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

Issue 43 - Evidence

OTTAWA, Tuesday, December 8, 1998

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-53, to increase the availability of financing for the establishment, expansion, modernization and improvement of small businesses, met this day at 9:30 a.m. to give consideration to the bill.

Senator Michael Kirby (Chairman) in the Chair.


The Chairman: Honourable senators, we are here to deal with the committee's study of Bill C-53. Our witnesses today are from the Department of Industry Canada. You have before you an opening statement from Mr. Sulzenko. We will ask him in a moment to proceed with his statement and then we will turn to questions.

Honourable senators, when we are finished with this panel I have a number of items relating to the future business of this committee so I will suggest that we go in camera for 15 or 20 minutes.

Please proceed, Mr. Sulzenko.

Mr. Andrei Sulzenko, Assistant Deputy Minister, Industry and Science Policy, Department of Industry Canada: Honourable senators, I should like to introduce my colleagues. Robert Dunlop is the director general of the Small Business Office in Industry Canada; Lenore Scanlon is our legal counsel on this file; Peter Webber is the case officer for this bill in the Small Business Office; and Serge Croteau is the director general in the operations sector of our department responsible for the administration of the legislation.

We are here this morning to present a brief opening statement on the bill and we have provided committee members with a package that contains various documents and research papers relating to the bill and a brief response to the recommendations contained in your September report.

Committee members will be aware that the bill was amended during study by the House of Commons Standing Committee on Industry and that the government introduced amendments at the report stage. If the committee has any questions we will be pleased to answer them.

The proposed legislation is the product of extensive and intensive study of the Small Business Loans Act, which has been meeting the needs of small and medium-sized business for 37 years. This committee provided very helpful advice following its cross-country hearings and I will come to your specific recommendations later in the statement.


The Auditor General and the House standing committee each made substantive recommendations aimed at improving the program. The department itself undertook an extensive round of consultations with borrowers, lenders and other stakeholders.

In addition, the department commissioned a number of studies on various aspects of the operation of the program. Furthermore, we have been continuing our consultation on the proposed regulations with the banks, the Confédération des caisses populaires et d'économie Desjardins du Québec, the Credit Union Central of Canada, the Canadian Federation of Independent Business, and the Canadian Franchise Association and Canadian Restaurant and Foodservices Association. Representatives of these sectors have publicly indicated their satisfaction with the consultations.

As a consequence of the detailed examination I have just described, we believe the bill meets the test set by Mr. Manley in November 1997 when he announced the comprehensive review of the program. If the program were to continue, he said, it must be relevant to the needs of small business, be financially self-sustaining and have an adequate accountability framework.


That the legislation is relevant and meets the needs of its intended primary clientele, start-ups and very young companies, has been confirmed by every witness who has appeared before the Industry committee, through our earlier consultations and by outside evaluators.

On the question of self-sustainability, independent audits indicate that the program is on the right course towards cost recovery, which was established as an objective in 1995. The consensus of those studies is that the current structure of the program can achieve this cost recovery target. While all the consultants' forecasts are positive, they point out that more data is needed on a stable program base to provide reliable forecasts. Industry Canada will continue to monitor the program very carefully over the next few years, in particular to determine whether those forecasts are being realized.

New mechanisms that are being put in place for an adequate accountability framework and the obligations in this regard are a major new feature of the bill. The detailed accountability framework that is proposed is intended to provide Parliament with genuinely useful, timely and pertinent information to allow the house and Senate to make informed evaluations and decisions about the program in the future. Furthermore, the five-year sunset clause will be replaced with a mandatory five-year review, thereby providing both lenders and borrowers with improved stability and predictability.

The core features at the heart of the Small Business Loans Act, as we have known it, are untouched. In the bill, the categories of lenders, the types of eligible borrowers and the criteria for making loans are the same. The permissible interest rate charged, the administration fees and up-front costs are unchanged. The $250,000 ceiling on loans is also unchanged. Likewise, the 90-50-10 formula, which limits the taxpayers' liability in the event of defaults, remains in place.

The $15 billion ceiling on the loan guarantees that can be made under the program is being replaced with a $1.5 billion contingent liability. This new contingent liability ceiling protects the exposure of taxpayers. It means that regardless of the amount of lending, taxpayers will never be liable for more than $1.5 billion over a five-year period. That is calculated for individual lenders on the basis of the 90-50-10 rule outlined in clause 6. However, such a loss would only occur if 100 per cent of loans were to default at the same time. Over the 37-year history of the program, actual claims have been approximately 5.6 per cent of loans.

Under the SBLA, all of the major control elements of the program are found in the bill. The proposals contained in the bill, if approved by Parliament, would change this authority so that the Governor in Council would have authority to make regulations to restrict access to the program. That power is restrictive only and would take the form of measures that would, for example, reduce the maximum loan size, or exclude certain classes of loans or sizes of business, to ensure that the program remains on a cost recovery track. Should a future administration wish to expand the program, it would need to seek parliamentary approval.

The committee should be aware that amendments were proposed and adopted when the bill was before the House committee. Among those were two amendments that direct that a copy of each regulation proposed under the bill, including its pilot projects, be laid before each House of Parliament before they are made. The regulations will then be referred to the appropriate standing committee of each House of Parliament.

The intent of those amendments is to impose an obligation on the government to notify Parliament of proposed regulations and to ensure that those are brought to the attention of the appropriate committees. If they chose to do so, committees would then have an opportunity to schedule time to study the proposed regulations and to provide comments.

Although this notice requirement would not delay the making and coming into force of the regulations in accordance with the established regulatory process, where the proposed regulations are pre-published in the Canada Gazette, comments made by the committee and other interested stakeholders during the pre-publication period would be taken into consideration.

Regulations are being introduced to reduce costs of the program. For example, procedures for interim claims payments and the shortening of the time period in which lenders make claims and collect interest are being introduced. Risks to the program will be reduced through regulations intended to improve due care and due diligence by lenders. This includes authority to audit lenders' program loan files to improve compliance with the bill and regulations.

Mr. Chairman, I should like to conclude by addressing some of the recommendations of your committee. First, I should like to note that a number of your recommendations are contained in the bill.

As you recommended, the maximum loan size threshold of $250,000 is proposed in the bill.

The proposed regulations reflect the committee's recommendation to maintain the 25 per cent ceiling on personal guarantees.


Your committee recommended the creation of pilot projects on funding to the voluntary sector and to not-for-profit enterprises. The bill does call for the creation of a pilot project for the volunteer sector. This will be very useful in assessing the feasibility of extending the program to not-for-profit enterprises.

Your committee also recommended the creation of a pilot project for capital leasing. This has also been included in the proposed bill.

The bill makes it clear that these two pilot projects are to be run as separate, stand-alone initiatives. They are to achieve cost recovery, and will operate under their own regulations. Furthermore, the minister has made a commitment to consult the appropriate stakeholders, and seek the advice of the House and the Senate on the design of the pilots and their regulations.


Your committee recommended that the government not expand the SBLA program to cover working capital but that it set up a pilot project to study the most effective techniques of meeting the working capital needs of existing small businesses that are not being met by the private sector.

Several kinds of capital are often referred to as working capital. Standard bank operating lines, based on accounts receivable financing, is the principal form of debt-based working capital. People commonly refer to working capital in terms of equity and quasi-equity investments. Working capital for start-up business is often provided through the personal equities of the owners, partners or informal investors. In a similar manner, the form of working capital used for research development and commercialization of technology is typically equity or quasi-equity financing.

That form of financing remains a key concern of small businesses. However, most focus groups consulted during our comprehensive review recognized that that form of capital is more appropriately provided through increased equity in firms, not through debt financing. The majority of stakeholders agree that the SBLA is not the appropriate tool to administer working capital because of the associated high risk. While everyone acknowledges that access to working capital remains a major impediment to growth for small business, stakeholders did not see the SBLA as an appropriate way to meet their working capital needs.


Your committee recommended that the government work with the tourism industry to develop a vehicle to deal with the unique circumstances that make it difficult for the SBLA program to adequately serve this important sector. To assess whether the program is adequately meeting the needs of the tourism industry, the department will be gathering additional and better data. The Business Development Bank of Canada has implemented a Tourism Investment Fund to help meet the needs of this sector. This program, developed in conjunction with the Canadian Tourism Commission, will provide valuable information on the gaps which remain to be filled.


You recommended, as well, that financing be extended to knowledge-based industries. During the comprehensive review, most stakeholders recognized that the SBLA, as a term-debt instrument, is not well suited to meeting the existing gap in equity and quasi-equity financing for this broad sector. In sectors such as software and telecommunications, informal investors fill an important gap in capital markets. Private investors are an important source of early-stage external equity capital in the development of knowledge-based businesses, as that is a key area in which informal investors are currently involved. The Information Technology Association of Canada, ITAC, and the Alliance of Manufacturers and Exporters of Canada, AMEC, acknowledged in our consultations that increased equity, whether through retained earnings or risk capital financing, is primarily what knowledge-based enterprises require.

The government has already established a number of initiatives through the BDC and Industry Canada's Technology Partnerships Canada program aimed at helping to address that kind of concern. Given the goal that this program operate on a cost recovery basis and the difficulties associated with developing a pilot that would respect the current asset-based lending of the program, it was decided not to proceed with a pilot project that focused on knowledge-based industries.

In closing, honourable senators, on behalf of Minister Manley, I should like to thank this committee for the report you made in September and your recommendations for this bill. Our consultations with you on Bill C-53 have proven invaluable in responding to the concerns of all of our stakeholders.

Senator Tkachuk: I should like to thank you for coming in last week and providing me with a briefing on the bill. You answered many of my questions during that meeting. However, I will turn to the Tourism Investment Fund as it relates to the SBLA. Will this fund then exclude the tourism industry from the SBLA?

Mr. Peter Webber, Team Leader, Small Business Financing, Department of Industry Canada: No, senator. In fact, the tourism industry is one of the largest users of the SBLA. According to our figures, the accommodation, food and beverage sector is the number one user of the SBLA.

However, the SBLA does not necessarily meet all the financing needs of the tourism industry. In recognizing that there is a need for more financing for medium-sized businesses, particularly in that industry, the government established the BDC's Tourism Investment Fund two years ago. Since then, they have done about 68 deals, and the investments that they will look at range from about $250,000 to $10 million. It covers a very broad spectrum.

They have done about $68 million worth of investments in that time and have provided us with an important window on the industry, particularly in that sort of small to medium-sized sector which we feel has perhaps not been as well served by the commercial banks as it might have been in the past.

Senator Tkachuk: How long will the programs run that will test the two new initiatives, especially the non-profit initiatives? Will those two pilot projects last one year or two years? What are their parameters and what kind of businesses will be part of those pilot projects?

Mr. Webber: To a large extent, that is yet to be defined. However, the bill does provide for a maximum term of five years for each of the pilot projects. Moreover, it provides the regulations that will be brought forward in establishing the parameters of those programs. To that effect, Mr. Sulzenko explained earlier in his statement that he wants to involve the parliamentary committees and the stakeholders in helping to define those parameters.

One of the parameters states that both pilot projects must operate on a cost recovery basis. Thus, we can test whether it is feasible to provide that kind of financing on a cost recovery basis, which is a key criterion for allowing that kind of financing to become a permanent part of the SBLA. The proposed Canada Small Business Financing Act would be the son or daughter of the SBLA.

Senator Tkachuk: Financial institutions have objected to the notice of audit because they did not think enough notice was provided either in the bill or in the regulations. That problem was explained to me in the briefing session we had. Could you explain to the committee exactly how that audit works and how you keep track of that stuff?

Mr. Serge Croteau, Director General, Programs and Services Branch, Department of Industry Canada: In the first draft, no period of time was specified. We could launch a surprise audit anytime and that is what they really objected to. They proposed a 45-day notice, but agreed to a 21-day notice before we would do an audit. The period of time requested is to be spent putting together the documentation required for that audit.

Presently, under the program, the SBLA does not have any provision for audits. That is something new in this program. We have not yet developed the procedure or determined how often we would launch an audit. We are aiming to monitor the performance of various lenders. For that reason, we would have audits whenever there were indications, such as incorrect registration forms or deficient claims requiring considerable adjustment of many problems. In other words, we will target those audits; they will not be across the board.

Senator Tkachuk: I did not participate in the Quebec and East Coast hearings, but in Western Canada many businesses that came to the hearings had not heard of the program at all. In British Columbia, only one out of the eight manufacturing and export associations had heard of the program, which I thought was quite odd but understandable.

We made some recommendations about this. What are the department's marketing plans to let the business community know that this program exists? Will they ensure fair access to the program?

Mr. Croteau: Indeed, through consultation, we noticed that several borrowers were not aware that the type of loan that they had was guaranteed by the Government of Canada. What we are doing about it right now is amending our registration form. That is the document that the borrower signs when receiving the loan. We want to indicate on that document that it is a Government of Canada program and that the loan is guaranteed by the Government of Canada. The borrower will have to sign a declaration where there are references to the act.

We will also amend our brochure, which will describe the enterprise as a Government of Canada program. The brochures will be distributed at infofairs for SMEs and through the various CBSCs across Canada to increase the visibility of the program and to let the borrowers know that it is a Government of Canada program.

Senator Kolber: I should like to address the question of lending to knowledge-based industries, which we have suggested you should do, but which you have suggested you should not do.

From your point of view you are probably right. Similar criticisms following your reasoning indicate that banks suffer problems when lending to small businesses. Are the knowledge-based industries the odd man out because they need equity capital? The banks point out that they need equity capital; however, all kinds of businesses in this country need equity capital.

In the United States, the knowledge-based industries are probably the fastest growing industry. They are huge creators of jobs. It seems to me that we are somehow missing something here. I am not suggesting that it is your fault or your problem. However, perhaps you could guide this committee as to what we could do to try to overcome what seems to be a real gap. Of course, in the United States there is a huge surplus, I am told, of venture capital money. There is more venture capital money than there are places to put it. In Canada, however, it is quite the opposite. Also, you talk about informal investors; perhaps you could elucidate for me what that means.

The obvious lack in Canada is that we will not pay attention to our capital gains rate. If we do not do that, how can we get people interested in putting up venture capital? Why would a venture capitalist come here when the rate in Quebec is effectively 42 per cent? In the United States the rate is 22 per cent going down to 14 per cent. That is almost three to one. What do you suggest this committee do to try to correct what seems to be a real anomaly in our manner of looking after small businesses?

Mr. Robert Dunlop, Director General, Entrepreneurship and Small Business Office, Department of Industry Canada: Senator, you have raised a number of issues. Certainly we noted the emphasis that the MacKay report placed on this issue, which is one that we want to address. We have spent a great deal of time recently on the BDC and now with the proposed Canada Small Business Financing Act dealing with the debt side of the balance sheet. We have heard from the people we have been dealing with in the private sector that in Canada the debt availability is in relatively good shape. The real problem is equity. We agree on that.

One demonstration program we are running at the moment is the Canada Community Investment Program. Its objective is to link up informal investors, people who would be called "angels." They would be knowledgeable investors who would make specific investments in a small business and then be involved to some degree in the management. So far, we have set up the infrastructure that will permit that informal network of angel investors to join with the small businesses needing equity financing in 22 communities.

We are about a year and a half into the program. However, some of the pilot programs were added in a later round. Some of them have only a couple of months of experience. However, we are hoping to learn how that informal market works so that we can come up with ways to make it more attractive. We recognize that we are in Industry Canada and that we are dealing with issues over which we have control, not issues such as taxes and capital gains, which our contacts in the private sector raise with us when we speak to them.

Senator Kolber: That sounds nice, but it does not answer my question.

The average venture capitalist who typically goes into a start-up situation will say that one in 10 succeeds. Let us say the one who succeeds doubles or triples their money and the other nine lose it all. Once they double it or triple it, they have to give back 40 per cent. Tell me what is left. Why should they do it?

Mr. Dunlop: That is a very real problem.

Senator Kolber: I am asking you if we should initiate a study on capital gains. Should you folks take the lead? Are you supposed to be screaming that there is a real gap in our country? You can have all of these nice little community projects, but you will not solve the problem.

Mr. Sulzenko: If the Department of Finance found out that we initiated a study on capital gains, we would have some trouble with them. I would encourage this committee to move forward if it is interested in the subject.

Senator Kolber: You should be interested in the subject.

Mr. Sulzenko: We are advocates with the Department of Finance on many tax issues, but ultimately it is their analysis and their call.

We agree that this is an issue. If the chairman and the committee feel it is an important one, we would not discourage you from reviewing it.

Senator Kolber: With respect, it sounds like you are copping out.

The Chairman: Senator Kolber, in fairness, tax policy is the responsibility of the tax department.

Senator Kolber: I am not suggesting that they create tax policy. I am suggesting that they point out that there is a real problem in that area.

Senator Oliver: They admit that equity is the problem.

The Chairman: I am not disagreeing that we have identified a common problem. I am only saying that it is not their responsibility to solve it.

Senator Kolber: It is their responsibility not to solve it, but to highlight it.

Senator Tkachuk: We and senators on the other side have often made the point that when a bill comes before the Senate, we should have a politician here, such as a minister. Senator Kolber's questions are policy questions. My view is that we should not deal with a bill at all unless a minister appears before a Senate committee.

Senator Kroft: Further to your comment about the pilot project with sources of informal equity, the network of angels, at least 10 to 15 years ago the then Federal Business Development Bank ran exactly the same kind of program. It had a refined analysis program, a relationship with private sources of venture capital funding and a search for opportunities to link that with other programs. I make that observation only so that the reinvention of the same wheel is not too energetically pursued.

Mr. Webber: I am not specifically aware of the program to which you refer. However, I would say that the conditions in Canada were somewhat different at that time.

Today we have a surplus of venture capital money looking for investments. Unfortunately, the problem seems to be investments of less than $1 million. This program is directly aimed at trying to bridge that gap. Obviously, there is sufficient investment capital available. The problem is getting it into the hands of entrepreneurs who have ideas and plans for growth.

While the risk-reward question is a separate issue, there is obviously a lot of venture capital money looking for opportunities to invest in this country.

The Chairman: I hope the record will show that in keeping with the spirit of the Christmas season, Senator Kroft raised the question of angels.


Senator Hervieux-Payette: I would like to add to the question concerning businesses working in knowledged-based fields, such as biotechnology and telecommunications, for example.

I am under the impression that you are facing the same problems as the banks with respect to the lack of knowledge about knowledge-based industries, and that is why you are reluctant to undertake a study. There is even a lack of knowledge with respect to venture capital, and what is a bit problematic is that at our level, despite the tools that we have, like the National Research Council and other knowledge-based organizations, we have still been unable to come up with a way of evaluating the sectors better and bridging the gaps not being met by private commercial banks, and so we are amending the act.

Over the next five years, this is in fact the sector that will develop the most, and you do not want to undertake a study, or a pilot project, telling us you have already consulted industry. But I am not aware of your having consulted the Canadian Federation of Independent Business and the people working in biotechnology and telecommunications, with the exception of the manufacturing sector.

Can you explain to me why you are refusing to conduct a study or launch a pilot project, be it in biotechnology or telecommunications, to determine what tools are required and how to evaluate them, and perhaps also show the commercial sector how to proceed?


Mr. Webber: First, we have had discussions with financial institutions, both in Quebec and Ontario, about exactly that problem. There is a great deal of reluctance on the part of financial institutions to make investments in firms on which they have not done due diligence. However, one of the ways we are seeking to moderate that is through alliances developed with the Business Development Bank. In Ontario, in particular, the Business Development Bank has developed an alliance with the Royal Bank to do assessments of the business plans of high-tech firms, thus spreading around the expertise the BDC has gathered in their particular niches.

Second, they have built on that to create seed capital funds across the country aimed specifically at trying to get commercialization funds into the hands of entrepreneurs at the stage immediately after research and before commercialization. Those funds have just been established in the last little while. They will, over time, create the expertise we are talking about. All of those are done in conjunction with venture capitalists and, in some cases, capital investment corporations.

We recognize that there definitely is a problem here. I do not want to leave the impression that we are not aware of it and are not taking steps to address certain aspects of it.


Senator Hervieux-Payette: I want to conclude by saying that I will submit the idea of having a status report within two years so that we can review the matter. Five years is too long. I am prepared to give the BDC a chance to develop an alliance with a bank -- and I hope they will move into Quebec since they are also in Ontario -- but I nevertheless find it is not enough to say that you are going to use the BDC, which is an offshoot of Industry Canada.

I do not have a problem with that, but it is nevertheless important that you push your partners, who grant the loans and make the profits, and who in the end, join forces with us.

I am sorry, but those people should have greater responsibility for developing expertise. It is up to you to push them in the back. That is how I see it.

On page 6 of your document, you state: "Regulations are being introduced to reduce costs of the program." Then you list a series of measures that lead to reducing administrative costs.

Were those measures recommended by the banks? Will they prevent the program from working smoothly and in the end hinder small and medium-sized businesses? Who did you consult about changing the rules? Will the process end up being so bureaucratic that SMEs will get lost in them and no longer be able to do anything?

I want to make sure that these measures for administering the program correspond to SME programs and not bank programs.

Mr. Croteau: First of all, this program is perhaps the least bureaucratic of its type, because it is delivered by different lenders throughout the country. That is something we wanted to leave fundamentally unchanged, and I think that with the measures that have been introduced and that, in passing, came from the Auditor General, who wanted to see a little more diligence in reviewing the various matters-- The Auditor General noted that lenders were not always applying the same procedures when it came to conventional loans and when granting a loan under a program. As a result, the changes were made in consultation with lenders.

We discussed the matter at great length to ensure that it would not complicate to a large extent the implementation of this program.

What we are asking them to do is to use the same type of procedure that they are currently using when they administer loans of the same type, but which are not guaranteed by the government.

So to answer your question, I do not think that the measures that were introduced in the program are going to unduly complicate its administration or access for small businesses.


Senator Callbeck: I have a few questions about the tourism sector. We held hearings on this bill last year in Atlantic Canada. We heard many witnesses from the hospitality and tourism sector who expressed concern about the lack of availability of money. I remember particularly the association of tourism in Nova Scotia saying that if the thinking of financial institutions did not change by the year 2000, there would be a crisis in tourism. That greatly concerns me because tourism creates a lot of jobs in Atlantic Canada.

One of you said this morning that the food and beverage sector of the tourism industry is one of your highest users. What statistics do you have on the number and size of loans that go to that sector and how many applications are rejected, et cetera? Is it possible to break that down by province?

Mr. Webber: We can do a breakdown by province for the industry. The accommodation, food and beverage sector, which I use as a proxy for the tourism industry, represents 17.7 per cent of overall lending under the program, with about $345 million outstanding in loans to that sector in 1997-98.

Our default rate has historically been about 5.6 per cent on lending under this program. We do not have figures specific to that sector for default rates. Therefore, I am not able to answer that aspect of your question.

Rejections have, of course, been a major source of concern for the Industry committee in their dealings with the banks regarding trying to assess the degree of unmet demand. Recent surveys tell us that the banks provide about 50 per cent of small-business financing. They claim that there is an 89 per cent approval rating by banks lending to small businesses. We do not have specific figures for the tourism industry. That would require additional research.

Senator Callbeck: We heard about the 89 per cent approval rating in Halifax. Someone said that that means nothing because, although the bank will meet with people three or four times, they do not even get to fill out an application unless the bank believes that the loan will be approved. Therefore, the people who never fill out an application are not included in those statistics.

What information can you give me on this program for Prince Edward Island? Can you tell me the number of loans and the dollar amounts of those? You say that, overall, 17 per cent is spent in this area across Canada. I should like to zero in on my province. You may not have it now, but I should like to get that information because I continually hear this complaint.

Mr. Webber: We will run those numbers for you and provide them to the clerk of the committee as soon as possible.

We have a breakdown in the annual report by banks. For Prince Edward Island last year, there were 187 loans totalling about $10 million. Of course, that is all loans under the program, not loans specific to accommodation, food and beverage.

Senator Callbeck: That is the area in which I am interested.

You mentioned the Tourism Investment Fund that was implemented by the Business Development Bank of Canada. When was that established?

Mr. Webber: That was established following the budget of 1997. It has been in operation for a little over a year now.

Senator Callbeck: Could you get those figures as well?

Mr. Webber: The figures that I quoted earlier, 49 investments of $68 million, were the latest numbers I was able to get. I was not able to get a breakdown by province. However, I shall ask them to provide that and we will provide it to the clerk of the committee.

Senator Callbeck: At our hearings, some tourism and hospitality operators indicated that banks are rapidly withdrawing their support for businesses, reducing their lines of credit and so on. Have you seen any evidence of that?

Mr. Webber: Our research shows no specific evidence of that, although we have heard anecdotally that that is the case. Certainly, in our consultations with the Canadian Tourism Commission during the development of the Tourism Investment Fund, that was a key concern raised by members of the tourism industry. That was one response to their needs.

Senator Meighen: I wish to return to clause 5(2) of the bill. I want to know the thinking behind it. It states:

The Minister may, with the approval of the Governor in Council, give notice to a lender of the termination of the Minister's liability in respect of loans of a prescribed class or of any prescribed classes made by the lender on or after the date set out in the notice.

It is a cabinet decision. Does that clause not permit the minister, in effect, to withdraw guarantees retroactively? I can understand why you would want to give the minister the right to do that for future loans, but why is it necessary to provide for this retroactivity?

Mr. Webber: It is not intended to be retroactive.

Let me give you the sense of its intention. That provision has been in the SBLA for quite a number of years. We are proposing to leave it as a mechanism to ensure that if there are instances of egregious abuse by lenders of the program and their loss rates are extreme, then the minister acting on the taxpayers' behalf can act quickly to limit the liability. The short notice period is to ensure that in cases where there is egregious abuse the lender does not have a long period of time in which to arrange their affairs to continue or even exacerbate that abuse.

In the 37-year history of the program, that provision has never been used. It is our experience that lenders use the program in a responsible fashion. We have never even reached the stage at which we have considered using it.

I hesitate to suggest that this would come on to a lender like a thunderclap. It would be the end of a process of consultation and there would be an expression of deep concern by the government in advance of this arriving on a lender's doorstep.

Senator Meighen: It is probably my legal training that makes me uneasy when I see anything that smacks of retroactivity. I am comforted to some extent by the fact that it has not been used in 37 years. Perhaps at the five-year review we will see if that good record continues.

Clause 6(1) establishes the ceiling in the amount of loans. Do I read this correctly that it is quite possible for the lenders, unknowingly, to exceed the ceiling and then find out after the fact when the minister says, "Sorry, you have gone beyond the ceiling and we cannot guarantee any more"?

Mr. Croteau: The ceiling will be monitored much in the same way as we monitor the $15 billion loan ceiling that we have under the SBLA program. Essentially, when lenders make loans under the program they have three months in which to register those loans with the administration. In the process of registering those loans, we calculate how much of the ceiling is being used. We monitor constantly the evolution of how much of the ceiling is being used. Thus, when we see that there is a possibility that the ceiling will be reached, we can advise the government, after which there are two options.

We can increase the ceiling through an appropriation bill. If, on the other hand, we maintain the ceiling as it is, then as we get close to the ceiling, we would advise all the lenders that we are in a situation where there is a possibility that the ceiling will be reached. In that instance, we would suggest to the lenders that they might want to pre-register the loan before disbursement. That is to ensure that they will be able to have the loan protected with the government guarantee.

We would do that until we reach the ceiling, at which time lending under the program would stop until the new period could start. We have a $1.5 billion ceiling for a five-year period. That allows us to lend about $10 billion during that period, which is $2 billion per year. That is approximately the experience of the two or three most recent years.

The likelihood that we will reach the ceiling is not necessarily strong unless, of course, there is a lot more usage of the program due to an increase in economic activities and so on.

Senator Meighen: I misspoke when I said that the minister's guarantee would fall. My concern was that the lenders would not be paid if the ceiling had been breached and they were not aware of it and the authority was there not to make the payment. Is that a new provision or was it in the former legislation?

Mr. Croteau: In the former act, there was a provision regarding the total amount of loans. At the moment, the ceiling is $15 billion worth of loans that could be extended under the program during period 12.

We moved from loans to minister's liability because it is more representative of the potential costs of the program to taxpayers.

Senator Austin: Mr. Sulzenko, can you or one of your colleagues tell us if there are parallel programs with the provinces in the area of small-business lending? If there are not such programs, could this legislation possibly be supported by provincial programs? Essentially, what goes on in the provincial sector?

Mr. Webber: In Quebec, there is a provincial program that deals with financing for new business start-ups. Alberta has a similar program concerning the start up of young firms. The provincial programs are built around the notion that the SBLA is in place. Therefore, all the evidence we have suggests that provincial programs do not duplicate but, rather, complement the SBLA.

For example, the Quebec program has provided working capital for start-up firms. We do not provide that because of its high-risk nature. Similarly, the Alberta program provides for other-than-fixed-asset financing for firms. Again, that is not the sort of thing that the SBLA provides, but it may, in fact, be the case that borrowers under the SBLA or the proposed Canada Small Business Financing Act will be able to find aspects of financing that they need from a number of different sources because they are built to be complementary.

Senator Austin: In other words, eligibility is not exclusive. If you can borrow from one, you can borrow from the other.

Do you have any idea what kind of capital Alberta or Quebec engage for support to small businesses?

Mr. Webber: I cannot recall off the top of my head. We can get what we know of those numbers to you.

Senator Austin: Is there nothing in Ontario that strikes you as integrated or supporting the same clientele?

Mr. Webber: Not really, no. There are a number of Ontario government programs that recently have been discontinued that covered similar ground. Recently established in Ontario are the Community Small Business Investment Funds, which are really aimed at dealing with the equity side. To the extent that I know the status of their establishment, they are still in the start-up stage. I do not believe that they have made much progress in getting those in place.

As far as the other provinces go, I am not aware of anything.

Senator Hervieux-Payette: When you refer to the Quebec program, are you talking about the Plan Paillé?

Mr. Webber: Yes.

Senator Hervieux-Payette: The latest figure I had on that plan was $30 million, and the figure for failure was very high. It has nothing to do with the plan. It was criticized strongly. The terms and conditions were not very well implemented and it was seen as a give-away but not helpful for small and medium-sized businesses or as a way to start up serious businesses.

Senator Austin: Obviously, some provinces have resources and all of them have ambitions to support small business. I am wondering whether the federal programs are not levers to develop within the provinces policy interest in the area of small-business financing, whether through equity or loans, and whether you can attract a more cooperative level of participation, not to detract from your efforts but to enhance them.

I have one other question. Could you explain in a general way what the constitutional authority for this program is at the federal level?

Mr. Sulzenko: I think you have the panel stumped.

Ms Lenore Scanlon, Lawyer, Commercial Law, Department of Industry Canada: Two that come to mind immediately are banking, and trade and commerce.

Senator Austin: I am interested in the constitutional authority. I am not challenging it. We have been in the field for a long time. It is probably a shared jurisdictional field. In any event, I will pursue the answer elsewhere.

The Chairman: It is so wonderful to see five senior public servants stumped, because it happens to us all the time.

Not seeing any further questions, I am therefore happy to entertain a motion to report the bill back unamended. However, I should like to make it unamended with observations, for the following reason: Our report to the minister in September was never a public document because it was not an official report of the committee. We were not sitting but we wanted to get it to him. It is appropriate, in light of the parts of the bill that reflect our letter to the minister, that we report the bill with observation, the observation simply being our letter to the minister, which then makes it a public document.

Could I have a motion to that effect?

Senator Oliver: I so move.

The Chairman: Is it agreed?

Hon. Senators: Agreed.

The Chairman: Carried.

We will report the bill back this afternoon.

Honourable senators, I should like to move into an in camera session.

The committee continued in camera.