Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 50 - Evidence for the afternoon meeting of April 28, 1999
TORONTO, Wednesday, April 28, 1999
The Standing Senate Committee on Banking, Trade and Commerce met this day at 2:00 p.m. to consider the present state of the financial system in Canada (equity financing).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, our first witness this afternoon is Mr. Gordon Sharwood, who is the chairman and CEO of his own company, and who a lot of us have known in other incarnations over the years. He has testified before us and -- you can correct me if I am wrong, Gordon -- he has also testified also before the House of Commons Industry and Finance Committee on other issues. Mr. Sharwood was here this morning and heard our discussion.
Please take us through the highlights of your brief and then we will ask you a number of questions. Thanks for coming. It is good to see you.
Mr. Gordon Sharwood, Chairman and CEO, Sharwood and Company: I have just come from a meeting, and I attach a copy of the speech I made there about the Canadian Community Investment Program. I was told by the CCIP officer from North Bay that not a single venture capitalist has ever been north of the 401. I know that is a bit of an exaggeration, but the Sault would be hard put to find a venture capital deal.
It was true of Niagara, and I will just speak colloquially here. Human Resources Development Canada in fact funded helicopter trips for a whole bunch of venture capitalists, including me, to tour the Niagara Peninsula because, with one exception, no venture capitalist has made an investment in the Niagara Peninsula in the last 25 years. The exception was Ben Webster who invested in Kittling Ridge Wineries. That was a highly successful investment on his part. There is now talk of Working Ventures starting a fund in the Niagara Peninsula.
Looking at the list Mary talked about, you will see that 54 out of 116 deals are made in Quebec. Are there any outside Ontario? Are there any very far outside Metro Toronto? No. Distribution and access to capital are major concerns.
The Canadian Community Growth Accelerator Network, of which I am chairman, is trying to bring access to capital to places like Sarnia and the Sault, which now have a CCIP office. This is what creates growth.
We know that Saskatoon is a hot spot.
I have asked INC. Magazine where the hot spots are in the United States, and I have a list that includes Sioux Falls, Colorado Springs, Madison, Nashville, Jackson, Tucson, Boise, Idaho, Omaha, Albuquerque, Wichita and Tulsa. How do they get access to venture capital? I am trying to find out, and when I do, I will tell you.
I can assure you that venture capital is not spread around. It is still very difficult to come by. I certainly concur with what Senator Kelleher said. The money is there but it is not well distributed. I would not argue with what was said to you earlier in the day.
Somebody said that any good entrepreneur will find a way. It is hard if you are in North Bay or Sudbury to get access to the venture capital in Toronto, particularly when there are now about 140 funds based in Toronto, all of which are focused, of course, on the deal-making in the Toronto area.
I have developed something called the "Angel Hunting Kit" and we are now in the process of putting that onto a CD-ROM, so that it may be interactive. I would certainly echo what has been said before by my good friend Denzil Doyle and others, even this morning, that there is a place for a tax break if there ever was one.
I am sorry that Mr. Geller is not here, because I would take a crack at him about the fact that, as Jeff MacIntosh said, although not as forcibly as I say, this $150,000 rule is moronic and is a breach in the observance.
Think about the industry changes that are occurring. It is one thing to start a sawmill where you need $150,000, $200,000 $300,000 as starting capital. IT companies need $25,000 to $30,000. It is illegal to do that under the OSC rules. You can use the seed capital exemption. There are many limitations, as Jeff said, about the love money and so forth. It is absolutely ridiculous because I was behind the recommendations of the Small Business Task Force, that we would adopt the sophisticated investor rule in the United States whereby anyone who has a net worth of over a million and a net income of over $200,000 qualifies as a sophisticated investor and can invest $15,000 in a kid who has a great idea. This committee could certainly do a lot to urge the OSC to change that particular rule. I think it is absolutely ridiculous. That report sat on the shelf for two and a half years while they have been obsessed with mutual funds' salesmen and their improprieties. In the meantime, a whole bunch of improprieties are occurring in the venture capital market, in the angel market, which they do not seem to care about.
One of the problems about breaking the rules is that if things go wrong, if you put $50,000 into a deal illegally and you bring some friends in with you, and then it blows up, your friends can sue you for breaking the Securities Commission law. Is that right? It is not right.
As you know in the committee, one of the issues that we see in our work is what I call the de-skilling of the banks in the mid-market, and it is very difficult. We deal a lot with ABN Amro, Congress Finance, GE Capital, Reservoir Capital and others that will give 90 per cent of government receivables, with no debt equity ratios, and the banks are still obsessed with debt equity ratios.
I think it is very interesting: I talk in my report about the "fungible" nature. Somebody asked me what that word means. It means that debt and equity are interchangeable. Let me give you an example.
Let us say that a client has an offer from a bank for 75 per cent of receivables and 40 per cent of inventory, with probably an inventory cap based on the debt equity ratio, and he also has an offer from Congress. They will give me 85 per cent of receivables and 65 per cent of inventory with no debt equity ratio.
I suggest that we take the 10 per cent of your receivables and 25 per cent of your inventory and assume that you have to raise that money by way of 40 per cent equity. The deal that he has been offered by the bank is one over prime, say. The deal he is offered by Congress is 4 over prime. It is still cheap money.
A lot of people ask for equity, and when we examine their situation we find that they do not. We can solve their problem through one of the near banks, the new Finova, Congress or ABN Amro.
The other interesting thing is the technology that the near-banks use. When you deal with Congress, you get a disk and that goes into your general ledger and you are tied in to the bank's lending officer in downtown Toronto. You may be in Winnipeg. Every day the loan officer can look at what was paid in, paid out, shipped in, shipped out.
The Canadian banks have spent billions of dollars trying to get us to do our banking at home, but when you get a letter from a Canadian bank today authorizing a line of credit, it says, "Please report by the third week of the month following the month-end." The banks have not heard of this technology. It probably costs maybe $100,000 to put together a disk like that and its software.
There is some kind of Presbyterian attitude in the Canadian banking system in which anything over 2 over prime is too risky a loan to make, and we turn it down. I think that has been a big problem and it has been one of the reasons why we have not done many deals recently with any of the Canadian banks.
The Chairman: Can I ask you a question? Why do you think the banks turn it down? Is it because it is too risky or is it because if they priced it according to risk, it would be too politically embarrassing?
Senator Angus: You were at the bank for a long time. You can tell.
The Chairman: That is why I thought I would ask that.
Mr. Sharwood: When I started in the bank, we were making loans of 4 and 5 over prime. It was partly something to do with the 1967 Bank Act, and interest rates were going up and banks were prevented from charging over 6 per cent. I think that this is a legacy of that era.
Senator Angus: It is a legacy of usury.
Mr. Sharwood: Yes, and of the usury rules. I do not know. I was asked by an anonymous person who will remain anonymous to do a little analysis of the assets of the four banks that were proposed to be merged: 55 per cent of their Canadian dollar deposits were in residential mortgages, and 25 per cent of their deposits were in credit cards and in those personal loans at 12 per cent that they make, such as car loans. That adds up to 80 per cent.
If you look at the list of directors of the four banks and make an estimate of the credit requirements of those big companies and the directors, you probably could easily come up with 10 per cent of their Canadian dollar deposits. They have to put a little into what I will call the "Catherine Swift market," or the "Brien Gray market," and some into the SMEs to keep them happy, and they have no money left over for mid-market lending.
Senator Meighen: We have asked this question before, and I think the majority answered that they cannot do that because it would be politically embarrassing when we collect. The banks would be held up as usurious ogres.
I wonder whether that is so and how you feel about that. I wonder whether Wells Fargo will not change that a little bit. They do not seem to worry about charging 4 or 5 or 6 over prime.
Senator Kelleher: Neither does the Federal Business Development Corp. They charge prime plus 8.
Senator Meighen: That is a good point.
Mr. Sharwood: Yes, and they do it by marketing.
Senator Angus: Think of what the banks charge on their credit cards.
Mr. Sharwood: Yes, I think that it is very hard to compete with the profitability. You have heard of lot of discussion this morning about due diligence costs for the venture capitalist and there are quite a few such costs involved in lending to the mid-market. These are not mature companies for the most part. They are growing rapidly, as White Rose did.
Senator Kelleher: Or they grow not so rapidly.
Senator Kroft: Can we just get a couple of definitions when we are talking, in your terminology, mid-market? Can you just place us?
Mr. Sharwood: Yes. My definition of the mid-market is that it basically funds needs of between $5 million and $100 million.
Senator Angus: That is just a modest little range.
Senator Meighen: What is left?
Mr. Sharwood: I think you all recognize that one of the biggest differences between us and the U.S. is that we really have to determine how to make those companies grow into that middle range.
I do not see the Canadian banks at the moment, except for the National Bank, the Hongkong Bank and the Laurentian Bank doing very much in that area. Now, Tony Comper has talked about setting up a bank, but you need the skill sets to be able to do that economically, and of course, you know the problem.
Those U.S. towns that I mentioned tend to have a local bank that funds the entrepreneur and a board of directors made up of local and prominent businessmen. If a bank president thinks that something is beyond the level of where he can bank the deal, he will take it to the board because they have all kinds of connections.
Someone at the First National Bank of Rochester, let us say, might know somebody in Boston will do that. The Royal Bank in Guelph cannot do that because, first of all, the bank manager turns over every two years and he does not have anybody to go and talk to like that. I am absolutely 100 per cent behind the Mackay task force recommendation that we be allowed to start new banks, for then they will charge some of these rates and get right into it and develop the skills that are needed to tackle this market, because it is a quasi-form of venture capital in some ways.
I could not find how much the 18 divisions of GE Capital lend in this country. There are no figures. I do not know how much the ABN Amro puts out. There are no figures on any of that, and we should know. It is an important issue.
In looking at the Canadian Community Investment Program and the dealings we are having with places like Sarnia and North Bay and the Sault and others, I find that the community spirit is stronger in the U.S. than it is in Canada. There is a culture of community, of growth from the community up. You are probably familiar with Michael Porter's cluster theory, and these are the clusters. One of the people at the committee meeting I was at at lunchtime had just come back from Wichita and he said that anybody can get a job there because it is just booming and there is hardly any unemployment. This is one of the reasons why the unemployment rate is so much lower there than it is here.
Someone mentioned this morning that we tap into the American venture capital market all the time without hesitation. I would take issue with that. We are on very close terms with a lot of American venture capital funds, and they will invest here. They are quite delighted. They got a good deal. They are part of our community. They will come from Boston or New York. It is pretty hard to get them to come up from California.
Senator Meighen: They will come in with you, will they not? They will not come in alone, typically?
Mr. Sharwood: We are an intermediary. We are not an investor. They will come alone. They will put together their own syndicate from the U.S.
I am thoroughly in agreement with this absolutely ridiculous escrow change that is proposed by the Ontario Securities Commission. We are at the moment backing into two Naasdaq shells, or two of our clients, so NADASQ does not have that rule. That is a good way of exiting, and of course, the liquidity in NADASQ is far higher than the Canadian market. If given a choice, a Canadian entrepreneur would much rather list on NADASQ than the TSE.
The Chairman: What do you mean by a NADASQ shell?
Mr. Sharwood: It is a shell company that has a NADASQ listing.
I think that we have a problem. I was kind of interested in the interchange that was going on about liquidity, because I think we are at an interesting transition point about how much of the trading will go on the Internet and whether a stock exchange will really be relevant at all.
There is certainly no question that the amount of trading on the Internet now, in Green Line Direct and so on, is huge and threatening. It is all very well for the rich individual to do that, but what about the institutional investor? If they can trade on the Internet, they will.
The brokers and the big investment dealers say that they are still needed to write the reports on whether or not IBM or CIBC is a good investment. Maybe they are right, but the big funds may develop their own expertise and the heck with the brokerage houses' reports. I think we have to look ahead a little bit to what will happen there.
I would also like to point to one of the problems of labour-sponsored funds. There is this rule that they cannot invest in companies that have more employees working outside Ontario than inside it.
I took a very good deal to Earl Storrie who runs the best labour-sponsored fund. He could not invest in it because the number of employees outside Canada outnumbered those inside Canada Are we going to be an international economy or not? That rule is ridiculous, but that is the rule.
Senator Kroft: Is it a Canadian rule?
Mr. Sharwood: No, it is an Ontario rule. In an Ontario labour-sponsored fund, There must be more employees in Ontario than outside it. It includes Ontario. I said Canada because if it is licensed to do business, if it is selling, it depends where it sells, so it applies to Canada.
Senator Kroft: In Manitoba we are aware that Ontario confuses itself with Canada.
Mr. Sharwood: I will accept your criticism.
Senator Hervieux-Payette: It is the same rule in Quebec. If a plant in Quebec is doing well, and it wants to expand into the United States, it cannot put any money there.
Mr. Sharwood: I will close those comments with one other thing that I really endorse: Senator Kirby, your directors' and officers' liability is really a problem because of what is happening with the entrepreneurial community now. It is certainly borne out by some of the discussions you had with a couple of entrepreneurs. It was interesting to hear how early they started their businesses, even when they were still in school.
The Association of Collegiate Entrepreneurs has members who start businesses when they are in college. They need mentoring. I am always asked to go on the boards of junior companies, but you will not find me going anywhere near because of due diligence and jurisprudence. Someone told me that the only way to defend yourself is to have a computer at the table where you can plug into Revenue Canada and find out whether something has really been paid. Otherwise, even if the vice-president of finance shows you some cheques, you do not know whether that is the whole amount owing. You cannot know whether your CFO has lied to you.
Senator Angus: You are supposed to hire a CFO, not a lawyer, to get your due diligence going.
Mr. Sharwood: I think that is enough to get you started, anyway.
Senator Angus: Mr. Sharwood. I bring you greetings from your old buddies in Montreal. They look with great envy at the lotus land of Ontario and all your great triumphs here.
I was pleased to receive your brief at least two weeks ago. It is very helpful for us to get your presentations well in advance and I thought it was an excellent brief. I did not recognize, though, too much of it in your remarks that you have just made here.
Mr. Sharwood: I knew you had time to read it.
Senator Angus: That is fine, because I think the idea is to get a good discussion going.
You said, "I detected a touch of self-satisfaction amongst these lads this morning." I am wondering if you think there is a problem.
It seems to me there is a hell of a problem in Canada with the tax structure and with the directors' liability. These things really are front and centre. Quite apart from whether the money is available in Toronto, Montreal or Vancouver, I think it is a bad scene in Canada. These guys are the exception. Do you not think that they are quite amazing and that they can be helpful to us in solving the problem?
Mr. Sharwood: Yes. I was encouraged. I would echo Mary's comments, that there is a major change, but Mr. Lobo really put his finger on the issue, that half the funding is out of the labour-sponsored funds and of course, a lot of it comes out of Quebec where they are terribly well organized, where they have regional and industry structures.
Senator Angus: You are holding up something here?
Mr. Sharwood: This is the American clusters of expertise, developed by Michael Porter. They have developed expertise in various specialties in those funds in Quebec, and it is really interesting to read the annual report of the Caisse de dépôt which has just come out, and see how much specialization is going on in Quebec.
Senator Angus: Are you talking expertise on one hand and real estate on the other?
Mr. Sharwood: No, I am talking about biomedical, IT, telecommunications and all kinds of things. They are doing a lot of investing in IT, biomed and medical devices in a much more organized way because we are, as you can see from what you heard this morning, in transition from funds being run by bankers to funds being run by people who have been there and done that. I think that is a very healthy thing that is going on.
Mary emphasized, and I would re-emphasize it, that Solidarity and Caisse have been around for so long that they have had time to train all these people and there is an infrastructure there, including regional funds that really get distributed.
Let us not kid ourselves. A study was done by Don Allen about four years ago for the Solidarity Fund on the comparative profitability and funding of the machine tool industry in Quebec versus Ontario, and on the electronics industry. The Quebec industry is better because venture capital is more available there.
Senator Angus: The Caisse, for example, as I understand it, certainly does not confine itself to Quebec's borders.
Mr. Sharwood: I agree.
Senator Angus: They have a percentage in the States, Far East and elsewhere in the world, as well as in the rest of Canada, do they not?
Mr. Sharwood: Very definitely, yes.
Senator Angus: Why is the Caisse so big? What is the equivalent thing in Ontario, or is there one? Is it OMERS?
Mr. Sharwood: The Caisse, as far as I know, is basically funded by the pension fund monies of the Quebec government.
Senator Angus: Yes, whereas in Ontario the pension fund monies are divided up.
The Chairman: What about teachers' pension funds?
Senator Angus: Yes, they are in the different funds.
Your comments this afternoon would have been relevant to our hearings on the Mackay task force. I think they would have been relevant to our discussion the other day on a monetary union for North America. They would have been relevant when we had the Bank of Canada governor talk to us.
I think you are highlighting some of the ills and malaises here. This is Canada, which is supposed to be the land of the plenty, and we have gone from third to ninth in the OECD in terms of our standard of living. I believe that productivity in the new economy type industries and the availability of money are at the heart of the problem. Do you agree? Why have we slipped like that?
Mr. Sharwood: It is a very good question. Tomorrow, I am spending a full day at the C.D. Howe Institute to discuss productivity. I have been working with Professor Don Daly, who did all the work for the Free Trade Agreement. He has come up with this incredible picture which shows that since FTA, our big companies -- the Alcans if you like -- have improved their productivity more than General Motors, let us say. The smaller American-owned firms, of under 50 employees, have basically held their level or gone down slightly. The Canadian-owned manufacturers that have fewer than 50 employees have just gone directly down.
Senator Angus: They have gone way down. Is that because of obsolescence?
Mr. Sharwood: We do not know, so Industry Canada has funded Professor Daly $100,000 to hand out a sample questionnaire in Ontario communities, such as London, Kitchener, Windsor and St. Catharines. We will ask the questions of the people who are not in the automotive sector to find out why they are doing so badly. We felt that the automotive industries were too tied into the American parent companies.
Senator Kelleher: Just to follow up, does not our weak dollar protect the people who are not efficient? I do not know how to articulate it, but there is a sort of reverse free trade thing happening here. The weak dollar increases our exports to the United States, and we do not import as much. I do not know if I am right or just guessing.
Mr. Sharwood: You are dead on. I attended the Hamson Memorial Lecture about three weeks ago with Gordon Thiessen, and I think he got a fair running over about the effects on productivity. I cast my mind back to the time when Japan was going to take over the world and the American dollar was undervalued versus the yen. Jack Welsh, one of the most successful managers that North America has ever had, threatened to change the whole accounting system of General Electric over to yen so that they could remain competitive with the Japanese.
Looking at the situation now, there is no question that the protection afforded by an undervalued dollar is allowing people to be fat and happy at the small end. I think that is part of it.
I talk about lifestyle businesses, and there is an element of that. Once you get up to about $10 million in sales, and you have bought your cottage in Muskoka, your boat, your racehorses and your place in Florida --
Senator Kolber: All for $10 million?
Senator Hervieux-Payette: Can I just add to that? Do you have the feeling that taxation plays a role? What about the strange amortization pattern where people were encouraged to keep their old equipment? If technology is changing every two years and your amortization is over four years or five years, how do you renew and become more competitive? We must try to convince the finance people to adjust their amortization to the cycle of the equipment.
Other businesses, including conventional ones, face the same problem. This does not provide work or investment. When amortization periods are not properly adjusted, you are investing less and of course you become less productive. Have you seen that?
Mr. Sharwood: It has not prevented technology from arising. You have in Quebec one of the most innovative entrepreneurs in Canada in the person of Charlie Sirois. I do not know whether amortization would have slowed him down or not. I do not think so.
Senator Kroft: I am interested in this Quebec phenomenon that you were talking about and the dynamic on the venture capital side. You and I will both recall from past experience, that the FBDB book of business always mirrored that the most dynamic, entrepreneurial region in the country is always in Quebec. It is a fascinating thing. It keeps recurring in many subjects that we are looking at. What the implications of this on bigger questions? When you talk about the Caisse as opposed to other pension funds, clearly, you have a more centralized, politically-focused, governmentally-focused agency there that has priorities. It increasingly fascinates our committee how effectively entrepreneurial that province is. This subject keeps recurring in a number of areas. I think an exploration of why and what the implications of it are might be quite interesting.
One of the witnesses this morning took a very strong position that the work of the Business Development Bank as a government entity was an inappropriate intrusion by government into the marketplace.
Mr. Sharwood: The fellow who was criticizing does not have a branch in Sudbury and the BDC does. Certainly, in terms of the way I look at community development, I would think he is very Toronto.
B.C. has a sterling record of achievement and has one of the best run labour-sponsored funds in Canada. The government is doing its best to destroy the economy but in spite of that, there is a flourishing entrepreneurial sector there. None of us really understand why.
I was just talking to Don Daly yesterday as to why Saskatoon is the hot spot. He has just arrived back from Ireland, which is also flourishing. I am not sure that I share the view that this is due entirely to taxation. I side with Mr. Martin on that. It is not the easy answer to explain productivity.
Senator Kroft: I would like to hear your reaction to the concept of productivity being very low in the mid-range companies and even more so in the smaller companies.
Mr. Sharwood: As I said earlier, we will know more when we finish the study. I am attending a meeting on this subject tomorrow. There is no question that our standard of living, by whatever measures that you use, has steadily fallen over the last 10 years relative to the U.S. That is still the fact, whether Statistics Canada issues one set of statistics, or John Manley uses a certain figure, or Paul Martin uses a different one.
Mr. Daly has broken productivity down into big companies and small companies and by ownership. I think that is more interesting and useful than just making generalities about productivity. We do not know what we will find. Do the small Canadian manufacturers adopt best practices? Are they able to finance their computer-controlled machinery? We do not know, but we will have an answer by September, I would suggest, if we do this survey.
Senator Kelleher: If I may quote from your speech your astute observation, "Thus, Senator Kelleher is absolutely right." I am taking this home to show my wife. She has never been aware of that fact.
The problem is not so much the supply of capital but access to capital, and I believe you were here this morning when I discussed it with the first three speakers.
Do you have any concrete suggestions for us as to how we can make this access more available because entrepreneurs reside in places other than in Montreal, Toronto and Vancouver? What can we do to better this access?
Mr. Sharwood: If you read the speech that I made to the Ontario Chamber of Commerce, which is attached to my presentation, it gives you a little history of the Canadian Community Investment Program. I may say that during the period that I was launching this, I was opposed all the way through by Industry Canada. I was very well supported by the president of the Canadian Chamber of Commerce, and he set me up. He asked me to make a presentation on my Canadian Community Investment Program at the annual meeting of the chamber in Quebec City. I was asked about the ideal CCIP office. I do not know how the one in the Sault works, but the ideal CCIP office gets $124,000 a year from Industry Canada and must raise matching local funds. They also have a local board that consists of two prominent lawyers, two prominent accountants and two businessmen. Even in London, Ontario and Windsor, they can find angels.
If a kid goes into the CCIP office and outlines his idea and says that he needs $50,000, the proposal will be looked at by the board. They will help him or her write up a business plan. They will find an angel at the beginning; that is why they want the angel hunting kit that we are perfecting for them.
I think we need to do more about it across Canada. Even in Toronto it is not easy. I am involved in something called the Toronto Access to Capital Committee and we are setting up a Web site. We did a little bit of this, oddly enough prompted by John Godfrey, the MP from East York, in the new media village. That Web site is really worth looking at because you can see the quick quiz about what your ambitions are on the Web site, and of course the Web site also shows the angel hunting kit which can be ordered and which I created.
The problem in the angel investing business in Toronto, and probably in all big cities, is that the deals are all at either end of Queen Street. The angels are all in Forest Hill, Rosedale and the Bridle Path. How do you bring them together? It is a much bigger problem than it is in the communities where you have a CCIP organization, funnily enough.
I say this in a purely non-partisan manner, although most of you know my political background. When I created this, I said that we would do this as an experiment. The fellow from Industry Canada wanted to do 10 and we proposed 20. I said that I would have nothing to do with the choice of location.
It is significant that seven out of the 20 sites that were chosen were in Ontario. There is a CCIP office in Canmore, Alberta. The one in Newfoundland is in Mount Pearl. Need I say more? I think there was a real problem.
I have written an article, "Will the Bank of America open a branch in Lethbridge?" That is a good question. We have not spread out access to capital, and I think the CCIP program is something that should be extended.
Senator Meighen: Maybe that ties in with what I wanted to hear. You talk about the BDC now carrying out the mandate that you had urged when you were on the board. You were here when Mr. Ashley said this morning that, in his view, the BDC has gone far beyond its appropriate mandate and was crowding out the private sector. What was your response to that?
Mr. Sharwood: My response to that is that Mr. Ashley does not have a branch in Sudbury. That is the answer. He is here in Toronto and his investments are all made in Toronto. He may find it competitive in Toronto, but he is not operating in Sudbury.
Senator Angus: That is not a criticism. That is just an observation, right? I mean, he is out to make money.
Senator Meighen: Are you saying that the BDC should be in Sudbury?
Mr. Sharwood: Yes, absolutely. I do not see his observation making any sense except in the context of where he is coming from. He has a very Toronto-focused view.
Senator Meighen: That is the question. Should the BDC be in Toronto or should it be in areas where there is not a lot of competition, where the need for its services is greater and where its mandate might involve just breaking even or perhaps even losing money? That is what it was originally supposed to do.
Mr. Sharwood: Let us start from square one. When Senator Kroft and I were on the board, they were making loans at below market rates to lifestyle businesses, which is certainly not what they are doing now. They are making money through rising stars and future gazelles. That is what they are trying to do. It is the first time that I have heard they are making investments at substantially below-market rates.
Senator Meighen: That is what Mr. Ashley said.
Mr. Sharwood: That is not my observation. That was the issue that Senator Kroft and I complained about. The FBDB said that they were taking more risks and pricing below market. When they finally decided to price some of their mezzanine loans at 18 per cent, I said hurray. But they were making those advances when the banks would not.
Senator Meighen: This goes back a few years. When you were on the board you were aware of their lending practices. Did I hear you criticizing the banks for not being more active in this area? Yesterday Mr. Doyle told us that the people who criticize the banks for not being in the front end are entirely wrong. That is not the bank's business. That is not where they should be. Do you take a different view?
Mr. Sharwood: If the choice comes down to allocating money to mortgages or wealth management, what did the Royal Bank do? The first thing they did after the merger got turned around was to buy Connor Clark. That is a big signal as to where they think they will make their money.
It is hard to make money at two over prime in the mid-market because this is not Alcan. These are not syndicated American loans with Bankers Trust in New York and stuff. You have to have experienced people and they have to be paid a fair amount of money.
Bank bashing is easy to do and I am not really bashing the banks. I am saying that they are making a very rational decision as far as they are concerned to allocate the resource to their most profitable line of business. At the moment, they do not price the risk. If they want to go in and compete with Congress at eight over prime, then bully for them. But they have chosen not to.
Senator Meighen: Ms Macdonald this morning talked about the fact that the pension funds had gotten out of the Canadian market as had the pension funds in the U.S. The ones in the U.S. have come back and ours have not. Do you have a suggestion for us as to how to encourage them to do so or should we just let nature take its course?
Mr. Sharwood: There is little bit of history behind the entry that Mary did not report. This problem has existed in Canada for a long time. Ben Webster went to see Michael Wilson when he was Minister of Finance in 1986 and suggested that we do a deal where, for every dollar they invest in businesses with under $35 million in assets, they will be allowed to invest $3 in foreign assets.
They all thought that was a great idea. It took about a year to get the legislation passed, so that took us into late 1987. The pension funds then took about a year to get organized and to find fund managers. That took us into 1988. Then it took about a year to get the money out into the market, into deals, and then we had the recession. They all said, "Never again."
I think it is a timing issue and, in fact, Mary and I have been a bit of a Mutt-and-Jeff act in front of the pensions. The American pension funds have been much steadier and they have also been anticyclical in that they start investing early in the cycle and slow down. The lemming effect worries me right now. The pension funds are now climbing on board at the very end of the cycle and will get bitten. I noticed that some of the American funds are slowing down their investments right now because they are worried about Ebay and Amazon.com.
I just launched a company that is trading in Alberta, and with no sales, it has a market cap of $30 million. It is ridiculous. We just look at it and cannot explain it. You can only explain it in the context of the fact that it is an Internet stock.
The Chairman: Mr. Sharwood, thank you very much for coming. It is good to see you, as always. Senators, I know we are running a little late but Mr. Latner has come in since we started the session and there was some confusion as to the exact time he was appearing as a witness. I will ask Mr. Latner to come forward at the present moment.
He is the vice-president and general counsel of a company called XDL Capital. Mr. Latner, you do not need to read your three or four pages. I wonder if you might just hit the highlights and then we would love to ask you some questions. Thank you very much for taking the time to come.
Mr. David Latner, Counsel, XDL Capital: First of all, Gordon Sharwood is a very hard act to follow.
My background is entirely different from most of the people around this table and certainly from Mr. Sharwood and most of the other speakers that you have had.
XDL is a company that focuses on very early stage opportunities. If there is a company that has no business plan but a great idea, or a business plan but no product, or a product that is nearing the end of the development cycle but has not yet got revenues, that is the type of opportunity that we are looking for. We are very narrowly focused on the Internet and Internet-related service and the software opportunities sector.
We would normally see companies that have no product, no revenue, no profits, no nothing, and we are betting on an idea.
Where we come from is a little bit different from where a lot of the people around the table and many of the people you have heard come from.
We were all operationally involved in software companies. Of the four partners in the firm, the three relatively senior partners all have about 10 years working in the software business. One of them was the CFO of a company called Alias. He joined it at the turnaround stage where there was about $30 million in sales and, as CFO, ultimately helped it to grow. It was ultimately sold off to an American company for $640 million. In the process it created hundreds of jobs.
Dennis Bennie, the primus inter pares of XDL, started the company in 1979 doing speakers. He grew the company in North America and sold it off.
He then founded a company in 1982 called Aviva Software. Its was chiefly involved in distributing mass market software. Ultimately he rode that wave and sold that off to Ingram, which is the world's largest mass market software distributor and then moved on and co-founded a company called Delrina.
Delrina grew from three people in 1988 to 770 in 1996, when it was ultimately sold. In the company's early days, I was a lawyer in private practice and I remember lending the president the desk. We carried it up the stairs because it was a walk-up. They could not afford space. There is an art in growing a company like that. It grew from zero in sales to $130 million in sales over the course of six or seven years. The bulk of the employees ended up being in Canada. Of the 770, about 600 people were in Canada.
The people here tend to come from finance backgrounds. They are investment bankers or just more traditional lending bankers who end up moving into the venture capital world. They are not people who have actually built businesses from the ground up. When they go to lend, even as venture capitalists -- and this is true even of Vengrowth or Working Ventures -- the companies that they are looking at are ones that are already too developed for us to bother investing in. They are companies that already have a product and revenues and, ideally, profits.
They are looking at companies that no longer have a development risk, just a market risk. The question is whether I can grow it faster than the competition can.
We identify a big gap between the angel round and the venture capital round because certainly right now the amount of capital that is required in the States on average for a venture round is about U.S. $7 million, or Can. $10 million.
Tech companies in general, but Internet companies in particular, do not get enough money at that angel stage anymore to produce the sophisticated programs, ramp-up sales, marketing, development and QA. They do not have the amount of capital anymore from angels to take them to that stage where they actually have a product that they can get out there and sell. Therefore, they need someone like an XDL or our colleagues. Our competitors in Toronto are people like Mosaic or McLean Watson. I know that Vern Lobo was here this morning or is coming here later. We can provide people focused on that niche with that type of interim capital in the Can. $1 million to $4 million range. More importantly, we provide them with some type of hands-on expertise.
Between the partners of XDL, we have made so many mistakes of our own growing the companies that we were involved in that we can short-circuit the process for them. They can go from A to B in six months instead of the 18 months that it took us, and hopefully they will avoid a lot of pitfalls that we suffered.
I do not need to read this brief because you have it now. In a nutshell, if I wanted to say anything it would be that I think the focus should not be specifically on taxes. Way, way back in the 1960s with the Carter Commission, there was this idea that a buck is a buck is a buck, that everything should be taxed at one relatively low flat rate. It was felt that the tax system should not be used for social policy purposes, that we should move forward to something where you somehow give people incentives to provide more capital for that interim stage, more true risk capital.
In my mind, looking at the stage Ventures West is at, they are no longer interested in risk capital but are focusing on the creation of human capital.
A lot of the stuff has been in press. Pattison and Charles Sirois have said, "Woe is me. Canada is so terrible. The tax rates are so high that we cannot attract good people or we cannot keep good people here. They all go to the States."
That certainly has not been our experience. Our experience has been that Canada has an abundance of people on the engineering and computer science side of things.
I am lucky enough to teach at the University of Waterloo in the computer science department. The people there are just as smart as the people anywhere else. We are lacking sales and marketing people. We do not have the opportunities here yet. We do not have a sufficient number of companies to grow our own opportunities. We need to create a co-op program in the sales, marketing and operations just as we had for University of Waterloo computer science students. That way we will get people who end up staying here.
I have never come across an entrepreneur who said, "I have a fantastic idea. I will leave Canada because the tax rate will be too high if I ultimately succeed."
The tax laws are riddled with enough methods that an entrepreneur can save most of their profits and still have the advantages of living in Canada. It is not the tax system that needs fixing. We need to create that nucleus of interesting and reasonably well-paying opportunities in Canada.
Although, Gordon was talking about spreading the focus so that you have more of the money invested across Canada, I do not think that, in truth, in the little field that we are interested in, that is likely to happen.
We are looking at creating something that is much more akin to Boston or Silicon Valley or Seattle. There has to be a number of companies that grow and flower, and then you have a lot of spin-offs. That is certainly what happened in Ottawa with Newbridge and that is certainly what happened with Delrina.
When Delrina spun off, the people who were no-names suddenly became famous. You were part of the Delrina story, therefore you got the benefit. You suddenly were smart in retrospect, not because you did anything good or bad, just because you had that growth experience and the company succeeded. You were then able to get some type of financing to start your business. I know of at least five or six different spin-off companies grew out of Delrina. Scores of companies grew out of Newbridge.
I would focus on finding more money for true risk capital and thereby create an environment in which there was a whole panoply of jobs, not only engineering jobs. Canada would then become not just a producer of good code, but also be a producer of good marketing and sales programs. That is where we are lacking and that is where we are at the greatest competitive disadvantage. We have great engineers. However, it is hard to find Canadians trained in these areas and, therefore, we try to get them from the United States. That is the only time we face a tax disadvantage. They say that they are making US$200,000, so we will have to pay them Can$300,000, or whatever the amount is to make up for the higher Canadian taxes.
Senator Angus: Mr. Latner, welcome. It is great to have you here and to hear a little bit of the other side. There is no two ways about it, we have been hearing over and over again about the non-level playing field in the country and the many things that are tied in with it. As I mentioned to Mr. Sharwood a little while ago, our standard of living has gone from third to ninth in the OECD, and there are many problems out there.
Let me just challenge you on a couple of things, because we need to know before we make our recommendations. You talked about teaching all these great Canadians at the University of Waterloo, which we hear is super and is called MIT North, and what a wonderful thing it is for Canada. But we hear that Microsoft recruits about 30 per cent of the class, and by the time all these bright young Canadians are 30 years old, they all have a net worth of U.S. $26 million. What about that? That to me is a brain drain and that is part of the real problem we have here.
Mr. Latner: Absolutely. Let me comment in two ways. First of all, one of the companies that we have invested in was started by a person who immigrated from Iran to Canada when he was around 20. He is 36. He first worked first at Delrina and got his spurs, as it were. Because he had that Delrina experience, he was able to go off to Netscape when Netscape was a young entrepreneurial company.
He went there for the promise of options, but more importantly, he went there because it gave him an opportunity to create a very successful product called Netscape Net Centre.
However, two or three years later, he had become a small cog in a relatively large machine. Most of his options had not panned out and Netscape, although it has done very well since, was on the downturn. But he had a vision of something he wanted to create and he could not find the financing easily there. He was Iranian and he did not have a network in Silicon Valley. He came back here and, with a little bit of the nest egg that he started and the funding that we provided him, he was able to create something here. There is such a thing as a reverse brain drain if you provide people with an opportunity, and we were able to allow him to create his vision. So this can go both ways. That is number one.
Number two, when it comes to taking those raw recruits fresh out of Waterloo, you are right, a very large percentage go to Microsoft. If you are 22 years old and somebody offers you $60,000 to work in Toronto, Waterloo or Ottawa and somebody else offers you U.S. $65,000, which equals Can. $100,000, and you are single, have no responsibilities and will have the advantage of going to Microsoft or Netscape, then certainly some people will do that.
But most of the people do not do that. The majority of the people do not leave. They stay and work at Nortel or whatever. Then when they get a little bit of experience, many of them will want to do something on their own. If you provide them with the opportunities to do that here, with a combination of financial remuneration and intellectual stimulation, then they will stay. None of them has ever said to me that because of the net after-tax amount that they take home that they are moving to join Microsoft. They tell me that they leave because of the opportunity to work on cool things. "Cool" is a very big word when you are 22.
If you are a Wharton Business School graduate, it is the same thing. You will ask yourself if you want to work at some plastics or lumber industry or if you want to work where its cool. You will work where it is cool.
If you can create a cool environment, and we can do that as easily in Canada as in the United States, I think we will have a much better opportunity of attracting people.
What I want to avoid is another situation like the one that exists in the film industry, where the tax system is skewed to achieve some social policy and benefit some particular group, such as promoters, brokers, lawyers and accountants. It did not work very well. If there is a way of creating this human capital without skewing the tax system, I think we would prefer that approach.
Senator Angus: I hear you and I think it makes a lot of sense. We are not so much studying the anticipated lifestyle of bright young Canadian graduates, although we have seen some spin-offs, but rather, why angels and high net worth individuals are not given incentives to invest and provide the funding that is necessary to help create the opportunities. In that regard we are told that capital gains tax does not remove opportunities and that major modification is not a panacea. It would go a long, long way to fix the problem, however.
For example, I am thinking of rollover provisions like they have in the U.S. On certain types of new economy businesses, if an entrepreneur or an angel puts in his money and the company does well, you have the unrealized gains. They are able to cash those, provided they reinvest within a certain period, such as 20 days or three months. Is that not a good type of thing and would you not advocate that?
Mr. Latner: Absolutely. If you want to tinker with the tax system to do things like that, nobody will disagree. Who would not say, "Give me more after-tax income." On the other hand, I have never heard an entrepreneur say that he will locate in Bermuda because the taxes might be lower.
A company, once it gets to a certain size, might set up a European operation and base it in Ireland partly because of the tax system, but also partly because in Ireland they have a highly motivated, highly educated multilingual population that can support the products across Europe.
Senator Angus: This is fascinating. You keep talking from the entrepreneur's perspective, whereas I am trying to look at it from the investor's perspective. Most of the evidence we have heard is that there is a problem, especially in the small gap or early stages of these innovative knowledge-based industries. If you do not have evidence, we can show you millions of examples of investors looking for offshore places to invest their money if they will get a bigger net return on their dollar there.
Mr. Latner: Absolutely, they do. All things being equal, people will go to a place where they will get a higher after-tax return.
From the perspective that we see though, if you were a pension fund, for example, taxes are not necessarily an issue. Risk aversion is an issue, and Canadians generally appear to be somewhat more risk averse than Americans. That is the major problem for most people rather than the tax system.
When they ask for a tax break, I think they are really saying, "Take the risk out of venture capital for me by giving me such a large tax break that it is okay even if the thing goes south, even if the business fails." This was the benefit of the labour-sponsored venture funds. That is not risk capital. I am not sure why you should prefer one group of taxpayers to another in that forum.
Senator Angus: In institutional investors and in pension funds, it is money being managed for others as opposed to an individual's money. That is the real pure lend-risk kind of capital that is needed at the start-up stage. We are talking about the love money.
Mr. Latner: That does not explain why Teachers does it and OMERS does not, for example.
Senator Angus: That is a good point.
Mr. Latner: It may have to do with the compensation levels of the people at Teachers and the people at OMERS.
The Chairman: It also has to do with the composition of management at the board.
Could I ask you a question? You talked about the importance of giving young entrepreneurs sales and marketing education and training skills, given the fact that they have the technical skills. You talked about the co-op program at Waterloo and so on. Is there any role that government can play in that? My instinct is that that is not a government responsibility.
Mr. Latner: It may not be a federal government responsibility, but to the extent that more money would be available for universities to provide higher quality programs and support a co-op program for marketing and sales students as has been done for computer science students, I think it is a governmental responsibility.
The Chairman: To the best of your knowledge, are those programs available at U.S. universities? In other words, I am curious as to whether or not, because my instinct is that (a) there is a gap; and (b) the gap does not exist nearly as much in the U.S. They do not lack marketing and sales skills for technologically trained people.
Mr. Latner: I go city by city. I think you have as much of a problem in Buffalo as you do in Toronto in terms of finding these types of people.
The Chairman: But you do not in Boston and you do not in Chicago. So the answer is that it is selective.
Mr. Latner: That is right. That is because they have scores of companies -- perhaps hundreds or even thousands of companies -- and you can earn your spurs in any one of those companies. You earn your spurs and go on to the next company. Failure there is not considered particularly stigmatic the way it is here. If you fail here and try to get a job somewhere, they will say, "Hmm, there is a loser. I will not back him." In California, though, you can say that you got your experience at such-and-such a company that went south and it does not matter; so many companies have failed there that it is not regarded in the same way as it is here.
The Chairman: What you are saying is that in Canada there is a stigma attached to having been with a company that failed, whereas that stigma does not exist in the United States.
Mr. Latner: I believe it exists more here than it does there in the valley.
Senator Kroft: I am really interested in the focus on the marketing and promotional side of the product once it is developed, because, in my experience, it is critically important.
Just as an aside, Israel suffered for a long time with exactly this problem. It had an enormous pool of technology, but there was a great gap in their potential to exploit that.
Mr. Latner: You used the past tense. It continues to suffer and that is why you see a very large percentage of Israeli start-ups being bought up by American companies that can provide that sales and marketing expertise; or you see Israeli companies ultimately being reduced to development in Israel with their sales and marketing happening outside Israel.
I know personally that XDL invested in one Israeli company, and we found it very difficult to manage it outside Israel. The development team remained there and the sales and marketing ended up happening out of Boston. That company is now being sold off to an American company.
Similarly, another company that is Toronto-based and is now called Servicesoft, just two months ago was called Valley Soft. It was started by the ex-president of Delrina, Mark Skopinker who has nothing to do with XDL. He went to Israel after he got bought out, spent a couple of years there, set up a company there, and found the exact same problem. He could not find the appropriately acculturized and experienced sales and marketing people there. So they still do retain a rump of development in Israel, but the bulk of it is Boston and Toronto now.
Senator Kroft: To echo the Chairman's point, what can we do about this? We know what the education and the jurisdictional responsibilities are, but this has been a recurring problem in Canada for a long time and I would be interested in your views because you have obviously thought about it a lot.
Mr. Latner: I have actually thought about it very little, because we are way down in the trenches. We do not get to go macro very often, and in that sense I am out of my league.
Senator Kroft: Not at all.
Mr. Latner: I have read your biography and I have read my biography: I am out of my league. I am probably the only NDP venture capitalist that you will see. So perhaps I take a somewhat more statist view.
I like what they have done in Quebec. Whether Quebec stays as part of Canada or not, the way they have managed to harness capital to the needs of the nation is a good example for the rest of Canada. I have good ties with people who are in the venture capital community there. Charles Sirois is one at this level. His software investment company, Telesoft, is at this level, and we deal with them all the time. They have had their winners and their losers in venturing, but they are getting money out there into Quebec companies, and similarly SOFINOV and anything that is associated with the case has a good chance of getting some money.
If there was a way, through moral suasion or some type of incentive, such as the one you spoke about, or through legislation, of getting the percentage of capital that is invested in true risk capital, whether it was pension funds or something else, that would be great. I am not begging people to give XDL money, although it would be nice to get money from a pension fund. Our money primarily comes from wealthy entrepreneurs who put in $1 million or more; in a couple of cases it has been institutions, which are very entrepreneurial -- CIBC, Wood Gundy and First Marathon. If there some way we could get pension funds either to invest directly, although I do not think they have the skill set to do that, or to invest in either an entrepreneurial-oriented fund or a fund of funds so they could spread the risk, I think that would be wonderful. If we could increase it from 1 per cent to 2 per cent and 2 per cent to 3 per cent, that would be great. How you would do it, I am not sure; you have the levers of power; we do not.
Senator Hervieux-Payette: I have just a comment on what you said about Quebec. Listening to the speakers this morning, it was as if I were living in paradise, except that in my paradise there is no money invested in the regions. We are talking always about Montreal, Toronto, Vancouver and Calgary, but if you and your group want to invest in people with ideas, I can provide you with at least 10 medium-size towns in Quebec.
I was in Matane last weekend. The real unemployment rate in the towns around there is 30 per cent; so there must be something I do not understand about our system. It is supposed to be so great, but we are not creating jobs. We also have great universities; so there must be a gap somewhere that I have not found so far.
Mr. Latner: Obviously, you are labouring under a couple of problems. One is that for a large majority of people there, English is a second language and it is a foreign culture. It is tremendously difficult for us to get Americans to come to Toronto, which is very similar culturally. It is much, much harder to get them to invest in places like Quebec or to take a company there seriously. For them, people in Toronto are kind of like provincial yahoos, so it is very difficult for them to take our companies seriously; and I imagine you have a double burden being from Quebec.
In terms of employment, I do not know. I do not sit there and measure the rates, and I am only looking at that very narrow slice of the market that is information technology companies; so I do not think there is any way you will ever get broadly-based spreading of venture capital in places like Sault Ste. Marie. They just do not have the critical mass of personnel to do it. It will always be in the big cities and we will be lucky if it happens in two or three big cities.
Mr. Sharwood: Yes. I would echo David's comments. I look at hundreds of business plans a year, and in the IT area what he says is absolutely true. We get pages and pages describing the software, and then I turn over the page and see their projections, usually on Lotus 1, 2, 3, and the fifth year is figured out down to the last decimal point in cents. There is no sales plan. There is no marketing plan. They really have no idea how to do that. Then we say, "Well, how are you going to get to these figures? Do you know the routes by which you are going to make this happen?" There is still a bit of the "build a better mouse trap and beat the path to my door" syndrome out there among these guys and it makes it very frustrating.
On the university side, we have found that for business planning the focus is not on entrepreneurship; I think Brien Gray talked earlier about the business schools leaving a legacy of being focused on the non-entrepreneurial sector. Nobody teaches how to write a business plan to raise equity. Not a single community college that we know of -- I think Queen's is just beginning to do it -- teaches how to write a business plan to raise equity, which is very different from writing a business plan to do debt.
One of the projects we have in this CGAN organization which I have founded is to persuade the universities that this is something they should really shift into in a big way. In the U.S., in fact, there is a competition called Campus in which they give awards for the best business plan to raise equity written on a regional basis. It is a bit like the Young Entrepreneurs Program, and we are trying to interest one of the banks in doing that.
With an equity investor, unlike a lender, there are shareholder's agreements, and when you are doing an angel deal or an early-stage deal, it is remarkable how many entrepreneurs are surprised to find themselves being asked some embarrassing questions about their lifestyle and their personal habits, with restrictions on capital expenditures and what kind of car will they drive. Those are things that lenders do not often pay much attention to, but equity providers are very interested in making sure that the entrepreneurs devote their moneys to the business.
The Chairman: Gentlemen, thank you very much for coming this afternoon. It has been enlightening. We had met Mr. Sharwood before, and we were delighted to meet you, Mr. Latner.
Senators, if we can take just five minutes to deal with Bill S-18, which is all it should take, we will hear the representatives of the former CMA, the Canadian Manufacturers' Association, now called the Alliance of Manufacturers & Exporters Canada.
Senator Meighen: May I bring constructive criticism on the choice of the new name?
The Chairman: That is about right. By the way, just for the record, the Committee has been notified by the Law Clerk of the Senate that he has reviewed the bill and that the bill is, in fact, in the required legislative form.
Mr. Nykanen, I understand that you are the acting president of the Alliance of Manufacturers & Exporters Canada.
Mr. Paul Nykanen: That is correct, Mr. Chairman.
The Chairman: Senators, the bill is before you. I have looked at it. Am I correct that the bill does two things: first, it changes the name of the Canadian Manufacturers' Association to Alliance of Manufacturers & Exporters Canada; second, it makes some minor changes in the wording of your objectives? Is that a fair capsule summary of what the bill does?
Mr. Gary Graham, Alliance of Manufacturers & Exporters Canada: Yes.
The Chairman: Yes.
Senator Kelleher: Excuse me. Would the clerk please note that I have a conflict of interest.
The Chairman: As a sponsor. You are also a member of the executive, are you not?
Senator Kelleher: No, but my partner, Gary Graham, who has just spoken, is the former president.
The Chairman: We are certainly happy to offer you condolences, Mr. Graham, on that account.
That is fine, senator. You cannot vote.
Senator Kelleher: So I will not be taking part in the discussion.
The Chairman: I understand that. Am I correct, Mr. Graham, that that is all the bill does, or does the bill do anything other than those two things?
Mr. Graham: The bill does three things.
The Chairman: What is the one I missed?
Mr. Graham: Well, you did not really miss one, because you described two of the three things in general terms.
The Chairman: All right.
Mr. Graham: You were quite right. Specifically, the bill changes the name of the organization. That is the first point.
The Chairman: Right.
Mr. Graham: Second, it clarifies the mandate to include a reference to services as well as goods.
The Chairman: That is because you have gone from manufacturers to manufacturers and exporters.
Mr. Graham: We had to change the name, and we had to amend the bill anyway in order to change the name.
The Chairman: Right.
Mr. Graham: So we chose to attend to some other minor changes as well. The third point is that there is an historical anomaly in the act that restricts the ability of the organization to own or lease property in excess of $50,000. That anomaly goes back to the 1800s.
The Chairman: Back when $50,000 meant something, as it were.
Mr. Graham: Yes; so we have taken that out.
Senator Kroft: Excuse me if I am confused on this, but has there always been another organization called the Canadian Exporters Association?
Mr. Graham: Yes. Perhaps the Committee would not mind if Mr. Nykanen took two or three minutes to explain the history of the two organizations and how they have come together.
Senator Kroft: I would appreciate that.
Mr. Paul Nykanen, Acting President, Alliance of Manufacturers & Exporters Canada: Honourable senators, the Alliance is a broad-based national, horizontal organization, which represents all sectors of manufacturing and exporting across Canada. Our member companies account for over 75 per cent of the total manufacturing production in Canada. Our mission as an organization is to enhance the competitiveness of Canadian manufacturers and to increase the export business.
The coming together of the two organizations was a natural. The 127-year-old CMA, or Canadian Manufacturers Association, came together with the 54-year-old Canadian Exporters Association, both of which were national organizations representing their respective sectors.
In today's world, particularly now in the global economy, most manufacturers, or the large majority of them, are also exporters, and with the mandate as we had it before we represented the goods-producing sector, and this broadened the actual base so that we are now in a position to provide additional services. That means that we are stretching out globally now with strategic alliances with sister organizations around the world.
We have inbound and outbound trade missions. We provide a lot of training, information, workshops, seminars, and that sort of thing, on how to do business in other countries and how to increase the productivity of a business, and so on. That, in a nutshell, is where we are.
Senator Hervieux-Payette: Maybe I should know the answer to this question, but why did you have to scrap the old acts and go through the regular incorporation of a non-profit corporation? Why do we have to pass a law for your association, when other associations do not proceed by way of special bills? Do you see an advantage in keeping that special status?
Mr. Graham: Yes. I think the executive did perceive an advantage and did not want to say good-bye to the 150 or so years of history of the organization. It was created by an act of Parliament and they wanted to maintain that and there are some special powers in the act which they would not have been able to gain had they simply scrapped the association and started with a new association.
Senator Hervieux-Payette: Were both organizations enjoying these benefits, and now one will enjoy them but not the other?
Mr. Graham: There is only one organization.
Senator Hervieux-Payette: So the exporters now will take advantage of the 124-year-old law.
Mr. Graham: Those companies that were members of the exporters association no longer have an association to be members of. Those companies can choose, if they like, to be members of this association, and it is certainly the desire of this association to represent those companies.
Senator Hervieux-Payette: And it is a voluntary contribution?
Mr. Graham: Yes.
Senator Hervieux-Payette: If you exclude the big ones, how many manufacturers are there in the small business sector?
Mr. Graham: There are thousands of members of the association and many of them have fewer than 50 employees. In fact, the smaller organizations arguably benefit more from the services that the association offers than do the larger members who have their own staffs.
Senator Meighen: I have two questions, if I may. The first is a little bit tongue-in-cheek. I look at your new name and reading the French version, l'Alliance des manufacturiers et des exportateurs du Canada, I find it has a certain ring to it, a nice ring to it.
Senator Angus: We have not passed it yet, so it only the proposed new name.
Senator Meighen: Be that as it may, when I look at the English version, it seems to be right out of Bureaucratise Canada: Alliance of Manufacturers & Exporters Canada. Why that wording? Why not have it as "the Canadian Alliance of Manufacturers and Exporters," or "the Alliance of Canadian Manufacturers and Exporters," or "the Alliance of Manufacturers and Exporters of Canada"?
Mr. Graham: Senator, if your question was a bit tongue-in-cheek, allow me an answer that is a bit tongue-in-cheek and intends no disrespect to your Committee: but isn't a camel a horse designed by one? That is the name that the parties chose and they did have some consultations.
Senator Meighen: But it is different in English and French.
Senator Hervieux-Payette: No, no.
Senator Meighen: It says "du Canada." No? Am I wrong?
Senator Hervieux-Payette: No, the acronym is the same. If you change the order of letters, you will not have AMEC.
Senator Meighen: That is the answer.
Senator Hervieux-Payette: As it is, it is the same in both French and English: AMEC.
Senator Meighen: Why not say "the Alliance of Manufacturers & Exporters of Canada"? That would also be AMEC. It just has "Canada" dangling at the end, and it sounds like Statistics Canada.
However, let me move on and take advantage of your presence. In one of our sessions, there was some testimony that I found disturbing because it alleged or purported to demonstrate that a lot of our Canadian exports are intercompany exports, which makes it look like we are shipping all kinds of different products around the world at different customers, when that is not necessarily so, and, secondly, a disproportionately large percentage of our exports can be traced back to one or two sources, such as the auto industry and the Wheat Board.
Mr. Graham: I will comment briefly on that and I am sure Mr. Nykanen will have something to add.
The fact that an export is intercompany does not make it any less an export. The people who build the stuff still know they built it and they are still proud of it; if they happen to ship it to another related factory that incorporates it into a finished product and sells it to a customer, perhaps even back in Canada, that is fine by them. They are happy to be working and to be producing the goods; so it is no less an export.
There are many great companies -- one that comes to mind is in Hamilton -- that do a lot of intercompany exports, but those are still exports. The goods are produced and they are sold ultimately to customers through their parent organizations. Perhaps Mr. Nykanen wants to add something to that.
Mr. Nykanen: I think that is particularly true all around the world right now, particularly because of the global economy. Because of the way industries have shifted, there are a lot of world product mandates; previously, there were many individual companies in the countries that used to manufacture the entire assembly, if you will, and then build on that. Today, there are economies of scale and, because of very stiff, fierce, global competition, it has become necessary to source in the most productive areas and at the least cost.
Take the automotive industry as an example. We have a tremendous automotive industry in Canada, and of course a large part of our market is to the United States. Indeed, a large section of our economy is dependent upon our exports to the U.S. About 80 per cent of our exports go to the United States; when we take the relative proportion of the automotive industry to the other sectors of the economy, it becomes very evident that the automotive parts end of it is a very significant portion of this.
As Mr. Graham just mentioned, it really matters not whether they are intercompany transfers, or what have you, because quite often the components that are manufactured here are shipped to a parent company to the United States where they are then assembled into another component that comes back to Canada and is put into an automobile that is shipped overseas. It is that sort of thing. So it has changed, actually.
Senator Meighen: Is the base of support for exports getting any broader?
Mr. Graham: Well, your question does touch on an important point, and I think one's reaction to it can depend on whether you are more "blue collar" or more "white collar."
There is no doubt that globalization has been a challenge to "country managers" in Canada, to white-collar workers who in the past may have been able to justify their role in terms of the national presence and the national know-how and the knowledge of matters Canadian that they provided; but globalization has challenged them to prove that that really is value, and organizations are by and large inclined towards centralized product groups and not country management. That is just a fact of life.
While it has been a challenge to white-collar workers, to blue-collar workers in many cases it has been a boon, and we have seen that in many Ontario factories over the last ten years.
The Chairman: One quick question. Are members of the new association Canadian-owned companies or do you have foreign-owned companies that operate in Canada as members?
Mr. Nykanen: We have both, actually. There are Canadian companies that are home-grown Canadian, completely controlled in Canada, and then we have Canadian subsidiaries of multinational corporations, and that sort of thing. They all are entitled to be members.
The Chairman: Right, so the Canadians subsidiaries of the automobile companies, for example, would be members.
Mr. Nykanen: Yes, they would be.
The Chairman: Are there any other questions, honourable senators? If not, may I then have a motion to report the bill back?
Senator Hervieux-Payette: I so move.
The Chairman: Is it agreed, honourable senators?
Hon. Senators: Agreed.
The Chairman: Thank you very much for coming, gentlemen.
The committee adjourned.