Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 12 - Evidence - November 3, 2010
OTTAWA, Wednesday, November 3, 2010
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:20 p.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: Welcome to this meeting of the Standing Senate Committee on Banking, Trade and Commerce.
Pursuant to the authority granted to this committee by the Senate on October 5, 2010, we are continuing our review of the Business Development Bank of Canada.
This is the fourth meeting devoted to this topic. Subsequent to hearing from representatives from the Business Development Bank of Canada on October 20, it is my hope that our hearings will focus on the merits of the five requests that the Bank has made during this current review. A detailed explanation of these five requests is available on pages 43 to 51 of the BDC legislative review document entitled Building an Innovative Nation One Entrepreneur at a Time. This document is available on the BDC website.
Joining us to give their perspective on this topic are Mr. Glen Hodgson, from The Conference Board of Canada; and Mr. Stéphane Achard and Mr. Bernard Brun, from the Desjardins Group.
In hour two of today's meeting, we will hear from representatives of the Canadian Chamber of Commerce and the Canadian Federation of Independent Business.
[Translation]
Honourable senators, Glen Hodgson brings 27 years of experience and a specialization in international economics and financial issues to the position of Senior Vice-President and Chief Economist of the Conference Board of Canada.
Mr. Hodgson joined the Conference Board in September 2004, after 10 years at Export Development Canada. He also spent 10 years with the Department of Finance.
Stéphane Achard is Senior Vice-President and General Manager, Business Services, Desjardins Group. Prior to his appointment, Mr. Achard was Senior Vice-President, Business Markets of the Fédération des Caisses Desjardins du Québec since 2003.
[English]
Honourable senators, accompanying Mr. Achard is Mr. Bernard Brun, who serves as Director of Government Relations at the Desjardins Group.
Gentlemen, welcome to the Standing Senate Committee on Banking, Trade and Commerce. We would be pleased to hear opening statements, following which we hope you will take our questions.
Glen Hodgson, Senior Vice-President and Chief Economist, The Conference Board of Canada: Thank you, Mr. Chair, for showing my initial biases. Yes, I was a federal official for ten years and worked at BDC for ten years. I have had a chance to watch BDC's evolution over my career. I have three or four things to say. I do not have written comments, so I will speak spontaneously.
The BDC was kind enough to attach a brief that I wrote earlier this year on the global financial crisis, the consequences and the lessons we are drawing from that experience. We are in the midst of turning this into a book, which will be out in two and a half weeks. I hope that senators will show interest in it when the time comes. The brief is called Lessons From the Recession: Overview—What Caused the 2008-09 Financial Crisis and Recession? Lesson two is Public Sector Financial Institutions Prove Their Worth. I drew upon my experience at the IMF for three and a half years. I oversaw Canada's investment in the IMF and World Bank for a period of time as well as EDC in my time at the Department of Finance. I was trying to understand who took advantage of public sector financial institutions during the financial crisis. The bottom line is that Canada was lucky as an investor and member of the IMF and World Bank globally. They are back in business and will stay in business for some time. The IMF was almost out of business in 2007. They were reaching the point where they were laying staff off because there was no credit. Today, they are fully back in business, extending $50 billion to $75 billion in credit this year.
Within Canada specifically, we were well served by having BDC and EDC in place to step up during the financial crisis to fill gaps that emerged in the marketplace within Canada. To do that, I came up with the phrase ``the sleeping beauty theory of developing finance,'' or what is called generally ``the state of readiness.'' If you do not have the skills and the experience to operate, you cannot step up; but if you do have the skills and experience, you can play a powerful role within the national marketplace. BDC in particular was able to step in and ensure that credit was available to small businesses at a time when other financial institutions were recoiling and pulling back, and to take on other tasks at the request of the federal government.
That is an important concept. I saw both BDC and EDC evolve over the years away from being lenders or insurers of last resort, which is a difficult model to manage well that costs the treasury a lot of money. The state of readiness is a much better concept because it leads to complementarity, being there alongside both private and membership-based organizations that behave in a private way as we behave in a private way in our capacity as a not-for-profit think tank. The BDC is there ready and working on a daily basis to fill gaps in the marketplace, acting as a complementary player to ensure that deals are done for our small businesses, that they do not fall between the gaps and actually have a bankable transaction that otherwise would not get done. I see that as really BDC's job. State of readiness is a concept I like, and it is described more thoroughly in the brief.
The next point is around global value chains. I spent a lot of my career at the Conference Board and before that at EDC watching the evolution of how business is done today. We have evolved to a state that is built around global value chains or global supply chains. Value is a bigger concept because it goes beyond hard goods into the creation of ideas and functions within a modern business today. More and more for a small company to be competitive, it has to be able to engage global resources from the first moment. It is no longer a matter of doing something well in Canada and then taking it to the world. Our companies have to find a space in global value chains where they can add value, attract clients, have inputs coming from elsewhere in the world and have the flow of investment two ways. That is the competitive model of today. I say that because you then have to think about how BDC's evolution will proceed and how they will play a role within global value chains. This means opening up the basket, thinking beyond financing within Canada and having the capacity to follow your clients offshore and finding ways to add value doing so.
EDC does that as well. I understand there could be some overlap and occasional conflict. I am not troubled by the overlap because it means we do not have gaps in the marketplace. Any friction that emerges between EDC and BDC could be addressed through a clear understanding determined in advance about how you will resolve any differences.
Generally I am sympathetic to the idea that BDC has advanced in terms of expanding their financial powers and the other elements being sought. That covers the opening remarks I wanted to make.
The Chair: Thank you. I have one question for clarification.
With regard to your comments about the advisability of following your clients abroad, BDC has certainly made the argument that they wish to do that. As you noted, EDC is abroad, and I understand they have a higher threshold under which they will not get involved. They are doing bigger deals.
Mr. Hodgson: Yes.
The Chair: Does that remove potential conflict between BDC and EDC in your view?
Mr. Hodgson: Not always. EDC has tried hard. In my time at EDC, I saw a tremendous evolution. They are thinking about how to serve small business. We went from doing virtually nothing or few deals in the 1990s to small business becoming an important part of the portfolio. It is not a matter of deal size but rather a matter of client relationship, understanding what the client is trying to accomplish, then looking at the kind of tools that either organization has to determine who has the best tools and the best client knowledge to do the risk evaluation, to shape the product to meet the client's needs and to offer the service. I think about offshore investment, for example. I have written a lot about this subject as a critical success tool for Canadian businesses going into the world.
EDC has equity powers, but they are circumscribed in how they use them. BDC is more active in the areas of venture capital and straight balance sheet financing for small companies. On many occasions, BDC may be the better tool for doing something like that. If there is conflict, they have to find a way to communicate because they are both agents of the federal government. They are agents of the Crown trying to create wealth for Canada. That means there has to be a dialogue and an understanding as to who does what with respect to both offshore and onshore ventures. EDC has expanded its powers over the last two years in domestic financing, which means they are growing into BDC's space.
I do not think it is necessary to have a hard boundary line between the two. It is a matter of understanding who has primacy and who has the right skills to bring to the table.
[Translation]
Stéphane Achard, Senior Vice-President, Business Services, Desjardins Group: Thank you, Mr. Chair, Honourable Senators. On behalf of the Mouvement Desjardins, I am very happy to be here today to take part in this 10-year review.
In my opening remarks, I will endeavour mainly, if you will, to explain who we are and why we are here.
[English]
It is important to me that you have a good understanding of who we are, which may not be the case for all senators present, so that there is a better understanding of where we come from when we talk about the BDC, its role and how we see it evolve in our further discussions.
Desjardins Financial Group is often seen as a group of caisse — a term that is often used and is not to be confused with la Caisse des Dépôts because they are not the same thing — and as a retail bank offering services to the personal side. However, we have $30 billion in commercial loans under management, which is mainly in Quebec. We have some operations in Ontario with three business centres. The intent is to move across the country. When compared with the BDC, which has about $19 billion across the country, the Desjardins Group is a sizeable player in the commercial field.
Global Finance magazine this summer ranked us as the fourth safest financial institution in North America, with a strong credit rating equivalent to some of Canada's largest banks.
It is often underestimated. We are seen as a small player by Canadian standards, but we have a 16-and-above capital ratio, which makes us a strong financial institution.
We are an organization that is close to all business owners and entrepreneurs in the Quebec market. We have market share in the smaller segments, where we started off, given our history. It ranges from 50 to 60 per cent in the rural markets; it goes as high as 80 per cent. Oftentimes, we serve these communities alone with the BDC. As we move up the ladder, our market shares are much more challenged by virtue of all Canadian banks having an interest in larger organizations — the Cirque du Soleils, the Couche-Tards and the Metro Richelieus of this world. There is obviously a bigger challenge as we move on toward the large organizations.
We are a cooperative; we have no shareholders and no dividends. The only thing we have is a member dividend paid to our clients every year. The rest of the profit is either kept for growth or donated back through donations and sponsorships in the community in various domains. The purpose is not as much driving the ROE of the organization as ensuring there is economic viability in all the areas where we operate.
We have huge respect for the Business Development Bank. I have said so in public statements in the past. I think we have one of the best development banks there is out there. It is accessible, dynamic and it serves its role.
Our presence here today is to ensure that we keep that role — we do not divert from it — and that we provide ourselves, as Canadians, with the opportunity to have the right mechanisms as it evolves to maintain that leadership role and balance in our financial sector.
Senator Greene: My question is for Mr. Hodgson in particular, although anyone can answer. Your statement on behalf of the BDC's desire to follow their customers offshore is one of the strongest ones that we have heard.
Once a Canadian company has become successful with the help of the BDC and wishes to expand offshore, is that not almost, by definition, an indicator that the company is too successful for the BDC and actually belongs with a private bank?
Mr. Hodgson: In a perfect world, companies should grow beyond the BDC. Companies may start there, have a relationship there, grow their balance sheet and their business and look to build affiliates offshore.
Yes, in a perfect world they would then tap into private capital markets, perhaps develop a banking relationship with the other country. However, as we have seen over the past two years, we are not in a perfect world. Huge gaps have emerged. Global capital markets are a long way from healthy right now. You look at the turmoil happening in almost all of Europe still or in the United States.
In a perfect world, absolutely, they would find a private banker or new investors, but I think the principal purpose of the BDC is to serve the interests of Canadian small business. Having them there as a partner or as a gap filler makes a lot of sense to me.
EDC, to a great degree, does not have the capacity to follow clients offshore and help them. I had the privilege of sitting inside the EDC boardroom over many years and I saw the debate on investment financing. EDC is good at project financing, receivables financing, covering foreign investment in terms of political risk, but being a balance sheet financier is not their strength.
As a first principle, I agree with you, but the hard reality is there has been tremendous shrinkage in the global financial marketplace and gaps. Therefore, the BDC stepping into that gap on a case-by-case basis and seeing where it makes sense is a positive power for them.
Senator Greene: Are you suggesting that the expanded BDC powers should be temporary, then, until we get back to a perfect world?
Mr. Hodgson: Back to the state of readiness. None of us has perfect foresight. The people who designed sub-prime mortgages in the United States thought they were the masters of the universe and it all blew up.
I do not think any of the powers you are talking about here should be temporary. They may be circumscribed or there may be a relationship between the shareholder — the Government of Canada — and the corporation. However, if you offer up this power as a legislative power, it should not be temporary; it should be permanent because that is where the universe is going.
You will see more and more pressure on Canadian companies to grow offshore, to grow their business model, because we are going through a bumpy period. Our neighbours next door are still in trouble. If Canadian businesses are to grow, they may have to look to even more high-risk markets, for example.
Senator Greene: I would like Mr. Achard to comment.
Mr. Achard: I would respectfully say that once a company goes abroad, it still requires the BDC's help. If I look at my close to 25 years of experience in banking, the marketplace has changed. The playing ground is now international.
A lot of our clients that have less than $2 million or $3 million in revenue are now exporters on the international scene. I would not consider them solidly established organizations that do not warrant the support of a BDC. For that matter, oftentimes these companies will rely on both financing from a Crown corporation and a bank, or non-bank like us, but you will not see two banks involved in a small corporation. That only happens once you get in the $15 million to $20 million range. However, you will see a BDC and another bank like Desjardins. The need for that help is a reality.
[Translation]
Senator Ringuette: Mr. Achard and Mr. Brun, last week, the Canadian Bankers Association was here and told us they would like to see the BDC act as guarantor, with taxpayers' money, for loans made by Canadian banks. How do you feel about that statement by the Canadian Bankers Association?
Mr. Achard: An initial reaction is that it is something that's possible. In that sense, as I understand it, the BDC's current powers allowed for that during the crisis, along with the amendments BCAP brought about. If I understand the Quebec example, there we have Investissement Québec which plays this supporting role for SMEs. It is a Quebec government organization that primarily offers guarantees to small and medium-sized businesses; these are mainly guarantees given on loans made by financial institutions. So this is one way of helping that seems to be entirely acceptable, and that often makes it possible to persuade a financial institution that is already supporting a business to go a little farther, with the support of a Crown institution behind it. So I look on that quite favourably.
Senator Ringuette: Does Investissement Québec allow for loan guarantees for a bank or for your group outside Quebec or outside Canada, for SMEs?
Mr. Achard: Investissement Québec has various programs. I have not been in direct financing for several years, but there were export assistance programs, a few years ago now, for entrepreneurs, that made it possible to work both for exporting firms and for firms that are primarily in domestic locations and are non-exporting.
Senator Ringuette: We have to distinguish between Canadian firms in Canada that export their products, who have access to EDC, and the call for BDC to finance Canadian entities that might set up shop and create jobs outside Canada.
Mr. Achard: I understand your question. I think the call for BDC to look at supporting exporting firms in the broad sense must be considered on its merits. There is something viable and valuable, even though it ends up creating jobs that may be outside Canada. This is fundamental if you want to support a strong enterprise here at its head office, it can be a positive thing for the Canadian economy.
However, I would immediately add an important caveat, and my colleague from the Conference Board of Canada said this: a very clear distinction should be made, to avoid any confusion in the minds of entrepreneurs between the roles of EDC and the BDC, so there is no question of duplication in what is offered and complications. This will be particularly true inside Quebec, since last week the Minister of Economic Development, Industry and Commerce, Clément Gignac, introduced a bill to merge Investissement Québec and the Société générale de financement.
[English]
Two Crown corporations that will be merged.
[Translation]
So there will be a single window for businesses. Far be it from the Mouvement Desjardins to say that the same thing should be done at the federal level. However, it is clear that if the BDC is given additional powers, they will have to be clearly distinguished from EDC's powers, otherwise it will lead to confusion and duplication of costs for governments, for financial institutions, and probably for entrepreneurs.
[English]
Senator Ringuette: May I have one more question?
The Chair: Can I ask a supplementary question?
[Translation]
How do we make the distinction on a money basis, the amount involved or some other criteria? I don't understand how you make the distinction or how you want to make the distinction.
Mr. Achard: The distinction that existed, mainly, for example, FGS, Investissement Québec.
[English]
One arm was getting into direct investments and corporations most of the time, and the other arm, Investment Quebec, was going more by virtue of guarantees on bank loans or on Desjardins loans. That is one way of doing it.
You mentioned earlier that EDC was becoming involved, if I understood you correctly, in higher loans?
The Chair: That is my understanding.
Mr. Achard: I would argue that we see them very much, and rightly so, on receivable inventory insurance programs and so forth, again for very small corporations that make $5 million or $6 million of revenue with a million dollar loan. EDC is a strong partner in that market with us, so it is important that if we have guarantees, they be in a different format than what we see on the other side to avoid this confusion. I do not have the immediate answer, but it needs to be addressed.
[Translation]
Senator Ringuette: If I understand correctly, you are entirely in favour of what the BDC's mandate is and of expanding it, notwithstanding all the arguments we might hear, which would mean that the government should not interfere in the market?
Mr. Achard: This is a first here, for me. Nonetheless, I will still say ``yes, but,'' if I may.
We think there may be reasons to rework the existing framework. I said earlier what the Mouvement Desjardins thought about the BDC. I won't repeat that. In terms of partnership, when the time comes to assess new products, new offerings, new entities to which loans might be made, it should be reviewed otherwise than every 10 years. In the circumstances, the Groupe Desjardins says that if the additional powers are to be used or put into effect, it should first be clearly documented with the targets for a new product, and then have adequate accountability to ensure that the targets for a new product are achieved, for example for exports, entering foreign markets, for businesses or for not-for- profit organizations, and so on.
Generally speaking, the proposals presented, whether they be trusts, NFPOs or expanding the framework for new products, we support it as long as it is well documented and monitoring is done.
I would like to say far be it from me to think that the BDC should justify itself to the Canadian banks and the Mouvement Desjardins. At the end of the day, however, there should still have been discussions, because if what BDC is offering results in the banks withdrawing from the field, Canadian entrepreneurs will not come out ahead. There has to be accountability and a division of strategies in the field.
[English]
That is what we mean by complementarity, so that we follow up on how it works. Do we stay in the market? Do we have more joint loans? This is what I would call a complementary role and follow-up on these initiatives.
[Translation]
Senator Ringuette: Unlike the Canadian Bankers Association, which would like to see the sole role of the BDC be to receive loan guarantees with Canadian taxpayers' money, while it would be the Canadian banks raking in the profits from the interest, you are advocating, for the first time since we began our hearings, that the BDC's mandate be reviewed, not every 10 years, but at much shorter intervals, with a structure that is both much more rigid and much more flexible.
Mr. Achard: Entirely in the sense, for example, that one input at a Senate committee like this one might be sessions for sharing information and ideas with Canadian financial institutions about how products could add value or changes that could be made in terms of how it operates. Let me clarify why we may be different.
[English]
If you allow me, I will cite two or three numbers that relate back to the crisis from last year. I will speak as to the Quebec market because, obviously, it is where we have 90 per cent of our commercial loans.
Our economists in their public reviews — I am referring to public information here — estimated that the Quebec commercial and industrial market in terms of financing size was at $75 billion on December 30, 2008, before the crisis started. At the end of 2009, the market in Quebec had shrunk to $71 billion, a $4 billion reduction.
During the crisis, we have all seen and we have all heard — you have mentioned it as well — that the banking market shrunk substantially and that there was no liquidity for Canadian entrepreneurs.
During that same period, while the market shrunk by $4 billion, Desjardins Group increased its loans to business owners by half a billion dollars in the Quebec market. By virtue of the half billion dollar loans, our market share increased from 23.6 to 26 per cent market share. It was a tough year for us, but we were still open for business and we went up in terms of market share.
I do not view the BDC as a competitor inasmuch as my modus operandi is to be there for business owners. I have been in the banking world before, so I can say that we look at developing the market quite differently.
Senator Ringuette: Did Desjardins benefit from that liquidity input through the BDC and through the purchase of mortgages in order to provide liquidity to you?
Mr. Achard: I would have to check, but to my knowledge, we did not use the liquidity lines of the BDC in any way for commercial mortgages.
As part of the BCAP, I found it difficult — and I sat on the BCAP committee — to try to provide information to the finance committees, to the BDC and to the EDC as to what we were doing as a result of that extra money in the system. If I am financing PME for $5 million in Rimouski, how can I know whether or not that deal is the result of the BCAP program? It becomes extremely difficult.
I would say this more to our governments than to the BDC, that if we provide additional powers to the BDC and to the EDC in times of crisis, let them do their job. Do not ask for a rendition that is stronger and unusual relative to their normal way of doing business. It is just bureaucracy for nothing. Let them do their work within their mandates.
Senator Kochhar: Mr. Hodgson, you have indicated that it is all right for BDC to help their Canadian clients going overseas and that it is all right for them to step on EDC's mandate and for EDC to step on BDC's mandate. Why do we need two organizations? Why do we not amalgamate them? That will simplify bureaucracy and save a lot money, and they will not have to compete with each other.
Mr. Hodgson: That is a great question, but it is not a new one. That has been studied a number of times by this committee, and this committee has made recommendations on it.
In fact, in my time at EDC, a former chair of this committee and senior public servants asked us to examine that issue, and I led the examination there. We hired a top quality external consulting firm and worked very closely with BDC. We looked at the treasury function as a starting point. The premise was that both organizations borrow money and manage the same things, so would it not save money to combine our treasury functions and have one set of borrowers and one set of asset managers.
We hired PriceWaterhouse Coopers to do the work. They found that combining the treasuries of BDC and EDC would cost $3 million, and that is because there are very different competencies. The organizations are borrowing different things under different terms for different purposes. The purpose of a treasury is not just to manage existing assets but to manage them well, to sell assets into the marketplace and to raise money in different currencies. We examined that and found that there would have been a net loss.
They are very different institutions. You can conceptualize putting everything under one roof, but you would end up with different operating units doing very different things.
The core difference is that BDC is basically a balance sheet lender. Their risks are the risks of management, the capacity of small companies to grow into big companies. Do they have a good business plan; do they have a good product or service; do they have a good strategy going forward? That is why I like the blending together of their non- financial functions; that is, giving advice and being there to help, because they are managing their assets, ensuring that the place is well run and that they will get repaid down the road.
EDC does a little bit of that, but EDC's core competency is to manage offshore risk, to evaluate foreign buyers and foreign projects. That is a different skill set and different competency. I have seen the skills grow up in the two organizations.
I think we would actually be behind if we merged the two. A better way to operate is to have strong communication and strong understanding of what each is doing, and to ensure that there is no friction, because they can offer roughly the same service and there are primacy matters to consider. Whose client is it and how do we provide the service the best way possible? For me that is a better approach.
Senator Kochhar: Following up on Senator Greene's questioning, when a BDC client has become successful, it may not be in the best interest of BDC for it to go to another banking institution, but it is in the best interest of taxpayers because that will free up some of BDC's capital and enable them to help other higher-risk clients that will not be helped otherwise because BDC does not have the capital to help them.
Mr. Hodgson: The answer to that question relates to the price of offering your risk management services. Between us, BDC is not the cheapest bank out there. Their spreads are significant; they have to manage their portfolio over time. Graduation happens quite naturally. If you are able to get financing for your business at a better price, go out and get that better price. If you can actually tap into capital markets directly, go to the private banking market and other sources of capital and grow your financing. I would strongly encourage businesses to do that.
I see that as a natural evolution. Businesses start with BDC because the complementarity is there and they can get the credit they need to grow their business, but over time a healthy business will find a way to grow out of BDC's portfolio and expand their access to other sources of capital.
[Translation]
The Chair: Mr. Achard, do you have something to add?
Mr. Achard: I would say, on that point, that to date these were mandates that were relatively different. There was no overlap. With the amendments you are considering making, I think the question will arise in future. I think this is not the time, our Canadian economy is still too fragile. I think we need these two players operating at full capacity. I think that if there is an expansion of powers and there is no clear differentiation between products and roles, inevitably, in a few years, a committee will be looking at this question. But as we speak now, I think there would be no benefit in doing it.
Senator Massicotte: Thank you for being with us today. I think we are all saying more or less the same thing: BDC's role is to be complementary. In other words, as the starting point, in my opinion, the market is very important. We have a market economy in Canada; that is fundamental, it is certainly the most effective process and the one that will make the country the wealthiest, but from time to time there are gaps because of the rules or the players. We have to identify the gaps in the system and the BDC can play that role.
I am trying to understand your reaction. My concern is this: we observe things, we clearly see that the BDC's performance is weak: a return of 8 per cent on its assets, it does not pay income taxes, as compared to 18 per cent or 20 per cent for the Canadian banks. They are doing work that the other players, the caisse Desjardins and the banks, are not prepared to do. They take risks or make higher loans, and I think this is not something you would like to take over managing.
Certainly your position is favourable to the BDC, because it enables you to get involved in the market, which you would not do otherwise. You relegate the higher risk to the BDC, and that enables you to take a higher position for our security and make the transaction. It can be argued, in that case, that it's good for the economy, good for the caisse Desjardins and for the banks. But it can also be said that given that the BDC charges more — but obviously, not enough —these are transactions that perhaps should not have been made. You may be in a bit of a conflict, because this suits you, but from the taxpayer's point of view it is not a valid role.
The question I am asking myself is: if there were no BDC, what would be missing? Particularly, we are very familiar with you in Quebec, you are so ubiquitous that if we did a survey of SMEs, it would be surprising if they said that the caisse Desjardins cannot meet their needs. People would very probably say they are satisfied with the services of the caisse Desjardins; that is your role, and that is very important in that sector. I do not know whether they would say there is something missing. The BDC does things the others do not want to do; is that a valid reason for it to exist? If you do not want to do it, perhaps they should not be doing it either. What is your reaction to that argument?
Mr. Achard: I have two reactions, senator. First, when you say they are taking risks that should not be taken, that is probably true. I would respectfully say to you that this is probably something better said to the banks, because the way we are organized, our board of directors is made up of entrepreneurs and business people; we do not have stock markets or shareholders to satisfy, no share values to increase. So if I am not lending in the market, my local caisses, which elect the board of directors, are soon going to let me know. That is why we have continued to be present in the market.
That being said, you will tell me that it is paradoxical, but in several places in Quebec, the only institutions are the BDC and the Mouvement Desjardins, and as loyal as I am to the Mouvement Desjardins, I think it is wrong for us to be the only financial institution and the only choice for Canadian entrepreneurs. In this situation, and I am saying this more as a Canadian than as a representative of the Mouvement Desjardins, there has to be a second option. In many markets in Quebec, the only option is the Mouvement Desjardins, and the BDC provides an alternative.
The success of the BDC and the role it plays, I define it by the cases in which it is not that the risk is being shifted to them, but quite often it is shared, and we deal with the cases jointly. The BDC's annual report talked about Recochem, which is a fine company in Quebec, and we did the financing together. We shared the risk, and so we were able to support a business plan together.
On the second point, the 8 per cent and the BDC's rate of return, that is reasonable, in my opinion. That is the reason a business becomes more profitable. Even if I were to stand foursquare by the Mouvement Desjardins and say: I want to keep these clients, they should not be with the BDC — I know the banks have taken this approach — in my opinion, it is important that the BDC also be there for good entrepreneurs. Otherwise, they will perform poorly and will not be sustainable.
I am quite comfortable with the fact that from time to time the BDC takes cases in the field that are going to provide it with an adequate return and profitability. That is part of the game.
Senator Massicotte: I want to be sure I understand you correctly. Generally, your loans with the BDC are the same everywhere.
Mr. Achard: Often we work together.
Senator Massicotte: In more than 50 per cent of cases?
Mr. Achard: It would be hard for me to give a number, but when I talk about transactions that I see go through the credit committee, often we are there together, or we'll do the short term and they will do the long term. There really is risk-sharing, but even in short-term loans, often it will be $3 million by the Mouvement Desjardins and $3 million from BDC, and so on. Making a loan on its own, that's another thing. I think the sharing with other financial institutions is a measure of the BDC's success.
Senator Massicotte: You say that in many markets, in rural or other markets, you are the only one; there is the caisse and the BDC. So I assume you compete for the same loan?
Mr. Achard: Yes.
Senator Massicotte: That is quite interesting. Some studies show the rural side and from time to time there is an SME. Perhaps there is a lack of competition. But according to the survey by the Canadian banks, that is not the case. Clients say they are satisfied and they think that the competition results in adequate service. You do not agree. You are saying that, on the contrary, there is a lack of service and part of the market is not adequately served.
Mr. Achard: I will not speak for the banks. Obviously, it is different for us. The Mouvement Desjardins came out of a rural presence in the beginning, it's very important for us and we want to maintain that access. You only need to look at the locations of the various institutions, it is relatively uneven across Quebec, with major concentrations in urban areas. It is the same thing in Toronto and in Ontario.
[English]
Senator Massicotte: I understand your argument. BDC and EDC have played an important role in recent history. Your argument is that given the importance, we must keep BDC around to fill the gap. You also referred to the international market as an immense state.
Let me tell you how I react, and you can react to my comments. I have a bit of difficulty with keeping such a large institution that is underperforming and using a lot of government money, just in case we need it. Many countries in the world figured out other solutions in case they needed one. I have difficulty with that argument. I have more openness to the argument about a need to fill a market void or failure. In that case, BDC has a role to play. Keeping it in case we need it is a tough argument to accept.
Mr. Hodgson: The markets are fluid, so you do not know whether you have a void until you try to do a deal and get the financing. That is when you discover whether there is adequate private-sector financing available. Our capital markets are massive so many deals are done without BDC, the Desjardins and others. BDC and EDC have a role during good times as well because they are innovative and try out new things. The marketplace is evolving constantly.
In case your need, as you put it, becomes a particular need, like the economic times we have just been through over the past two years, and the private market craters with no alternative, they can play an important role even in good times as an innovative organization that finds new ways to get deals done.
I learned at EDC over ten years that the market in innovation is in a constant state of evolution. You are there to bring new ideas and to keep their market honest. You can be there as a bit of a competition maker at times. I hear your concern. Watching global finance over the last decade, I noticed that your argument applied absolutely for the IMF and the World Bank. There was a tremendous explosion of global finance, and they were almost rendered irrelevant. The IMF extended $1 billion in credit in 2007. They were almost out of business. The pure gap-filling argument applies in their case a little better. We must remember that BDC is an agent of public policy in Canada, and we clearly have challenges in providing adequate financing for small business.
Senator Massicotte: One could argue that BDC will always have a role; of course they will have a role. They get 8 per cent return on equity, which is very inferior; they are getting government money at the cost of their funds; they will undercut anyone to have a role; so why should they be subsidized to that level?
Mr. Hodgson: The answer is addressed easily through transparency and ensuring they are not price competing, for example on business. It is wrong for EDC and BDC in particular to bid business away from private banks. If you can do the same deal at a lower credit spread from the private sector, it should be done there. They should not be in the business of matching private-sector financing. I do not buy the opening premise about them using government money. They borrow with taxpayer guarantees on their bonds. However, the target on using government money, for me, is a lower threshold and more of a long bond yield. As long as they are in a return beyond that and not price competing with the private sector, I do not see that they are using government money. I believe they have a dividend policy and actually pay dividends. I look at BDC as a pretty good investment for Canada.
[Translation]
Senator Hervieux-Payette: I'm going to disclose my interest, I am a client of the caisse populaire.
Senator Meighen: In a rural area or an urban area?
Senator Hervieux-Payette: It is relatively urban. I give them my change to invest. I have to prepare for the future.
There is one question that interests me more specifically. Mr. Hodgson, you have done studies on the question of venture capital and the fact that there is a void in Canada, a shortage of venture capital in the market for growing businesses, to enable them to achieve a better balance, between equity and debt.
They have invested funds along with other partners. With your experience and your skills, do you think this aspect could be expanded to fill the existing void in the private sector? You, your institution or other institutions that operate in the economic domain, you tell us there is a void, a hole, in terms of venture capital. Do you think a five-year review would be reasonable? There has to be something specific in a bill.
There was also the ceiling question. The BDC has asked us to remove the ceiling, but we, as parliamentarians, would be more comfortable keeping a reasonable ceiling, particularly if the act is reviewed every five years. If the ceiling was not high enough, we could increase it.
Do you think the BDC's consulting role with SMEs is played by other people in the financial sector? Is this service a value added for the BDC, to have people who can do consulting, but at affordable prices for small and medium-sized enterprises that cannot pay for big consulting firms at $300 or $400 an hour, and by the day instead?
[English]
Mr. Hodgson: Risk sharing should be a core concept for BDC. I see financial markets like an accordion that can expand and contract. As markets do that, BDC has to find its proper space at any point in the business cycle. The same thing is happening with the inflow of new entrepreneurs and new ideas.
Even when markets were overabundant, say in 2005, 2006 and 2007, the BDC was still able to serve particular niches in the marketplace, individuals who, for whatever reason — not having enough information or a secure enough business model — were not able to access capital. As a first principle, I think that accordion expands and contracts.
There may be times when the BDC does not have a big role to play and that is good. That means entrepreneurs are able to access capital markets quite easily with partners on their own. Clearly, that has not been the case the last two years. We suspect it will be quite some time before we are back to a normal state, within Canada sectorally and globally, before capital markets are working properly again. That would be a starting point.
Having a prescribed capital floor is almost a relic from another age. When these institutions were seen as lenders or insurers of last resort, and where the Crown did not want to get overexposed by having too much leverage, you use your capital floor as a way to limit the expansion.
As you evolve more toward a financial sustainability model, where you are reporting on a regular basis, where there is a high degree of transparency on your operations and where you are able to pay dividends if you have a good year, you have evolved to a different space. I think the floor could be done away with, but if there is discomfort with that, set a very high ceiling.
Set a floor at a number that will take 15 or 20 years to get to — like $10 billion or something very high. If there is not a comfort with doing away with the concept entirely, at least give them a lot of operating room so that the BDC does not have to come back in five or eight years and have it revisited.
It is not a constraint now. It should not be a constraint from the other business operations. That should be driven by the core business, by their success, by their financial results every quarter, every year.
The track record has been pretty good. BDC was a very different institution back in the early 1990s when it was losing money. It had to be bailed out, as I recall. The model has evolved now to a much more interesting, viable model in terms of helping entrepreneurs and also protecting the interests of the Government of Canada.
Your third point was around complementarity advice. I hear you entirely. I think it would be wrong if the BDC crowds out other advice givers in the private sector. That is a more nuanced thing. Clearly, the kind of advice that companies are seeking today is also evolving quickly. The stretching of that capacity for me is kind of a natural evolution in how business is being done today.
Not everyone understands global value chains, for example, or how to set up an offshore affiliate. There is scope there for the BDC to offer helpful advice. However, it should not be at the expense of other private providers of that kind of advice.
[Translation]
Mr. Achard: First, I would like to thank you for your deposits.
More seriously, in terms of venture capital, the Canadian market, to my knowledge, is very different. When I look at capital, a lot of small businesses in the Quebec market start up with an action fund, a solidarity fund. With what the Mouvement Desjardins does, there is about $1 billion in development capital and venture capital, nearly $600 million invested, through tax-funded funds.
I still think there are attractive products available. What I understand about the Ontario market is that there is a lot more private capital and capital investment funds, but at the upper levels of the market, and there is not the same availability of products at the lower levels of the market.
So there are regional differences, if I may say that, within Canada, and I think the BDC can certainly offer products to fill these gaps.
In terms of the ceiling or the limit on the ceiling, we saw, with the crisis, that the government, the BDC and EDC, were quickly given the necessary powers and capacity to meet the need for additional credit in the market.
However, if there is a significant expansion in volume by the BDC, and I will come back to the figure I gave earlier about commercial credit markets, that expansion and the correspondence between extremely large growth in the BDC's volumes and market contraction has to be monitored. That means that the banks and institutions like Desjardins are in the market and have a taste for risk. And there may be less need for very strong growth at that point.
So I would be more inclined to monitor this dynamic and limit it, rather than monitor the ceiling itself. I hope my comments on this point are clear.
My second to last point relates to the five-year period. I think it is a good thing, it would probably be easier, to have a certain input one more time, a review of everything that has changed in the modi operandi, which might be an important input for a forum like this one.
And last, regarding consulting, we do it at Desjardins and all financial institutions do it. As well, I would note that the main competition, in my view, comes much more from small firms of professionals and from accounting firms, and occasionally lawyers, who do this kind of business consulting.
I do not know the BDC's numbers, but I think that in my career I have often seen people who went to the BDC strictly for advice and not for financing, because they see it as having a certain independence and an attractive price. I think it offers attractive services for Canadian entrepreneurs.
[English]
The Chair: My question is about the push and pull between the BDC making loans, which we want them to do, to SMEs and in high-risk situations and paying a dividend to the government. If the BDC was to say, ``Look at us, we paid a big dividend to the government,'' what does that tell us? Does it mean that they have been successful in making loans and their customers have justified their faith in them and paid back with interest, or does it mean they are not loaning enough?
They have asked for financial sustainability to be incorporated into any amended act. What is your reaction to that and what is your reaction to paying dividends?
Mr. Hodgson: I think you probably have to get behind the reason why the dividend was paid, because you are right; it could be either because they have been so good at their financial management — they use their treasury, for example, to borrow money with the right term and got it right and were able to generate good profits that way — but it also could be because they were not taking enough risk and getting too close to the private sector and not really stretching the capacity of our system and playing the public policy role.
The Chair: This goes to the examination their annual returns and operations.
Mr. Hodgson: Absolutely. You have to get behind the numbers, examine different parts of business and assure yourself, for example, that they were stretching their margins enough. They were doing enough things that were not fully creditworthy in the private market and adding a lot of public policy value.
Mr. Achard: I have the same comment. The pressure on dividends, if too strong, may lead to a divestiture from the complementary role and become a competition to the financial institutions in the Canadian landscape. As to whether it is a good or a bad thing, I will leave that to the government.
The Chair: We thank our witnesses. It has been an interesting and productive exchange, which will give us much food for thought.
Continuing with our examination of the BDC Act, we will now hear from Mr. Warren Everson, Senior Vice- President of Policy at the Canadian Chamber of Commerce; and Corinne Pohlmann, Vice-President of National Affairs at the Canadian Federation of Independent Business.
Honourable senators, Mr. Everson was appointed to his current post for the Chamber of Commerce on September 1. He has extensive experience in public policy and advocacy, as many of you know. He has served in senior positions in ministers' offices of numerous federal departments in the 1980s and early 1990s and also as executive director of the National Transportation Act Review Commission and as commissioner on the Transportation Safety Board Review Commission.
For the past four years, he has been senior consultant with Strategy Corp, providing strategic advice and government relations services to support a wide range of clients in communications, education and transportation files.
[Translation]
Since joining the CFIB in 1998, Corinne Pohlmann worked in research, where she authored several reports on a variety of public policy and economic issues, then as the Manager of Member Services.
In 2000, Ms. Pohlmann was appointed Director of Provincial Affairs for Alberta and the Northwest Territories based in Edmonton and spent almost six years representing the interests of Alberta and NWT members to all levels of government.
In 2006 Corinne moved to Ottawa to pursue her current position.
[English]
If our witnesses have opening statements, we would be pleased to hear them, after which we would appreciate it if you would answer our questions.
Warren Everson, Senior Vice-President, Policy, The Canadian Chamber of Commerce: I understand you have had a long day, so I will try to move quickly through my remarks and get to your questions. We are pleased to be invited to comment on the issue before you.
As you know, the Canadian Chamber of Commerce is a broadly based business association in Canada. We represent more than 190,000 businesses in I think every sector and certainly every region of the country. In case that sounded impressive, I remind you of what the chair said, that I just took up my duties five weeks ago, so at the end of this spear is a somewhat blunt point in my tenure so far.
I would also say it is not common for the Chamber of Commerce to speak on an issue that is internally divisive to our members, and we have credit unions and banks as well as BDC as members. We would normally be very cautious about an appearance here today. I add to that a well-established skepticism about the function of the Government of Canada in our economy, having occasionally competed against government agencies when I had my own business.
Notwithstanding, here I am. The reason I am here is that we did not find within our membership a lot of internal discord. In fact, there was good support for making a submission and to tell you of the importance that we feel BDC has in the economy, especially targeting small and medium-sized businesses.
As you all know, access to capital is a challenging issue, especially for the young technology companies. Start-ups in general lack that kind of money, tangible assets do not exist, and commercial banks are not encouraged to enter into the high-risk, small-deal marketplace.
We note that Deloitte's 2010 Global Venture Capital Survey came to the conclusion that there was a serious lack of domestic venture capitalists in creating a climate for investment and innovation. The majority of survey respondents in that survey said they expected the number of venture capital firms to decline between now and 2015. I hear that comment made frequently in the Canadian marketplace.
BDC collaborates with the private sector to fill those gaps, and in doing so, it supports the development of small businesses and allows us to promote innovation.
You have been here all day; I do not think I need to cite the various statistics of the amount of money that BDC has introduced into the market. However, I will say that in consulting our members, there was a strong and sincerely held belief that the organization had been critical in the last few years during the financial crisis. Many foreign banks and some of the non-regulated financial institutions essentially vacated the market. Credit conditions tightened seriously. BDC and EDC worked with private lenders and provided something close to $10 billion in liquidity, and for a period of time virtually replaced the asset-backed financing marketplace, which was essentially closed.
Many jobs were saved thereby and a lot of business failures were averted. Statistics Canada estimates BDC clients received financing that allowed them to go on and generate almost $40 billion in direct and indirect value-added economic activity.
The Conference Board of Canada concluded that the federal government's financial institutions, specifically the BDC and Export Development Canada, stepped up to the plate and provided exceptional support in times of crisis. Collectively, those organizations helped speed the healing of the Canadian financial system.
The healing, of course, is not complete as the Bank of Canada's autumn Business Outlook Survey indicates. Improvement in credit conditions are starting to become broadly based. Nonetheless, small businesses continue to report little change in their access to credit. Looking back, it is clear to us that the Chamber has done important work in the past. To the senator's question, looking forward, we still see an important role for it.
The world changed quite significantly through the downturn. You need only look at the difference in the growth rates of North America and those on the other side of the Pacific, with the Asian economies and Brazil recording growth rates of 7, 8 and 9 per cent while we have an anaemic growth rate of 2 per cent and the Americans much worse, to realize that there is a seismic change under way in our economic conditions. The developing countries are competing much more effectively. They are outrunning us in technological innovation and they are drawing an enormous amount of foreign investment.
As a result, it is not only imperative that we trade more effectively but there is no refuge for small businesses to stay in our own economy. As a personal observation, it seems to me that business is becoming harder to bank generally. It is reasonably easy to count the number of units, and it is easy to seize those units when someone is in default of their loan, but increasingly Canadians make their livings abroad with the asset they have between their ears, and it is very difficult to establish a lien on that.
I had my own business for seven or eight years. I was in consulting so I had extremely low overheads. I did not have to seek financing, but had I needed to, I am not sure what I would have offered up as collateral except receipts for projects that I had already secured, which would be short term. I ran my business on a line of credit secured by my personal home. When someone would suggest that I pursue a market in the United States or look at Asia because it is growing fast, I would say that I cannot finance that kind of expansion, and my wife would kill me if I took any more risks with our private residence. It is a real-time problem and not something to be dismissed.
Canadian businesses, including the SMEs, have to be smarter to keep their competitive edge, and they have to invest a lot in information technology. They have to occasionally produce new products. They have to definitely step up their marketing efforts, and to do that they need capital. Given the small size of the deals and the high risk, it is not an area in which commercial lenders tend to find themselves.
In partnership with the private sector, BDC has a definite role to play providing complementary financial and non- financial services. As I said, I have considerable scepticism for the role of the government in the economy, especially where it finds itself in competition with Canadian business. Therefore, as we approached this appearance we surveyed the credit unions and banks that are in our membership, expecting to find a considerable amount of resentment about the presence of BDC, and we did not. To the contrary, the organization appears to have been shrewd enough in the way it approaches its relationships to be seen as a complement and a support rather than a competitor. That is to their credit, and I believe the government should reward them for that.
BDC has proposed a number of changes to the Business Development Bank Act. Although we find the financing products that they want to bring sound enough, bonding and indemnification are not areas in which we think they would offer important competition to existing commercial lenders. Some of our members have accessed the consulting service and found it useful. No one has told me that it is a problem for them.
The Canadian Chamber of Commerce believes that much can be gained by BDC working with the private sector to identify the complementary roles they can play, and also with EDC to avoid duplication. We commend to you the suggestion that very clear guidelines on that latter point be established for fear that the agencies would find themselves in competition.
If gaps exist in the availability of certain products and services and the private sector cannot fill those gaps, BDC can and does play an important complementary role.
The Chair: Did you say that the chartered banks are members of your organization?
Mr. Everson: Yes.
The Chair: Ms. Pohlmann, please proceed with your statement.
Corinne Pohlmann, Vice-President of National Affairs, Canadian Federation of Independent Business: I am pleased to be here today to share CFIB's perspective on SME financing in Canada and the role of BDC within that context. I am no banking expert, nor do I know the ins and outs of the BDC, but I can share small business financing issues, and hopefully this will be helpful in your deliberations on BDC given their mandate to primarily focus on the SME market.
I will walk you through a slide deck that you should have in front of you. It will be quick and, hopefully, informative.
CFIB is a nonpartisan, not-for-profit organization that represents more than 107,000 small and medium-sized businesses across Canada that are independently owned and operated Canadian companies. We deal with issues at all levels of government and our members come from every region of the country and every sector of the economy.
As you know, small business is big in Canada. They represent 98 per cent of all businesses, employ the majority of Canadians, and produce almost half of Canada's economic output. CFIB's latest business barometer was released today, and you should each have a copy in front of you in your package.
On slide 4 of the deck is the barometer index, which shows that after a steady drift downward through the spring and summer, small business confidence perked upward in October rising more than three points since September and is at its highest level since May. This index level is still modest compared to pre-recession, but it does suggest a firming up of business owners' expectations, though they remain cautious in their hiring and investment intentions.
I will now share with you some details from previous CFIB research on banking in Canada. First, it is important to understand some of the financing barriers SME's face in establishing their businesses. Slide 5 shows that simply getting a loan was the most difficult part for 61 per cent, followed by difficulty in providing collateral — and I think service- related industries are often in that category — and then of course the cost. There is indeed a role for an entity such as BDC to help small businesses that are facing these types of barriers.
We also asked where small businesses got their funds to build their businesses. As you can see on slide 6, two thirds used their own savings, followed by almost half relying on traditional business bank loans. BDC was used by about 6 per cent of small firms when building their businesses.
We have also been tracking the source of largest loans by SMEs monthly since early 2009. As you can see on slide 7, government institutions are the source of largest loans for about 10 per cent of small firms. As noted, this would include BDC, but as well EDC, FCC and CCC.
These government institutions play a relatively small role in providing loans to small businesses in Canada, which is appropriate, as they should be the lender of last resort or of high risk loans, filling those gaps that are not being addressed by Canada's traditional banking sector.
CFIB has been looking at SME banking issues for more than 20 years, and we have seen quite a bit of change over that time. For example, slide 8 shows that over the years some banks have seen their small business market shares erode, such as CIBC and Royal Bank, while others have become much more important in servicing Canada's small business, such as the credit unions and Scotiabank. This indicates that the competitive landscape for small business financing is always changing. This is a good thing as it offers small businesses new lending options and more competitive pricing on loans and banking services.
We do believe there is a role for a government lending institution. It should focus on those who find it difficult to access traditional loans. Therefore, it must be complementary to the traditional banking sector rather than competing with it.
The last three slides illustrate some of the key indicators of financing for SMEs. This could be helpful in determining the gaps in small business financing and whether BDC is addressing those gaps.
Slide 9 looks at these indicators by size of firm. The smaller the firm, the more difficult it is to secure financing, as one in four microfirms, those with fewer than five employees, have had their loan requests rejected versus fewer than one in ten mid-size firms. One question would be: What is the average firm size of BDC clients?
The next slide looks at those same indicators by number of years in business. This shows that one in three of the newest firms, those that have been around less than five years, have had their loan requests rejected, which leads to the second question: What proportion of BDC loans go to start-ups or relatively new businesses? I understand that it is quite a lot.
Finally, as you can see on slide 11, there are also certain sectors that face more financing challenges than others and may be areas for BDC also to address. Those that find it more difficult include many service-oriented businesses such as those in arts and recreation, hospitality and personal services, and also transportation and retail. In sharing this information we are not suggesting that BDC is not addressing these gaps, simply that these are segments that struggle the most in securing financing, and it may be worthwhile looking at whether those are being addressed by BDC. I do not have that information.
CFIB does believe that there is an important role for an organization such as BDC in addressing gaps in small business financing, especially during a recession when more traditional sources of financing tighten up. Now that things are improving, albeit slowly, they must start to extricate themselves from the market and allow the traditional banking sector to refill some of that gap.
We do sometimes fear that entities like BDC or, for example, the small business financing program, while addressing a needed gap in the market, can inadvertently keep the traditional banking sector from taking on risks that they might if they did not have a government loan guarantee or entity to send that client to.
The danger of this is that it can drive the cost of lending up for the most vulnerable small firms as government lending options tend to be more expensive to access. We are not suggesting that this is happening but simply that this is a risk when governments enter the lending market and why it is so critical that groups like BDC begin to extricate themselves from the market as the economy improves.
As mentioned earlier, BDC must compliment, not compete with the private sector. This extends to non-financial services as well. We have heard complaints from some in the private sector that BDC's current ability to provide consulting services in competition with those in the private sector is unfair. As a result, CFIB would be very dubious about extending BDC a wider access to non-financial services for fear that it would be stepping into areas already being offered by the private sector, many of which would be small businesses themselves. At the very least, any provisions allowing them access to a wider range of financial and non-financial services must follow an extensive analysis and consultation that clearly illustrates that the service is not already being provided by the private sector.
Finally, I would like to raise a question on how BDC interacts with and/or complements other government lending institutions, such as the EDC, Farm Credit Canada and the Canada Small Business Financing Program, all of which are meant to address gaps in Canada's financing market. I raise this as it would seem that some of BDC's requests for a broader range of services might overlap other government lending agencies. It would be important to ensure that these new powers complement the others so as not to create too much confusion in the marketplace.
The Chair: Ms. Pohlmann, did you touch on the request from BDC to follow the client abroad?
Ms. Pohlmann: Only in the context of whether that is something that EDC should address or appropriate for BDC to address. I did not touch on it further than that.
The Chair: What is your answer regarding BDC's request?
Ms. Pohlmann: I do not think I can honestly answer that with any great authority given that less than 25 per cent of our members are involved in export markets or in other markets.
The Chair: Did you deal with BDC's request for a wider range of financial tools.
Ms. Pohlmann: Yes, only in saying that it should be complementary and not competitive with the private sector.
The Chair: As I understood, the main thrust of that request, for example, was to loan to trusts and other organizations that have many members, if you will, so they do not have to go to each member individually and do a different transaction. In that way, they could lend to that entity and the entity could then do the individual transactions.
Ms. Pohlmann: Yes. We would be okay with that. For example, I know that the Canada Youth Business Foundation has a very interesting and good relationship, in our opinion, with BDC. That could eliminate some of the administration and duplication, whatever that might be. We would see that as positive.
Senator Ringuette: My first question is to you both because you both indicated that you strongly believe in the free market and government non-intervention in the marketplace and that BDC should play a complementary role to the private sector. How do you reconcile the opposing positions?
Ms. Pohlmann: There is no doubt that it is not an easy thing, because there must be a balance. Smaller businesses considered high risk deserve to have some sort of financial support, although they pay for it, mind you. These types of loans are more expensive. They should have the opportunity to access that kind of funding when available to them. At the same time, we worry a bit about whether that keeps the traditional banking sector off the hook for not taking on some of that risk. I agree with you that there is a fine balance, which is important to try to manage appropriately.
Mr. Everson: I do not think it is tremendously inconsistent. BDC is set up as a policy instrument to address a problem that is well identified and persistent in Canada. We never argue that the state has no role in the economy; just that it has to be very careful that it does not find itself suppressing innovation or private sector activity. Had I received that kind of comment from our membership, certainly I would have passed it on to you. You are right to proceed with caution as you reconstitute the BDC and consider its proposed amendments. Financing the small business sector is a serious business challenge, which has to be done. Pragmatically, this model appears to be working.
Senator Ringuette: That is one way to indicate reconciliation of the opposing philosophies.
Ms. Pohlmann, I am looking at slide 9 where you indicate the interest rate over prime for micro businesses, which is probably home-based businesses.
Ms. Pohlmann: It is not always for that; it could be a consulting firm. Many of those businesses are service oriented firms. Some of them could be self-employed individuals working from home. The median loan amount approved is fairly small at about $50,000.
Senator Ringuette: From the data you provide on this slide, it seems that the smaller the business, the higher the interest rate charged and the higher the rate of rejection of loan applications. What we should be reading from this slide is that there should be more intervention in that particular market in terms of BDC's mandate.
Ms. Pohlmann: We are trying to put forward exactly that. These are the gaps that we identify through our work. They may very well be addressing that particular segment of the market, but I do not know. We put it forward because they tend to be a group. We understand that newer companies and some specific sectors tend to be higher risk. Therefore, they tend to be more costly to loan to and are more likely to be rejected at the loan application stage by traditional banks. This is traditional banking sector data.
Senator Ringuette: On slide 11, I see the median loan amount and how it relates to loan rejection. However, there does not seem to be any real correlation. It is based more on the type of business sector.
Ms. Pohlmann: That is exactly what it is based on. The service oriented sectors tend to be considered more high risk and, therefore, have higher loan rejection rates. The more traditional sector, such as agriculture, manufacturing and construction, tend to have lower rejection rates.
Senator Ringuette: Loan rejection rates in the hospitality industry, natural resources, and arts and recreation are extremely high. I thank you for this information because it is important for the committee in terms of targeting the needs for BDC.
Ms. Pohlmann: That is precisely why we wanted to bring it to your attention. This is part of our banking report, and we have been doing it for years. We have tracked this a long time. This is information that we felt was important for you to know, to see that the BDC was targeting those particular segments.
Senator Ringuette: This is information that you gather from your membership, is that right?
Ms. Pohlmann: Correct.
The Chair: Senator Ringuette does not throw out compliments wildly so you should be very happy to receive that one.
Senator Moore: Mr. Everson, I think the chair asked you or maybe you made this comment voluntarily that your organization seems to agree with the five requests that the BDC has made in terms of extending their authorities and the services they offer.
Ms. Pohlmann, you made a comment with regard to dubious bills extending financial services; let the private sector do that. You also made a comment with respect to the complementarity.
I am interested in the fact that the BDC is looking to have the ceiling removed with respect to its paid-in capital. It is now $3 billion, and they want it open. I am kind of old-fashioned because we are dealing with taxpayers' money here. I like people to come in and tell Parliament, both houses, why they need the money, how much they need and for what purpose and for how long. I want your comments about that. Do you think they should have an open-ended, paid-in capital limit?
Mr. Everson: I am not competent to answer that; I am not a banker or knowledgeable about banking. I share your belief that it is unwise to give excessive limits. Notwithstanding the fact that the organization has been reasonably prudent to this time, you have to ask yourself what will happen years from now. So, some kind of limit, but I am not competent as to what the limit should be.
Senator Moore: Yes, but your organization must have seen how quickly Parliament responded when there was a need economically for something to happen within our country. We turned that around within weeks. Considering that background against this request, do you have any other comment? Do you, Ms. Pohlmann, have anything to say about that?
Ms. Pohlmann: I am not a banker either or an expert on the ins and outs of the BDC. However, on its surface, that is something that we are a little concerned about — again, for the same reasons that you mentioned. It is the fact that we are talking about taxpayers' money. We want them to be complementary in the marketplace, not competitive. There must be a lid on how much they can really be in that market. When it is necessary to increase that presence, there are other mechanisms that can be used to do that.
Yes, I think we are a little skeptical of that particular request.
Mr. Everson: Can I speak to it? You raised a second point, which is that in a crisis, is it necessary to have an agency sitting around waiting until the crisis comes along?
Senator Moore: That was the question of Senator Massicotte earlier today.
Mr. Everson: I was raised in a small town. We had a volunteer fire service, but you do not have that in a big city because the challenges are formidable and the volunteers would not be able to do it. In my company, the only asset we had of any value was between our ears. A lot of what the BDC and sister agencies are bringing is market knowledge, systems that are already true and tried and so forth.
Parliament can respond very quickly, I agree. There was admirable consensus in the house, but something has to be connected to that button when you push it. You had the resources available to you as state agencies, which would not have been present if you had said, let us just start from the beginning with nothing and go to the Department of Finance and see what they can set up. You would not have had that infrastructure within the time frame we faced.
Senator Moore: We were not starting from ground zero; that was not the situation.
Senator Massicotte: Mr. Everson, most of your members are potential clients of the banks or the BDC and Desjardins. Some of you members are banks, but they are in the minority.
I am a business person. If I was your client, I would say the more the merrier. If you look at your own survey, the particular problem of business people is getting the capital; it is not the interest rate. If you have a good project, the cost will not be very important compared to getting the capital.
Of course, you will say they have a role; the more the merrier. The problem we are having as legislators is saying we believe in a market economy and there is an indirect subsidy of significance to the BDC. It is not insignificant after returns; more recently, it is direct government money that is funding their needs.
We are saying is it appropriate? Our starting point is if the market is adequate, let the market behave. Certainly, the market is never perfect; there will be vacuums or holes in it, but that is the market and that is how holes are filled up. Someone else sees the hole and fills it.
To have the government interfere with that market structure — look at Russia — is not a good idea. The market is always looking for the hole.
When we asked that question of the Canadian Bankers Association, they said there is no hole for small and medium companies. The polls are clear; they are happy with the services. You have one chart showing that the BDC is only there for 8 per cent of the collateral necessary.
The banks seem to be doing a good job, but they mention possibly venture capital for start-ups; there is probably a hole there. To be cynical, they are losing significant money there; they do not want to be there either. Everyone wants the good piece and let someone else do the bad piece. How do you respond to that? How do you weigh all these pros and cons?
Mr. Everson: The majority of our membership is small businesses and most of them would be potential clients of one of these agencies. I will say that the chartered banks represent a kind of a formidable minority within our membership. If they had been saying to us that we find the BDC objectionable and we fear what they are proposing, I would not be here making supportive comments.
I do think the state has the right to say we want something done; it is not being done by the private sector, so we want to make it happen. I think you have the right to do that.
The suggestion that if there were not these agencies, the financing institutions would be compelled to fill the space is not accurate. They will not be compelled to fill the space. They do not have a public duty, so it would not be filled. That would be my expectation.
Senator Massicotte: Would not greed dictate that they would?
Mr. Everson: Someone might stoop to conquer. It is a risk; however, my membership does not see the point. We have something that is working in practice. I agree that it is a bit of a conundrum to make it work in theory. Nonetheless, there is no energy in the membership to suggest that this agency be shut out.
Senator Massicotte: I was surprised that the BDC is only at a level of 8 per cent. I thought it would be more significant. Do you have any comments there?
Ms. Pohlmann: No. It is 10 per cent for all government institutions, of which I think the bulk of that is the BDC. Some of that is the EDC and the others, but we think that is appropriate. We would not want it to be any bigger than that, but that is consistently what our numbers have shown us.
The 6 per cent came from 2007, which was even during a better time in our economy. The 10 per cent number is just in the last year or so.
Senator Massicotte: It is even significant for every other bank. Yet, they are spending a lot on advertising and market presence. Obviously, the market is working quite well without the BDC.
Ms. Pohlmann: As I said, there have been changes over the years. We have seen improvements in the traditional banking sector in providing more access to credit for smaller firms. Having said that, we do see traditional banks sometimes pull out of sectors for whatever reason. It could be that they decided that particular segment of the economy is now not one they want to invest in.
What do you do at that point? These are businesses that are viable, they have employees, they want to move forward and suddenly they do not have any kind of financing opportunities because they were connected to the auto industry somehow, for example.
That is what happened during the last downturn. The banks did fairly well during the last downturn in addressing some of the needs of our members, except in segments like those associated with the car industry in southern Ontario. Even though they paid their loans, they were very good and they had no problems, it did not matter; the banks pulled out. That is where sometime these types of organizations can be helpful.
Senator Massicotte: You read in the paper recently, the government came in and helped the car companies, especially GMC. For $10 billion we will make two. I can understand why the banks were not there.
Senator Moore: Mr. Everson, you mentioned that the credit unions, the banks and BDC are all members of your organization and that the banks are a strong minority.
How did you prepare your comments for submission today? Historically CFIB has polled it members constantly for trends and current numbers. How do you get the position of your diverse members on topics such as the ones we are dealing with today?
Mr. Everson: In this case, we did not do an active survey asking all our members for input. To Senator Massicotte's point, our members are mostly small businesses, so if something was characterized as being good for small business, I think the answer would have been predetermined.
I have a finance expert in my policy group who canvassed our bank and credit union members directly. I talked to a couple of them myself. Ours was a passive examination. We basically asked whether they had any problems. We usually know quite quickly when they have a problem.
Senator Moore: Of the 190,000 businesses that you say you represent in all sectors and all regions, the banks and the credit unions would be a nominal number in terms of your canvass for opinion.
Mr. Everson: Are you asking, had they raised a ruckus, would I have —
Senator Moore: I am mindful that some of these things are going on and, if I were in small business, I would have something to say about some of these issues. I was wondering how strong the influence is of your strong minority members.
[Translation]
Senator Mockler: I am happy to hear you say that BDC, EDC and FCC play an important and positive role in the Canadian economy.
In October, however, at the Senate Committee on Agriculture and Forestry, we heard from John Thompson, Chairman of TD Bank Financial Group, who said that Canada in particular, not to say North America, had a serious venture capital deficit.
We know that BDC and EDC and FCC play an important role. But according to some witnesses who have testified, people are accused of taking on an increasingly large part in the economy, whether it be in agriculture or in natural resources.
[English]
Slide 11 shows that the interest rate over prime is about 1.4 per cent for agriculture and about 1.9 per cent for natural resources. However, the rejection rate for agriculture is 8.3 per cent and for natural resources it is 20.4 per cent.
Could you explain the difference between the two?
Mr. Everson: No, sir. I do not have the competence to do that.
Ms. Pohlmann: This is based on feedback from businesses in those particular sectors. Agriculture members tend to be long established. They have large properties and therefore more security. Our natural resources members tend to be newer businesses. They tend to service the oil patch, for example, which is, I think, why there is a much higher rejection rate. Our natural resources members are often the ones servicing mining, the oil sands and that type of thing, which are considered a little higher risk, hence the higher loan rejection rate.
Agriculture is a fairly well-established business. People understand how they make their money and I think that is what you are seeing reflected there.
Senator Mockler: What do you have to say about BDC, EDC and FCC taking a bigger market in competing with the traditional banking system?
Ms. Pohlmann: We believe that should not be the case. We think they should start extricating themselves from the market. There was a role for them when traditional banks were pulling back during the downturn. We believe that they should now get out of those markets and let the traditional banking sector move back in, partly because of the cost. It is much more expensive to get loans through government institutions, and the traditional banking sector can play a more competitive role in going after those types of contracts.
Senator Mockler: Mr. Everson, do you have a comment on that?
Mr. Everson: The proposals the BDC is putting forward with regard to their role in the provision of services do not seem to attack areas that are being adequately served. They want to offer indemnifications and provide bonding services, and my membership did not alert me of problems with that. I am not competent to know whether there is vigorous competition between BDC and private-sector consultants.
You have raised the relationship with EDC, and I do think the committee should be attentive to the possibility that the two agencies might find themselves in competition or in duplication. It seems to me that is a solvable problem with proper guidelines, but it is an opportunity for mischief. That would be one thing that I would certainly commend to you.
I have another observation that might be of interest. When I was executive director of the Transportation Review Commission in the early 1990s, we did an exercise similar to this trying to assess how satisfactory the progress of legislation was. It was an extensive study, because it dealt with all of transportation. I was astonished at how often witnesses raised the purpose clause of the legislation. Transportation legislation is as thick as a phone book, and this was one paragraph at the beginning stating the reason for the act.
All the provincial governments and various other agencies raised it. When they were discussing the function of the act, they did not argue much about the methodology of it; they argued about the purpose, which was in that one paragraph. Every lawyer raised it as well, either because they were making a petition for regulatory advantage or they were suing someone and they were going to argue to a court that that was the point of the act. They used that one paragraph repeatedly.
I mention this to you because the BDC's purpose clause is very brief. It is efficiently written; I have no problem with what it says. However, if you are concerned or you hear witnesses who are concerned about its hegemonic approach to the market, this can be addressed by giving it direction in the purpose clause. While it has less standing in law, in my experience it very much draws the attention of practitioners.
Senator Mockler: Will this make more venture capital available for our clients, which is what they are asking us to do?
Mr. Everson: I believe so. I have not been with the chamber for long, but I am quite surprised by the number of small business organizations that are talking about the challenge of international markets as opposed to maintaining just their domestic base. I have heard it constantly since I arrived. I believe there is a big preoccupation among small business to enter foreign markets, especially on the other side of the Pacific where they are really intimidated.
Ms. Pohlmann: There are definitely issues around venture capital financing right now. A very small percentage of the small business population accesses venture capital. Our numbers say 2 to 4 per cent. We would prefer the government create conditions to allow venture capital to be created in Canada rather than have government entities put it out there. I do not know whether BDC can do that effectively. Our desire has always been to create the conditions to create a venture capital industry within Canada so that it is not necessarily the government doing that, because they are not necessarily the best at choosing the winners.
The Chair: I thank our witnesses. This has been another good exchange that will serve us well when we come to make a report that will please everyone and that the government will feel compelled to adopt holus-bolus, I am sure. I say that tongue in check, of course, but we will do our best in that regard.
(The committee adjourned.)