you do that not to invest either in Canada or elsewhere but to maintain what you have in Canada and to continue to grow business in this country.
Senator Ringuette: Not necessarily. Sometimes you invest in other countries to have access to lower cost human resources and to lower your overall cost to compete. Therefore, your foreign investment, at the end of the day, would reduce the number of Canadian manufacturing jobs.
Mr. Laurin: As an example, I have seen a number of metal fabricators invest in China. The first reason they did so was that they wanted to source inputs at a lower cost. They had no choice. Many companies that were not able to lower their costs quickly enough to respond to growing competition, but also an appreciating dollar, are unfortunately no longer in business.
Our members are telling us they need to make those investments in the short term in some cases to reduce their costs and keep some jobs in Canada. However, the nature of what we are doing in Canada is changing. Much of the production of the high-volume commodity type of products that we used to manufacture in Canada has moved overseas, and today we are focusing more on production activities that are more value added, more tied to the R&D and innovation of the company. Many companies will say that if they had not made those investments abroad, they would not have survived as a company.
The other reason many companies are investing in China is that they want to start selling in that market. In many markets, you cannot sell unless you have a domestic presence in that market.
Senator Ringuette: These SMEs, the more medium-sized businesses, would have access to our Canadian chartered banks or any other lending institution, even in the foreign country in which they want to make an investment, in comparison to a Canadian tax-dollar-based investment in a Crown corporation.
Mr. Laurin: It depends. We have seen, especially since the recession, that the risk appetite of certain financial institutions is not the same. There is less money available, and banks have reduced their exposure to certain business sectors. For example, many companies selling into the automotive supply chain have been facing issues with access to financing. I could provide more examples of companies in that sector that could say they would no longer be in business without the support of either BDC or EDC, or both.
You are right in that the private sector plays an important role. We are not saying the government should take over all of the financing, but I think there is a role for BDC to play, especially in areas where there is somewhat of a market failure. I have not discussed this issue with banks. However, when talking with small- and medium-sized companies, in many cases I hear that yes, financing is available in the private sector, but the terms and conditions are not always such that they can qualify, or they might have to twist themselves into a pretzel to qualify, which would jeopardize other things they have been working on as a companies.
I am not saying every company or every one of our members does or should do business with BDC, but those that have developed a good business relationship with them generally want BDC to have the flexibility to continue to support them in whatever it is they are doing.
I do not know if anyone here has been in business, but what I hear from entrepreneurs is that they want to do business with someone that has a good understanding of their business. You do not have to always explain what you do and what your strategy is. You want a business partner you can trust because that business partner has a lot of information about you. Your banker tends to have more information on you than anyone else, aside from your accountant.
Once that trust and relationship is developed, companies do not necessarily want to go elsewhere unless they have to. Their preference would be to continue to do business with the same person they trust.
Senator Hervieux-Payette: On this particular question, let us say we agree but with some limitations so that the interests of Canadian taxpayers and other companies and SMEs are protected. When you talk about investing abroad, I hope you are referring to medium-sized businesses. A small business with less than 20 employees wanting to invest abroad does not usually have enough money to travel to those countries in the course of a year. Whether they go to China or elsewhere, it would take all their cash flow to do so.
If I understand what you have said, we are talking about companies that have grown up with BDC and they do not want to lose their mother. I am just thinking that maybe as grown-up children, they should go to a private sector bank.
Our banks are moving more and more abroad. They have been talking about it for the last 25 years, but they took a lot of time to set foot in those markets. We now have a lot of activity taking place in Latin America. Of course, we agreed that salaries would be less and many companies moved their production to Mexico, such as Bombardier. As far as I am concerned, our banks should be accompanied by the private sector. We will see the banks at a later date, and we will ask them why they do not accompany the private sector.
What I hear you saying is that they are more comfortable. This is not a business decision. It is just that they know each other and, of course, they would like to continue the relationship. For me in business, and especially for public policy, it is not good criteria. Good criteria would be that it is a good project and a good investment, but it should not be taken care of by the Canadian government.
I want your reaction to that. The only evidence you gave us is that they would be more comfortable. You have to give me another reason to be convinced.
Mr. Laurin: I do not have statistics to back this up, but I have a lot anecdotal evidence to say that we have competitive businesses that should have access to credit. Especially given the market conditions over the last two to three years, they would not have been able to move forward with their business plans if not for BDC and EDC. You have to understand that the nature of their business is countercyclical.
I will agree with you; generally, banks are able to do things that BDC and, in some cases, EDC cannot necessarily do. I do not want to get into that discussion.
The size of business does not discount the fact that companies need to grow internationally. For example, I can think of one of our members who has under 20 employees. I am not sure they have even 10 employees yet. They manufacture carbon capture and storage technologies, but their market is not in Canada. Their market is where new manufacturing plants are being built and, unfortunately, we are not building that many in Canada right now. Their market is mostly in Asia. They are a good example of a small company that is innovative and internationally focused. I do not think they have any sales in Canada, for that matter.
Do not discount the fact that many smaller companies that are emerging do not necessarily have a market in Canada, but they have the knowledge and technology here to develop something even though the market is not necessarily in this country.
Your more direct question was this: What should be the role of the private sector banks versus BDC and EDC? Some sectors have been saying that their members continue to do business with private sector banks. However, given the banks' risk appetite for certain companies because of their sector or location, or for a number of different reasons, they are reducing their direct exposure to these companies. These companies are saying, "They do not like some of our clients, so we have to look elsewhere."
The fact that we have BDC and EDC in Canada helps to add capacity to the market. It is important to stress that their role is complementary to what the private sector provides. There is a complementary role that somebody must play, and we think BDC and EDC are the appropriate institutions.
Senator Hervieux-Payette: It should be a criterion to accompany the private sector but not be a sole source.
Mr. Laurin: The Business Credit Availability Program was established in the federal budget of 2008 or 2009. Many transactions flowed through that program. It was a program without necessarily any money. It was basically a facility set up by the Department of Finance that allowed private sector banks, BDC and others to work to complement each other. That mechanism has been working effectively. It has helped to facilitate transactions and business deals that would not have happened otherwise.
I think business and credit conditions have improved somewhat over the last year, but I still hear regularly from companies that — the money is there. It is more about the conditions and terms under which financing is available, as well as the costs. Even though rates are low, the rates that businesses are charged over prime rate are still high and still constrain the growth of many Canadian companies.
The Chair: We pointed out to BDC that they are not allowed to loan directly abroad under the present act, but of course they could loan to a company here in Canada.
In your example of a small 10-person firm with a market in Asia or South America or wherever else, why could BDC not make a loan to the Canadian company, and the Canadian company could use that money to do whatever they must do abroad? The only argument we heard was that this would possibly distort the balance sheet of the Canadian company.
Mr. Laurin: I am not clear on the mechanics of the transactions that this specific company would make, but what is important here is that the line between what is domestic and what is not domestic is blurred. I do not know when the BDC Act was written, but I understand that it was over 10 years ago. At that time, international trade was very simple.
The Chair: I understand that. There is no blurring between ABC Company Canada Inc. and ABC Company Mexico Inc. They are two different legal entities. One may be a subsidiary of the other. Have you had a lot of concern from your members who might be saying, "We have talked to BDC and they would like to loan us money. We want it down in Mexico, but the only way they can give it to us is here in Canada, and that will cause us problems"?
Mr. Laurin: I have heard that specific example. We have been hearing from members that they will not be able to tell us, for example, "It is because of the BDC legislation." In many cases, I hear: "They had to cancel the transaction because of the nature of the deal, the way it is structured, so we have to go somewhere else."
If a company were buying up assets in a foreign country, would BDC have the flexibility to facilitate those transactions? It probably depends on the legal arrangements. Again, that would probably be a better question for BDC to answer.
The Chair: I understand they have the right to loan to a Canadian company.
[Translation]
Senator Massicotte: I am not surprised that manufacturers support the proposal because, in your shoes, it is obvious that the more lenders there are, the better it is. I want to confirm a few facts about the comments you made. You agree that BDC's role is to fill a market void.
As a Crown corporation, you agree that you should not compete or get involved in the private market unless there is a void. You would not like to compete in the manufacturing sector. You have to show at the outset that there is a void. I would really like to focus on this point.
You said that there is not a lack of liquidity; there is not a lack of funding as such; money is always available. The problem is the conditions and perhaps the rates that competitors want to charge for that risk and that transaction. We are going to talk a little about that. There is always an available lender; that is not a problem. The problem is that it may charge a higher interest rate or higher transaction fee. I would like to discuss that argument. We can conduct an analysis. When you look at BDC's financial statements, the return on invested capital, the return on funds that government taxpayers lend to that business are well below market conditions. They make a return of 6 per cent to 8 per cent, whereas the Canadian banks achieve a return of 20 per cent before taxes. That is quite a large subsidy by taxpayers in order to make these loans to your members. That explains why they are much cheaper than the competitors. However, is it a valid idea for taxpayers to subsidize loans to your business?
You say that, if these favourable conditions were not available, the transaction would not be done. Perhaps it should not be done? But why should it be conducted if it is financed by taxpayers? Where is the benefit for Canada in that situation?
Mr. Laurin: Thank you for your question. In general, that is a comment that we regularly hear from our members: BDC's rates are not the lowest; in general they are higher than what is available in the market. What we often hear is that we are going to do business with them because they often have a bigger appetite for risk than the conventional financial institutions.
There is a market void; this is a societal choice that we have to make. Is there a role for an independent financial institution financially supported by public funds that has a greater appetite for risk and helps businesses grow, create employment and ultimately ensure our economic future? Otherwise these transactions would not be conducted because the type of sectors in which they occur is not of very great interest to the conventional banks because they are unable to secure financing on the terms and conditions they need, or just because there is not enough capacity in our domestic market. So there is a role for an institution that is able to lend on more advantageous conditions for these businesses.
The market void issue is to see — and I agree with you — the role of the institution such as BDC. We do not want them to lend at a loss or for that to become a burden for taxpayers. However, to the extent they are able to provide financing to businesses that would otherwise not have access to financing, you have to look beyond financing. BDC is active in venture capital, where there really is a shortage of financing in Canada.
The institution has shown that it is able to play a positive role in this market. If you talk to people in the biotechnology field, they will say that BDC plays a fundamentally important role in venture capital in Canada, even though they have a limited presence relative to the pension funds, for example; they play a fairly important role.
How do you define that market void? I am not an expert in defining it. What we hear from our members concerns subordinated financing, second-tier financing. BDC is very much involved in this market. It shows a great deal of flexibility with businesses that it believes in and that have good business plans, good strategies and financial results. This shows that it does not take risks beyond what Canadian taxpayers might expect.
Senator Massicotte: I would like to understand. Earlier it was said that there is no lack of capital; it is the terms and conditions.
Mr. Laurin: Yes.
Senator Massicotte: You said, no, BDC's interest rates are lower.
Mr. Laurin: Higher, always higher; that is what we hear all the time.
Senator Massicotte: There is a shortage of what? What are the conditions to which they contribute? They cost more; there is available capital. What advantages does it offer so that clients are interested in supporting BDC?
Mr. Laurin: That may be the repayment period, assets pledged as collateral, percentage guarantees, the rate; that is the most visible aspect, but there are other conditions. Ultimately, if you take on a financial obligation with a bank or BDC, it is with respect to these conditions. There is greater capacity to be creative and to find a way to work.
Senator Massicotte: If you analyze a loan, there are security and transaction costs. BDC costs more. You say that BDC takes higher risks than the others. Something is not right here. There is adequate competition. I am trying to establish what the void is, why it even exists?
Mr. Laurin: What we hear is that the rate is higher, but they are more flexible with regard to required guarantees and the way the loan is structured. In other words, the banks do not want to take risks, whereas BDC is prepared to take on more and to work with us to structure the transaction in a more suitable way. Thus, we can move forward with our project; otherwise there would have to be too many guarantees, and that compromises our ability to borrow elsewhere or to satisfy first-tier creditors.
Senator Massicotte: One thing is certain for the client: it always costs more. When you say it costs less, that is because the risk is lower. It takes a subordinated risk, but it is always too expensive.
BDC is there to help you; it is a model. The idea is to be more competitive. We hear that a lot. Yesterday the Governor of the Bank of Canada said that productivity is a major problem in Canada. We are not competitive enough.
The manufacturing sector is often singled out. It does not invest enough, perhaps because BDC is not doing its job. That is a major problem. Why do your members not get more seriously involved in order to make our economy more productive and more competitive?
Mr. Laurin: First, I do not agree. Our members have made major efforts to improve productivity. Furthermore, the main response by businesses to the rising dollar, which was at 65 cents, 5 or 6 years ago, and which is now at parity, was to improve productivity, to eliminate waste, to put everything in place to achieve lean manufacturing. I would say there is still a lot of work to do.
I believe that requires investments in capital, in innovation and in developing new markets. We have been attacked a lot. If there is one economic sector that compares favourably on productivity with its competitors in the rest of the world, it is the manufacturing sector. I can provide you with figures that prove that.
However, it is never enough; we always have to continue improving. If you look at the investments manufacturing businesses make in new material, new equipment, we are often told that that decline during the recession, even though the government came up with measures to stimulate investment in machinery, manufacturers are dragging their heels. If you take a look, I can provide you with figures, the percentage of available capital invested by businesses has increased, year over year; it does not stop increasing.
So, businesses definitely have less available capital because their sales declined by roughly 25 per cent last year. There is a short-term cash flow problem, except that a larger percentage of available capital is invested by manufacturing businesses. However, a lot of work definitely remains to be done. This is the main problem we have asked to have solved in the next federal budget.
[English]
Senator Kochhar: Mr. Laurin, you have spoken very positively of BDC and the good job they are doing. You can always learn more from people who do not like you than from people who like you. You have quoted some of your members who have spoken about BDC in glowing terms. Do you have any examples of comments from people who have criticized BDC for its practices? Do you have any knowledge of the things that BDC could improve upon or how BDC's policies could change?
Mr. Laurin: That is a very good question. As I said earlier, the comment we hear most often is that rates are higher than elsewhere. That is a comment we hear regularly.
As with any major service provider, we hear of cases where there have been issues or unsatisfied clients. BDC is like any other business in that regard. Our experience has been that if we have members telling us they have a problem, we can usually come up with a solution. Sometimes it has to do with the local person with whom they are doing business. I wish I had a long list of issues that I could bring to you, but we have not heard that many.
Certainly the figures show that BDC stepped up quite a bit during the recession, but a number of companies still could not find financing under any terms, conditions or rates. Even the private banks lent more during the recession. Everyone made a significant effort in response to the capacity provided by the government. In terms of anything specific that BDC should be doing to improve their service offering, I am at a loss.
Senator Kochhar: In your opinion, BDC is giving a fair amount of return to the government in the form of dividends. Should they increase their risk factor from what it is right now? That might serve to reduce the dividend or profit margin, but it would fulfill the mission for which BDC was established.
Mr. Laurin: Their objective, as much as possible, should be to break even. I do not think taxpayers want to subsidize lending to manufacturers. Their role is to take on risk where there is a market failure and where there is a need for the public sector to step in. We have been hearing about venture capital markets. We need BDC to take on greater risks that the private sector may not be willing to take on. It is a delicate balance. How do you take enough risk and play an active role in the market while at the same time not taking too much risk that might require the government to bail you out at the end of the year? It is a delicate balance that over the last 10 years or so BDC has been able to achieve effectively.
Senator Kochhar: Do you have any written recommendations for this committee for improvements to BDC?
Mr. Laurin: I can share comments that we have received from our members. We have testimonials that you might find helpful.
The Chair: Would you send those to the committee?
Mr. Laurin: Yes.
The Chair: Would that be helpful, Senator Kochhar?
Senator Kochhar: Yes.
[Translation]
We have benefited from your presence here and from your presentation. Thank you on behalf of all the senators here today.
[English]
Senator Ringuette wishes to raise a matter before we adjourn.
Senator Ringuette: I want to highlight something that I should have done yesterday. The BDC has indicated to us that there are similar corporations in other countries with a similar mandate to that of BDC. It would be of great value to us to obtain a list of such banks in other countries. BDC probably could easily supply that list. It would be a great exercise for us to look at the general mandate to know how they operate comparatively. I do not want us to spend more time than necessary on it, but it would be of value to this committee to do that exercise. When we prepare our recommendations, we will have a better idea of what is going on in that sector elsewhere.
Senator Hervieux-Payette: When they made their presentation, their document contained information on 20 to 25 trading countries, and they provided comments on the mandate. We could ask the clerk of the committee to obtain this information. Generally speaking, we would need it in point form. As well, we would have to consider the respective size of the economy of each country, what kind of money is available and what mandate they have. We are dealing with competition. We could see whether we are part of the club of the OECD countries.
BDC has quite a bit of information from their study. Part of it was in the report provided to me, but you would also like to have information on their different organizations. France is probably more aggressive than we are in terms of helping and supporting their companies.
We would need the terms and conditions they provide, as well as the size of their budget. They might have a great mandate but no money. We need to know what is available to their small- and medium-sized businesses. These would be mostly OECD countries. I do not think China is there.
Senator Massicotte: It would be neat if they had a report on what they call development banks. There are a couple of articles on that.
The Chair: Let us get what we can and then we can take the matter further. In the information requested, we could include whether the organization has a dual domestic and external mandate.
Senator Hervieux-Payette: All of the features would be helpful.
Senator Massicotte: What other witnesses do we have planned for this debate?
Senator Hervieux-Payette: Thank you for that question.
May I say, Mr. Chair, when we started our study there was a possibility of hearing witnesses from EDC. Since then, they asked to have their own report.
I would feel uncomfortable studying EDC because we would have to do it the other way around. I am saying that maybe we will have to put forward an interim report and say to the government that they have to do this now. However, when it comes to the foreign side, maybe we will have to wait for EDC's presentation. They want us to review their mandate and the mandate of the other Crown corporation. How can we come back with a good picture of what the two organizations do?
I do not think it would be appropriate at this point to hear from EDC. I would like to hear the whole story about BDC's neighbour, not just a bit of it.
The Chair: I worry about doing two separate reports in that I think BDC and EDC have inevitable linkages. We may have enough time to do both reports by Christmas.
Senator Massicotte: What other witnesses do we have?
The Chair: Leaving EDC aside, we have the governor on Wednesday, and the Canadian Bankers Association and the Credit Union Central of Canada on Thursday. The witnesses have not been confirmed for the following week. We are looking at other organizations such as the Chamber of Commerce and the Conference Board.
Senator Massicotte: You are referring to SMEs. You have to cater to banks that do SMEs. The Canadian Bankers Association is obvious, but maybe we should hear from groups like the Laurentian Bank as well. The credit union is very good because they are very heavy in that sector.
Senator Hervieux-Payette: They are all represented in the Canadian Bankers Association, so maybe when they come, we can ask them to send one representative for the banks. It is the same thing with the credit union; Caisses Desjardins is a small financial entity. I think we should ask the clerk to ensure that we have one bank that deals more with small business because the Royal Bank is certainly not a small business bank.
Senator Massicotte: An executive director will speak in generalities, but some banks specialize in small business, like Desjardins. It would be good if they were here, as well as Laurentian Bank — if they were physically here with the Canadian Bankers Association — to get people who do loans. Let us hear from them about whether they are competing with BDC and whether they are losing business to them.
Senator Ringuette: In cooperation with Senator Mockler —
[Translation]
— we would like the network of Canadian caisses populaires to testify because they are directly involved with small businesses in the communities. Notwithstanding this question, I believe that there is obviously something that must be clarified in our own mandate.
[English]
The Chair: Should we go in camera, colleagues? The business of today has been concluded. We will discuss our internal matters in camera.
(The committee continued in camera.)